AI
Monday, November 22, 2010 11:45:33 PM
Looking real good going forward.
Form 10-Q for ECOSPHERE TECHNOLOGIES INC
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22-Nov-2010
Quarterly Report
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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, 2009.
Company Overview
Ecosphere Technologies, Inc. ("Ecosphere" or the "Company") is a diversified engineering, technology development and manufacturing company dedicated to identifying, creating, building and marketing innovative technology solutions that provide for responsible, sustainable stewardship of the world's natural resources. Companies that use our patented technologies are able to improve their financial metrics while also reducing their ecological and environmental footprint. The Company's business model is to invent, develop, commercialize, sell and or license green technologies to industrial partners using water as a key component.
Ecosphere Technologies has been focusing the bulk of its efforts on EES, its 52.6% owned subsidiary. EES is engaged in operating high volume mobile water filtration equipment to treat energy exploration related wastewaters. EES is successfully providing water recycling services to major energy exploration companies utilizing our patented Ecosphere Ozonix? technology. The commercial viability of this technology is demonstrated by the multi-year Agreements the Company has been able to secure. These Agreements have proven the technology is commercially viable and have led to the development of additional applications of our technologies which will allow energy companies to optimize the revenues generated from a wellsite.
Ecosphere's patented Ozonix? technology is an advanced oxidation process that has the ability to kill bacteria and reduce scaling without using chemicals in a variety of industries. While EES has an exclusive license for energy, Ecosphere owns 100% of all other applications. These industries include mining, municipal drinking, municipal wastewater, industrial wastewater, food processing, agriculture and the heavy marine industry for cruise, military, and cargo ships ballast water as well as grey and black water treatment. The Company is beginning to seek financial partners to expand its Ozonix? technology to other applications.
2010 Highlights
We began 2010 by delivering the final units to our second fleet of Ecos Frac units to provide water processing services for fracturing natural gas wells in the Fayetteville Shale. Highlights include:
? As evidence that the Ecosphere Ozonix? process is breakthrough technology, we received three patents for our Ecosphere Ozonix? process from the U.S Patent and Trademark Office under the new Green Tech Fast Track program. Patent numbers 7,699,994, 7,699,988 and 7,785,470.
? Our revenues of $2.1 million for the first quarter and $2.1 million for the second quarter and $2.2 million for the third quarter were records for operating revenues in any quarter, a 981% increase compared to the first quarter of 2009, a 1,288% increase compared to the second quarter of 2009 and a 513% increase compared to the third quarter of 2009.
? In January and February we performed paid pilot programs for British Petroleum in Wyoming and for Southwestern Energy in Arkansas.
? We converted all of our remaining convertible debt, a reduction of $2.5 million since December 31, 2009
? We filed additional patents for applying our Ecosphere Ozonix? technology using our Ecosphere Oxonix? technology to raise oil in a concentrated column of ozonated bubbles from below the surface of the ocean.
? The Company deployed personnel and equipment to the Gulf in an attempt to secure a contract. See further discussion on page 34.
? In August, we signed a new 13 month agreement to process frac flowback water for a subsidiary of Newfield Explorations for a monthly flat fee.
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
CRITICAL ACCOUNTING ESTIMATES
In response to the SEC's financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, the Company has selected its more subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the Company's financial condition. These accounting estimates are discussed below. These estimates involve certain assumptions that if incorrect could create a material adverse impact on the Company's results of operations and financial condition.
Revenue Recognition
Revenue from sales of equipment is recognized when products are delivered to and accepted by the customer, economic risk of loss has passed to the customer, price is fixed or determinable, collection is probable, and any future obligations of the Company are insignificant. Revenue from the Ecosphere Ozonix? water-filtration contracts is earned based upon the volume of water processed plus additional contractual period based 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. The Company includes shipping and handling fees billed to customers as revenues and shipping and handling costs as cost of revenues.
Stock-Based Compensation
The Company follows the provisions of ASC 718-20-10 Compensation - Stock Compensation which establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under ASC 718-20-10, we recognize an expense for the fair value of our outstanding stock options as they vest, whether held by employees or others.
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 9 to our unaudited condensed consolidated financial statements contained in this report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our stock options and warrants have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options.
Fair Value of Liabilities for Warrant and Embedded Conversion Option Derivative Instruments
We estimate the fair value of each warrant and embedded conversion option at the issuance date and at each subsequent reporting date by using the Black-Scholes option pricing model based upon certain assumptions which are contained in Note 1 to our unaudited consolidated financial statements contained in this report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our warrants and embedded conversion options have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such warrants and embedded conversion options.
