ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
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|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
In 2010 and 2011, the Company issued convertible notes in the aggregate principal amount of $1,225,000. The notes accrue interest at an annual rate of 10%, matured in the quarter ended March 31, 2013 and were convertible into common stock at a conversion rate of $0.70 per share. In connection with the issuance of the notes, the Company issued to the investors five-year warrants to purchase 875,000 shares of common stock at an exercise price of $0.70 per share. The Company recorded a discount related to the warrants of $302,387 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 100.73% to 112.55%, an expected term of five years, a risk-free discount rates of 1.74% to 2.06%, and no dividends. During the second quarter of 2013, the Company repaid an aggregate of approximately $1.1 million of principal and interest on the notes. Holders of an aggregate of $295,000 of principal agreed to extend the maturity of their notes to March 2014. As consideration of the extensions the Company reduced the conversion price of the extended notes to $0.42 and issued warrants to purchase 368,467 shares of common stock for $0.42 per share over five years. As a result of extending the notes, the Company recorded additional discounts for beneficial conversion feature and relative fair value of the warrants totaling $111,738, which was being amortized through the extended maturity of the notes. Subsequent to March 31, 2014, the holders of the notes due in March 2014 agreed to extend the maturity dates of the notes to September 2014 for $50,000 of principal and March 2015 for $245,000 of principal, totaling $295,000. The note holders agreed to further extend in March 2015, this extends the maturity dates to September 2015 for $50,000 of principal and March 2016 for $245,000 of principal, totaling $295,000. The holders agreed to extend their maturity dates to December 2017 in exchange for 2,458,333 warrants to purchase common stock at an exercise price of $0.045 per share. In connection with this issuance, the Company recorded debt discounts of $122,975 that amortize over the remaining term of the debt. As of March 31, 2017, the unamortized amount of the discounts was $62,593 and accrued interest was $185,089.
|
|
|
232,407
|
|
|
|
210,891
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,826,519
|
|
|
$
|
6,544,737
|
|
Less Current Portion, net of discounts
|
|
|
(6,826,519
|
)
|
|
|
(6,544,737
|
)
|
Convertible notes payable, long term
|
|
$
|
|
|
|
$
|
|
|
Amortization of debt discounts in the accompanying condensed consolidated statements of operation is included in interest expense for the three months ended March 31, 2017.
(1) As of March 31, 2017 and December 31, 2016, the Company had issued the following secured convertible note to its principal lender, which was consolidated into an amended and restated note in September 2016. As amended and restated, the note is collateralized by a first lien on the following: (i) the Ecos PowerCube® unit located in Stuart, FL; (ii) one completed Ecos GrowCube unit located in Kennewick, WA; (iii) each of the Companys patents related to the Ozonix® technology in any global field of use other than agriculture; (iv) 30.6% of the limited liability company interests in the Companys subsidiary Fidelity National Environmental Solutions, LLC; (v) 25% of the limited liability company interests in the Companys subsidiary Ecosphere Mining, LLC, and (vi) all proceeds received by Ecosphere from Ozonix® patents in any global field of use other than agriculture. The Company has agreed to apply 5% of revenues from certain equipment sales and licensing fees as well as certain securities offering proceeds toward repayment of the note. In addition, the Company shall pay the lender an amount equal to 7% of the gross lease revenue received by the Company on a cash basis from the Companys first tenant at EDCs Cannatech Agriculture Center.
(2) In 2015, the holder (the Companys principal lender) agreed to extend its notes in exchange for 10,440,000 shares of common stock in SOGS as noted above. The shares are subject to anti-dilution rights.
(3) The Notes are secured by a security interest in the Companys shares of common stock of SOGS. In 2015, the holders of an aggregate principal amount of $2 million agreed to extend their notes in exchange for 10,822,800 shares of common stock in SOGS as noted above. The shares are subject to anti-dilution rights.
