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Executives

Gary Dvorchak – Senior Vice President-ICR, LLC

Charles Vinick – Chairman and Chief Executive Officer

Barbara Carabetta - Interim Chief Financial Officer

Analysts

Guffary Castle – Private Investor

Tom Bridges – Private Investor

Steven Hart – Octagon Capital Partners

Wayne Thomas – Private Investor

William Briskman – Private Investor

David Cole – Eagle Capital Incorporated

Scott Hodges – Private Investor

Gary Kramer – Private Investor

Martin Cohen – Balanced Financial Securities

Bradley Grayson – Wells Fargo Advisors, LLC

Ecosphere Technologies, Inc. (OTCQB:ESPH) Q3 2012 Earnings Call November 8, 2012 4:30 PM ET

Operator

Welcome to the Ecosphere Technologies Incorporated third quarter 2012 earnings conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Gary Dvorchak, Senior Vice President of ICR. Please go ahead Sir.

Gary Dvorchak

Thank you, Melissa, and thank you everyone for being on the call today. On the call today are Ecosphere's Chairman and CEO, Charles Vinick, and our interim Chief Financial Officer, Barbara Carabetta.

Before we begin, I'd like to remind everyone that this call is being webcast and is available under the events tab in the investor section of our website at www.ecospheretech.com. The replay of the webcast will be available for one year. Also [inaudible] on our investor relations website is the earnings press release and an accompanying slide presentation. For those of you listening via webcast, the slides will come up automatically. However, you will need to advance manually as we [inaudible]. For those of you dialing into the conference call, please download the copy of the slides from our website.

Turning to slide two, we need to advise you that some of the information discussed on this conference call and in the question and answer session will contain forward-looking statements including our 2012 guidance, our continuing relationship with [inaudible] gas industry, Hydrozonix, and profitability from this relationship, delivery of the industry Hydrozonix as well as an update of the expansion of our patent Ozonix technology and other water industries.

These forward-looking statements are not a guarantee of performance. And the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in the risk factors contained in our form 10-K filed on March 15th, 2012 with the SEC as well as in our earnings released and subsequent SEC filings. These forward-looking statements speak only to the date of this call. And the company undertakes no obligation to publicly update any forward-looking statements unless required by law.

With that, let me now turn the call over to our Chairman and CEO, Charles Vinick. Charles.

Charles Vinick – Director, CEO

Thank you, Gary. And thank you everyone for joining our third quarter earnings conference call.

I want to start by reiterating our business model, [inaudible] financial results, and we will conclude the formal part of the call with our long-term outlook.

Our interim CFO, Barbara Carabetta is here with us and will be available to answer questions as well during the question and answer period.

Before we discuss the details of the financials, I want to emphasize that our multi-tested Ozonix water treatment technology is the growth driver of this company.

Please turn to slide three. Since the adoption of our intellectual property based open innovation network years ago, our business model has been to commercialize our innovative patented Ozonix technology through highly profitable licensing and manufacturing transactions. Our continued growth over the last 18 months demonstrates the validity of this business model.

The recent study by the MIT's formal tools management has forecasts shown on slide four. Founded investors on Wall Street are favoring business models focused on the licensing intellectual properties and innovative manufacturing. This is precisely our business model. The one that resulted in our first Ozonix technology license and manufacturing agreement with Hydrozonix.

Going forward, this is the business model that we believe will bring the highest shareholder value because it provides attractive economics and better valuation opportunities for our shareholders.

For each wastewater treatment opportunity, we seek the right strategic partners that can bring capital and market access. Partners will pay a license fee for the privilege in the developing of market with our technology, will purchase equipment from us, and will pay us a recurring royalty based on their success.

If you study public companies that pursue this model, you will find the IP headed capital rights businesses garners some of the highest valuations in the stock market. Slide five illustrates the benefits of IP licensing business models. Ecosphere is a blend of an innovative manufacturing company and an IP licensing company. We believe our valuations should be favorably influenced as our high market licensing and royalty revenue streams continue to grow.

While we can't guarantee how the market will value us, we believe there is merit in our decision to pursue this intellectual property, licensing, and manufacturing business model. And we have positioned Ecosphere to do so.

Now let me turn the call over to Barbara to discuss financial results starting on slide six. Barbara.

Barbara Carabetta – Interim CFO

Thank you, Charles.

We are very pleased with our overall performance for the first nine months of 2012 as compared to the first nine months of 2011. Our results to date warrant upgrading our 2012 guidance. In December of 2011, we projected 2012 annual revenue at $28 million. We are now increasing our revenue projection for 2012 to $31 million, an 11% increase over our original guidance.

Cash flow from operations was originally projected to be $3 million. And we believe we will exceed that number as well.