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
Comparison of the Three Months ended September 30, 2010 with the Three Months
Ended September 30, 2009
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, 2010
2010 2009 $ %
Revenues $ 2,188,534 $ 357,076 $ 1,831,458 513 %
Cost of revenues 1,002,796 136,257 866,539 636 %
Gross profit 1,185,738 220,819 964,919 437 %
Operating expenses
Salaries and employee benefits 1,447,248 1,914,578 (467,330 ) -24 %
Administrative and selling 375,478 166,128 209,350 126 %
Professional fees 377,748 507,410 (129,662 ) -26 %
Depreciation and amortization 510,018 185,500 324,518 175 %
Research and development 37,205 31,244 5,961 19 %
Total selling general and
administrative 2,747,697 2,804,860 (57,163 ) -2 %
Impairment of assets 116,000 - 116,000 100 %
Restructuring charge 50,000 - 50,000 100 %
Total operating expenses 2,913,697 2,804,860 (7,163 ) 0 %
Loss from operations (1,727,959 ) (2,584,041 ) 856,082 62 %
Other income (expense):
Other income (expense) 31 2 29 -1450 %
Gain (loss) on conversion, net 12,524 (27,288 ) 39,812 146 %
Interest expense (93,883 ) (655,645 ) 561,762 86 %
Change in fair value of derivative
instruments 1,203,883 2,173,567 (969,684 ) 81 %
Total other income (expense) 1,122,555 1,490,636 (368,081 ) -25 %
Net (loss) income (605,404 ) (1,093,405 ) 488,001 45 %
Preferred stock dividends 26,000 30,000 4,000 -13 %
Net income (loss) applicable to common
stock (631,404 ) (1,123,405 ) 492,001 44 %
Net (income) loss applicable to
noncontrolling interest of consolidated
subsidiary 135,665 268,531 (132,866 ) -98 %
Net income (loss) applicable to
Ecosphere Technologies, Inc. common
stock $ (495,739 ) $ (854,874 ) $ 359,135 42 %
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2010 to the Three Months Ended September 30, 2009
The Company reported a net loss applicable to common stock of $495,739 during the three months ended September 30, 2010 as compared to a net loss applicable to common stock of $854,874 for the three months ended September 30, 2009. The Company's net loss for the three months ended September 30, 2010 and its net loss for the three months ended September 30, 2009 were significantly reduced by the accounting for derivative liabilities related to warrants and convertible notes issued by the Company. On May 18, 2009 and May 17, 2010, the Company filed Form 8-Ks which highlighted the fluctuations in net income (loss) which may occur related to the accounting for these derivative instruments, stated that we believe an evaluation of our results should focus on our income or loss from operations and outlined steps the Company was taking to reduce the number of derivative instruments.
These derivative liabilities are recorded at fair value each reporting period. A major component of this valuation is the market value of the Company's common stock. The periodic change in the value of the derivative liability is recorded in other income and expense. As the market value of the Company's common stock increases, so does the Company's derivative liability. This results in other expense. As the market value of the Company's common stock declines, the Company's derivative liability decreases resulting in other income for the period. During the three months ended September 30, 2010, the market value of the Company's common stock decreased from $1.24 per share at June 30, 2010 to $0.50 per share at September 30, 2010 resulting in other income of $1,203,883 related to the decrease in the Company's derivative liability. During the three months ended September 30, 2009, the market value of the Company's common stock decreased from $0.49 per share at June 30, 2009 to $0.43 per share at September 30, 2009, resulting in other income of $2,173,567 related to the decrease in the Company's derivative liability. The larger impact realized during the three months ended September 30, 2010 was due to a significantly larger number of derivative instruments outstanding as of September 30, 2009 as compared to September 30, 2010.
As of September 30, 2010 there are no remaining convertible notes outstanding and as such there are no embedded conversion option derivative instruments remaining. In addition, the number of warrants derivative instruments has been reduced from 16.9 million as of December 31, 2009 to 1.7 million as of September 30, 2010 through a combination of cashless exercises, exercises for cash and one year term extensions in exchange for removal of repricing clauses that make the warrants subject to derivative accounting. As such, the effect of the changes in the fair value of the remaining warrant derivative instruments should have less of an impact on the future results of operations of the Company.
Revenues
Revenues for the three months ended September 30, 2010 increased $1,831,458 or 513% over the three months ended September 30, 2009. Revenue for the three months ended September 30, 2010 was approximately 84% related to pretreating water prior to its use to fracture natural gas wells and 16% related to processing frac flowback water. Revenue for the three months ended September 30, 2009 was generated entirely from the processing of frac flowback water related to the contract with Newfield Exploration Co. See comparison of the nine months ended September 30, 2010 to the nine months ended September 30, 2009 below for information concerning our changed guidance.
Cost of Revenues
Cost of revenues amounted to $1,002,796 for the three months ended September 30, 2010 as compared to $136,257 for the three months ended September 30, 2009. These costs consisted of the payroll related costs of field personnel, plus parts and supplies used in support of the operation of the water filtration and Ecos Frac Tank units.