17
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
A summary of convertible notes payable and the related discounts as of March 31, 2017, and December 31, 2016 is as follows:
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|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Principal amount of convertible notes payable
|
|
$
|
7,179,040
|
|
|
$
|
7,019,230
|
|
Unamortized discounts
|
|
|
(352,521
|
)
|
|
|
(474,493
|
)
|
Convertible notes payable, net of discount
|
|
|
6,826,519
|
|
|
|
6,544,737
|
|
Less: current portion
|
|
|
(6,826,519
|
)
|
|
|
(6,544,737
|
)
|
Convertible notes payable, net of discount, less current portion
|
|
$
|
|
|
|
$
|
|
|
Notes Payable
On January 1, 2012, the Company reclassified a non-interest bearing unsecured note payable to a former director totaling $272,399 of which $102,149 was outstanding at December 31, 2016 and 2015, respectively, from related party debt due to lack of on-going affiliation with the lender. Due to lack of payment the note was in default beginning in April 2015, the note began accruing interest at a rate of 7% per annum through December 2015 when the note the note holder agreed to extend the maturity date to October 2018 and agreed to suspend payments until July 2016 without the note bearing any additional default interest. Accordingly, $102,149 is included in current portion of notes payable in the accompanying consolidated financial statements. Accrued interest at March 31, 2017 was $8,938.
In October 2015, the Company issued a promissory note in the aggregate principal amount of $50,000. The note accrues interest at an annual rate of 10%, maturing in May 2016 and is past due, but not in default as the Company has not received notification from the lender. In connection with the promissory note, the investor was granted 750,000 options to purchase shares of SOGS common stock. The options are exercisable over a three-year period at $0.046 per share. Accrued interest at March 31, 2017 was $7,444. The note is included in current portion of notes payable.
In June 2016, the Company and its wholly-owned subsidiary, EDC, issued a senior secured promissory note in the aggregate principal amount of $1,000,000. The Company recorded a discount of $10,000 for legal fees that will be amortized over the 5 year term of the note. The note bears annual interest at the rate of 15% and matures 63 months after EDCs initial tenant obtains both a certificate of occupancy and an approved I-502 cultivation license issued by the Washington State Liquor Control Board, but no later than April 15, 2022. The Note is secured by all of EDCs personal property and by EDCs interest in certain agreements entered into between EDC and its initial tenant pursuant to which EDC will lease the initial tenant property and equipment, provide consulting services, and license its technology. See Note 12. The balance at March 31, 2017 was $991,500 of which $791,500 is in long term and $200,000 is in current portion of notes payable. Accrued interest at March 31, 2017 was 112,500 and unamortized discount was $8,500.
In Q4 2016, the Company entered into a secured loan arrangement in the aggregate principal amount of $500,000 with its principal lender. The note accrues interest at a rate of 10% per annum. In addition, the note has a security interest in shares of SOGS which are presently held by the Company. Accrued interest at March 31, 2017 was $22,153. The note is included in current portion of notes payable.
Related Party Notes and Loans Payable
In January 2015, the Company issued a promissory note to an employee of the Company in the aggregate principal amount of $50,000. During 2016, the employee made additional loans to the Company of $69,733, respectively. The total outstanding balance of the notes was $119,733 as of March 31, 2017. The Company is currently in discussions with the employee regarding an extension. The note accrues interest an annual rate of 10% and matured in July 2016. Accrued interest at March 31, 2017 was $15,032.
During the year ended December 31, 2016, the Company received unsecured, non-interest bearing advances from a related party, who is the Companys Director of Manufacturing and son of the Companys CEO, of $100,000 and repaid $29,393 of the advance. During the three months ended March 31, 2017, the Company received additional advances of $130,000 and repaid $20,000. As of March 31, 2017 the balance of this advance was $180,607.