Our operating expenses were projected to be $14 million. We significantly reduced our cost of operations during the year. And now estimate that operating expenses will be approximately $10 million, a reduction of over 28% compared to the original guidance.

We now expect income from operations of over $2 million compared to our original expectation of break even.

As we expected when we started the year, 2012 is marking our transmission from a surface based business to a technology, licensing, and manufacturing business. Over the last nine months, our licensing and equipment sales grew tremendously as you can see on slide seven.

Equipment and licensing sales totaled only $5.6 million in the first nine months of 2011. Yet grew by 212% to $17.6 million in the same period of 2012.

Our field services revenue was down by 7% for the first nine months of 2012 when compared to the year earlier period. This decline in service revenue tracked the lower natural gas prices and slowdown in natural gas drilling. And was expected when we issued our original guidance at the start of the year. Even with this decrease in field services revenue, we have had our third successive profitable quarter and are profitable for the year.

Our consolidated business has achieved an $11.5 million increase in total revenue in 2012 over the same nine month period in 2011, a 90% increase.

Equally important, our net cash provided from operations for the nine month period, over $3 million as compared to $99,000 for the same period in 2011 as shown on slide eight. This demonstrates how we are executing our moving from a company deriving revenues primarily from field services to an innovative intellectual property and manufacturing company building our patented equipment here in the U.S.A.

Turning to slide nine, our cash balance improved to $3.6 million. That is 77% higher than our cash balance at the start of the year. And we did this while reducing our debt, which is now down to $1.8 million. We started the year with $2.4 million in debt.

Summarizing our financial performance on slide ten, so far this year, we have grown revenue, expanded margins, controlled SG&A, posted three quarters of net earnings, generated over $3 million of operating cash flow, increased our cash balance substantially, and reduced debt.

Let me now turn the call back to Charles to discuss the long-term outlook for Ecosphere starting on slide 11.

Charles Vinick – Chairman, CEO

Thank you, Barbara.

The license for Hydrozonix is performing precisely as expected. Equipment sales to Hydrozonix stayed on pace. We earlier announced the shipment of units nine and ten, and the receipt of the purchase orders for units eleven and twelve. We expect to order of these units to Hydrozonix before the end of Q4.

Hyrdozonix business is increasing as expected. And is driven by serving the energy exploration companies in the unconventional liquid and oil shale [inaudible].

The royalty stream that they internally forecasted for future years is extremely attractive. We expect to see those additional revenues to Ecosphere beginning in 2013. And increasing as more Ozonix equipment is deployed by Hydrozonix.

We received many questions about Hydrozonix. And many we cannot answer because Hydrozonix is an independent private company. However, as we conclude 2012 and look to 2013 and beyond, we want to make sure that investors fully comprehend how the license works and the potential for this partnership.

The first thing to keep in mind is that our exclusive intellectual property and manufacturing agreement with Hydrozonix is a 20 year agreement, not 2 years. Let me emphasize this, 20 years, which is the lifetime of the patent to drive our IP licensing model. Both we and Hydrozonix have undertaken a multi-year effort to build a very large business based on treating water in the U.S. oil and gas sector with our patented Ozonix technology.

Some investors have confused the initial two year purchase period as being the life of the contract. It is correct that Hydrozonix is not obligated to purchase more than two units per quarter. But if they stop purchasing two per quarter, then their exclusivity lapses and we are free to find other partners to move into the business. While we cannot guarantee anything, we would be very surprised if Hydrozonix abandoned their exclusive access to such an attractive market so early in the life of their business.

Hydrozonix has already invested a considerable amount of money to take the high ground in recycling water in the oil and gas industry with a patented non-chemical process. As long as they keep purchasing equipment, they will retain their exclusive rights in the onshore U.S. oil and gas market.

What is most beneficial about this license is that it provides expediential growth for Ecosphere. Projecting forward at the rate of two units per quarter, the Hydrozonix fleet will grow to 20 units by the end of 2013. And ultimately 44 units by the end of 2016. Not only do we receive licensing and manufacturing fees on each unit, but more importantly, we collect royalties of 20% on their [inaudible].

Hydrozonix is an independent private company as I mentioned. And does not disclose their financial results. However, for investors in Ecosphere, we need to make an acceptance of our future opportunities. I think you can see how this 100% gross margin royalty stream enhances the value of Ecosphere.

Please turn to slide 12. I think it is very important for all of us, shareholders and management alike to take a few moments to discuss what we have accomplished. In a very short time, we have brought game changing technology into the oil and gas market, a market that is known to be very slow in adopting new technology. Our technology has enabled the [inaudible] companies to eliminate liquid bio [inaudible] operations. And to recycle 100% of their flow back and produce water. That is a huge statement. And the resulting business has provided 15 X growth since we entered this market in the late 2009.

