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ESPH > SEC Filings for ESPH > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ECOSPHERE TECHNOLOGIES INC

Form 10-Q for ECOSPHERE TECHNOLOGIES INC


12-Nov-2013

Quarterly Report


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, 2012.

Company Overview

Ecosphere Technologies, Inc. ("Ecosphere" or the "Company") is a water engineering, technology licensing and innovative U.S. manufacturing company that develops environmental water treatment solutions for industrial markets throughout the world. The Company is a leader in emerging advanced oxidation processes and has an extensive portfolio of intellectual property that includes five approved United States patents and more than thirteen patents pending for the Ecosphere Ozonix® process. The patented Ecosphere Ozonix® process is a revolutionary advanced oxidation process that is currently being used by customers to reduce costs, increase treatment efficiencies and eliminate harmful chemicals from wastewater treatment operations around the United States.
Ozonix® can be used to replace chemicals in a wide variety of industries and applications, including but not limited to agriculture, energy, food and beverage, industrial, mining, marine, and municipal wastewater treatment.

Business Model

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

1.

Identify a major environmental and technical challenge;

2.

Invent new technologies and file patents

3.

Partner with industry leaders;

4.

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

5.

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

6.

Create and increase shareholder value.

As a result, we have designed, developed, manufactured and commercialized technologies that are currently solving some of the world's most critical water challenges. Our patented Ozonix® technology is a revolutionary, high volume, advanced oxidation process designed to treat and recycle industrial wastewater without the use of toxic chemicals.

In addition to Ozonix®, we have developed an extensive portfolio of intellectual property that includes over 30 patents and trademarks that have been filed and approved in various locations around the world. These patented technologies can be purchased and licensed for use in large-scale and sustainable applications across industries, nations and ecosystems. Companies that license our patented technologies are able to improve their financial metrics while also reducing their ecological and environmental footprints. Our current focus is on licensing Ecosphere's patented Ozonix® technology, although our other technologies and patents remain a viable part of our long-term technology licensing strategy.

Ozonix® Intellectual Property Portfolio

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


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

In the past five months, Ecosphere has received $10 million from FNF for the sale of the Company's 20% interest in FNES. Ecosphere's management team estimates that this sale represents approximately 2% of the estimated value of the Company's global Ozonix® intellectual property portfolio. Additionally, FNF has an option to purchase another 12% interest for $6 million representing approximately 1% of the Company's global Ozonix® intellectual property portfolio in Q4 2013.

The Company has formed six subsidiaries which it expects will obtain exclusive sublicenses for global, industry-specific fields-of-use to its patented Ozonix® technology. See Note 1 to the unaudited condensed consolidated financial statements. The Company has hired investment banker Ladenburg Thalmann to assist it with obtaining equity financing for these subsidiaries, but initially will focus on Ecosphere Mining, LLC and Ecosphere Municipal, LLC.

Global Water Market

According to an analysis by Frost & Sullivan, the global water market --- comprised on numerous activities1 --- is estimated at $425 billion.2 Its growth is being driven by macro political, financial, social and ecological considerations.

Additionally, according to a United Nations Report, demand for water can be broken down into major water use sectors:3

·

Food & Agricultural (70 percent of freshwater use);

·

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

·

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


1.

For example, construction, engineering and design, operations and maintenance, chemicals supply, technology and equipment supply, research and development, and management.

2.

Frost & Sullivan.

3.

Managing Water under Uncertainty and Risk," The United Nations World Water Development Report 4, Volume 1.


                 ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



Ecosphere's patented Ozonix® technology has the potential to be applied across
numerous water treatment market sectors and industries around the world.
 Potential industries and applications include but are not limited to:


INDUSTRIES                       APPLICATIONS
Agriculture
                                 Grain Growing & processing
                                 Landscape irrigation & runoff
                                 Livestock farms (dairy, poultry, beef, hog)
                                 Aquaculture & fish farming
Energy
                                 Oil & natural gas exploration & production
                                 (onshore & offshore)
                                 Power generation
                                 Refineries
                                 Nuclear power
                                 Coal-fired power plants
                                 Produced water recycling

Food and Beverage
                                 Breweries
                                 Drinking water
                                 Vineyards
                                 Dairy (milk, butter, cheese)
                                 Livestock processing (poultry, beef, hog)
                                 Fruits and vegetables
                                 Sugar
Industrial
                                 Automotive
                                 Pharmaceutical
                                 Biotechnology
                                 Pulp and paper
                                 Leisure and water parks
                                 Textiles
                                 Manufacturing
                                 Microelectronics
                                 Material waste management
Mining & Minerals
                                 Acid mine drainage
                                 Metals & minerals
                                 Mining process water treatment
                                 Tailing ponds
                                 Leachate and recovery
Marine
                                 Aquariums
                                 Ballast water
                                 Marine process water
                                 Onboard grey water
Public/Private Utilities
                                 Municipal drinking water
                                 Municipal sewage
                                 Storm & drainage water treatment