18
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
Financing Obligations
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Secured vehicle notes payable in monthly installments of $1,046 over 72 months, maturing in September 2019 and accruing interest at an annual rate of 9.65%.
|
|
$
|
26,655
|
|
|
$
|
29,111
|
|
|
|
|
|
|
|
|
|
|
Financing for insurance premiums payable in nine monthly installments of $1,938 accruing interest at 8.23%. The final payment is due in January 2017.
|
|
|
|
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
26,655
|
|
|
|
31,042
|
|
Less Current Portion
|
|
|
(10,439
|
)
|
|
|
(12,122
|
)
|
Financing obligations, long-term portion
|
|
$
|
16,216
|
|
|
$
|
18,920
|
|
Capital Lease Obligation
The Company entered into a capital lease to purchase a forklift costing $78,896 in July of 2012. The lease is payable in 60 monthly installments of $1,491 including interest at an implied rate of 5.05% through July 2017. The Company is entitled to buy the equipment for a bargain purchase price of $1 at the end of the lease. In November 2015, the Company signed a settlement agreement with the financing company agreeing to pay 24 payments of $1,397. At March 31, 2017 the remaining balance was transferred to accounts payable. Furthermore, the Company has no future obligation as the forklift was paid off in April 2017.
Third Party Debt
Aggregate annual maturities of third and related party debt are as follows as of March 31, 2017:
|
|
|
|
|
For the year ended December 31,
|
|
Amount
|
|
2017
|
|
$
|
8,341,968
|
|
2018
|
|
|
211,219
|
|
2019
|
|
|
204,997
|
|
2020
|
|
|
200,000
|
|
2021
|
|
|
200,000
|
|
Total debt- face value
|
|
|
9,158,184
|
|
Less: unamortized discount
|
|
|
(361,021
|
)
|
Net debt
|
|
$
|
8,797,163
|
|
Obligation Secured by Revenues
Under a $2,000,000 offering as amended, as of March 31, 2017, the Company has received $745,000 of investments, net of investment discounts, for 7.75% of the Companys subsidiary, EDC, future $250,000 monthly revenues under a 30-year lease with a related party tenant in connection with Phase 1 of the Washington Cannatech Agriculture Center project. The $745,000 is recorded as a current liability under obligations secured by revenues in the accompanying unaudited condensed consolidated financial statements due to the demand investment repayment feature described below. Once the Company begins to receive monthly rental revenues of $250,000, the Company will pay the current investors 7.75% of the monthly rental revenues or $19,375 per month which will be considered interest expense (see Note 15 Obligation Secured by Revenues).
Each $100,000 investment is secured by a 1% interest in EDC Phase 1 of the Cannatech Agriculture Center revenues up to the offering maximum or 20% and a second lien on the intellectual property assets and patent portfolio of Ecosphere and the investors will be the first secured creditor behind the collateral rights of the senior lender in Ecosphere. Upon completion of Phase 1 of the Washington Cannatech Agriculture Center and the investors receive their first monthly payment; the intellectual property collateral will be released. In addition to the collateral, the investors have multiple exit strategies. The investors reserve the right to the following options: (1) the investment is convertible into Ecosphere common stock at a rate of $0.045 per share after six months from the respective investment date; and (2) with 30-day notice the investor can request the return of the original investment after one-year from the original investment date. (See Note 11 Related Party Contracts and Note 12 Other Commitments).
19
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
6.
CUSTOMER DEPOSITS AND DEFERRED REVENUE
Customer deposits are summarized as follows:
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Customer A
|
$
|
|
|
$
|
1,293,900
|
Customer B
|
|
237,000
|
|
|
237,000
|
Customer C
|
|
32,500
|
|
|
32,500
|
Total customer deposits
|
$
|
269,500
|
|
$
|
1,563,400
|
As of March 31, 2017, the Company had customer deposits of approximately $0.3 million in connection with growing equipment orders received from one customer. The Company had work-in-process inventory related to these deposits of $160,884. In accordance with the sales contracts, 80% of the selling price, or $189,600, was advanced by SOGS to Ecosphere, the parent company and manufacturer.
