XOTC:ESPH Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

 

FORM 10-Q

____________

 

þ

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

  

  

For the quarterly period ended June 30, 2012

  

  

OR

  

  

o

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

  

  

For the transition period from ________________ to ________________


Commission file number: 000-25663

 

Ecosphere Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

  

20-350286

(State or other jurisdiction of

  

(I.R.S. Employer

incorporation or organization)

  

Identification No.)

  

  

  

3515 S.E. Lionel Terrace, Stuart, Florida

  

34997

(Address of principal executive offices)

  

(Zip Code)


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


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


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


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

 

Large accelerated filer

o

Accelerated filer 

þ

 

 

 

 

Non-accelerated filer  

o  (Do not check if a smaller reporting company)

Smaller reporting company 

o

 

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


Class

  

Outstanding at August 6, 2012

Common Stock, $0.01 par value per share

  

149,552,700 shares

  

 






TABLE OF CONTENTS

 

  

 

Page

 

PART I FINANCIAL INFORMATION

  

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

 

 

1

 

  

  

 

 

 

 

  

Condensed Consolidated Balance Sheets

 

 

1

 

  

  

 

 

 

 

  

Condensed Consolidated Statements of Operations (unaudited)

 

 

2

 

  

  

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

3

 

  

  

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

5

 

  

 

 

 

 

Item 2.

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

 

 

19

 

  

  

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

26

 

  

  

 

 

 

 

Item 4.

Controls and Procedures

 

 

27

 

  

  

 

 

 

 

PART II – OTHER INFORMATION

  

 

 

 

 

Item 1.

Legal Proceedings

 

 

28

 

  

  

 

 

 

 

Item 1A.

Risk Factors

 

 

28

 

  

  

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

28

 

  

  

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

28

 

  

  

 

 

 

 

Item 4.

Mine Safety Disclosures

 

 

28

 

  

  

 

 

 

 

Item 5.

Other Information

 

 

28

 

  

  

 

 

 

 

Item 6.

Exhibits

 

 

28

 

  

  

 

 

 

 

SIGNATURES

 

 

29

 

  

  


  

 



i



PART I – FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS.


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

June 30,

 

 

December 31,

 

 

 

2012

 

 

2011

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash

 

$

1,977,796

 

 

$

2,043,593

 

Restricted cash

 

 

403,809

 

 

 

 

Accounts receivable

 

 

3,722,882

 

 

 

873,117

 

Inventory

 

 

447,736

 

 

 

408,747

 

Prepaid expenses and other current assets

 

 

188,226

 

 

 

81,850

 

Total current assets

 

 

6,740,449

 

 

 

3,407,307

 

Property and equipment, net

 

 

5,090,183

 

 

 

6,141,519

 

Patents, net

 

 

40,173

 

 

 

42,164

 

Deposits

 

 

22,035

 

 

 

22,598

 

Total assets

 

$

11,892,840

 

 

$

9,613,588

 

  

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,212,213

 

 

$

1,180,723

 

Accrued liabilities

 

 

941,911

 

 

 

1,163,504

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

188,679

 

 

 

 

Customer deposit

 

 

100,000

 

 

 

 

Convertible notes payable, net of discounts

 

 

1,128,700

 

 

 

370,561

 

Other notes payable

 

 

68,100

 

 

 

 

Related party notes payable

 

 

136,676

 

 

 

204,776

 

Warrant derivatives fair value

 

 

327,006

 

 

 

347,235

 

Financing obligations

 

 

120,083

 

 

 

49,299

 

Total current liabilities

 

 

4,223,368

 

 

 

3,316,098

 

Convertible notes payable, net of discounts

 

 

 

 

 

1,366,177

 

Related party notes payable

 

 

 

 

 

204,299

 

Other notes payable

 

 

170,249

 

 

 

 

Financing obligations

 

 

125,206

 

 

 

168,048

 

Restructuring reserve

 

 

94,259

 

 

 

119,184

 

Total liabilities

 

 

4,613,082

 

 

 

5,173,806

 

Redeemable convertible cumulative preferred stock

 

 

 

 

 

 

 

 

Series A - 11 shares authorized; 6 shares issued and outstanding at June 30, 2012 and December 31, 2011; $25,000 per share redemption amount plus accrued dividends

 

 

1,169,744

 

 

 

1,158,494

 

Series B - 484 shares authorized; 321 and 322 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively; $2,500 per share redemption amount plus accrued dividends

 

 

2,859,989

 

 

 

2,822,302

 

Total redeemable convertible cumulative preferred stock

 

 

4,029,733

 

 

 

3,980,796

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

Equity (deficit)

 

 

 

 

 

 

 

 

Ecosphere Technologies, Inc. stockholders' deficit

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 300,000,000 shares authorized; 149,092,684 and 146,262,357 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

 

 

1,490,926

 

 

 

1,462,622

 

Common stock issuable, $0.01 par value; 71,959 issuable at June 30, 2012 and December 31, 2011, respectively

 

 

720

 

 

 

720

 

Additional paid-in capital

 

 

106,808,730

 

 

 

104,804,159

 

Accumulated deficit

 

 

(116,654,812

)

 

 

(117,576,896

)

Total Ecosphere Technologies, Inc. stockholders' deficit

 

 

(8,354,436

)

 

 

(11,309,395

)

Noncontrolling interest in consolidated subsidiary

 

 

11,604,461

 

 

 

11,768,381

 

Total equity

 

 

3,250,025

 

 

 

458,986

 

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

 

$

11,892,840

 

 

$

9,613,588

 


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



1




ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


 

 

For the Three Months Ended

June 30,

 

 

For the Six Months Ended

June 30,

 

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales and licensing

 

$

5,778,614

 

 

$

 

 

$

11,426,707

 

 

$

 

Field services

 

 

2,846,490

 

 

 

2,367,543

 

 

 

5,559,192

 

 

 

4,595,184

 

Total revenues

 

 

8,625,104

 

 

 

2,367,543

 

 

 

16,985,899

 

 

 

4,595,184

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales and licensing

 

 

4,562,761

 

 

 

 

 

 

8,670,423

 

 

 

 

Field services

 

 

713,865

 

 

 

802,558

 

 

 

1,515,582

 

 

 

1,424,257

 

Total cost of revenues

 

 

5,276,626

 

 

 

802,558

 

 

 

10,186,005

 

 

 

1,424,257

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

3,348,478

 

 

 

1,564,985

 

 

 

6,799,894

 

 

 

3,170,927

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

2,463,714

 

 

 

3,100,049

 

 

 

4,876,470

 

 

 

8,036,199

 

Total operating expenses

 

 

2,463,714

 

 

 

3,100,049

 

 

 

4,876,470

 

 

 

8,036,199

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

884,764

 

 

 

(1,535,064

)

 

 

1,923,424

 

 

 

(4,865,272

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(77,861

)

 

 

(189,084

)

 

 

(175,342

)

 

 

(311,496

)

Loss on conversion, net

 

 

 

 

 

 

 

 

 

 

 

(94,662

)

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

 

 

112,167

 

 

 

174,873

 

 

 

(85,995

)

 

 

(23,888

)

Other, net

 

 

864

 

 

 

290

 

 

 

4,628

 

 

 

433

 

Total other income (expense)

 

 

35,170

 

 

 

(13,921

)

 

 

(256,709

)

 

 

(429,613

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

919,934

 

 

 

(1,548,985

)

 

 

1,666,715

 

 

 

(5,294,885

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

(25,688

)

 

 

(25,750

)

 

 

(51,438

)

 

 

(51,500

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) applicable to common stock before allocation to noncontrolling interest

 

 

894,246

 

 

 

(1,574,735

)

 

 

1,615,277

 

 

 

(5,346,385

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: net income applicable to noncontrolling interest in consolidated subsidiary

 

 

(388,386

)

 

 

(285,786

)

 

 

(744,631

)

 

 

(313,798

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

505,860

 

 

$

(1,860,521

)

 

$

870,646

 

 

$

(5,660,183

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share applicable to common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.00

 

 

$

(0.01

)

 

$

0.01

 

 

$

(0.04

)

Diluted

 

$

0.00

 

 

$

(0.01

)

 

$

0.01

 

 

$

(0.04

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

148,851,205

 

 

 

143,472,955

 

 

 

148,132,482

 

 

 

142,577,732

 

Diluted

 

 

158,744,098

 

 

 

143,472,955

 

 

 

160,914,515

 

 

 

142,577,732

 


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



2




ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

For the Six Months Ended

June 30,

 

 

 

2012

 

 

2011

 

Operating Activities:

 

 

 

 

 

 

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

 

$

870,646

 

 

$

(5,660,183

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

51,438

 

 

 

51,500

 

Depreciation and amortization

 

 

1,101,170

 

 

 

1,062,142

 

Accretion of discount on notes payable

 

 

115,178

 

 

 

118,607

 

Loss on conversion of debt and accrued interest to common stock

 

 

 

 

 

93,762

 

Stock-based compensation expense

 

 

895,672

 

 

 

3,753,097

 

Stock options issued for services

 

 

 

 

 

97,450

 

Noncontrolling interest in income of consolidated subsidiary

 

 

744,631

 

 

 

313,798

 

Loss from change in fair value of warrant derivative liability

 

 

85,995

 

 

 