Because of this growth, many people, many of you think of Ecosphere as an oil and gas services company. But I want to underscore today that our oil and gas business is a small part of where we see this technology taking us. We see the licensing of our technology in oil and gas as having far more potential value than we would ourselves survive in conducting the field services on our own.

We are a technology licensing and innovative manufacturing company. It is now positioned to bring non-chemical water treatment solutions to markets throughout the world. The proof of Ozonix technology has indeed been in the oil and gas industry by treating over two billion gallons of water. This now makes it possible for us to be discussing both strategic partnerships and strategic investments that would not have been possible even 12 months ago.

We are providing this level of detail because it underscores how far we have come and how much we have accomplished. When you think about your investments, of course you will look at the daily and quarterly share tracks. And you may be frustrated by it as our [inaudible], but you should take comfort in knowing that we've improved every fundamental measure of our business. We have built a licensing and manufacturing business that is positioned to continue on the growth path we have established as we roll out additional licenses and take this game changing technology into exciting new applications.

Industries throughout the United States and the world are facing increasing governmental regulations on the treatment and discharge of contaminated waste [inaudible]. They are under increasing pressures to reduce use of toxic liquid chemicals and [inaudible]. And there's a universal need to recycle industrial wastewater. Our patented Ozonix technology has broad applicability to be a solution for these industries and be licensed to help them meet stringent water quality standards for discharge.

We have identified the following opportunities for the Ozonix technology. In mining where we will treat contaminated mining wastewater and replace cyanides and chemicals as a leeching agent for ore recovery. In coal fired power plants, we will improve wastewater and coal ash. In the broad fields of sludge, we will treat human and animal waste streams. In municipal and private water plants, we will treat reverse osmosis membranes to replace chemicals like chlorine.

The key to each of these opportunities is identifying the right strategic properties who can bring capital and market access. The process of getting partners and structure the right relationship is by no means a quick process. But I can assure you that we are aggressively pursuing these opportunities.

Turning to slide 13, allow me to summarize before we go to questions and answers. In the near term, we are very pleased with our business performance. So far this year, we have grown revenue, expanded margins, controlled SG&A, posted three quarters of net earnings, generated over $3 million in operating cash flow, increased our cash balance substantially, and reduced debt. We are concluding our CFO transition. And are well positioned for success in 2013.

In the longer term, we control a valuable patented technology with multiple applications in large markets. We have an innovative business model that is IP heavy and capital light. We have proven the model with an exceptionally strong partner that we believe will build a large business using our patented Ozonix technology. We expect to fully benefit with high margin royalties from Hydrozonix starting in 2013 and growing in subsequent years. We believe that our future is very bright.

We would now like to take questions. Operator, please open the call for questions and answers.

Question-and-Answer Session

Operator

(Operator instructions). And our first question will come from Guffary Castle, private investor

Guffary Castle – Private Investor

Good afternoon, everybody. Thanks for talking the call. I wondered if you can offer some color on the sequential differences between this quarter and last quarter? You know, I didn’t have a lot of time between the release and the call to look over the differences, but I – I noticed that accounts receivable looked like they’d grown by 1.5 million and your quarter-over-quarter revenues were down by 1.3 million, income from operations was cut in half. Is there a connection between the accounts receivables going up and revenues going down? Can you just offer some color on that, please?

Charles Vinick – Chairman, CEO

Accounts receivable in Q3 actually is down from Q2, so I’m not sure there’s a reflection of that. To offer any color on the two quarters, what I think I want to point out is a couple of things. One, first of all, the business has grown substantially over the 9-month period. What you do see in the Q3 is a decline in the service business as we anticipated earlier in the year and the increase in the business in licensing and manufacturing so the decline that you see in Q3 is a reflection of the decline in the natural gas rate count and particularly the fact that we, in our business, as opposed to in the Hydrozonix business, had really two customers in natural gas, Southwestern and Newfield, and that’s a part of the business that has limits to it and that’s the reason we had moved into the licensing business. As part of that licensing business we will continue to grow outside the U.S. market but our two customers are the only customers that we will have in the U.S. onshore market because that whole business has been transitioned to Hydrozonix, you see the benefits of that business through manufacturing today and as we move into 2013, you see the benefits to the increasing wealthy string that occurs beginning in 2013.

Guffary Castle – Private Investor

Okay. And you’re right, I was looking at those backwards in terms of this quarter versus last quarter on your accounts receivables. That was just a quick look. With respect to your services business and you attribute the reduction in income to reduction in your services business, and attributing that to lower gas prices. How does that work exactly? Are you – is your pricing – I mean, I assumed your services are not tied directly to the price of gas, or what you charge for your services are not tied directly to the price of gas. Is it – it is a utilization issue? Are your two customers utilizing your services less or are your margins getting – are you – are they getting your prices down where, you know, what is it that’s potentially causing that reduction?