The Company received an upfront, non-refundable licensing fee in January 2015 and in accordance with SAB Topic 13f, is amortizing it over the 20 year life of the licensing agreement. For the three months ended March 31, 2016, the Company recorded $6,250 as equipment sales and licensing revenue. The remaining $444,792 of the licensing fee is recorded as deferred revenue with $25,000 in current liabilities and $419,792 as a long term liability and will be amortized over the 20 year period.
7.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company applies the provisions of ASC Topic 815-40, Contracts in Entitys Own Equity, 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 and embedded conversion options are recorded as a liability and are revalued at fair value at each reporting date. The Company has 3,000,000 warrants with repricing options and $23,333 of convertible debt qualifying for derivative accounting at March 31, 2017.
The Company calculates the estimated fair values of the liabilities for warrant and embedded conversion option derivative instruments at each quarter-end using the Monte Carlo simulations. The closing price of the Companys common stock March 31, 2017 was $0.042. Volatility, expected term and risk free interest rates used to estimate the fair value of derivative liabilities at March 31, 2017, 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
|
|
March 31, 2017
|
|
Embedded Conversion Option
|
|
March 31, 2017
|
Risk-free interest rate
|
|
1.65%
|
|
Risk-free interest rate
|
|
0.96%
|
Expected term in years
|
|
3.7 years
|
|
Expected term in years
|
|
0.7 years
|
Expected stock price volatility
|
|
96.49%
|
|
Expected stock price volatility
|
|
104.54%
|
Expected dividend yield
|
|
None
|
|
Expected dividend yield
|
|
None
|
During the three months ended March 31, 2017, based upon the estimated fair value and reduction of principal due to conversions, the Company decreased its liability for the derivative instruments by $40,014 which was recorded as "Change in fair value of derivative instruments" in the other income (expense) section of the Company's consolidated statement of operations.
We currently measure and report at fair value the liability for warrant and embedded conversion option derivative instruments. The fair value liabilities for price adjustable derivative instruments have been recorded as determined utilizing the Monte Carlo simulations. The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
March 31, 2017
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of liability for embedded conversion option liability
|
|
$
|
33,023
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
33,023
|
|
Fair value of liability for warrant derivative instruments
|
|
$
|
87,619
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
87,619
|
|
Total
|
|
$
|
120,642
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
120,642
|
|
20
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
The following is a roll forward for the three months ended March 31, 2017 of the fair value liability of price adjustable derivative instruments:
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
Liability for
|
|
|
|
Warrant and
Embedded
Conversion
Option
|
|
|
|
Derivative
|
|
|
|
Instruments
|
|
Balance at December 31, 2016
|
|
$
|
160,656
|
|
Change in fair value included in statement of operations
|
|
|
(40,014
|
)
|
Balance at March 31, 2017
|
|
$
|
120,642
|
|
8.
REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK
Series A
At March 31, 2017 and December 31, 2016 there were 6 shares of Series A Redeemable Convertible Cumulative 15% Preferred Stock 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 event at $25,000 per share plus accrued dividends. A Change of Control ("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. Our Series A preferred stock provides for annual cash dividends at the rate of $3,750 per share. Accrued dividends totaled $1,126,619 and $1,120,994 on March 31, 2017 and December 31, 2016, respectively.
Series B
At March 31, 2017 and December 31, 2016 there were 241, respectively, of Series B Redeemable Convertible Cumulative 10% Preferred Stock outstanding. The shares are redeemable at the option of the Company at $3,000 per share plus accrued dividends or redeemable at the option of the holder upon a Change of Control (CoC) event at $2,500 per share plus accrued dividends. The shares are convertible each into 835 common shares. Our Series B preferred stock provides for annual cash dividends at the rate of $250 per share. Accrued dividends totaled $2,110,332 and $2,095,269 on March 31, 2017 and December 31, 2016, respectively.
9.
COMMON STOCK
Sea of Green Systems, Inc.
SOGS is authorized to issue 250,000,000 shares (no par value) of its common stock.
No shares were issued during the three months ended March 31, 2017. At March 31, 2017, ETI owned 59.92% of SOGS.
Ecosphere Technologies, Inc.