23,888

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

 

(2,849,765

)

 

 

(53,553

)

Decrease in prepaid expenses and other current assets

 

 

46,517

 

 

 

45,840

 

Increase in inventory

 

 

(38,989

)

 

 

(3,684,795

)

Decrease (increase) in deposits

 

 

563

 

 

 

(5,440

)

Increase in restricted cash

 

 

(378,809

)

 

 

(323,125

)

Increase (decrease) in accounts payable

 

 

31,493

 

 

 

(591,780

)

Decrease in accrued liabilities

 

 

(221,593

)

 

 

(240,083

)

Increase in billings in excess of costs and estimated earnings on uncompleted contracts

 

 

188,679

 

 

 

 

Decrease in restructuring reserve

 

 

(24,925

)

 

 

(35,585

)

Increase in customer deposits

 

 

100,000

 

 

 

4,300,000

 

Net cash provided by (used in) operating activities

 

 

717,901

 

 

 

(734,460

)

Investing Activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(47,845

)

 

 

(539,207

)

Transfer to restricted cash

 

 

(25,000

)

 

 

 

Net cash used in investing activities

 

 

(72,845

)

 

 

(539,207

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible notes payable and warrants

 

 

 

 

 

1,575,000

 

Proceeds from warrant and option exercises

 

 

249,299

 

 

 

604,164

 

Proceeds from warrant modifications

 

 

107,400

 

 

 

 

Proceeds from equipment financing

 

 

 

 

 

189,504

 

Distributions from EES subsidiary to noncontrolling members

 

 

(908,551

)

 

 

 

Repayments of notes payable and insurance financing

 

 

(109,862

)

 

 

(83,191

)

Repayments of notes payable to related parties

 

 

 

 

 

(611,807

)

Repayments of vehicle and equipment financing

 

 

(49,139

)

 

 

(6,937

)

Net cash (used in) provided by financing activities

 

 

(710,853

)

 

 

1,666,733

 

Net (decrease) increase in cash

 

 

(65,797

)

 

 

393,066

 

Cash at beginning of year

 

 

2,043,593

 

 

 

46,387

 

Cash at end of period

 

$

1,977,796

 

 

$

439,453

 



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



3




ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

For the Six Months Ended

June 30,

 

 

 

2012

 

2011

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

6,717

 

$

124,835

 

Income taxes

 

$

 

$

 

 

     

 

 

 

 

 

  

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Preferred stock dividends

 

$

51,438

 

$

51,500

 

Conversion of preferred stock to common stock

 

$

2,500

 

$

 

Conversion of convertible notes to common stock

 

$

723,216

 

$

 

Conversion of related party interest to note principal

 

$

 

$

49,089

 

Discount related to warrants issued with convertible debt

 

$

 

$

415,751

 

Cashless exercise of options and warrants

 

$

3,706

 

$

 

Reduction of derivative liability for warrant derivative instruments from warrant exercises and modifications

 

$

106,224

 

$

27,040

 

Insurance premium finance contract recorded as prepaid asset

 

$

171,929

 

$

151,052

 

Common stock issued as settlement of note and accrued interest

 

$

 

$

66,328

 




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



4



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)




1.

 DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION


Description of the Business


Ecosphere Technologies, Inc. (“Ecosphere” or the “Company”), is a diversified water engineering, technology licensing and environmental services company that designs, develops and manufactures wastewater treatment solutions for industrial markets. The Company provides environmental services and technologies for use in large-scale and sustainable applications across industries, nations and ecosystems. Ecosphere is driving clean water innovation with its patented Ozonix™ advanced oxidation technologies and its mobile, low maintenance water treatment systems. Ecosphere's patented Ozonix™ technology is a high volume, advanced oxidation process designed to recycle water while reducing liquid chemicals used during water treatment applications.


The Company, through its majority-owned subsidiary Ecosphere Energy Services, LLC, ("EES") currently provides energy exploration companies with an onsite, chemical free method to kill bacteria and control microbiologically induced fouling and corrosion that occurs during hydraulic fracturing and flowback operations. The Company has been a water industry innovator since 1998 when Company founders began developing eco-friendly technologies to solve major water remediation challenges on land and at sea.


Material Contract with Hydrozonix


In March 2011, the Company entered into an Exclusive Product Purchase and Sub-License Agreement (the “Agreement”) with Hydrozonix, LLC (a strategic alliance between the principals of Phillips and Jordan, Inc., a private family trust and Siboney Contracting Company) (“Hydrozonix”) to deploy its patented Ecosphere Ozonix® technology in the U.S. onshore oil and gas exploration and production industry. As part of the Agreement, Hydrozonix agreed to advance the direct costs and the manufacturing overhead for each Ozonix™ EF80 unit it ordered. Additionally, Hydrozonix pays a manufacturing fee and a sub-licensing fee to EES. In turn, ETI is the exclusive manufacturer of the Ozonix™ Ecos-Frac® Series and is paid its costs plus a manufacturing fee from EES. In addition, ETI receives profit distributions from EES relating to its ownership percentage of EES. ETI, will also receive a percentage of the royalties paid to EES by Hydrozonix. However, such royalties are not assured. The Ozonix™ EF80 employs the same patented Ozonix™ technology as the units that have successfully processed water for onshore oil and gas exploration companies over the past three years on over 530 oil and natural gas wells. The Ozonix™ EF80 units are capable of processing 80 barrels of water per minute or approximately 3,360 gallons per minute. Ecosphere delivered to Hydrozonix the first four Ozonix™ EF80 units in 2011, two additional units in the first quarter of 2012 and two more units in early July 2012. Concurrent with the acceptance of the two units in July, the Company received an order for production of the next two units pursuant to the terms of the Agreement.


To secure the Company's obligations under the Agreement, the Company assigned a continuing first priority interest in each unit to be manufactured for Hydrozonix (including its components), as well as a continuing first priority interest in twenty-four Ozonix™ EF10 units which are part of the Company's service fleet. The security interest in the assets terminated in July 2012 once the Company delivered the eighth unit to Hydrozonix.


Basis of Presentation


The accompanying unaudited condensed consolidated financial statements include the accounts of Ecosphere and its subsidiaries, including its 52.6% owned subsidiary EES. All intercompany account balances and transactions have been eliminated.


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) in the United States of America (“U.S.”) as promulgated by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and with the rules and regulations of the U.S Securities and Exchange Commission (“SEC”) for interim financial information. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods shown. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis and Results of Operations contained in this report and the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.



5



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



The Company has two operating segments that (i) engage in similar operating activities, (ii) have similar economic characteristics and, (iii) can be expected to have essentially the same future prospects. As such, based on guidance provided by the FASB ASC Topic 280 Segment Reporting, the Company has aggregated its operating segments into one reportable segment thus negating the need for the disclosure of segment data.


2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Principles of Consolidation


The consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.


Noncontrolling Interest


The Company accounts for its less than 100% interest in consolidated subsidiaries in accordance with ASC Topic 810, Consolidation, and accordingly the Company presents noncontrolling interests as a component of equity on its condensed consolidated balance sheets and reports noncontrolling interest net income or loss under the heading “Net income applicable to noncontrolling interest in consolidated subsidiary” in the condensed consolidated statements of operations.


Use of Estimates


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


Cash Equivalents


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


Restricted Cash


Restricted cash represents a $25,000 compensating balance held pursuant to certain of the Company's short term financing arrangements along with $378,809 of cash placed in an escrow account pursuant to the Hydrozonix Agreement which was released subsequent to June 30, 2012.


Accounts Receivable and Allowance for Doubtful Accounts


Accounts receivable are stated at their estimated net realizable value. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers. The Company’s collection experience has been favorable reflecting a limited number of customers, all of which are in the oil and gas industry. No allowance was deemed necessary at June 30, 2012 and December 31, 2011.


Inventory


Inventory is primarily comprised of raw materials and work-in-process representing water filtration units being manufactured and assembled for sale.  These units are built pursuant to individual order specifications.  The Company has minimal raw materials on hand and once a unit is completed, it is submitted to the customer for acceptance.  Inventory on hand at each respective balance sheet date is stated at the lower of cost or market.  At June 30, 2012 and December 31, 2011, inventory was comprised of raw materials only.




6



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



Property and Equipment


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


Patents


Patents consist of costs related to the development of such patents which have finite lives. Intangible assets with finite lives are amortized over their estimated useful lives on a straight line basis.


Impairment of Long-Lived Assets


The Company reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or group of assets to undiscounted future net cash flows expected to be generated by the asset or group of assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered appropriate.


Derivative Instruments


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


Fair Value of Financial Instruments and Fair Value Measurements

 

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


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

 

 

Level 1:

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

 

 

 

 

Level 2:

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

 

 

 

 

Level 3:

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

 



7



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



Revenue Recognition

 

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


Equipment and Component Sales


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


Through March 31, 2012 and prospectively for production type contracts that do not qualify for use of the percentage of completion method, the Company accounts for these contracts using the “completed contract method” of accounting in accordance with ASC 605-35-25-57. Under this method, contract costs are accumulated as deferred assets, and billings and/or cash received is recorded to a deferred revenue liability account, during the periods of construction, but no revenues, costs, or profits are recognized in operations until the period upon completion of the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs. All unallocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined. The deferred asset (accumulated contract costs) in excess of the deferred liability (billings and/or cash received) is classified as a current asset under "Costs in excess of billings on uncompleted contracts". The deferred liability (billings and/or cash received) in excess of the deferred asset (accumulated contract costs) is classified under current liabilities as "Billings in excess of costs on uncompleted contracts".