Charles Vinick – Chairman, CEO

It’s simply a reflection of the reduction in the rate count and the number of wells that a customer drills. Our pricing isn’t directly related to gas prices at all, it’s simply related to the customer’s service as they cut back on their rate count or the numbers of wells that they drill, they reduce the overall amount of business they do. We’re still doing a very similar percentage of work that we were doing for the customers before, but their overall business is down and that’s reflected on the – if you think back to the call three months ago, we talked about this being a potential event going forward, we saw it beginning then, we discussed it then and I think it’s what we expected.

Guffary Castle – Private Investor

Okay, and then are your margins staying the same? I know in the past you said your services work is your highest margin part of your business, but is that changing?

Charles Vinick – Chairman – CEO

No, our service business is a high margin business and of course when it declines there’s a lag between cutting certain expenses and the like, but if you look at our SG&A, that has declined appreciably during the period and we’ve been able to, as profit – gross profit has gone down, certainly your SG&A has gone down even more and that’s enabled us to have our third quarter of net profitability. And so overall, as I look at the 9 months for the year, I see a very strong business. I see that continuing and I see it cutting – already taking into account for the variables that you’re describing.

Operator

And now at this time, we’ll move onto our next question from Tom Bridges, Private Investor.

Tom Bridges – Private Investor

Hey, guys. How are you doing today?

Charles Vinick – Chairman, CEO

Good, tom, thank you for calling in.

Tom Bridges – Private Investor

No problem. Fabulous quarter, very happy to see it. I’m also thrilled that you raised guidance and so congratulations on the execution on behalf of everybody at Ecosphere.

Charles Vinick – Chairman, CEO

Thank you very much.

Tom Bridges – Private Investor

Just a question for you; if you know a little bit is – I think you’ve got a fabulous story, execution in my opinion has been fabulous. What are we – maybe I missed a little bit earlier part of the call, but what are we talking about as far as trying to get your story out there? Would you know – I’ve had – discussed a little bit in the past and a little bit to more potential investors other than just institutions who probably can’t buy the stock price at its current level, and just wondering what initiatives are in place? And also, how do we also maybe publicize a little bit the value of your IP? And just wondering what the thoughts are there in order to make your story even more compelling?

Charles Vinick – Chairman, CEO

Well, thanks, Tom. It’s a terrific question. It’s one that we, frankly, and very honestly struggle with every day to improve how we are communicating the story, how we are articulating the story and how we are reaching more potential investors with it. One of the things that we have begun to do is to attend conferences that include retail investors and include brokers who have retail investors who can buy the stock. So that’ s directing we’re doing.

We’re also, with the help of our investor relations company, having more individual interviews so that the story is getting out into select media opportunities and I think in some ways, it’s not an easy story. People have had a difficult time understanding an intellectual property and innovative manufacturing company, but we’re getting better at telling that story and I think we have to continue to try to provide more information and more color on why the value of that intellectual property is likely to result in long-term licenses with the recurring royalty revenue that such licenses bring. So I share the concern, we as the management are out every day doing so and we will continue to try to get that story our more effectively and continue to bring more shareholders into the fold.

Tom Bridges – Private Investor

Great. Can I ask one other questions?

Charles Vinick – Chariman, CEO

Sure, please follow up, Tom

Tom Bridges – Private Investor

My other would be – again, I missed part of the call, but I – obviously I know that there’s a focus on also getting the technology into other industries outside of energy services. Have you had any – how are you going about doing that? Have we have any trials in other areas, whether it be mining or water remediations? I mean, do, you know, just curious on other avenues of growth.

Charles Vinick – Chairman, CEO

Yes, I think as we spoke a little bit during the call, we are very much focused on taking the patented Ozonix technology into other applications outside of the field of oil and gas as well as, while I mentioned it, internationally with oil and gas. But in the fields outside, certainly, we are in ongoing discussions with a number of entities for the scheduling of pilot projects and those are necessary as we build the relationships in these other applications and we have a number of such activity and conversations going on today. I cannot disclose the details of them publically, but suffice it to say that we are very actively scheduling such pilots going forward.

Tom Bridges – Private Investor

Okay.

Operator

And now we’ll go to Steven Hart from Octagon Capital Partners

Steven Hart – Octagon Capital Partners

Hi, there, guys. Thanks for the update today. In regards to the – the initial royalty revenues from Hydrozonix, is that something you can receive in quarterly or is that an annual payment from them?

Charles Vinick – Chairman, CEO

Thanks for the question, Steve. Thank you for joining the call. We receive a – we receive them on a quarterly basis but they are then audited annually and are recalculated if you will so that the annual royalty is then based on the annual EBIT of Hydrozonix, but there is a quarterly process for doing so and initial payments come in that way.