Shares issued and issuable during the three months ended March 31, 2017 are summarized below.
|
|
|
|
|
Shares outstanding and issuable at December 31, 2016
|
|
|
174,713,046
|
|
Shares issued for conversion of convertible debt (a)
|
|
|
5,571,145
|
|
Total common shares outstanding at March 31, 2017
|
|
|
180,284,191
|
|
(a)
issued for the conversion of the aggregate principal amount of $250,701 at a rate of $0.045 per share. See Note 5.
21
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
10.
STOCK OPTIONS AND WARRANTS
The fair value of each option and warrant is estimated on the date of grant using the BSM option-pricing model. No new warrants or options were issued during the three months ended March 31, 2017. The Company had 96,606,532 warrants and 27,834,321 options to purchase common stock outstanding at March 31, 2017.
Stock-based compensation expense related to options for the three months ended March 31, 2017 was $6,586. At March 31, 2017, total unrecognized compensation cost related to unvested options granted under the Companys option plans totaled $20,124. This unrecognized compensation cost is expected to be recognized over the next nine months.
11.
RELATED PARTY TRANSACTIONS
Related Party Note Payable
In January and February 2017, the Company received unsecured, non-interest bearing advances from a related party of $130,000 and repaid $20,000 of the advance during the three months ended March 31, 2017. As of March 31, 2017 the balance of this advance was $180,607 and included in related party notes and loans payable.
Related Party Accounts Payable
As of March 31, 2017, the Company had a balance of $29,450 payable to two of the Companys employees.
Related Party Service and Manufacturing Fees
The Company is accruing a monthly management fee payable by SOGS of $25,000 retroactive from January 1, 2015, for the Companys executive, marketing, accounting, administrative and other miscellaneous services in supporting SOGS operations. In addition, the Company will manufacture for SOGS all Ecos GrowCube products at 80% of the selling prices, subject to the Companys approval. The management fees are eliminated in consolidation.
Related Party Contracts
In June 2016, the Company and EDC entered into various non-binding agreements for a term of five years with the option to renew the lease for five additional five year terms with an employee and family member of the CEO to lease one of its turn-key growing facilities in Washington State, subject to successful completion of Washington State requirements. The Company is expected to receive monthly rental revenue of $250,000 in connection with these agreements. (See Note 5 Obligations Secured by Revenues and Note 12 Other Commitments).
12.
COMMITMENTS AND CONTINGENCIES
Leases
The Company makes monthly rent payments of $13,214 under a month-to-month agreement for the Companys Stuart, Florida corporate offices and manufacturing location. For the three months ended March 31, 2017 the Company recognized rent expense amount of $39,642 for the two buildings in Stuart, FL. As of the date of this Report, the Company has $56,454 in past due rent payments recorded in accounts payable. The Company has come to an agreement with the landlord to pay the past due balance over a one-year period.
In March 2016, the Company entered into a lease agreement for a 6-acre property in Washington State. Through various extensions, the term of this lease commenced in January 2017 and will terminate on a date five years from the commencement date. The Company has the option to renew the lease for five additional five year terms. The Company is required to make a security deposit in the amount of $72,932 by May 2017, $33,821 of which has been paid as of the date of this Report. The landlord agreed to defer lease payments to March 2017. In March, April and May 2017, the Company is required to lease payments of $19,751, $34,418 and $47,281. As of the date of this Report the Company has paid $54,169 in payments. Beginning in June 2017 and going forward the aggregate monthly rent will be $27,725.
In May 2016, the Company entered into a new three-year lease agreement for additional warehouse space at a location near its current offices. The term of this lease commences in May 2016 and will terminate in May 2019. The aggregate monthly rent is $2,332.