Operating Expenses
Operating expenses for the three months ended September 30, 2010 were $2,913,697 compared to $2,804,860 for the three months ended September 30, 2009. This increase resulted from an asset impairment reserve charge of $116,000 related to two older generation water filtration units. In addition, an additional restructuring charge of $50,000 was recorded during the three months ended September 30, 2010. Depreciation expense increased $325,000 as a result of an increase in the number of units of equipment being deployed. Further, general and administrative expense increased $209,000 as a result of increases in travel expense of $98,000, insurance of $48,000 and office supplies and postage of $50,000. These increases were partially offset by a reduction in salary and employee benefits of $467,000 which resulted primarily from a reduction of the amount of non-cash compensation of $783,000 which was partially offset increases in cash salaries of $318,000. In addition, professional fees decreased $136,000 due to lower legal fees partially offset by increases in accounting and consulting fees. Research and development increased as we continued to investigate new applications of our technologies.
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
Loss from Operations
Loss from operations for the three months ended September 30, 2010 was $1,727,959 compared to a loss of $2,584,041 for the three months ended September 30, 2009. The decrease in the loss from operations in 2010 versus 2009 was due to an increase of $964,919 in gross profit partially offset by the higher operating expenses as identified above. Included in the loss from operations were non-cash expenses including stock based compensation of $622,000 and depreciation and amortization of $510,018.
Interest Expense
Interest expense was $93,883 and $655,645 for the three months ended September 30, 2010 and 2009, respectively. The decline in 2010 is the result of a decrease in the outstanding debt of $6.4 million since March 31, 2009. The 2010 amount consisted entirely interest paid and accrued on notes payable. Of the 2009 amounts, approximately $2,224,000 related to the accretion of the discounts related to the Company's notes payable (non-cash) and the remainder related to actual and accrued interest associated with the notes payable.
Preferred Stock Dividends
Preferred stock dividends were $26,000 for the three months ended September 30, 2010 and $30,000 for the three months ended September 30, 2009. The dividends reflect Company obligations to preferred shareholders that have not been paid and decreased from 2009 because a number of holders chose to convert their preferred stock into common stock.
Change in Fair Value of Derivative Instruments
The Company adopted ASC 810-15 effective January 1, 2009. Under ASC 810-15 the Company recorded a liability for the fair value of warrants and the embedded conversion options of certain convertible debt agreements as of January 1, 2009 in the amount of $10,218,158. Under ASC 810-15, the fair value of these liabilities is calculated at each reporting date with the change in liability recorded in other income or expense. The Company estimated the fair value of these liabilities to be $654,332 as of September 30, 2010 using the Black-Scholes option pricing model. As such, the Company recognized other income of $1,203,883 for the three months ended September 30, 2010, representing the decrease in the fair value of the derivative liability at September 30, 2010 as compared to the fair value at June 30, 2010. The decrease in the liability resulted primarily due to the decrease in the market value of the Company's common stock from $1.24 per share at June 30, 2010 to $0.50 per share at September 30, 2010.
The Company estimated the fair value of these liabilities to be $7,400,539 as of September 30, 2009 using the Black-Scholes option pricing model. As a result, the Company recognized other expense of $2,173,567, representing the increase in the fair value of these liabilities.
If the Company's common stock price at December 31, 2010 is higher than the $0.50 per share September 30, 2010 closing price, the Company may record a non-cash charge which may be material. Conversely, if the Company's common stock price at December 31, 2010 is lower than the September 30, 2010 closing price of $0.50, the Company will record other income which may be material.
As of the filing date of this report, there are no remaining convertible notes which generate a derivative liability for the Company. In addition, as mentioned above the number of warrants requiring derivative accounting treatment has been reduced from 16.9 million warrants at December 31, 2009 to 1.7 million warrants at September 30, 2010. As such, we anticipate that future other income and expense from these financial instruments will diminish.
Net Income (Loss) Applicable to Ecosphere Technologies, Inc. Common Stock
Net loss applicable to common stock was $495,739 for the three months ended September 30, 2010, compared to a net loss applicable to common stock of $854,874 for the three months ended September 30, 2009. Net loss per share of common stock was $0.00 diluted for the three months ended September 30, 2010 and net loss per share of common stock was $0.01 basic diluted for the three months ended September 30, 2009. Weighted average shares outstanding were 137,646,787 and 110,461,145 for the three months ended September 30, 2010 and 2009.