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


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


Royalties


Revenue from technology license royalties will be recorded as the royalties are earned.


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


Product Warranties


The Company accrues for product warranties when the loss is probable and can be reasonably estimated. At June 30, 2012 and December 31, 2011, the Company has no product warranty accrual given its lack of historical warranty experience.




8



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



Equity-based Compensation


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


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


Income Taxes


The Company uses the asset and liability method in accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based on difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.


Accounting for Uncertainty in Income Taxes


The Company applies the provisions of ASC Topic 740-10-25 Income Taxes – Overall – Recognition (“ASC Topic 740-10-25”) with respect to the accounting for uncertainty of income tax positions. ASC Topic 740-10-25 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740-10-25 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of June 30, 2012, tax years 2009, 2010 and 2011 remain open for IRS audit. The Company has received no notice of audit from the Internal Revenue Service for any of the open tax years.


New Standards


No ASUs have been issued impacting the Company.


3.

PROPERTY AND EQUIPMENT


Property and equipment consists of the following at June 30, 2012:


 

 

Estimated Useful

 

 

 

 

 

 

Lives in Years

 

 

2012

 

Machinery and equipment

 

5

 

 

$

11,099,294

 

Furniture and fixtures

 

5 to 7

 

 

 

330,238

 

Automobiles and trucks

 

3 to 5

 

 

 

236,944

 

Leasehold improvements

 

5

 

 

 

415,281

 

Office equipment

 

5

 

 

 

520,700

 

 

 

 

 

 

 

 

12,602,457

 

Less total accumulated depreciation

 

 

 

 

 

 

(7,512,274

)

Property and equipment, net

 

 

 

 

 

$

5,090,183

 


In the six months ended June 30, 2012, additions to property and equipment were de minimis. Depreciation expense amounted to approximately $1.1 million for the six month period ended June 30, 2012.



9



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



4.

NOTES PAYABLE AND OTHER DEBT


Long-term debt, other than debt held by related parties (see Note 5), consists of the following at June 30, 2012:


Convertible notes payable, net of a discount of $96,300 (a)

 

$

1,128,700

 

Note payable (b)

 

 

238,349

 

Equipment financing (c)

 

 

145,514


Insurance premium financing contract (d)

 

 

77,081

 

Vehicle financing (e)

 

 

22,694

 

Total debt

 

 

1,612,338

 

Less amounts payable within one year

 

 

(1,316,883

)

Long term debt

 

$

295,455

 

———————

(a)

Two-year term convertible notes issued in 2010 and 2011 with an aggregate principal balance of $1,225,000 at June 30, 2012. The notes have a conversion rate of $0.70 per share and bear interest at 10% payable at the earlier of maturity or conversion. The notes were issued along with a total of 1,464,286 five-year warrants to purchase common shares at an exercise price of $0.70 per share. The warrants were valued using the BSM option pricing model with expected terms of 5 years, volatility ranging from 100.73% to 112.55% and discounts rates from 1.51% to 2.06%. The relative fair value of these warrants, $506,867, was recorded as a debt discount and is being amortized to interest expense over the term of the notes. Because the conversion rate of the notes exceeded the trading price of the Company’s common stock at the dates of issue, there was no intrinsic value recorded for the embedded conversion features. In addition, two of the convertible notes were issued with original issue discounts totaling $75,000 which was also recorded as debt discount and was being amortized to interest expense over the term of the respective notes. The two aforementioned notes were converted into common stock during 2012 as discussed below.

 

 

 

On March 2, 2012, the holder of a $275,000 convertible note elected to convert such note into 392,857 shares of the Company's common stock. The principal amount of the note net of both warrant and original issue discounts on the date of conversion amounted to $242,453. On April 26, 2012, the holder of a $550,000 convertible note elected to convert such note into 785,714 shares of the Company's common stock. The principal amount of the note net of both warrant and original issue discounts on the date of conversion amounted to $480,763. The remaining unamortized discounts at the time of conversion were credited to the capital accounts upon conversion to reflect the stock issued and no gain or loss was recognized in accordance with ASC 470-20-40.

 

 

 

The remaining notes mature on dates ranging from November 2012 through March 2013.

 

 

(b)

Non-interest bearing unsecured note payable to former director reclassified from related party debt on January 1, 2012 due to lack of on-going affiliation with the lender.

 

 

(c)

Secured equipment notes payable in monthly installments of $3,406 over 60 months accruing interest at 6.75%.

 

 

(d)

Financing for insurance premiums payable in nine monthly installments of $19,439 accruing interest at 4.25%. The final payment is due in October 2012.

 

 

(e)

Secured vehicle notes payable in monthly installments totaling $878 over 60 months accruing interest at 9.0%. In May of 2012, one of the three vehicle notes outstanding at the beginning of the year was repaid early and such repayment amounted to $24,949.


A summary of convertible notes payable and the related discounts as of June 30, 2012:


Principal amount of convertible notes payable

 

$

1,225,000


Unamortized discount

 

 

(96,300

)

Convertible notes payable, net of discount

 

 

1,128,700

 

Less: current portion

 

 

(1,128,700

)

Convertible notes payable, net of discount, less current portion

 

$

 




10



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



5.

RELATED PARTY NOTES PAYABLE


Related party debt consists of the following at June 30, 2012:


Default interest on secured line of credit agreement (a)

 

$

40,512


Default interest on related party notes payable (b)

 

 

96,164

 

Total debt

 

 

136,676

 

Less current portion

 

 

(136,676

)

Non-current portion of related party notes payable

 

$

 

———————

(a)

In December 2010, creditor deferred default interest due December 2012. The final payment of principal and interest, other than the default interest, on this note was made in February 2011.

 

 

(b)

In December 2010, creditor deferred interest on historical underlying note payable (principal amount repaid in December 2011) due December 2012.


6.

BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS


Billings in excess of costs and estimated earnings on uncompleted contracts represents billings and/or cash received that exceeded accumulated revenues recognized on uncompleted contracts accounted for under the percentage of completion method. (See Note 2)


At June 30, 2012, billings in excess of costs and estimated earnings on uncompleted contracts consisted of the following for contracts accounted for using the percentage of completion method of accounting:


Billings and/or cash receipts on uncompleted contracts

 

$

5,945,696

 

Less: Revenues recognized

 

 

(5,757,017

)

Billings in excess of costs and estimated earnings on uncompleted contracts

 

$

188,679

 


7.

RESTRUCTURING RESERVE

 

In June 2009, the Board of Directors approved an exit strategy to close the Company’s New York office in order to reduce operating costs. The Company recognized aggregate restructuring charges related to the office closing in the amount of $548,090 consisting of future lease commitments and employee severance costs in the amount of $246,920 and $301,170, respectively. The Company entered into a sublease agreement with a tenant that provides for monthly sublease payments of approximately $11,300 through April 2013. As of June 30, 2012, the restructuring reserve liability consists of the present value of the future minimum rental payments due, net of the sublease income payments to be received.

 

The following table summarizes the activity in the restructuring reserve for the six months ended June 30, 2012:


Balance, beginning of year

 

$

119,184

 

Rental payments

 

 

(92,738

)

Sublease payments received

 

 

67,813

 

Balance, end of period

 

$

94,259

 


8.

DERIVATIVE FINANCIAL INSTRUMENTS


The Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC Topic 815-40”) under which convertible instruments and warrants, which contain terms that protect holders from declines in the stock price (reset provisions), may not be exempt from derivative accounting treatment. As a result, warrants are recorded as a liability and are revalued at fair value at each reporting date. Further, under derivative accounting, the warrants are recorded at their fair value. If the fair value of the warrants exceeds the face value of the related debt, the excess is recorded as change in fair value in operations on the issuance date. The Company has approximately 1.0 million warrants with repricing options outstanding at June 30, 2012.




11



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



The Company calculates the estimated fair values of the liabilities for warrant derivative instruments at each quarter-end using the BSM option pricing model. The closing price of the Company’s common stock at June 30, 2012 was $0.50. Volatility, expected term and risk free interest rates used are indicated in the table that follows. The volatility was based on historical volatility, the expected term is equal to the remaining term of the warrants and the risk free rate is based upon rates for treasury securities with the same term.


Warrants

 

June 30, 2012

 

 

 

Volatility

 

54.75%

Expected term in years

 

0.88 to 1.78

Risk free interest rate

 

0.18% to 0.30%


During the six month periods ended June 30, 2012, based upon the estimated fair value, the Company increased its liability for warrant derivative instruments by $85,995 which was recorded as "Loss from change in derivative liability" in the other expense section of the Company's condensed consolidated statement of operations. This increase was offset by conversions of warrant instruments with fair values totaling $106,224 at the time of conversion resulting in a net reduction of the liability of $20,229.


9.