22
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
In July 2016, the Company entered into a lease agreement for an additional 1.57 acres in Washington State. Through various extensions, the term of this lease commenced in January 2017 and will terminate on a date five years from the commencement date or July 2021. The Company has the option to renew the lease for five additional five-year terms. The Company paid a security deposit in the amount of $25,646 in August 2016. The landlord agreed to defer lease payments to March 2017. In March and April 2017, the Company is required to lease payments of $4,812 each month. As of the date of this Report the Company has paid $9,624 in rent. Beginning in May 2017 and going forward the aggregate monthly rent will be $7,624. In addition, the Company paid $7,500 for an option to lease additional property in Washington State.
Legal
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.
In December 2012, the Company reached a settlement with KIA, who filed a lawsuit against the Company in 2007, amounting to $100,000 to be paid with an initial $25,000 payment and 36 monthly installments for the remainder of the settlement amount. The Company has defaulted on its required payments and the settlement amount increased to $150,000. The Company had originally accrued $197,500 in liabilities related to this settlement. As a result of the settlement, the Company reduced legal expense by $47,500 (as the original expense was charged to this account) leaving an accrued balance of $125,000 at December 31, 2012, which was comprised of the $150,000 obligation less the initial $25,000 payment. As of March 31, 2017, the Company had an accrued balance of $70,833, which is comprised of the $150,000 obligation less $79,167 in payments. Since the Company has not been current in regards to payment, the Company will no longer record a $50,000 gain upon final payment in accordance with the settlement.
In March 2011, a former vendor obtained a judgment against the Company for a number of disputed billings. As of March 31, 2017 the Company has accrued $70,000 which is anticipated to be the amount of payment due to the vendor plus attorneys fees.
Other Commitments
As of March 31, 2017, the Company has received a $745,000 investment for 7.75% in the Companys subsidiary, Ecosphere Development Company, LLC future revenues generated in connection with Phase 1 of the Washington Cannatech Agriculture Center project. The $745,000 is recorded as a current liability under obligation secured by revenues in the accompanying unaudited condensed consolidated financial statements since the Investor may demand repayment of the original investment any time one-year after the original investment date. Furthermore, the Company is obligated to pay up to $19,375 per month based on 7.75% of an expected $250,000 month rental revenue stream. (See Note 5 Obligations Secured by Revenues and Note 11, Related Party Contracts).
In June 2016, the Company and EDC issued a senior secured promissory note in the amount of $1.0 million to a lender. In addition, EDC entered into a long-term Business Consulting Agreement with the lender under the note agreement pursuant to which the lender will provide EDC with advice and services with respect to EDCs business and financial management and long-range planning. In exchange for the consulting services, EDC will pay the Lender $8,333 monthly plus 15% of EDCs monthly revenues received under agreements with EDCs initial tenant.
In July 2015, SOGS entered into a non-exclusive sales representative agreement with DWC. DWC is to act as a non-exclusive sales representative for SOGS on a worldwide basis to sell the Companys Ecos GrowCube technology and related Precision-Agriculture products to its customers. The term of the agreement commenced in July 2015 and shall continue in perpetuity. In consideration of the services to be rendered by DWC, the Company agrees to pay DWC 10% of gross revenues received by SOGS from sales of the Ecos GrowCube technology and related Precision-Agriculture products to its customers. As of March 31, 2017 the Company accrued $10,104 in commissions related to a SOGS equipment order and licensing royalties.
In June 2016, the Company and its subsidiaries entered into a sales representative and business development agreement with a DWC Equipment Sales, LLC (DWC). DWC is to receive a finders fee related to a license agreement with the Companys nutrient manufacturer equal to 10% of the gross revenues received by SOGS. Also, during the term of the agreement, the Company agrees to pay DWC 3% of the gross revenues received by the Company from licensing and/or transferring of intellectual property rights of the Ozonix® water treatment technology as a result of any and all direct or indirect introductions made by DWC. In addition, the Company agrees to pay DWC 10% of adjusted gross collected revenues from Ozonix® water treatment equipment sales and/or contract services as a result of any and all direct or indirect introductions made by DWC. Lastly, the Company agrees to pay DWC a monthly performance based consulting fee of 3% of rental income received from Phase 1 for years 1 thru 5 and 2% of rental income received from Phase 1 for years 6 through 30 of EDCs Washington Cannatech Agriculture Center. As of March 31, 2017, the Company has accrued $1,038 of commissions related to the royalties received from the Companys nutrient manufacturer.