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
Comparison of the Nine Months ended September 30, 2010 with the Nine Months
Ended September 30, 2009
The following table sets forth a modified version of our unaudited Condensed
Consolidated Statements of Operations that is used in the following discussions
of our results of operations:
For the Nine Months Ended September 30, 2010
Change
2010 2009 $ %
Revenues $ 6,427,787 $ 705,385 $ 5,722,402 811 %
Cost of revenues 2,541,566 391,006 2,150,560 550 %
Gross profit 3,886,221 314,379 3,571,842 1136 %
Operating expenses
Salaries and employee benefits 4,949,593 5,134,875 (185,282 ) -4 %
Administrative and selling 1,299,676 734,076 565,600 77 %
Professional fees 826,535 943,128 (116,593 ) -12 %
Depreciation and amortization 1,432,363 438,549 993,814 227 %
Research and development 126,940 42,794 84,146 197 %
Total selling general and
administrative 8,635,107 7,293,422 1,341,685 18 %
Impairment of assets 116,000 - 116,000 100 %
Restructuring charge 50,000 548,090 (498,090 ) -91 %
Total operating expenses 8,801,107 7,841,512 843,595 11 %
Loss from operations (4,914,886 ) (7,527,133 ) 2,612,247 35 %
Other income (expense):
Other income (expense): 273 1,153 (880 ) 76 %
Gain (loss) on conversion, net (121,080 ) (716,538 ) 595,458 83 %
Interest expense (939,213 ) (4,656,787 ) 3,717,574 80 %
Change in fair value of derivative
instruments (12,831,356 ) (3,565,592 ) (9,265,764 ) -72 %
Total other income (expense) (13,891,376 ) (8,937,764 ) (4,953,612 ) 55 %
Net (loss) income (18,806,262 ) (16,464,897 ) (2,341,365 ) -14 %
Preferred stock dividends 79,750 90,000 10,250 -11 %
Net income (loss) applicable to common
stock (18,886,012 ) (16,554,897 ) (2,331,115 ) -14 %
Net (income) loss applicable to
noncontrolling interest of consolidated
subsidiary (57,045 ) 268,531 (325,576 ) 571 %
Net income (loss) applicable to
Ecosphere Technologies, Inc. common
stock $ (18,943,057 ) $ (16,286,366 ) $ (2,656,691 ) -16 %
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
RESULTS OF OPERATIONS
Comparison of the Nine Months Ended September 30, 2010 to the Nine Months Ended September 30, 2009
The Company's reported a net loss applicable to common stock of $18,943,057 during the nine months ended September 30, 2010 as compared to a net loss applicable to common stock of $16,286,366 for the nine months ended September 30, 2009. The Company's large net losses for the nine months ended September 30, 2010 and 2009 were due to the accounting for derivative liabilities related to warrants and convertible notes issued by the Company. On May 18, 2009 and May 17, 2010, the Company filed Form 8-Ks which highlighted the fluctuations in net income (loss) which may occur related to the accounting for these derivative instruments, stated that we believe an evaluation of our results should focus on our income or loss from operations and outlined steps the Company was taking to reduce the number of derivative instruments.
These derivative liabilities are recorded at fair value each reporting period. A major component of this valuation is the market value of the Company's common stock. The periodic change in the value of the derivative liability is recorded in other income and expense. As the market value of the Company's common stock increases, so does the Company's derivative liability. This results in other expense. As the market value of the Company's common stock declines, the Company's derivative liability decreases resulting in other income for the period. The market value of the Company's common stock was $0.47 as of December 31, 2009. Since December 31, 2009 the fair value of the Company's common stock has increased to $1.50 as of March 31, 2010, decreased to $1.24 as of June 30, 2010 and further decreased to $0.50 as of September 30, 2010 resulting in other expense of $21 million during the 3 month ended March 31, 2010, other income of $7 million during the three months ended June 30, 2010 and other income of $1.2 million for the three months ended September 30, 2010. As a result, the year to date impact for the nine months ended September 30, 2010 has been other expense of $12.8 million. During the nine months ended September 30, 2009, the market value of the Company's common stock increased from $0.31 per share at December 31, 2008 to $0.43 per share at September 30, 2009, resulting in other expense of $3.6 million related to the increase in the Company's derivative liability.
During the three months ended June 30, 2010, the holders of the remaining convertible notes in the amount of $713,889 have converted the notes into common stock of the Company such that there are no embedded conversion option derivative instruments remaining as of September 30, 2010. In addition, the number of warrants derivative instruments has been reduced from 16.9 million as of December 31, 2009 to 1.7 million as of September 30, 2010 through a combination of cashless exercises, exercises for cash and one year term extensions in exchange for removal of repricing clauses that make the warrants subject to derivative accounting. As such, the effect of the changes in the fair value of the remaining warrant derivative instruments should have less of an impact on the future results of operations of the Company.
Revenues
Revenues for the nine months ended September 30, 2010 increased $5,722,402 or 811% over the nine months ended September 30, 2009. Revenue for the nine months . . .
Form 10-Q for ECOSPHERE TECHNOLOGIES INC
--------------------------------------------------------------------------------
22-Nov-2010
Quarterly Report
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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, 2009.
Company Overview
Ecosphere Technologies, Inc. ("Ecosphere" or the "Company") is a diversified engineering, technology development and manufacturing company dedicated to identifying, creating, building and marketing innovative technology solutions that provide for responsible, sustainable stewardship of the world's natural resources. Companies that use our patented technologies are able to improve their financial metrics while also reducing their ecological and environmental footprint. The Company's business model is to invent, develop, commercialize, sell and or license green technologies to industrial partners using water as a key component.
Ecosphere Technologies has been focusing the bulk of its efforts on EES, its 52.6% owned subsidiary. EES is engaged in operating high volume mobile water filtration equipment to treat energy exploration related wastewaters. EES is successfully providing water recycling services to major energy exploration companies utilizing our patented Ecosphere Ozonix? technology. The commercial viability of this technology is demonstrated by the multi-year Agreements the Company has been able to secure. These Agreements have proven the technology is commercially viable and have led to the development of additional applications of our technologies which will allow energy companies to optimize the revenues generated from a wellsite.
Ecosphere's patented Ozonix? technology is an advanced oxidation process that has the ability to kill bacteria and reduce scaling without using chemicals in a variety of industries. While EES has an exclusive license for energy, Ecosphere owns 100% of all other applications. These industries include mining, municipal drinking, municipal wastewater, industrial wastewater, food processing, agriculture and the heavy marine industry for cruise, military, and cargo ships ballast water as well as grey and black water treatment. The Company is beginning to seek financial partners to expand its Ozonix? technology to other applications.
2010 Highlights
We began 2010 by delivering the final units to our second fleet of Ecos Frac units to provide water processing services for fracturing natural gas wells in the Fayetteville Shale. Highlights include:
? As evidence that the Ecosphere Ozonix? process is breakthrough technology, we received three patents for our Ecosphere Ozonix? process from the U.S Patent and Trademark Office under the new Green Tech Fast Track program. Patent numbers 7,699,994, 7,699,988 and 7,785,470.
? Our revenues of $2.1 million for the first quarter and $2.1 million for the second quarter and $2.2 million for the third quarter were records for operating revenues in any quarter, a 981% increase compared to the first quarter of 2009, a 1,288% increase compared to the second quarter of 2009 and a 513% increase compared to the third quarter of 2009.
? In January and February we performed paid pilot programs for British Petroleum in Wyoming and for Southwestern Energy in Arkansas.
? We converted all of our remaining convertible debt, a reduction of $2.5 million since December 31, 2009
? We filed additional patents for applying our Ecosphere Ozonix? technology using our Ecosphere Oxonix? technology to raise oil in a concentrated column of ozonated bubbles from below the surface of the ocean.
? The Company deployed personnel and equipment to the Gulf in an attempt to secure a contract. See further discussion on page 34.
? In August, we signed a new 13 month agreement to process frac flowback water for a subsidiary of Newfield Explorations for a monthly flat fee.
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
CRITICAL ACCOUNTING ESTIMATES
In response to the SEC's financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, the Company has selected its more subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the Company's financial condition. These accounting estimates are discussed below. These estimates involve certain assumptions that if incorrect could create a material adverse impact on the Company's results of operations and financial condition.
Revenue Recognition
Revenue from sales of equipment is recognized when products are delivered to and accepted by the customer, economic risk of loss has passed to the customer, price is fixed or determinable, collection is probable, and any future obligations of the Company are insignificant. Revenue from the Ecosphere Ozonix? water-filtration contracts is earned based upon the volume of water processed plus additional contractual period based 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. The Company includes shipping and handling fees billed to customers as revenues and shipping and handling costs as cost of revenues.
Stock-Based Compensation
The Company follows the provisions of ASC 718-20-10 Compensation - Stock Compensation which establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under ASC 718-20-10, we recognize an expense for the fair value of our outstanding stock options as they vest, whether held by employees or others.
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 9 to our unaudited condensed consolidated financial statements contained in this report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our stock options and warrants have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options.
Fair Value of Liabilities for Warrant and Embedded Conversion Option Derivative Instruments
We estimate the fair value of each warrant and embedded conversion option at the issuance date and at each subsequent reporting date by using the Black-Scholes option pricing model based upon certain assumptions which are contained in Note 1 to our unaudited consolidated financial statements contained in this report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our warrants and embedded conversion options have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such warrants and embedded conversion options.
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
Comparison of the Three Months ended September 30, 2010 with the Three Months
Ended September 30, 2009
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, 2010
2010 2009 $ %
Revenues $ 2,188,534 $ 357,076 $ 1,831,458 513 %
Cost of revenues 1,002,796 136,257 866,539 636 %
Gross profit 1,185,738 220,819 964,919 437 %
Operating expenses
Salaries and employee benefits 1,447,248 1,914,578 (467,330 ) -24 %
Administrative and selling 375,478 166,128 209,350 126 %
Professional fees 377,748 507,410 (129,662 ) -26 %
Depreciation and amortization 510,018 185,500 324,518 175 %
Research and development 37,205 31,244 5,961 19 %
Total selling general and
administrative 2,747,697 2,804,860 (57,163 ) -2 %
Impairment of assets 116,000 - 116,000 100 %
Restructuring charge 50,000 - 50,000 100 %
Total operating expenses 2,913,697 2,804,860 (7,163 ) 0 %
Loss from operations (1,727,959 ) (2,584,041 ) 856,082 62 %
Other income (expense):
Other income (expense) 31 2 29 -1450 %
Gain (loss) on conversion, net 12,524 (27,288 ) 39,812 146 %
Interest expense (93,883 ) (655,645 ) 561,762 86 %
Change in fair value of derivative
instruments 1,203,883 2,173,567 (969,684 ) 81 %
Total other income (expense) 1,122,555 1,490,636 (368,081 ) -25 %
Net (loss) income (605,404 ) (1,093,405 ) 488,001 45 %
Preferred stock dividends 26,000 30,000 4,000 -13 %
Net income (loss) applicable to common
stock (631,404 ) (1,123,405 ) 492,001 44 %
Net (income) loss applicable to
noncontrolling interest of consolidated
subsidiary 135,665 268,531 (132,866 ) -98 %
Net income (loss) applicable to
Ecosphere Technologies, Inc. common
stock $ (495,739 ) $ (854,874 ) $ 359,135 42 %
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2010 to the Three Months Ended September 30, 2009
The Company reported a net loss applicable to common stock of $495,739 during the three months ended September 30, 2010 as compared to a net loss applicable to common stock of $854,874 for the three months ended September 30, 2009. The Company's net loss for the three months ended September 30, 2010 and its net loss for the three months ended September 30, 2009 were significantly reduced by the accounting for derivative liabilities related to warrants and convertible notes issued by the Company. On May 18, 2009 and May 17, 2010, the Company filed Form 8-Ks which highlighted the fluctuations in net income (loss) which may occur related to the accounting for these derivative instruments, stated that we believe an evaluation of our results should focus on our income or loss from operations and outlined steps the Company was taking to reduce the number of derivative instruments.
These derivative liabilities are recorded at fair value each reporting period. A major component of this valuation is the market value of the Company's common stock. The periodic change in the value of the derivative liability is recorded in other income and expense. As the market value of the Company's common stock increases, so does the Company's derivative liability. This results in other expense. As the market value of the Company's common stock declines, the Company's derivative liability decreases resulting in other income for the period. During the three months ended September 30, 2010, the market value of the Company's common stock decreased from $1.24 per share at June 30, 2010 to $0.50 per share at September 30, 2010 resulting in other income of $1,203,883 related to the decrease in the Company's derivative liability. During the three months ended September 30, 2009, the market value of the Company's common stock decreased from $0.49 per share at June 30, 2009 to $0.43 per share at September 30, 2009, resulting in other income of $2,173,567 related to the decrease in the Company's derivative liability. The larger impact realized during the three months ended September 30, 2010 was due to a significantly larger number of derivative instruments outstanding as of September 30, 2009 as compared to September 30, 2010.
As of September 30, 2010 there are no remaining convertible notes outstanding and as such there are no embedded conversion option derivative instruments remaining. In addition, the number of warrants derivative instruments has been reduced from 16.9 million as of December 31, 2009 to 1.7 million as of September 30, 2010 through a combination of cashless exercises, exercises for cash and one year term extensions in exchange for removal of repricing clauses that make the warrants subject to derivative accounting. As such, the effect of the changes in the fair value of the remaining warrant derivative instruments should have less of an impact on the future results of operations of the Company.
Revenues
Revenues for the three months ended September 30, 2010 increased $1,831,458 or 513% over the three months ended September 30, 2009. Revenue for the three months ended September 30, 2010 was approximately 84% related to pretreating water prior to its use to fracture natural gas wells and 16% related to processing frac flowback water. Revenue for the three months ended September 30, 2009 was generated entirely from the processing of frac flowback water related to the contract with Newfield Exploration Co. See comparison of the nine months ended September 30, 2010 to the nine months ended September 30, 2009 below for information concerning our changed guidance.
Cost of Revenues
Cost of revenues amounted to $1,002,796 for the three months ended September 30, 2010 as compared to $136,257 for the three months ended September 30, 2009. These costs consisted of the payroll related costs of field personnel, plus parts and supplies used in support of the operation of the water filtration and Ecos Frac Tank units.
Operating Expenses
Operating expenses for the three months ended September 30, 2010 were $2,913,697 compared to $2,804,860 for the three months ended September 30, 2009. This increase resulted from an asset impairment reserve charge of $116,000 related to two older generation water filtration units. In addition, an additional restructuring charge of $50,000 was recorded during the three months ended September 30, 2010. Depreciation expense increased $325,000 as a result of an increase in the number of units of equipment being deployed. Further, general and administrative expense increased $209,000 as a result of increases in travel expense of $98,000, insurance of $48,000 and office supplies and postage of $50,000. These increases were partially offset by a reduction in salary and employee benefits of $467,000 which resulted primarily from a reduction of the amount of non-cash compensation of $783,000 which was partially offset increases in cash salaries of $318,000. In addition, professional fees decreased $136,000 due to lower legal fees partially offset by increases in accounting and consulting fees. Research and development increased as we continued to investigate new applications of our technologies.
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
Loss from Operations
Loss from operations for the three months ended September 30, 2010 was $1,727,959 compared to a loss of $2,584,041 for the three months ended September 30, 2009. The decrease in the loss from operations in 2010 versus 2009 was due to an increase of $964,919 in gross profit partially offset by the higher operating expenses as identified above. Included in the loss from operations were non-cash expenses including stock based compensation of $622,000 and depreciation and amortization of $510,018.
Interest Expense
Interest expense was $93,883 and $655,645 for the three months ended September 30, 2010 and 2009, respectively. The decline in 2010 is the result of a decrease in the outstanding debt of $6.4 million since March 31, 2009. The 2010 amount consisted entirely interest paid and accrued on notes payable. Of the 2009 amounts, approximately $2,224,000 related to the accretion of the discounts related to the Company's notes payable (non-cash) and the remainder related to actual and accrued interest associated with the notes payable.
Preferred Stock Dividends
Preferred stock dividends were $26,000 for the three months ended September 30, 2010 and $30,000 for the three months ended September 30, 2009. The dividends reflect Company obligations to preferred shareholders that have not been paid and decreased from 2009 because a number of holders chose to convert their preferred stock into common stock.
Change in Fair Value of Derivative Instruments
The Company adopted ASC 810-15 effective January 1, 2009. Under ASC 810-15 the Company recorded a liability for the fair value of warrants and the embedded conversion options of certain convertible debt agreements as of January 1, 2009 in the amount of $10,218,158. Under ASC 810-15, the fair value of these liabilities is calculated at each reporting date with the change in liability recorded in other income or expense. The Company estimated the fair value of these liabilities to be $654,332 as of September 30, 2010 using the Black-Scholes option pricing model. As such, the Company recognized other income of $1,203,883 for the three months ended September 30, 2010, representing the decrease in the fair value of the derivative liability at September 30, 2010 as compared to the fair value at June 30, 2010. The decrease in the liability resulted primarily due to the decrease in the market value of the Company's common stock from $1.24 per share at June 30, 2010 to $0.50 per share at September 30, 2010.
The Company estimated the fair value of these liabilities to be $7,400,539 as of September 30, 2009 using the Black-Scholes option pricing model. As a result, the Company recognized other expense of $2,173,567, representing the increase in the fair value of these liabilities.
If the Company's common stock price at December 31, 2010 is higher than the $0.50 per share September 30, 2010 closing price, the Company may record a non-cash charge which may be material. Conversely, if the Company's common stock price at December 31, 2010 is lower than the September 30, 2010 closing price of $0.50, the Company will record other income which may be material.
As of the filing date of this report, there are no remaining convertible notes which generate a derivative liability for the Company. In addition, as mentioned above the number of warrants requiring derivative accounting treatment has been reduced from 16.9 million warrants at December 31, 2009 to 1.7 million warrants at September 30, 2010. As such, we anticipate that future other income and expense from these financial instruments will diminish.
Net Income (Loss) Applicable to Ecosphere Technologies, Inc. Common Stock
Net loss applicable to common stock was $495,739 for the three months ended September 30, 2010, compared to a net loss applicable to common stock of $854,874 for the three months ended September 30, 2009. Net loss per share of common stock was $0.00 diluted for the three months ended September 30, 2010 and net loss per share of common stock was $0.01 basic diluted for the three months ended September 30, 2009. Weighted average shares outstanding were 137,646,787 and 110,461,145 for the three months ended September 30, 2010 and 2009.
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
Comparison of the Nine Months ended September 30, 2010 with the Nine Months
Ended September 30, 2009
The following table sets forth a modified version of our unaudited Condensed
Consolidated Statements of Operations that is used in the following discussions
of our results of operations:
For the Nine Months Ended September 30, 2010
Change
2010 2009 $ %
Revenues $ 6,427,787 $ 705,385 $ 5,722,402 811 %
Cost of revenues 2,541,566 391,006 2,150,560 550 %
Gross profit 3,886,221 314,379 3,571,842 1136 %
Operating expenses
Salaries and employee benefits 4,949,593 5,134,875 (185,282 ) -4 %
Administrative and selling 1,299,676 734,076 565,600 77 %
Professional fees 826,535 943,128 (116,593 ) -12 %
Depreciation and amortization 1,432,363 438,549 993,814 227 %
Research and development 126,940 42,794 84,146 197 %
Total selling general and
administrative 8,635,107 7,293,422 1,341,685 18 %
Impairment of assets 116,000 - 116,000 100 %
Restructuring charge 50,000 548,090 (498,090 ) -91 %
Total operating expenses 8,801,107 7,841,512 843,595 11 %
Loss from operations (4,914,886 ) (7,527,133 ) 2,612,247 35 %
Other income (expense):
Other income (expense): 273 1,153 (880 ) 76 %
Gain (loss) on conversion, net (121,080 ) (716,538 ) 595,458 83 %
Interest expense (939,213 ) (4,656,787 ) 3,717,574 80 %
Change in fair value of derivative
instruments (12,831,356 ) (3,565,592 ) (9,265,764 ) -72 %
Total other income (expense) (13,891,376 ) (8,937,764 ) (4,953,612 ) 55 %
Net (loss) income (18,806,262 ) (16,464,897 ) (2,341,365 ) -14 %
Preferred stock dividends 79,750 90,000 10,250 -11 %
Net income (loss) applicable to common
stock (18,886,012 ) (16,554,897 ) (2,331,115 ) -14 %
Net (income) loss applicable to
noncontrolling interest of consolidated
subsidiary (57,045 ) 268,531 (325,576 ) 571 %
Net income (loss) applicable to
Ecosphere Technologies, Inc. common
stock $ (18,943,057 ) $ (16,286,366 ) $ (2,656,691 ) -16 %
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ECOSPHERE TECHNOLOGIES AND SUBSIDIARIES
RESULTS OF OPERATIONS
Comparison of the Nine Months Ended September 30, 2010 to the Nine Months Ended September 30, 2009
The Company's reported a net loss applicable to common stock of $18,943,057 during the nine months ended September 30, 2010 as compared to a net loss applicable to common stock of $16,286,366 for the nine months ended September 30, 2009. The Company's large net losses for the nine months ended September 30, 2010 and 2009 were due to the accounting for derivative liabilities related to warrants and convertible notes issued by the Company. On May 18, 2009 and May 17, 2010, the Company filed Form 8-Ks which highlighted the fluctuations in net income (loss) which may occur related to the accounting for these derivative instruments, stated that we believe an evaluation of our results should focus on our income or loss from operations and outlined steps the Company was taking to reduce the number of derivative instruments.
These derivative liabilities are recorded at fair value each reporting period. A major component of this valuation is the market value of the Company's common stock. The periodic change in the value of the derivative liability is recorded in other income and expense. As the market value of the Company's common stock increases, so does the Company's derivative liability. This results in other expense. As the market value of the Company's common stock declines, the Company's derivative liability decreases resulting in other income for the period. The market value of the Company's common stock was $0.47 as of December 31, 2009. Since December 31, 2009 the fair value of the Company's common stock has increased to $1.50 as of March 31, 2010, decreased to $1.24 as of June 30, 2010 and further decreased to $0.50 as of September 30, 2010 resulting in other expense of $21 million during the 3 month ended March 31, 2010, other income of $7 million during the three months ended June 30, 2010 and other income of $1.2 million for the three months ended September 30, 2010. As a result, the year to date impact for the nine months ended September 30, 2010 has been other expense of $12.8 million. During the nine months ended September 30, 2009, the market value of the Company's common stock increased from $0.31 per share at December 31, 2008 to $0.43 per share at September 30, 2009, resulting in other expense of $3.6 million related to the increase in the Company's derivative liability.
During the three months ended June 30, 2010, the holders of the remaining convertible notes in the amount of $713,889 have converted the notes into common stock of the Company such that there are no embedded conversion option derivative instruments remaining as of September 30, 2010. In addition, the number of warrants derivative instruments has been reduced from 16.9 million as of December 31, 2009 to 1.7 million as of September 30, 2010 through a combination of cashless exercises, exercises for cash and one year term extensions in exchange for removal of repricing clauses that make the warrants subject to derivative accounting. As such, the effect of the changes in the fair value of the remaining warrant derivative instruments should have less of an impact on the future results of operations of the Company.
Revenues
Revenues for the nine months ended September 30, 2010 increased $5,722,402 or 811% over the nine months ended September 30, 2009. Revenue for the nine months . . .
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