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

Recent Success in Energy

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

·

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

·

2013 Bloomberg New Energy Finance - New Energy Pioneer Award;

·

2013 IHS CERAWeek - Energy Innovation Pioneer Award;

·

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

·

2013 World Technology Awards Corporate "Environment" Category Winner;

·

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

·

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

Since 2009, Ecosphere's patented Ozonix® technology has enabled oil and gas customers to treat, recycle and reuse over 3 billion gallons of water on more than 800 oil and natural gas wells, protecting $4 billion worth of well assets, and generating over $65 million in revenue; substantially increasing Ecosphere's revenue over four years to more than $31 million in 2012.

Growth Strategy

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

·

Ecosphere Agriculture, LLC;

·

Ecosphere Food & Beverage, LLC;

·

Ecosphere Industrial, LLC;

·

Ecosphere Marine, LLC;

·

Ecosphere Mining, LLC;

·

Ecosphere Municipal, LLC;

Similar to the actual results associated with the FNES subsidiary, Ecosphere's expectations are that a subsidiary would initially be valued at, for example, $50 million, and built to a point where each subsidiary would be licensed and sold to a large market player for a much larger value.

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

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

2013 Highlights

·

In January 2013, Ecosphere announced that the Company appointed Dean Becker to its Board of Directors. Mr. Becker is currently the Chief Executive Officer of ICAP Patent Brokerage and ICAP Ocean Tomo Auctions. As a creator and leader of patent auctions since 2006, he has distinguished himself as one of the world's leading entrepreneurs in the development of next generation technology markets. Mr. Becker is also serving as an intellectual property consultant to Ecosphere and is working with Founder and Chief Executive Officer, Dennis McGuire, to monetize the Company's intellectual property and accelerate the deployment of its patented Ozonix® technology in fields beyond U.S. onshore energy production.

·

In February 2013, Ecosphere launched a new corporate website, www.ecospheretech.com, which reflects the Company's focus on expanding the use of its revolutionary Ozonix® technology into new industrial markets in which wastewater treatment is of critical importance. The content contained on our website is not incorporated into this report.


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

·

In February 2013, Ecosphere announced that it had been selected to IHS CERAWeek's 2013 class of Energy Innovation Pioneers. The Energy Innovation Pioneers program, held annually in conjunction with IHS CERAWeek, aims to identify the most innovative and distinctive new technologies in the energy spectrum. Criteria include creativity, feasibility of plan, scalability of technology and leadership team.

·

In April 2013, Ecosphere announced that its majority-owned subsidiary, EES, has regained the exclusive U.S. license to Ecosphere's patented Ozonix® technology for the treatment and recycling of water used during oil and gas exploration and production. This occurred when Hydrozonix, LLC forfeited its exclusive rights by failing to pay for Ozonix® EF80 units 13 and 14 by April 15, 2013.

·

In April 2013, Ecosphere announced that Bloomberg New Energy Finance, the definitive source of insight, data and news on the transformation of the energy sector, selected Ecosphere Technologies, Inc., as a 2013 New Energy Pioneer. The winners were recognized on stage at the sixth annual Bloomberg New Energy Finance Summit in New York City.

·

In May 2013, FNF, acquired an additional 12% ownership of Ecosphere Energy Services, LLC, from Ecosphere Technologies Inc. for $6 million, bringing its total ownership in EES to 31%. As a result, Ecosphere Technologies, Inc. recognized a $29 million gain.

·

In June 2013, Ecosphere announced that its Board of Directors approved a five percent (5%) common stock dividend to all common shareholders of record as of June 14, 2013.

·

In June 2013, Ecosphere announced its newest product for the oil and gas hydraulic fracturing market, the Ozonix® EF10M. The EF10M comes as an addition to Ecosphere's highly successful line of Ecos-Frac® mobile water treatment products that have been used to treat and recycle over 3 billion gallons of water on more than 750 oil and natural gas wells around the United States.

·

In June 2013, Ecosphere was named the winner in Clean Tech/Green Tech category for the 2013 TechAmerica Foundation American Technology Awards (ATAs). The ATAs cross the technology industry recognizing products and services like Ecosphere's patented Ozonix® technology for the treatment and recycling of water used during oil and gas exploration and production.

·

In July 2013, Ecosphere announced that FNF, exercised its option to purchase an additional 8% ownership of EES, from Ecosphere for $4 million, bringing its total ownership in EES to 39%. After the transaction, Ecosphere owns approximately 31% of the energy services division. FNF requested and received an additional option to buy another 12% of EES for $6 million before the end of 2013.