FAIR VALUE MEASUREMENTS


The Company measures and reports at fair value the liability for price adjustable warrant derivative instruments. The fair value liabilities for price adjustable warrants have been recorded as determined utilizing the BSM option pricing model. The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012:


 

 

Balance at

June 30, 2012

 

Quoted Prices in

Active Markets

for Identical

Inputs

 

Significant

Other

Observable

Assets

 

Significant

Unobservable

Inputs

 

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of liability for warrant derivative instruments

   

$

327,006

   

$

     

$

     

$

327,006

  


The following is a roll-forward for the six months ended June, 2012 of the fair value liability of price adjustable warrant derivative instruments:


 

 

Fair Value of

Liability For

Warrant

Derivative

Instruments

 

 

 

 

 

 

Balance at beginning of period

     

$

347,235

  

Fair value of warrants exercised

 

 

(106,224

)

Change in fair value included in statement of operations

 

 

 85,995

 

Balance at end of period

 

$

327,006

 


The Company had no non-financial assets or liabilities measured at fair value at June 30, 2012.

 

10.

REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK


Series A


At June 30, 2012 and December 31, 2011, there were 6 shares of Series A Redeemable Convertible Cumulative Preferred Stock (“Series A Preferred Shares”) outstanding. The shares are redeemable at the option of the Company at $27,500 per share plus accrued dividends or redeemable at the option of the holder upon a change of control ("CoC") event at $25,000 per share plus accrued dividends. A CoC event means a transfer of greater than fifty percent of the shares of common stock of the Company. The shares are convertible each into 24,000 common shares. Accrued dividends totaled $1,019,744 and $1,008,494 at June 30, 2012 and December 31, 2011, respectively. There was no Series A Preferred Shares activity during the six months ended June 30, 2012. Annual dividends accrue at a rate of $3,750 per share.




12



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



Series B


At June 30, 2012 and December 31, 2011, there were 321 and 322 shares, respectively, of Series B Redeemable Convertible Cumulative Preferred Stock (“Series B Preferred Shares”) outstanding. The shares are redeemable at the option of the Company at $3,000 per share plus accrued dividends or at the option of the holder upon a CoC event at $2,500 per share plus accrued dividends. The shares are convertible each into 835 common shares. Accrued dividends totaled $2,057,489 and $2,017,301 at June 30, 2012 and December 31, 2011, respectively. One Series B Preferred Share was converted during the six months ended June 30, 2012. Annual dividends accrue at a rate of $250 per share.


11.

COMMON STOCK


Shares issued and issuable during the six months ended June 30, 2012 are summarized below.


Shares outstanding and issuable at December 31, 2011

 

 

146,334,316

 

Conversion of convertible notes payable (a)

 

 

1,178,571

 

Conversion of Series B Preferred share (see Note 10)

 

 

835

 

Exercise of warrants and options (b)

 

 

1,280,332

 

Cashless exercises of warrants and options (c)

 

 

370,589

 

Total common shares outstanding and issuable at June 30, 2012

 

 

149,164,643

 

———————

(a)

issued to settle two convertible notes (net of original issue and warrant discounts) amounting to $723,216. The $825,000 face value of the notes was convertible at $0.70 per share. See Note 4.

(b)

issued upon exercise of warrants and options at exercise prices ranging from $0.15 to $0.60 per share resulting in proceeds to the Company of $249,300.

(c)

issued upon the cashless exercises of 4,356,000 options and warrants with exercise prices between $0.36 and $0.60 per share based upon market prices of the Company’s common stock ranging from $0.60 to $0.63 per share.


12.

RESTRICTED STOCK


The Company recognized share-based compensation expense of $42,500 for the six months ended June 30, 2012, related to restricted stock grants issued per the terms of the 2006 Equity Incentive Plan (the "Plan"). The following table summarizes non-vested restricted stock and the related activity for the six months ended June 30, 2012:


 

 

Shares

 

Weighted

Average

Grant Date

Fair Value

 

 

  

 

 

 

  

Unvested at January 1, 2012

 

317,397

 

$ 0.52

 

Vested

 

 (111,110

)

$ 0.54

 

Cancellations and forfeitures

 

(148,148

)

$ 0.54

 

Unvested at June 30, 2012

 

 58,139

 

$ 0.43

 


Total unrecognized share-based compensation expense from unvested restricted stock as of June 30, 2012 was $25,000 which is expected to be recognized over the next 0.5 years.


In accordance with the Plan, in 2011 the Company granted the directors restricted shares of the Company’s common stock that vested on June 30, 2012. A similar grant was made to directors on July 1, 2012 in accordance with the Plan. See Note 19.


13.

NET INCOME (LOSS) PER SHARE


The Company’s outstanding options and warrants to acquire common stock, shares of common stock which may be issued upon conversion of outstanding redeemable convertible cumulative preferred stock, unvested shares of restricted stock and shares of common stock which may be issued upon conversion of convertible notes total 70,859,514 as of June 30, 2012. These common stock equivalents may dilute future earnings per share.



13



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



For the six months ended June 30, 2012, basic net income per common share applicable to common stockholders was computed on the basis of the weighted average number of common shares outstanding during the period. Diluted net income per common share applicable to common stockholders was computed on the basis of the weighted average number of common shares and dilutive securities outstanding. Dilutive securities having an anti-dilutive effect on diluted net income per share were excluded from the calculation.

 

Basic and diluted net income per share for the three and six months ended June 30, 2012 were calculated as follows:


 

 

Three Months Ended

June 30, 2012

 

 

Six Months Ended

June 30, 2012

 

  

 

Basic

 

 

Diluted

 

 

Basic

 

 

Diluted

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stock

 

$

505,860

 

 

$

505,860

 

 

$

870,646

 

 

$

870,646

 

Preferred stock dividends

 

 

 

 

 

25,688

 

 

 

 

 

 

51,438

 

  

 

$

505,860

 

 

$

531,548

 

 

$

870,646

 

 

$

922,084

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

148,851,205

 

 

 

148,851,205

 

 

 

148,132,482

 

 

 

148,132,482

 

Restricted stock

 

 

 

 

 

285,529

 

 

 

 

 

 

285,529

 

Preferred stock

 

 

 

 

 

412,209

 

 

 

 

 

 

412,540

 

Warrants and options

 

 

 

 

 

9,195,155

 

 

 

 

 

 

12,083,964

 

  

 

 

148,851,205

 

 

 

158,744,098

 

 

 

148,132,482

 

 

 

160,914,515

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

$

0.00

 

 

$

0.00

 

 

$

0.01

 

 

$

0.01

 


There were 21,176,481 out-of-the-money stock options and warrants and 1,750,000 shares upon conversion of convertible debt excluded from the computation of diluted earnings per share for the six months ended June 30, 2012.


14.

STOCK OPTIONS AND WARRANTS


The fair value of each option is estimated on the date of grant using the BSM option-pricing model. The Company used the following assumptions for options issued during the six months ended June 30, 2012:


Risk-free interest rate

 

0.60% to 0.87%

Expected option life in years

 

4.0

Expected stock price volatility

 

63.85% to 64.15%

Expected dividend yield

 

None


Stock-based compensation expense related to options for the six months ended June 30, 2012 was $0.9 million. At June 30, 2012, total unrecognized compensation cost related to unvested options granted under the Company’s option plans totaled $0.8 million. This unrecognized compensation cost is expected to be recognized over the next 33 months.


Activity in the Company’s options for the six month period ended June 30, 2012 is as follows:

 

Option Grants


In January 2012, the Company granted five year options to purchase 1,060,000 shares of common stock to certain employees at an exercise price of $0.44 per share. The fair value of these options amounted to $224,816, calculated using the BSM method, and will be expensed over a three year period, one-third per year.


In February 2012, the Company granted 2,560,000 unvested five-year stock options exercisable at $0.64 per share to a director of the Company's 52.6% owned subsidiary, EES. The director is not a director or officer or affiliated with Ecosphere. The options were granted as part of a finder's fee agreement relating to a potential future transaction not in the ordinary course of business. We have no agreement with any other party relating to this future transaction and unless it is consummated, the options will never vest. The potential future transaction will be subject to future approval of the Company's Board of Directors. The future transaction would only occur if significant shareholder value were delivered by the transaction. Given the absence of a measurement date, no fair value has been established for these option grants.



14



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



In March 2012, upon the effective date of our new board member, the Company granted five year options to purchase 123,076 shares of common stock at an exercise prices of $0.65 per share. The fair value of these options amounted to $39,027, calculated using the BSM method, and will be expensed over a three year period, one-third per year.


Option and Warrant Exercises


Cash Exercises


During the first six months of 2012, the Company issued 1,280,332 shares of common stock in exchange for cash of $249,300 upon the exercise of options and warrants with an exercise prices ranging from $0.15 to $0.60 per share.


Cashless Exercises


During the first six months of 2012, the Company issued 300,675 shares of common stock in connection with the cashless exercise of 1,000,000 options to purchase the Company’s common stock exercisable at $0.36 to $0.60 per share and based upon the market value of the Company’s common stock ranging from $0.60 to $0.65 per share.


Warrant Extensions or Cashless Exercises for Warrants Expiring on March 31, 2012


In March of 2012, the Company provided an option to extend the expiration date of certain warrants for a period of one year, or surrender the warrants in a cashless exercise. The arrangement called for holders of warrants at exercise prices of $0.60 and $0.75 to extend such warrants for one year at a cost of $0.20 and $0.14, respectively. Holders of 320,000 and 310,000 $0.60 warrants and $0.75 warrants, respectively opted to extend their expiration date for one year at an aggregate cost of $107,400. Given the stock closing price at quarter-end of $0.61, the remainder of the $0.60 warrants were converted in cashless exercises, resulting in the issuance of 69,914 shares of common stock, while the $0.75 warrants expired.