23
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
In June 2016, the Company entered into a royalty agreement with the Companys principal lender. During the 30-year term of the agreement, the Company shall pay the lender an amount equal to 5% of the gross revenue received on a cash basis from the Companys first facility at the Cannatech Agriculture Center when it becomes operational. In September 2016, the Company increased the royalty rate to 7% of gross revenue as consideration for additional loans. As of December 31, 2016, the Company has not accrued or paid any royalties related to this agreement. In addition, the Company has issued a secured promissory note in October 2016 that applies to certain shares in the Companys consolidated subsidiary, Sea of Green Systems, Inc.
The Company has a Second Amended and Restated Royalty Agreement effective January 1, 2016, with Mr. McGuire, the Companys CEO, where he is entitled to receive royalties equal to 4% of Ecospheres revenues generated from the patents and inventions which were created by him (the Inventions). In addition to the royalties paid on revenues, the royalties will also be paid on any consideration Ecosphere receives or its shareholders receive from a merger or sale of our assets outside of the ordinary course of business relating to the Inventions plus consideration received by our shareholders from an exchange offer or tender offer, as well as 4% of any debt converted (for all new debt issued beginning January 1, 2016) and sales of Ecospheres equity securities. In May 2016, the Company entered in a letter agreement with Mr. McGuire where the Company agrees to pay the inventor a 10% royalty on any gross revenues received by EDC. Royalty payments will be paid for the life of all Inventions regardless of whether Mr. McGuire remains an employee of Ecosphere. Under the Royalty Agreement, Ecosphere granted Mr. McGuire a security interest (subordinated to all creditors and shareholders) in all of the Inventions and all revenues generated from the Inventions to secure payments owed to him under the Royalty Agreement. Provided that Ecosphere is not in default of the Royalty Agreement, Mr. McGuire will assign his rights to any technology invented by him during the term of his Employment Agreement. His amended Royalty Agreement provides that the Company will be in default for non-payment only if it has the liquidity to pay Mr. McGuire or if it defrauds him regarding its ability to pay him. As of March 31, 2017, the Company has accrued $84,702 of royalties earned by Mr. McGuire in 2016 and 2017.
As of March 31, 2017, the Company has the future obligation to pay 42.75% of EDCs Phase 1 monthly revenues to investors, consultants and the Companys CEO.
13.
CONCENTRATIONS OF RISK
Concentration of Accounts Receivable and Revenues
At March 31, 2017, accounts receivable of $10,385 was comprised of one customer balance amounting to 100% of the total receivable balance. In addition, 99% of the total revenue balance is related to the sale of growing equipment to one customer.
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 March 31, 2017. As of March 31, 2017, the Companys bank balances did not exceed FDIC insured amounts. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. The Companys payment terms are generally upon receipt or 30 days from delivery of products, but may fluctuate depending on the terms of each specific contract.
As of March 31, 2017, the Company was dependent on it principal lender as approximately 49% of our current outstanding funding came from this one source.
14.
NONCONTROLLING INTEREST IN CONSOLIDATED SUBSIDIARY
Ecosphere Mining, LLC
In October 2013, the Companys subsidiary, Ecosphere Mining, LLC, granted to its directors an aggregate of 5% ownership in Ecosphere Mining, LLC. Further in June 2015, the Company granted a note holder a 2.5% interest in Ecosphere Mining, LLC. Accordingly, the Company is presenting noncontrolling interests as a component of equity on its consolidated balance sheets and reported noncontrolling interest net income or loss under the heading Net (income) loss applicable to noncontrolling interest in consolidated subsidiaries in the consolidated statements of operations.