Steven Hart – Octagon Capital Partners

And can you – I know you shared earlier, obviously, our private company, are they – are they profitable now or are they expected to be profitable like starting in January where this is going to kick in right away or do they expect to be profitable at some point during the year?

Charles Vinick – Chairman, CEO

We’re not able, as you mentioned in the question, Steve, to provide a guidance if you will, or projections on their financials. What I can say is that based on the internal forecast that we received from them, we expect to receive royalties in 2013.

Steven Hart – Octagon Capital Partners

Okay, thanks.

Operator

Your next question will come from (Wayne Thomas), Private Investor.

Wayne Thomas – Private Investor

Yes, I just wanted to ask a question about the selling, general and administrative expense. What are the major components of that and are there still some commissions going to the directors under McGuire on some of the sales licensing and general and administrative?

Charles Vinick – Chairman, CEO

Well, the components of SG&A are all the standard expenses which we have in the operations of the company other than the direct expenses that show up in cost of goods sold. So that’s kind of a standard approach and all of the compensation that any members of management have are reflected in that and certainly Mr. McGuire’s compensation includes certain bonus payments based on his assignment of the patents to the company and part of the compensation package that he receives. But all management compensation is included in SG&A.

Wayne Thomas – Private Investor

Should the selling, general and administrative continue to go down as it’s gone down? That’s one question about when I compare 2012 and 2011. And I guess the other question is, that it looks like 2011, 9 months, is less in gross profit by somewhere in the neighborhood of 432,000 or so than in 2012 for the same 9 months. Why is that?

Charles Vinick – Chairman, CEO

I’m just looking at the figures, Wayne, and I’m not seeing that difference. The gross profit in the 9 months period for 2012 is a little over $9 million as compared to a $6 million gross profit in …

Wayne Thomas – Private Investor

I’m sorry. I was looking at – I apologize. My error.. I was looking at three months ended for ’11 versus three months ended for ’12 and seeing that difference. Why are we less for the same quarter in ’11 versus ’12 for that quarter?

Charles Vinick – Chairman, CEO

Well, that’s – that’s again, I think we – where we spoke earlier in the call a little bit about the difference in the service revenue and the service gross profit, that’s the difference in the Q for this last quarter and the comparable period in 2011. So that’s – that’s the difference that we spoke to earlier and then you have equipment gross profit during this same period as having increased by over $700,000 and that’s really where we see the growth of the business going forward as well.

Wayne Thomas – Private Investor

I guess the last question I’ve got is, do you ever do like forecasts of where you think you’ll be in 2013 or 2014 and kind of project out what those additional units will do in terms of revenue and the related expenses? And I guess the last question is, do we have any plans or are we trying to do something about getting the stock on another exchange?

Charles Vinick – Chairman, CEO

Well, let me take the first part of the question first, which I think really is a question about when would be the issuing guidance for 2013 or years beyond. I think we look at that, we at this moment don’t have visibility completely on 2013 to issue that guidance yet, but certainly we would look forward to doing so in the coming months. So that would be how we would look – that and if we can have sufficient visibility on future years to do so with a level of accuracy, then certainly, we would do that as well.

Now with respect to the exchange we’re on, certainly I think it’s important to look at moving to other exchanges and meeting the requirements to do so, that’s one that the Board of Directors of Ecosphere looks at on a regular basis and it would require a number of changes. It might, as we discussed back, if you think back to 2008, we looked at doing a reverse stock play and we had approval from the shareholders to do so for a window of a two-year period but at that time, you look at what was going on in the stock market, you look at the capital markets and it didn’t make sense to try and execute on that reverse stock outlet and move to a different exchange.

So we look at those opportunities and that opportunity going forward but we would do so carefully and prudently with the Board of Directors, we would want to make such a change to a different exchange if we were to do so with other significant financial activity taking place to underpin the stock during such transaction. So we look at it all the time, it’s something that is on our radar screen if you will but we want to be sure we adopt such a strategy very prudently.

Wayne Thomas – Private Investor

Okay. I just – the last question and it’s just a list maybe that you could go through. What do you see as the key things to increasing stockholder value and/or the stock price? And what are we doing really to make that happen?

Charles Vinick – Chairman, CEO

Well, I think what we’re doing to make that happen is exactly what we have done. If you look at every fundamental measure of what this company is doing financially, all of them are very substantial and the growth this year, the nine month period through a year ago is not just good, it’s unbelievable. I mean, you try to find other companies that had had the growth that we’ve had, find another company in our sector, treating water, who’s treated as much water as we’ve treated on as many wells as we’ve treated, a non-chemical process, there is no other company that has had the success of treating water non-chemically in the oil and gas industry that we have had. This is not just a good story, this is an exceptional story.

So what do we need to do? We need to continue to get that story out. We need to continue to help people understand just how successful we have been and we need to continue to build upon that success as we take this technology and take our patented intellectual property into other applications.

Wayne Thomas – Private Investor

Just one last question and I’m done. I appreciate your patience with me. Last question is, who is our biggest competition and do we have a competitor out there that can match us and/or – in doing the same kind of thing we do?

Charles Vinick – Chariman, CEO

Oh, we are not aware of any other company in the oil and gas services industry or frankly any other industry that has technology that’s able to do non-chemical water treatment on the front end of a frac at the [inaudible] that we do it. We’re able to treat water with the EF80 at 80 barrels a minute, over 3,000 barrels – 3,000 gallons a minute on the front end of hydraulic fracturing operation and enable 100% recycling of the flow back in produced waters. We’re not aware of any other technology or any other company that can do that and certainly not anyone who has treated as much water as we have during this period of time. So that – yes, we have competitors. Some of those competitors are chemical companies because that’s who we’re replacing on the front end of a frac. Some of them are other water treatment companies who are treating water in other ways, but we’re not aware of any company that has the technology or the technology advantages that we bring to the field.

Wayne Thomas – Private Investor

Fantastic. I bless you. I hope you do well. Thank you for your help today in answering questions. God bless you. Thank you. Bye, bye.

Charles Vinick – Chairman, CEO

Thank you.

Operator

(Operator Instructions). We’ll now go to our next question from William Briskman, Private Investor.

William Briskman – Private Investor

Congratulations, Charles and Dennis and the whole company on a great 9 months this year. I just want to touch on a couple things that you had mentioned, Charles. You mentioned early on and I know there’s been a lot of confusion that the Hydrozonix contract was a two-year contract when in fact it’s a 20-year contract. And if I multiplied a number south, that 20-year contract is worth something approaching $500 million. Is that number in the ballpark?

Charles Vinick – Chairman, CEO

You’ve done the math the way we’ve done the math, Bill.

William Briskman – Private Investor

Okay. So here we have a contract with Hydrozonix for 20 years, revenues of $500 million on just the equipment production side, which roughly, the numbers look like we’re making about a 33% profit on that. Then as you mentioned earlier, this is just a small fraction of what Ecosphere is going to be in the future. It is only fracing in North America, or pardon me, the Continental United States, not the rest of the world. So we’ve got $500 million come in within the next 20 years in this company on a small fraction of the revenue this can be generated because of the other eight areas that we can be involved in. And I want to just touch one base on what Steve had said, Steve Hart was talking about the royalties and so forth, which are going to be fantastic down the road. We have the right, if I’m understanding it correctly, Ecosphere has the right to go and audit the books of Hydrozonix to make sure that we are getting our fair share of the royalties even though they’re a private company. Is that correct?

Charles Vinick – Chairman, CEO

Yes, it is. We have an audit process with them. And not only that, I just mentioned, while we were talking about the numbers that you mentioned, in addition to the calculation you provided, there’s of course the royalties on top of that. And with respect to the royalties, just as you’ve asked, we have an audit process both quarterly and annually with them and there are a number of controls over what can be included in their SG&A when they go to calculate EBIT. Just for example, if they were to use private air craft to go somewhere, all that can be charged into their calculations with respect to EBIT are the equivalent to commercial flight rates. So just as an example, with the contract, there are those kinds of controls that give us the kind of confidence that this is a very profitable royalties trade going forward.

William Briskman – Private Investor

And I’ve done some of my own mass calculations on the royalty stream going forward. I’m not going to share any of that, what I think it will be. But it’s going to make the $500 million over 20 years look like pocket change. So with that, I congratulate you again and you’ll continue to get the story out and whoever’s shorting the stock is going to get an unhappy ending in the near future I hope. Thank you so much.

Charles Vinick – Chairman, CEO

Thanks for your questions and comments, Bill.

Operator

Our next question comes from David Cole from Eagle Capital Incorporated.

David Cole – Eagle Capital Incorporated

Thanks for the good report, Charles. I appreciate the work of all the management of the company. A couple questions or a couple comments. I’ve tried to understand the technology for quite some time and I’m amazed that it hasn’t caught on faster, possibly for other reasons, competition wouldn’t be likely to succeed, but the story that I see coming out of conferences, I see more involvement and including Hydrozonix in the end of November conference in Dallas where there’s significant players that are trying to reduce the costs and the use of water. Do you have more insight as to the exposure to additional conferences? I know you have some listed and I understand there’s a significant world conference coming up in Jacksonville.