15.

RELATED PARTY TRANSACTIONS


See Note 5 for discussion of related party notes payable.


In January 2012, the Company granted five year options to purchase 1,060,000 shares of common stock to certain employees at an exercise price of $0.44 per share. 910,000 of these grants were made to related parties. See Note 14.


In March 2012, upon the effective appointment date of our new board member, the Company granted five year options to purchase 123,076 shares of common stock at an exercise prices of $0.65 per share. See Note 14.


16.

COMMITMENTS AND CONTINGENCIES


Legal Matters


From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. To our knowledge, except as described below, no legal proceedings, government actions, administrative actions, investigations or claims are currently pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.


The Company had a long term relationship with Kamimura International Associates (“KIA”), a Washington D.C. based organization, whereby the principals at KIA agreed to assist the Company in developing the coating removal market in the Far East. The relationship resulted in the establishment of UltraStrip Japan, Ltd. (“USJ”), a company whose purpose was to market and deliver ship stripping services in Japan. The agreement with KIA was never formalized. In February 2007, KIA filed a lawsuit against the Company. In March 2007, the Company filed a Motion to Dismiss, Motion to Strike, and Motion for More Definite Statement. The Company intends to vigorously defend itself in this litigation; the Company believes that the plaintiff will not prevail. In 2008, the Company filed a counterclaim to which KIA responded by filing a motion to dismiss. The motion to dismiss was rejected by the court. Depositions were taken in the Spring and Summer of 2011. Since those depositions there have been no further actions taken by either party and the matter remains in dispute. The Company has expensed and accrued an amount it reasonably estimates may be required to resolve any outstanding issues between the Company and KIA and management does not expect this matter to have any future impact on the liquidity or results of operations of the Company.



15



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



In March 2011, a court adjudicated against the Company for a number of disputed billings by a former vendor. As of June 30, 2012, the Company has accrued $70,000 which is anticipated to be the amount of payment due to the vendor plus attorney’s fees. The Company filed an appeal which was rejected by the appeal court. The Company continues to attempt to settle this matter, but believes that the amount accrued represents a reasonable estimate as to the ultimate amount to be paid.


Warranties on EF80 Units


Each Ozonix™ EF80 unit carries a 24 month warranty with the individual component vendors passing through their individual warranties to the client. Ecosphere warranties construction and build quality for the aforementioned period and all repairs would be carried out by the manufacturing team including the fabrication of any pipes and fittings as necessary. No warranty liability is accrued at June 30, 2012 or December 31, 2011 given the Company's lack of historical experience resulting in its inability to estimate such future costs.


17.

NONCONTROLLING INTEREST

 

In July 2009, the Company formed EES and contributed the assets and liabilities of EES, Inc. in exchange for a 67% ownership interest in EES. In November 2009 EES received $7.9 million in exchange for a 21.5% interest in EES. After the November transaction, the Company owned 52.6% of EES. EES is a limited liability company operating under a Limited Liability Company Agreement, as amended ("LLC Operating Agreement") which among other things specifies profit and loss allocations and distribution allocations.


For the years ended December 31, 2009 and 2010, the Company allocated 100% of the net loss of EES, $743,417 and $528,277, respectively, to the noncontrolling interests of EES as stipulated in the LLC operating agreement. For fiscal 2011, EES had net income of $3,217,407 of which the first $1,271,694 was allocated entirely to the noncontrolling interest to allow them recovery of previously allocated losses, in accordance with the LLC operating agreement, after which income was allocated to ETI and certain noncontrolling interests based on a formula stipulated in the LLC operating agreement, as amended. On a net basis, $1,690,075 of income was allocated to noncontrolling interests in fiscal 2011. During the six months ended June 30, 2012, the Company allocated $744,631 of EES net income to its noncontrolling members.


In a March 2011 side agreement to the Hydrozonix Agreement, the EES operating agreement was amended to defer the Company’s right to preferential distributions and profit allocation, outlined under the original operating agreement, until such time as the noncontrolling members have received distributions equal to their original investments. In addition, so long as Hydrozonix maintains its exclusivity, the EES minority members will receive a 5% royalty while the remaining royalties of 15% are distributed by EES as part of a normal distribution in accordance with the LLC operating agreement to the Company and the minority members in accordance with their percentage interests in EES.


Pursuant to an EES Board of Members resolution in February 2012, a cash distribution of $1.9 million was made in accordance with membership interests in EES. Of this amount, $0.9 million was paid to members comprising the noncontrolling interest and $1.0 million was due to the Company and, accordingly, was eliminated in consolidation. The cash distribution was paid in full out of retained earnings of the subsidiary during March of 2012. See note 19 for July 2012 cash distribution.


The following provides a summary of activity in the noncontrolling interest in consolidated subsidiary account for the six months ended June 30, 2012:


 

 

 

2012

 

 

 

 

 

 

Balances at beginning of year

 

$

11,768,381

 

Noncontrolling interest in income

     

 

 744,631

  

Distributions to noncontrolling members

 

 

(908,551

)

Balances at end of period

 

$

11,604,461

 



16



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



18.

CONCENTRATIONS


Concentration of Accounts Receivable and Revenues


At June 30, 2012 accounts receivable of approximately $3.7 million was comprised primarily of two major customer balances amounting to 47% and 48% of the total receivable balance. In addition, two customers accounted for 67% and 29% of revenues.


Concentration of Credit Risk


Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through June 30, 2012. As of June 30, 2012, the Company had no cash equivalent balances held in a corporate checking account that were not insured. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. The Company’s payment terms are generally upon receipt or 30 days from delivery of products, but may fluctuate depending on the terms of each specific contract. The Company’s customers are in the oil and gas industry.


Major Suppliers


The Company purchases products from a limited number of manufacturers, however, management believes that other suppliers could adapt to provide similar products or components on comparable terms.


19.

SUBSEQUENT EVENTS


Director and Advisor Grants


In July 2012, in accordance with the 2006 Equity Incentive Plan (the “Plan”), the Company’s non-employee directors received an automatic grant of options and restricted stock for board service for the upcoming year. In connection with the automatic grants, non-employee directors were granted a total of 380,000 five-year stock options at an exercise price of $0.50 per share and 80,000 shares of restricted common stock. The options and restricted stock vest on June 30, 2013, subject to the continued service of each applicable person as a director. The value of the options, $70,018, calculated using the BSM option pricing model and the value of the restricted stock, $40,000, based upon the market value of the Company's common stock on the date of the grant, will be recognized as expense over the one-year vesting period.


In July 2012, in accordance with the Plan, the Company’s advisory board member received an automatic grant of 30,000 five-year stock options with an exercise price of $0.50 per share for service as an advisory board member for the upcoming year. The options vest on June 30, 2013, subject to the continued service as an advisory board member. The value of the options, $5,528, calculated using the BSM option pricing model, based upon the market value of the Company's common stock on the date of the grant, will be recognized as expense over the one-year vesting period.


On July 3, 2012, in connection with a non employee board member’s appointment to the compensation committee, the committee member received an automatic grant under the Plan of 41,666 five-year stock options at an exercise price of $0.48 per share. The options vest in three equal annual increments over a three year period with the first vesting date being one year from the date of the automatic grant. The value of the options, $8,410, calculated using the BSM option pricing model, based upon the market value of the Company's common stock on the date of the grant, will be recognized as expense over a three-year vesting period.


EES Cash Distribution


Pursuant to an EES Board of Members resolution in July 2012, a cash distribution of $1.5 million was made in accordance with membership interests in EES. Of this amount, $0.7 million was paid to members comprising the noncontrolling interest and $0.8 million was due to the Company and, accordingly, will be eliminated in future consolidated results of operations. The cash distribution was paid in full out of retained earnings of the subsidiary during July of 2012.




17



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)



Cashless Option Exercises


In July 2012, the Company issued 188,280 shares of common stock to its Chief Operating Officer upon the cashless exercise of 285,667 options with an exercise price of $0.15 per share based upon a market price of the Company's common stock of $0.44 per share.


In July 2012, the Company issued 199,777 shares of common stock upon the cashless exercise of 300,000 options with an exercise price of $0.15 per share based upon a market price of the Company's common stock of $0.449 per share.







18



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



ITEM 2:

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

 

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” in our Form 10-K for the year ended December 31, 2011.


Company Overview


Ecosphere Technologies, Inc. is a diversified water engineering, technology licensing and environmental services company that designs, develops and manufactures wastewater treatment solutions for industrial markets. The Company provides environmental services and technologies for use in large-scale and sustainable applications across industries, nations and ecosystems. Ecosphere is driving clean water innovation with its patented Ozonix™ advanced oxidation technologies and its mobile, low maintenance water treatment systems. Ecosphere's patented Ozonix™ technology is a high volume, advanced oxidation process designed to recycle water while reducing liquid chemicals used during water treatment applications.