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
|
$
|
(46,724
|
)
|
Noncontrolling interest in loss
|
|
|
|
|
(3
|
)
|
Balance, March 31, 2017
|
|
|
|
$
|
(46,727
|
)
|
24
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
Sea of Green Systems, Inc.
In 2014, the Companys subsidiary, SOGS, issued 80,000,000 shares of common stock to ETI as founders shares in exchange for a capital contribution of $10. From November 10, 2014 through August 2015, the Company was the sole shareholder. During the year ended December 31, 2015, SOGS issued a stock dividend payable to ETI in the amount of 21,262,800 shares of common stock. During 2015, ETI sold portions of its interest in SOGS for cash and issued its own shares to third parties for services benefiting ETI. At December 31, 2015, ETI owned 69.49% of SOGS. In 2016, ETI issued its own shares as bonuses to ETI employees and to convertible note holders as consideration for one-year debt extensions. In addition, SOGS issued shares as consultant fees in lieu of a cash payment. At March 31, 2017, ETI owned 59.92% of SOGS. Accordingly, the Company is presenting noncontrolling interests as a component of equity on its consolidated balance sheets and reported noncontrolling interest net income or loss under the heading Net (income) loss applicable to noncontrolling interest in consolidated subsidiaries in the consolidated statements of operations.
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
|
$
|
(753,484
|
)
|
Noncontrolling interest in income
|
|
|
|
|
69,838
|
|
Balance, March 31, 2017
|
|
|
|
$
|
(683,646
|
)
|
15.
SUBSEQUENT EVENTS
Debt Conversions
In April 2017, the Company issued 600,550 shares of common stock in connection with the conversion of $27,025 of principal and accrued interest.
Options Granted to Consultant
In April 2017, the Company entered into a two year consulting agreement and agreed to monthly payments of $5,000. In connection with the consulting agreement the Consultant was granted three-year options to purchase 500,000 shares of common stock with an exercise price of $0.045 per share. The fair value of the options amounts to $11,779. Upon execution of the consulting agreement 125,000 of the options vested immediately with the remaining options vesting in equal increments every 6 months over 18 months.
Option Repricing
In May 2017, the Company reduced the exercise price of 5,076,003 stock options held by Board members from prices ranging from $0.40 to $0.12 per share to $0.045 per share. The Company will immediately expense the incremental increase in value of $44,498 for the repricing of these previously issued options.
Obligation Secured by Revenues
Since April 1, 2017 and through the date of this Report, the Company received a $560,000 investment for an additional 6% interest in future revenues generated by the Companys subsidiary, Ecosphere Development Company, LLC in connection with the first phase of the Washington Cannatech Agriculture Center project. (See Note 5 Obligations Secured by Revenues and Note 12 Other Commitments).
SOGS Option Grants
In April 2017, SOGS granted ten-year options to purchase 13,000,000 shares to one of SOGS directors and two consultants at an exercise price of $0.0468 per share. The options vest quarterly in equal amounts over a three-year period, subject to performing services for the Company or a publicly reported company (Pubco) which acquires the Company by way of merger, share exchange or otherwise (Pubco Transaction). The options are not exercisable until and unless the Pubco Transaction has occurred. If the Pubco Transaction does not occur, the options will not be exercisable. The fair value of the options amounts to $449,357.
Draw on Convertible Note
In April 2017, the Company received the final draw of $101,295 from a previously issued $0.5 million convertible note (See Note 5). The note matures in December 2017 and is convertible into SOGS common stock.
25
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(Unaudited)
Related Party Repayments
The Company has repaid $90,102 since April 1, 2017 to two of the Companys employees for advances made to the Company and accounts payable.
Convertible Note Extension and Warrant Grant
A Convertible note holder of an aggregate principal amount of $25,000 has agreed to extend their maturity date to December 2017. In connection with the extension, the holder will be granted five-year warrants to purchase 208,333 shares of common stock at an exercise price of $0.045 per share. The Companys awaiting responses from convertible note holders of an aggregate principal amount of $115,000 on if they agree to the extension terms and as of the date of this Report these notes are in default.
26
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: