Here's what they are trying to do about the problem.
Liquidity
Through the end of 2012, the Company had sufficient liquidity and revenue to support its growing operations as evidenced by the record 2012 revenue and the net income. As the result of the unexpected failure of Hydrozonix to pay for Units 13-14, the Company has been focusing its efforts on providing liquidity while it implements its business model of developing, commercializing and selling innovative environmentally friendly technologies and maintaining the manufacturing rights for the products which use the technologies.
Our management has been actively engaged in seeking to sell a portion of its 52.6% interest in EES. The Company expected it would have closed that sale last week or the transaction would have terminated. However, the Company finds itself in a situation where definitive and complex agreements have essentially been agreed upon by the parties, but there has been no communications apparently due to another transaction involving the buyer.
Regardless of whether this transaction closes, the Company has retained a nationally known investment banking firm and charged it with monetizing its EES investment. During 2012, EES paid its members approximately $6.7 million in dividends. The Company’s goal is to monetize all or part of EES while maintaining the right to manufacture all equipment using Ozonix® technology. At the same time, the Company has requested the investment banker to solicit an interim bridge loan to provide working capital. We cannot assure you that the pending sale of a part of the Company’s interest in EES or those transactions through the investment banker will close.
When Hydrozonix failed to pay for Units 13-14, the Company and its majority-owned subsidiary, EES, had to take back the exclusivity it had granted Hydrozonix for the U.S. onshore oil and gas exploration market. The U.S. exclusivity for the patented Ozonix® technology for onshore oil and gas exploration was based on Hydrozonix receiving an approximate 25% discount off of the retail price of an Ozonix® EF80 system for agreeing to pay for two EF80 Units every quarter to maintain their exclusivity. The retail price for an EF80 was originally set at $4.5 million and Hydrozonix was allowed to purchase them for approximately $3 million plus paying a 20% EBIT royalty fee during their exclusivity period and a 15% royalty fee if they were to lose their exclusivity. At this time EES will now receive a 15% royalty of the EBIT of Hydrozonix for the life of the Ozonix® patents. If Hydrozonix was to sell their business to a larger service company we would still receive that royalty for the life of the Ozonix® patents. During the period from January 1, 2013-April 13, 2013, Hydrozonix principals assured Company executives repeatedly that they would be purchasing Units 13-14, as well as placing deposits on Units 15-16. Because of these promises from a customer that had been keeping up their end of the exclusive agreement, the Company, as the majority managing partner of EES, continued building Units 13-14 to be able to deliver these Units on time and on schedule. Units 13-14 were built on time and even tested and signed off for meeting its technical acceptance program by Hydrozonix at the Company’s Stuart, Florida facility by March 31, 2013. During the first quarter of 2013, Ecosphere was also completing its newest mobile Ozonix® demonstration Unit to be able to showcase its Ozonix® technology for mining, municipal, and agriculture applications. The Company and its subsidiary used a significant amount of its available cash resources on hand to manufacture these Units in order to be able to tender delivery to Hydrozonix as well as have equipment to build out its other vertical markets. As of the date of this filing, the Company does not have sufficient working capital on hand to sustain operations for the next 12 months. As of the date of this filing, our cash balance is approximately $255,000 and we have a working capital deficit of approximately $572,000. Our current assets total approximately $5.2 million, consisting primarily of finished goods inventory in stock that can be sold immediately, cash and accounts receivable. These current assets include Units 13-14 and a new demonstration Unit built to use the OzonixÒ technology in other fields of use. Our current liabilities total approximately $5.8 million. The Company now faces a need to immediately generate cash to fund its future working capital needs from one or more sources, including, but not limited to or exclusively, the sale of Units 13 and 14 that it has in inventory, and the realization of a portion of the value of its interest in EES. Among other things, the Company has been in discussions with a leasing company about a sale/leaseback of Units 13-14 and the demonstration Unit. We will also continue to focus our efforts on the sale of new equipment into the global oil and gas industry, now including the U.S.
The Company has been focusing on multiple approaches to provide the necessary working capital. As of April 15th Hydrozonix forfeited its exclusive rights and EES, the Company’s 52.6% subsidiary, has regained those rights to treat water in the U.S. onshore oil and gas exploration and production field-of-use. EES did not license Hydrozonix the U.S. offshore or international rights for Ozonix® and still retains those rights as well as the U.S. rights now for onshore oil and gas exploration and production. Management expects that, as a result of EES regaining rights to the U.S. oil and gas market, there will be opportunities for strategic partnerships that have the potential to accelerate market penetration within the U.S., and increased potential for financing through the sale of a portion of the Company’s interest in EES. Due to legal constraints, the Company and EES refrained from conducting any discussions with third parties while Hydrozonix had exclusivity. After April 15th, EES launched a marketing program to expand the use of its licensed technology. It has been engaged in meetings and discussions with third parties seeking to use the patented OzonixÒ technology in fracturing operations in a number of countries outside of the United States.
Our management is actively seeking to sell Units 13-14 and all future Ozonix® units they produce to a service company, an energy exploration company, or possibly injection well operators of which there are 150,000 in the U.S. that could use the Ozonix® technology to recycle produced and flowback waters. Again, it should be noted that the approximately $3 million price we sold the OzonixÒ Units to Hydrozonix was based on the volume discount of two Ozonix® EF80 Units per quarter, plus a 20% EBIT royalty during the exclusivity period and a 15% EBIT during the non exclusivity period. The retail price for each EF80 is actually $4.5 million. As disclosed elsewhere in this Report, we have received multiple awards from leading national companies as a result of the unique and environmentally important OzonixÒ technology that has treated over 700 wells and 3 billion gallons of water. This has increased our Company’s visibility, and we believe it will lead to future monetization. However, we cannot be certain as to the timing of the sale of our inventory Units 13 and 14. In addition to EES being able to now expand its service business beyond the two oil and gas drilling customers which the Hydrozonix agreement limited the Company to, EES can now sell OzonixÒ Units to customers including oil and gas exploration companies, oil and gas service companies, injection well operators, and trucking companies that are handling and recycling flowback and produced water for their customers. Assuming EES is able to sell new Units, the Company will manufacture them for EES as it did for the first 14 Ozonix® EF80 Units and the 26 Ozonix® EF10 and EF20 units. At the same time, our management has been actively engaged in seeking to obtain financing to provide the working capital until EES OzonixÒ sales resume. However, there can be no assurance that such financing will be available to the Company on acceptable terms.