The Company’s Open Innovation Network is a business model that was created to invent, develop, commercialize and sell green technologies using water treatment as a key component. Ecosphere manufacturers its Ozonix™ units at its Stuart, Florida facility; all material components are also made in the United States. The business model is used to:


1. Identify a major environmental water challenge

2. Invent technologies and file new patents

3. Partner with industry leaders

4. Commercialize and prove technologies with ongoing services paid for by customers and industry leaders

5. License the patented, commercialized technologies to well capitalized partners

6. Create reoccurring revenues and increase shareholder value


At present, Ecosphere is focusing its efforts on EES, its 52.6% owned subsidiary. In 2011, EES made a strategic re-positioning of its business by signing a multi-year licensing agreement with Hydrozonix LLC. This agreement moved the Company into the final stages of the Open Innovation Network in the Energy field of use by licensing the patented, commercialized technologies to a well capitalized partner in the oil and gas sector. The agreement contains numerous provisions for creating recurring revenues based on minimum order quantities and ongoing royalties based on the business results of Hydrozonix. EES will also continue to be engaged in operating high volume mobile water treatment equipment to treat energy exploration related wastewaters. EES has been successfully providing water recycling services to major energy exploration companies utilizing our patented Ecosphere Ozonix® technology. The industry acceptance of this technology is demonstrated by the three-year history of expanded service and increasing revenue from the services provided to customers by EES and the Exclusive Sublicense and Manufacturing Agreement signed with Hydrozonix for U.S. onshore oil and gas exploration and production. These agreements prove that the Ecosphere Ozonix® technology is commercially viable and have fueled the continuing development of Ozonix™ technologies and the identification of additional applications where our technologies will allow industrial companies to optimize revenues. We believe our contracts with energy oil and gas exploration companies and our sublicense agreement with Hydrozonix, LLC demonstrate the substantial value of our intellectual property above and beyond the amounts recorded in our financial statements using the historical cost basis of accounting under GAAP.


Ecosphere’s patented Ozonix™ technology has the ability to clean and recycle water without liquid chemicals in a variety of industries. While EES has an exclusive license for the global energy market, Ecosphere owns 100% of all non-energy Ozonix™ applications. These industries include, but are not limited to, mining and minerals, municipal wastewater, industrial wastewater, marine wastewater, food processing and agriculture. The Company continues to seek financial partners and licensees to expand its Ozonix™ technology into other industries and applications.


 



19



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



2012 Highlights


·

The Company continues to successfully service the Hydrozonix Agreement as evidenced by the completion of the manufacturing of units 7 and 8 and the acceptance and delivery of such Ozonix™ EF80 units on July 10, 2012. Following the delivery of units 7 and 8, Ecosphere received the purchase order for units 9 and 10 to be delivered in Q3 of 2012.


·

The Company, its majority-owned subsidiary, Ecosphere Energy Services LLC, and its sub-licensee, Hydrozonix LLC (collectively, the "Ecosphere Partners") have signed a Letter of Commitment with the Blackfeet Nation to provide Ecosphere's Ozonix™ water treatment services to oil and gas companies conducting hydraulic fracturing ("fracking" or "fracing") operations on the 3,000 square mile Blackfeet reservation in Montana. The Ecosphere Partners will be the exclusive provider of water treatment services on the Blackfeet reservation. The Ecosphere-Blackfeet commitment will make available to operators a chemical-free approach for treating and reusing 100% of their flowback and produced waters on the reservation. Use of Ecosphere's Ozonix™ technology will not only help preserve the Blackfeet Nation's water resources, but will also eliminate the need to truck wastewater to disposal sites off reservation, thereby improving the economics of shale oil and gas exploration on the reservation. This exclusive services agreement is part of a broad effort by the Blackfeet Nation to sustainably develop their heritage lands, bring jobs to tribal members and improve the economic well being of the tribe.


·

The Company was awarded the Frost & Sullivan’s 2012 "North American Product Leadership Award in Disinfection Equipment for Shale Oil and Gas Wastewater Treatment." The Excellence in Best Practices Awards are presented each year to companies that are predicted to encourage significant growth in their industries, have identified emerging trends before they became the standard in the marketplace, and have created advanced technologies that will catalyze and transform industries in the near future. Frost & Sullivan's Product Leadership Award is a prestigious recognition of the Company's accomplishments in wastewater treatment for the U.S. oil and natural gas industry. As demand for disinfection equipment grows within the oil and natural gas industry, having the best available technology and leading environmentally-safe solution we believe will enhance Ecosphere's overall growth, serving the rapidly growing unconventional oil and natural gas market. We are currently in discussions to expand the adoption of our Ozonix™ technology in other countries and in additional applications for non-chemical wastewater treatment. The 2012 Product Leadership Award recognizes Ecosphere's 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. To benchmark Ecosphere's performance against key competitors, Frost & Sullivan's industry analyst compared product features and functionality, innovative elements of the product, product acceptance in the marketplace, customer value enhancements and product quality to competitive solutions that address microbial control and eliminate chemical usage at a lower cost.


CRITICAL ACCOUNTING ESTIMATES

 

Below the Company will provide a discussion of its more subjective accounting estimation processes for purposes of (i) explaining the methodology used in calculating the estimates, (ii) the inherent uncertainties pertaining to such estimates, and (iii) the possible effects of a significant variance in actual experience, from that of the estimate, on the Company’s financial condition. Estimates involve the employ of numerous assumptions that, if incorrect, could create a material adverse impact on the Company’s results of operations and financial condition.

 

Revenue Recognition


In general we comply with ASC Topic 605-10, “Revenue – Overall” where revenue is recognized when persuasive evidence of an arrangement exists, products are delivered to and accepted by the customer, economic risk of loss has passed to the customer, the price is fixed or determinable, collection is reasonably assured, and any future obligations of the Company are insignificant.


For each of our revenue sources we have the following additional 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, formerly Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production Type Contracts.” Under this method, contract revenues and related expenses are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs. All unallocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is incurred. 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 recognized profit in excess of billings on uncompleted contracts," an asset account, or "Billings in excess of cost and recognized profit on uncompleted contracts," a liability account.



20



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



Through April 1, 2012 and prospectively for production type contracts that do not qualify for use of the percentage completion method, the Company accounts for these contracts using the “completed contract method” of accounting in accordance with ASC 605-35-25-57. Under this method, contract costs are accumulated as deferred assets, and billings and/or cash received are 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 upon completion of the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs. All unallocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined. The deferred asset (accumulated contract costs) in excess of the deferred liability (billings and/or cash received) is classified as a current asset under "Costs in excess of billings on uncompleted contracts". The deferred liability (billings and/or cash received) in excess of the deferred asset (accumulated contract costs) is classified under current liabilities as "Billings in excess of costs on uncompleted contracts".


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


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


Royalties


Revenue from technology license royalties will be recorded as the royalties are earned.


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


Stock-Based Compensation


The Company follows the provisions of ASC Topic 718-20-10 Compensation – Stock Compensation which 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 option pricing model based upon certain assumptions which are contained in Note 14 to our unaudited condensed consolidated financial statements contained in this report. The Black-Scholes-Merton ("BSM") option pricing model requires the input of highly subjective assumptions including the expected stock price volatility.


Fair Value of Liabilities for Warrant Derivative Instruments


We estimate the fair value of each warrant liability with a repricing feature at the issuance date and at each subsequent reporting date by using the BSM option pricing model based upon certain assumptions which are contained in Note 8 to our unaudited condensed consolidated financial statements contained in this report. The BSM model requires the input of highly subjective assumptions including the expected stock price volatility.




21



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



Comparison of the Three Months ended June 30, 2012 with the Three Months Ended June 30, 2011


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

 

 

 

For the Three Months Ended

June 30,

 

 

 

 

 

 

2012

 

 

2011

 

 

Change

 

Revenues

 

 

 

 

 

 

 

 

 

Equipment sales and licensing

 

$

5,778,614

 

 

$

 

 

$

5,778,614

 

Field services

 

 

2,846,490

 

 

 

2,367,543

 

 

 

478,947

 

Total revenues

 

 

8,625,104

 

 

 

2,367,543

 

 

 

6,257,561

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales and licensing

 

 

4,562,761

 

 

 

 

 

 

4,562,761

 

Field services

 

 

713,865

 

 

 

802,558

 

 

 

(88,693

)

Total cost of revenues

 

 

5,276,626

 

 

 

802,558

 

 

 

4,474,068

 

Gross profit

 

 

3,348,478

 

 

 

1,564,985

 

 

 

1,783,493

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

1,313,105

 

 

 

1,926,535

 

 

 

(613,430

)

Administrative and selling

 

 

460,005

 

 

 

317,046

 

 

 

142,959

 

Professional fees

 

 

128,563

 

 

 

264,506

 

 

 

(135,943

)

Depreciation and amortization

 

 

549,570

 

 

 

534,097

 

 

 

15,473

 

Research and development

 

 

12,471

 

 

 

57,865

 

 

 

(45,394

)

Total selling, general and administrative

 

 

2,463,714

 

 

 

3,100,049

 

 

 

(636,335

)

Income (loss) from operations

 

 

884,764

 

 

 

(1,535,064

)

 

 

2,419,828

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(77,861

)

 

 

(189,084

)

 

 

111,223

 

Other income (expense)

 

 

864

 

 

 

290

 

 

 

574

 

Change in fair value of derivative instruments

 

 

112,167

 

 

 

174,873

 

 

 

(62,706

)

Total other income (expense)

 

 

35,170

 

 

 

(13,921

)

 

 

49,091

 

Net income (loss)

 

 

919,934

 

 

 

(1,548,985

)

 

 

2,468,919

 

Preferred stock dividends

 

 

(25,688

)

 

 

(25,750

)

 

 

62

 

Net income (loss) applicable to common stock

 

 

894,246

 

 

 

(1,574,735

)

 

 

2,468,981

 

Net income applicable to noncontrolling interest of consolidated subsidiary

 

 

(388,386

)

 

 

(285,786

)

 

 

(102,600

)

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

 

$

505,860

 

 

$

(1,860,521

)

 

$

2,366,381

 


RESULTS OF OPERATIONS


Comparison of the Three Months Ended June 30, 2012 to the Three Months Ended June 30, 2011


The Company reported net income applicable to Ecosphere Technologies, Inc. common stock of $0.5 million during the three months ended June 30, 2012 as compared to a net loss applicable to Ecosphere Technologies, Inc. common stock of $1.9 million for the three months ended June 30, 2011. The drivers of the $2.4 million year over year favorability are discussed below.


Revenues


Revenues for the three months ended June 30, 2012 increased $6.3 million over the three months ended June 30, 2011. The increase in revenue is driven by the Company recognizing revenue under the percentage of completion method related to the manufacture of two Ozonix™ EF 80 units under the Hydrozonix Agreement which amounted to $5.8 million. Such units were approximately 97% complete at June 30, 2012. The balance of the revenue and associated costs relating to units 7 and 8 will be recognized in the quarter ending September 30, 2012. The remainder of the revenue increase resulted from increased volume of activities surrounding the pretreatment of water to fracture natural gas wells and the processing of frac flowback water.

 

Cost of Revenues

 

Cost of revenues amounted to $5.3 million for the three months ended June 30, 2012 as compared to $0.8 million for the three months ended June 30, 2011.




22



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



During the 2012 period, “Cost of revenues” also includes the cost of the manufacture of the Ozonix™ EF80 water treatment units sold to Hydrozonix. These costs amounted to $4.6 million.


Operating Expenses

 

Operating expenses for the three months ended June 30, 2012 were $2.5 million compared to $3.1 million for the three months ended June 30, 2011. The $0.6 million decrease in expense is the result of (i) $0.6 million less in salaries and employee benefits primarily driven by lower equity-based compensation in the current period, and (ii) $0.1 million less in professional fees resulting increased costs in the comparable 2011 period as a result of the negotiation of the Hydrozonix Agreement and other legal matters in that period. These increases were partially offset by slightly higher depreciation and $0.1 million increase in administrative and selling expenses associated with the Company growth.


Income (Loss) from Operations


Income from operations for the three months ended June 30, 2012 was $0.9 million compared to a loss of $1.5 million for the three months ended June 30, 2011. See discussion above under "Revenues," "Cost of Revenues" and "Operating Expenses" for details.


Interest Expense

 

Interest expense for the three months ended June 30, 2012 was $0.1 million compared to $0.2 million for the three months ended June 30, 2011. The minor decrease in the 2012 period versus the same period in 2011 is driven by the timing of borrowings and repayments in the respective periods.


Comparison of the Six Months ended June 30, 2012 with the Six Months Ended June 30, 2011


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

 

 

 

For the Six Months Ended

June 30,

 

 

 

 

 

 

2012

 

 

2011

 

 

Change

 

Revenues

 

 

 

 

 

 

 

 

 

Equipment sales and licensing

 

$

11,426,707

 

 

$

 

 

$

11,426,707

 

Field services

 

 

5,559,192

 

 

 

4,595,184

 

 

 

964,008

 

Total revenues

 

 

16,985,899

 

 

 

4,595,184

 

 

 

12,390,715

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales and licensing

 

 

8,670,423

 

 

 

 

 

 

8,670,423

 

Field services

 

 

1,515,582

 

 

 

1,424,257

 

 

 

91,325

 

Total cost of revenues

 

 

10,186,005

 

 

 

1,424,257

 

 

 

8,761,748

 

Gross profit

 

 

6,799,894

 

 

 

3,170,927

 

 

 

3,628,967

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

2,568,251

 

 

 

5,412,635

 

 

 

(2,844,384

)

Administrative and selling

 

 

817,223

 

 

 

646,703

 

 

 

170,520

 

Professional fees

 

 

377,355

 

 

 

826,399

 

 

 

(449,044

)

Depreciation and amortization

 

 

1,101,170

 

 

 

1,062,142

 

 

 

39,028

 

Research and development

 

 

12,471

 

 

 

88,320

 

 

 

(75,849

)

Total selling, general and administrative

 

 

4,876,470

 

 

 

8,036,199

 

 

 

(3,159,729

)

Income (loss) from operations

 

 

1,923,424

 

 

 

(4,865,272

)

 

 

6,788,696

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(175,342

)

 

 

(311,496

)

 

 

136,154

 

Loss on settlement

 

 

 

 

 

(94,662

)

 

 

 

 

Other income (expense)

 

 

4,628

 

 

 

433

 

 

 

4,195

 

Change in fair value of derivative instruments

 

 

(85,995

)

 

 

(23,888

)

 

 

(62,107

)

Total other income (expense)

 

 

(256,709

)

 

 

(429,613

)

 

 

78,242

 

Net income (loss)

 

 

1,666,715

 

 

 

(5,294,885

)

 

 

6,866,938

 

Preferred stock dividends

 

 

(51,438

)

 

 

(51,500

)

 

 

62

 

Net income (loss) applicable to common stock

 

 

1,615,277

 

 

 

(5,346,385

)

 

 

6,867,000

 

Net income applicable to noncontrolling interest of consolidated subsidiary

 

 

(744,631

)

 

 

(313,798

)

 

 

(430,833

)

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

 

$

870,646

 

 

$

(5,660,183

)

 

$

6,436,167

 



23



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



RESULTS OF OPERATIONS


Comparison of the Six Months Ended June 30, 2012 to the Six Months Ended June 30, 2011


The Company reported net income applicable to Ecosphere Technologies, Inc. common stock of $0.9 million during the six months ended June 30, 2012 as compared to a net loss applicable to Ecosphere Technologies, Inc. common stock of $5.7 million for the six months ended June 30, 2011. The drivers of the $6.4 million year over year favorability are discussed below.


Revenues


Revenues for the six months ended June 30, 2012 increased $12.4 million over the six months ended June 30, 2011. The increase in revenue is driven by the Company recognizing revenue related to the completion and delivery of two Ozonix ™ EF80 units and the manufacture of two additional units for which revenue was recognized under the percentage of completion method. Such units were approximately 97% complete at June 30, 2012. The revenue recognized for the four Ozonix™ EF80 units under the Hydrozonix Agreement amounted to $11.4 million. The balance of the revenue and associated costs relating to units 7 and 8 will be recognized in the quarter ending September 30, 2012. In the 2011 comparable period, the Company had not yet delivered any equipment under the Hydrozonix Agreement. The remainder of the revenue increase resulted from increased volume of activities surrounding the pretreatment of water to fracture natural gas wells and the processing of frac flowback water.

 

Cost of Revenues

 

Cost of revenues amounted to $10.2 million for the six months ended June 30, 2012 as compared to $1.4 million for the six months ended June 30, 2011.


During the 2012 period, “Cost of revenues” also includes the cost of the manufacture of the Ozonix™ EF80 water treatment units sold to Hydrozonix. These costs amounted to $8.7 million. In addition, included in "Cost of revenues" for both periods are the payroll related costs of field personnel and parts and supplies used in support of the operation of the water filtration and Ecos-Frac® Tank units which were slightly higher due to increased sales volume and repair and maintenance costs in the 2012 period resulting from a major equipment refurbishment effort underway.


Operating Expenses

 

Operating expenses for the six months ended June 30, 2012 were $4.9 million compared to $8.0 million for the six months ended June 30, 2011. The $3.1 million decrease in expense is the result of (i) $2.8 million less in salaries and employee benefits primarily driven by lower equity-based compensation in the current period, and (ii) $0.4 million less in professional fees resulting from increased costs in the comparable 2011 period as a result of the negotiation of the Hydrozonix Agreement and other legal matters in that period. These increases were partially offset by slightly higher depreciation and administrative and selling expenses associated with the Company growth.


Income (Loss) from Operations


Income from operations for the six months ended June 30, 2012 was $1.9 million compared to a loss of $4.9 million for the six months ended June 30, 2011. See discussion above under "Revenues," "Cost of Revenues" and "Operating Expenses" for details.


Interest Expense

 

Interest expense was largely consistent with the same period in the prior period. The minor decrease in the 2012 period versus the same period in 2011 is driven by the timing of borrowings and repayments in the respective periods.


LIQUIDITY AND CAPITAL RESOURCES

 

Operations:


Net cash provided by operating activities was $0.7 million for the six months ended June 30, 2012, compared to net cash used in operating activities of $0.7 million for the six months ended June 30, 2011.




24



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



2012 Period


Cash provided by operating activities in the 2012 period of $0.7 million resulted from net income applicable to Ecosphere Technologies, Inc. common stock of $0.9 million, non-cash charges of $3.0 million, partially offset by a $3.2 million use of cash resulting from working capital changes.


Non-cash charges included (i) depreciation and amortization of $1.1 million, (ii) vesting of options and restricted stock of $0.9 million, (iii) $0.8 million in income allocable to noncontrolling interests, (iv) $0.1 million in losses pursuant to the change in fair value of derivative instruments, and (v) $0.1 million in debt accretion.


Changes in working capital amounted to a use of $3.4 million in cash and were largely due to increases in accounts receivable which are driven by increased business activity and timing of associated collections. See the unaudited condensed consolidated statements of cash flows for additional details.


2011 Period


Cash used in operating activities in the 2011 period of $0.7 million is the result of the net loss applicable to common stock of $5.7 million and $0.6 million of cash used as a result of changes in working capital accounts being partially offset by $5.5 million in non-cash charges.


Non-cash charges included (i) vesting of options and restricted stock of $3.8 million, (ii) depreciation and amortization of $1.1 million, (iii) $0.3 million in income allocable to noncontrolling interests, and (iv) $0.3 million in other miscellaneous non-cash charges.


Usage of cash resulting from working capital changes was largely driven by reductions of accounts payable and accrued liabilities. See the unaudited condensed consolidated statements of cash flows for additional details


Investing:


The Company’s net cash used by investing activities was de minimis during the six months ended June 30, 2012 compared to net cash used in investing activities of $0.5 million for the six months ended June 30, 2011. Expenditures during the 2011 period were driven by the Company's preparation to service the Hydrozonix Agreement.


Financing:


The Company’s net cash used in financing activities was $0.7 million for the six months ended June 30, 2012 compared to net cash provided by financing activities of $1.7 million for the three months ended June 30, 2011. 


2012 Period


The Company's net cash used in financing activities consisted of a $0.9 million cash distribution to the noncontrolling partners of the Company's wholly-owned EES subsidiary and $0.2 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.


2011 Period


The Company'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 $0.6 million, (iii) $0.2 million in proceeds from equipment financing, offset by (iv) $0.7 million in debt payments largely related to related party notes of $0.6 million and, to a much lesser extent, repayments of insurance financings.


Liquidity


In March 2011, EES and the Company signed a manufacturing and licensing agreement with Hydrozonix for an exclusive sublicensing of the Company’s Ecosphere Ozonix® technology in the domestic onshore oil and gas exploration and production industry in exchange for minimum purchase commitments for the Company’s new Ozonix™ EF80 units. Hydrozonix must purchase at least 8 Ozonix™ EF80 units per year to maintain their exclusive license and will pay EES a continuing royalty based upon Hydrozonix income before interest and taxes from those units. As of July 10, 2012, the Company has delivered eight Ozonix™ EF80 units pursuant to this arrangement.



25



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES




Management believes that the Hydrozonix transaction will provide working capital sufficient to maintain operations for at least the next two years assuming Hydrozonix continues to purchase units in order to maintain its exclusivity. In addition, while EES has an exclusive license for the global energy market, Ecosphere Technologies Inc. owns 100% of all non-energy related Ozonix™ applications. These industries include, but are not limited to, mining and minerals, municipal wastewater, industrial wastewater, marine wastewater, food processing and agriculture. The Company is seeking financial partners and potential licensees to expand its Ozonix™ technology into other industries and applications. If we are successful in these efforts, we anticipate that we will have additional liquidity.


Contractual Obligations


There were no material changes to our contractual obligations during the period covered by this report.


RELATED PERSON TRANSACTIONS

 

For information on related party transactions and their financial impact, see Note 15 to the unaudited condensed consolidated financial statements.

 

RESEARCH AND DEVELOPMENT

 

In accordance with ASC 730-10 – Research and development expenditures for research and development of the Company's products are expensed when incurred, and are included in operating expenses. Research and development costs were de minimis during the six months ended June 30, 2012 and $0.1 million in costs were recognized for the six months ended June 30, 2011.

 

RECENTLY ISSUES ACCOUNTING PRONOUNCEMENTS


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


CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS


This report contains forward-looking statements including seeking financial partners and licensees to expand our technology into other industries, anticipated and potential revenue, working capital and liquidity. Forward looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.


Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the condition of the credit and financial markets, the effects of the global recession, the future price of natural gas, future legislation and regulations which affect hydraulic fracturing, the ability to finance the Company’s revenue generating equipment, the ability to locate a partner to finance the use of our technology in other markets and our ability to reach definitive agreements with one or more partners, unexpected delays and problems in manufacturing the Ozonix™ units including delays in the receipt of, or problems with, parts from component manufacturers, general reluctance of businesses to utilize new technology and continued positive results in the field.


Further information on our risk factors is contained in its filings with the Securities and Exchange Commission (the “SEC”) including our Form 10-K for the year ended December 31, 2011. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. Our cash balances as of June 30, 2012 were held in insured depository accounts, none of which exceeded insurance limits.




26



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



ITEM 4. CONTROLS AND PROCEDURES.

 

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


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

 



27



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. There are currently no such pending proceedings to which we are a party that our management believes will have a material adverse effect on the Company’s consolidated financial position or results of operations. However, future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

 

ITEM 1A. RISK FACTORS.

 

There have been no material changes during the period covered by this report to the risk factors disclosed in the Company's Form 10-K for the year ended December 31, 2011.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.


In addition to those unregistered securities previously disclosed in reports filed with the SEC, we have sold securities without registration under the Securities Act of 1933, which we refer to as the “Securities Act.” Unless stated, all securities are shares of common stock.

 

Name or Class of Investor

Date Sold

No. of Securities

Consideration

Warrant Holder (1)

04/17/12

76,389

Cashless exercise of 250,000 warrants exercisable at $0.45 per share, based on market price of $0.648 per share.

Series B Holder (1)

04/25/12

835

Conversion of one share of Series B Preferred Stock

Note Holder (1)

05/02/12

785,714

Conversion of a convertible note, convertible at $0.70 per share

Warrant Holder (2)

05/04/12

120,000

Exercise of 90,000 warrants at $0.15 per share and 30,000 warrants at $0.20 per share.

Warrant Holder (1)

05/07/12

1,639

Cashless exercise of 100,000 warrants exercisable at $0.60 per share, based on market price of $0.61 per share.

———————

(1)

The securities were issued in reliance upon the exemption provided by Section 3(a)(9) under the Securities Act.

(2)

The securities were issued in reliance upon the exemption provided by Section 4(2) and Rule 506 under the Securities Act.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES.


None

 

ITEM 5. OTHER INFORMATION.

 

None


ITEM 6. EXHIBITS.


See the Exhibit Index.



28



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



SIGNATURES

 

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


 

 

ECOSPHERE TECHNOLOGIES, INC.

 

 

 

 

 

August 9, 2012

 

/s/ Charles Vinick

 

 

 

Charles Vinick

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

August 9, 2012

 

/s/ Adrian Goldfarb

 

 

 

Adrian Goldfarb

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer)

 




29



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



EXHIBIT INDEX

 

Exhibit

 

 

 

Incorporated by Reference

 

Filed or Furnished

No.

 

Exhibit Description

 

Form

 

Date

 

Number

 

Herewith

 

 

 

 

 

 

 

 

 

 

 

3.1

 

Certificate of Incorporation

 

10-QSB

 

12/11/06

 

3.1

 

 

3.2

 

Certificate of Amendment

 

10-K

 

3/25/09

 

3.2

 

 

3.3

 

Certificate of Correction

 

10-K

 

3/25/09

 

3.3

 

 

3.4

 

Bylaws

 

10-QSB

 

12/11/06

 

3.2

 

 

3.5

 

Amendment to the Bylaws adopted June 17, 2008

 

10-Q

 

11/13/08

 

3.3

 

 

3.6

 

Amendment to the Bylaws adopted August 12, 2010

 

10-Q

 

8/16/10

 

3.6

 

 

3.7

 

Amendment to the Bylaws adopted October 20, 2011

 

10-K

 

3/15/12

 

3.7

 

 

10.1

 

Amended and Restated 2006 Equity Incentive Plan

 

10-Q

 

8/16/10

 

10.1

 

 

10.2

 

Amendment to the Amended and Restated 2006 Equity Incentive Plan

 

S-8

 

3/25/11

 

4.2

 

 

10.3

 

Hydrozonix Exclusive Product Purchase and Sublicense Agreement*

 

10-Q/A

 

12/1/11

 

10.3

 

 

10.4

 

EES Side Letter Agreement – Hydrozonix*

 

10-Q

 

5/10/11

 

10.6

 

 

31.1

 

Certification of Principal Executive Officer (Section 302)

 

 

 

 

 

 

 

Filed

31.2

 

Certification of Principal Financial Officer (Section 302)

 

 

 

 

 

 

 

Filed

32.1

 

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

 

 

 

 

 

 

 

Furnished**

101.INS

 

XBRL Instance Document

 

 

 

 

 

 

 

***

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

***

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

 

 

***

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

***

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

***

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

***

———————

*

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

**

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

***

Attached as Exhibit 101 to this report are the Company’s financial statements for the quarter ended June 30, 2012 formatted in XBRL (eXtensible Business Reporting Language). The XBRL-related information in Exhibit 101 to this report shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of those sections.


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



30


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