Charles Vinick – Chairman, CEO

That’s right, David. Thank you for the questions and you’re comments. Both Hyrdozonix and Ecosphere are continuing to participate in conferences to get the story out. Hydrozonix is, of course, focused on those that are directly related to oil and gas, some of our work is focused in that area where we’re presenting white papers on this technology later this month as well as the work we do on more investment conferences. But I think it’s a blend. When you’re looking at sales, when you’re thinking about Hyrdozonix sales, which is where your question was going, they are out not only at conferences because conferences help to get the word out, but they’re meeting directly with oil and gas companies throughout the country knowing the information that they share with us, they have pilots scheduled out two, three and four months in advance. You need to think about two EF80s, and we always thought two EF80s every quarter, that’s two units, that’s the equivalent of 16 of our EF10s, it’s two frac leaks going out every single quarter. And so there is a sales cycle but they’re already scheduling pilots, not only for units 11 and 12, that will be delivering this quarter, but they’re already scheduling out beyond that in order to be far enough ahead to really plan for this sales cycle. So it’s a complicated process, but it’s one form what we see from the information they provide that they are very much on top of and they’re adding the staff and the technical people to be able to roll out this number of units and I would in a sense, not challenge, but question the inclusion that it hasn’t caught on. When you think about how many places and how much water we are treating in every sense of the word, this technology is catching on, it is what’s called a disruptive technology, it’s game-changing technology in the industry and I think certainly in oil and gas it’s a tough-tough environment in which to bring new technology. Some people have written about it normally takes ten years for a new technology to be adopted in the oil and gas industry. Here we are a couple of years in and we’re seen as the dominate player in non-chemical water treatment within the industry.

So I think it is catching on. I think it’s happening, frankly, very quickly and yes, we’re all frustrated by share prices and the like, but what we’ve got to do is keep our eye on the ball, keep doing what we’re doing and I think the results will come in.

David Cole – Eagle Capital Incorporated

One final question, which I appreciate your comments and the comments of the caller prior because I think that this technology is disruptive, I see no problem with the technology and the patents are very – very well placed.

The fact that it takes a while to catch on, the impatience of shareholders will be overcome once additional industries are effectively put in to place in this technology. Is there a date selected for the ASM at this point? I know that it usually comes up in mid-December.

Charles Vinick – Chairman, CEO

Thank you for that question as well. One, with respect to the annual shareholder’s meeting, what we have decided is that we want to move and will move that meeting into the earlier part of 2013 and the reason for that is because each time we do it in December, what we are able to do under SEC guidance is then discuss the year-to-date, which is then through the third quarter, which we’re discussing now and we’re actually sending out the results of 2011 with the proxy rather than 2012. And as we’ve looked at other companies and what they’re doing, we find that more and more companies try to move that meeting into the early part of the year so that at the annual shareholder’s meeting you have the opportunity to discuss the real full-year results of the previous year, the full year. And we think that makes much more sense, otherwise it becomes a meeting similar to discussing exactly what we’re doing on this call.

David Cole – Eagle Capital Incorporated

I think that’s a very smart move and I appreciate the update. Thank you.

Operator

And now we’ll go to Scott Hodges, Private Investor.

Scott Hodges – Private Investor

Charles, congratulations. Excellent work. As a long-time investor I only have one question and one small comment. The question is, even though we have a lot of promise in a lot of industry, however, revenues are currently coming from the gas and oil industry. How does the current, just passed election – how do you think that figure into what goes forward and particularly in terms of gas and oil?

And my only comment, I’ve been involved in three other small companies that did a reverses split, it always fails. I beg you, as an investor, not to consider that as a way of increasing share value.

Charles Vinick – Chairman, CEO

Thank you, Scott. I’m not sure that any of us can really project how the election is going to impact things, but let me say a couple things about that.

I mean, clearly, from either party, and I say either party because with the results of the election, you still have a very divided administration. You have a, you know, republican House and a democratic Senate and getting new regulations, new laws is open to speculation. But that aside, both parties are very, very bullish on natural gas and oil. And shale plays and the continued exploitation of the huge reserves we in this country have in oil and gas. So I don’t think no matter who – who won the election, in this case the democrats have, that you’re going to see any decrease in exploration.

Scott Hodges – Private Investor

I agree. Thank you.

Charles Vinick – Chairman, CEO

I'm not sure whether you're getting the math right or not. I think what's important to note is what happens is that they have had additional two units coming out each quarter. They project it takes 90 to 180 days to get full service out there. And what they are initially doing is going throughout various shelf ways with the major, major companies and doing pilots. There's a sales process that requires them to do pilots and to get each unit placed.

And from everything we're seeing and everything we hear from them, they are very confident with which they're doing it. Now one way to think about that is, they've got – you know how much they have spent with us just by reading the numbers. You have to assume they're spending additional money substantially for the teams of people that they have out there. So they have a very, very significant investment to date. Now they weren't placing the units. And they weren't sure they were placing the units. They wouldn’t be ordering new equipment. So for me, that's the most significant indicator of what they're doing because they're not going to have units in the field that are sitting idle. And they're continuing to order. And they're giving us visibility on that continuing on into the future without stop. So that gives me the confidence to say that they and to say to you that they have the units being placed in the manner in which they expect to have them.

Now the rate count in the water, I think some of what you're seeing is, they're doing a lot of work on pits. They're not necessarily on the front end of a frac. There are different services they can provide in any number of ways. So I think that in some ways, the gallon count doesn’t necessarily reflect everything for us because that's what we started. It made grade sense to see that as the metric. I think it's a useful metric. But it's not the only metric to use in evaluating their business. What I look at is the orders that are coming in, and the projections, and the internal information we have by the royalty stream going forward. So in that context, I continue to be very optimistic. And I'm doing so not on blind faith, but on the data that I receive from them internally.

Unidentified Analyst

Okay, thank you and congratulations.

Male

Thank you, Matthew.

Operator

And our final question today will come from Gary Kramer, Private Investor.

Gary Kramer – Private Investor

Mr. Vinick, given the performance over the past year or so, I've held the stock now for over 20 years. And basically, this stock has held fairly constant in and around $0.50 a share. Because of the performance, the good performance that you've had over the past nine months, I'm sort of at a mystified as to why the stock has dropped and remains at $0.38 a share, which is approximately 20% down.

Charles Vinick – Chairman, CEO

Thank you Gary. Thank you for the question. I just might point out one thing. We've only been in business for 14 years. So I'm not sure how you've held the stock for 20 because we're not that old.

But putting that aside, I think the important part of your question really is the stock. And what I would say is look, you look at other companies. Who is the darling? Everyone talks about Heckmann being the darling of the water treatment industry. They’re not actually a water treatment company. They're a water hauling company. But in this market, being the darling of the industry, they're down 40%. You look at other companies. There are number of other water companies. They're down much further than we are. So I'm not by any means pleased with or comfortable with or satisfied with our stock price as are none of you.

But when I look at the marketplace and I look at what happened to E&D companies and others in the oil and gas industry, I have to say we've not only held our own. We've done pretty well. And when I look at our fundamentals and I look at our revenue growth, I don’t see any of those companies having the kind of growth we have, having the kind of fundamental success that we have with the balance sheet that you see. So in that regard, again, I have to say what we have to do is keep our eye on the ball, keep doing the business we're doing, and the stock will take care of itself. We cannot chase the stock price.

And as I think one of our earlier customers said, please be cautious about doing any kind of a reverse because so many of them don’t work. And again, that's the kind of prudence our board is very cognizant of. Our management is cognizant of. We haven't taken those steps because we want to be sure that we underpin our stock and our stock value with other financial events taking place simultaneously with any strategy that we may adopt because we are all shareholders. We all obviously share the concerns you have. And we want to make sure that collectively, you do well because we are running a business effectively. And that's really the purpose of our being here and in sense of having a call like this so we can share those kinds of strategies with you and hopefully give you the confidence that we are stewarding your investment as effectively as we can.

Gary Kramer – Private Investor

Just to clarify, I held the Ultra Strip before the company went public. So you were Ultra Strip 20 years, approximately 20 years ago.

Charles Vinick – Chairman, CEO

Just to be clear, the 14 years I mentioned include the founding of Ultra Strip.

Gary Kramer – Private Investor

Oh okay.

Charles Vinick – Chairman, CEO

It's not a question of a disagreement. I want to be accurate about it that in fact, Ultra Strip was founded 14 years ago. Fourteen years is the full Ultra Strip, Ecosphere duration.

Gary Kramer – Private Investor

Okay, be that as it may, I guess you have no particular thoughts on why the stock after years has dropped to $0.38 and remains there? Is there any thoughts on that given the performance? I guess that's what the question was ultimately. Do you have any thoughts as to why after many, many years and good performance, it's down by approximately 20%?

Charles Vinick – Chairman, CEO

As I said Gary, there have been other stocks and certainly other stocks in this sector that have not done nearly as well as we have during the period. And more importantly, if you look over that period while you've held the stock, there have been times when it has been very high. Other times when it has not. Some shareholders have gotten out and made quite a bit of money. Others have stayed in and I think they've stayed in as you've heard on this call from a number of people because of their belief in the technology, because they understand the fundamentals, and the fundamental improvement in the financials of the company. And I think we remain very, very optimistic about what we've been able to accomplish. And I think compared to others in our sector, we've done very well.

I want to thank you for your questions. And I want to thank all of you who have participated in the call and who have joined with us. And with that as there no other questions in the queue, I want to conclude the conference call and thank you very much.

Operator

And that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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