·

In July 2013, the Company sold one Ozonix® EF80 unit to FNES. FNES regained its exclusive rights to the Ozonix® technology in the U.S. oil and gas exploration and production market in April 2013, allowing FNES to place an Ozonix® EF80 unit in service with an existing customer, Southwestern Energy. Prior to this date, FNES was not allowed to increase it service work with existing customers due to the Hydrozonix exclusivity.

·

In August 2013, Ecosphere announced that EES purchased and took delivery of one Ozonix® EF80 unit for use in the U.S. oil and gas hydraulic fracturing market.

·

In August 2013, Ecosphere announced Q2 2013 Record Net Income of $27.3 Million and EPS of $0.17 an increase of $26.4 Million and $0.17 over Q2 2012 which was primarily a result from the gain on deconsolidation of FNES.

·

In August 2013, Ecosphere announced that William P. Foley, II, Chairman of Fidelity National Financial, Inc. (NYSE:FNF), a Fortune 500 company, was elected as Chairman of Fidelity National Environmental Solutions, LLC, formerly Ecosphere Energy Services, LLC.

·

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

·

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

·

In October 2013, Ecosphere announced that it has established a number of new subsidiaries that have been granted exclusive global field-of-use licenses to deploy its patented Ozonix® water treatment technology in specific water treatment markets. New subsidiaries include Ecosphere Agriculture, LLC, Ecosphere Food & Beverage, LLC, Ecosphere Industrial, LLC, Ecosphere Marine, LLC, Ecosphere Mining, LLC and Ecosphere Municipal, LLC.

·

In October 2013, Ecosphere announced that Fidelity National Environmental Solutions, formerly Ecosphere Energy Services, was named the 2013 "Water Management Company of the Year" in the Midcontinent Oil & Gas Awards. The Midcontinent Oil and Gas Awards is a platform for the oil and gas industry to demonstrate and celebrate the advances made in the key areas of environmental stewardship, efficiency, innovation, corporate social responsibility and health & safety.


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CRITICAL ACCOUNTING ESTIMATES

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

Results of Operations

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

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

                                            For the Three Months Ended
                                                   September 30,
                                               2013              2012            Change
                                                    (Unaudited)
Revenues
Equipment sales and licensing             $             -     $ 5,664,637     $ (5,664,637 )
Equipment sales and licensing, related
party                                           2,268,295               -        2,268,295
Field services                                          -       1,133,021       (1,133,021 )
Aftermarket part sales                                  -         528,725         (528,725 )
Aftermarket part sales, related party             120,294               -          120,294
Total revenues                                  2,388,589       7,326,383       (4,937,794 )
Costs and expenses
Equipment sales and licensing
(exclusive of depreciation shown below)         1,923,064       3,917,182       (1,994,118 )
Field services (exclusive of
depreciation shown below)                               -         576,670         (576,670 )
Aftermarket part costs (exclusive of
depreciation shown below)                          95,950         355,061         (259,111 )
Salaries and employee benefits                  1,388,278       1,123,124          265,153
Administrative and selling                        280,496         365,565          (85,069 )
Professional fees                                 408,266         190,267          217,999
Depreciation and amortization                      55,253         556,154         (500,901 )
Research and development                          (21,578 )        15,819          (37,397 )
Gain on sale/disposal of fixed asset,
net                                                     -        (142,457 )        142,457
Restructuring charge                                    -         (62,000 )         62,000
Total costs and expenses                        4,129,729       6,895,385       (2,765,657 )
(Loss) income from operations                  (1,741,140 )       430,998       (2,172,137 )
Loss on investment in unconsolidated
investee                                         (437,594 )             -         (437,594 )
Other income (expense)
Interest expense                                 (113,478 )      (111,261 )         (2,217 )
Loss on sale of interest in
unconsolidated investee                          (500,000 )             -         (500,000 )
Change in fair value of derivative
instruments                                         1,215          87,724          (86,509 )
Total other expense, net                         (612,263 )       (23,537 )       (588,726 )
Net (loss) income                              (2,790,997 )       407,461       (3,198,457 )
Preferred stock dividends                         (20,688 )       (25,687 )          4,999
Net (loss) income applicable to common
stock                                          (2,811,685 )       381,774       (3,193,458 )
Net loss (income) applicable to
noncontrolling interest of consolidated
subsidiary                                              -         (65,789 )         65,789
Net  (loss) income applicable to
Ecosphere Technologies, Inc. common
stock                                     $    (2,811,685 )   $   315,985     $ (3,127,669 )

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

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


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

Revenues

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

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

Cost and Expenses

Equipment Sales and Licensing Costs (exclusive of depreciation)

. . .

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