We presently have an intellectual property portfolio of registered and pending patents, trade secrets, trademarks, and copyrights for technologies that address pressing global environmental and humanitarian issues. To date, our technologies have been invented and developed internally by us. However, we are now developing the ability to acquire and/or partner with companies and inventors to enhance our capacity to develop clean technologies and expand our portfolio of intellectual property.
As we invent or acquire technology for new markets, we create divisions or subsidiaries to focus on our further development and commercialization. To date, Ecosphere has created three wholly-owned subsidiaries for its initial technologies. Each subsidiary has patented or patent pending technology. The three subsidiaries are:
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Ecosphere Systems, Inc., which produces mobile filtration systems that are affixed to shipping containers or integrated into rugged off road vehicles through an agreement with Pierce Manufacturing Inc. to respond to natural or manmade disasters, industrial, and military applications. The filtration technology is the first and only high volume system to be verified by the EPA through its Environmental Verification Program for a terrorist attack or natural disaster;
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UltraStrip Envirobotic Solutions, Inc., another subsidiary, has created a line of patented robotic vehicles or E-ROV's that remove paint and other coatings from ships using ultra high pressure water, reducing the discharge of contaminated residue or grit into the air and ocean; and
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Our newest subsidiary, Ecosphere Energy Solutions, Inc., invented the Ecos Lifelink, a micro utility capable of providing clean water, power, Internet and telecommunication services to remote areas of the world, using solar and wind energy and not depending on oil, gas or other fossil fuels. Additionally, Ecosphere Energy Solutions is developing what we call our Ecos Com Cube, which is similar to the Ecos Lifelink, but will not have a water filtration system. Instead it is being designed to provide the "last mile" link to traditional cellular telephone systems. Our goal is to deliver cellular telephone, VOIP and Internet services to remote, "off-grid" areas of developing countries.
As a small company, we believe we can provide solutions to these important global problems by joining with much larger companies that have substantially greater marketing and financial resources. Our business model focuses on a number of steps:
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First we create a clean technology solution for pressing environmental and humanitarian problems;
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Next we apply for a United States patent on the product;
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While the patent is pending, we may develop a working prototype;
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At the same time, we seek out and secure world-class companies to manufacture and market our products or provide other services which validate the product; and
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The final step is to sell or license our technologies to world-class companies with the financial, marketing and other recourses necessary to quickly roll out the product.
Thus, in our water filtration business, in late December 2005, we entered into an exclusive five-year Joint Marketing and Supply Agreement with Pierce Manufacturing Inc. Pierce is a leading North American manufacturer of fire trucks and homeland security vehicles and is a wholly-owned subsidiary of Oshkosh Truck Corporation, a leading defense contractor.
In our coating removal business, in February 2006 we signed an exclusive five-year Agreement with United States subsidiaries of BAE Systems plc. BAE Systems' website says that it is the largest European defense contractor and a top 10 United States defense contractor. Under the Agreement, we are the exclusive provider of robotic coating removal services in BAE's shipyards in San Francisco and San Diego, California, and we can expand those services elsewhere with them.
The Water Restoration Industry
According to the United Nations Global Environment Outlook report, "One third of the world's population lives in countries suffering from moderate-to-high water stress...[and it is projected] that more than half the people in the world could be living in severely water stressed areas by 2032." According to the World Health Organization, an estimated 1.1 billion people do not have access to any type of improved drinking water facility. The devastation found in the Gulf Coast in the wake of the 2005 hurricanes and in South Asia following the Tsunami in late December 2004 are both graphic examples of the need for clean and hygienic water following natural disasters. Clean water is not only needed for drinking, bathing and cleaning purposes, it is also required to grow the food we eat. We believe opportunities exist to provide clean water for a variety of domestic and international markets, including:
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Natural disasters and homeland security;
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ďilitary, commercial and industrial applications; and
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Remote areas in third world countries off the power grid.
For approximately six weeks beginning in September 2005, our water filtration system provided clean water to Waveland, Mississippi, a Gulf Coast town devastated by Hurricane Katrina, and to surrounding communities. See the discussion of Waveland at page 4 of this Report. Our experience in operating our system in a real-time environment providing disaster relief has been invaluable. We have redesigned our water filtration system to better serve areas devastated by natural disasters and terrorist events. During 2006, we manufactured a redesigned water filtration system (approximately one-half the size of our EPA-verified system) which has been installed in a Tactical Water Filtration Truck manufactured by Pierce Manufacturing. This Tactical Water Filtration Truck was delivered to us in early August 2006 and is currently being used as a demonstration model by Pierce Manufacturing.
The Public Health Security and Bioterrorism Preparedness and Response Act of 2002
The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 or the Bioterrorism Act requires the nation's community water systems operators to conduct vulnerability assessments certified by the EPA, and to prepare and adopt emergency response plans that would be executed in the event of a terrorist attack. There are 8,552 community water systems identified by the EPA serving the United States today that constitute our target market. The Bioterrorism Act requires drinking water utilities to identify equipment that can be implemented or utilized in the event of a terrorist or intentional attack.
Our mobile water filtration system will allow the community water systems to comply with this requirement of the Bioterrorism Act. Our original system, which is placed in a 40 foot container, can provide enough clean water to meet the minimum daily water needs of approximately 10,000 people.
Our redesigned system for the Tactical Water Filtration Truck can provide enough clean water to meet the minimum daily needs of approximately 20,000 people.
EPA Verification
In order to accelerate the entrance of new environmental technologies into the marketplace, including technologies relevant for water security, the EPA developed its Environmental Technology Verification Program. This program operates through public/private testing partnerships to evaluate the performance of environmental technology. The goal of this EPA program is to further environmental protection by accelerating the acceptance and use of improved and more cost-effective technologies.
In 2004, our original 40 foot filtration system became the first and only high volume system to be verified by the EPA program for a terrorist attack or natural disaster, and to this day we believe it remains the only wastewater purification system to be verified by the EPA.
Our Solution
Our water filtration system, which was originally designed to filter the water used by our robotic water-jetting system, is capable of producing up to 36,000 gallons of drinking water per unit per day. The system verified by the EPA was housed in a 40 foot container, while our next generation has been modified since deployment of the original to Waveland, Mississippi to be more mobile through integration into a military type truck vehicle we call the Tactical Water Filtration Truck. Some new models will also include living facilities for operators responding to future disasters since there may not be any accommodations.
An important part of our solution is the Agreement we signed with Pierce Manufacturing on December 5, 2005. Pierce manufactures the Tactical Water Filtration Truck which contains our water filtration system and is marketing the completed systems to federal, state and local governments and United States and foreign military customers. For more information describing this Agreement, see the discussion below.
Our system is a portable, self-contained automated water filtration system that removes contaminants and impurities from water including chemical and biological agents to produce clean drinking water from any natural source. The system weighs approximately 20,000 pounds and is enclosed in a 20 foot certified steel container as a standalone unit or integrated into a military style truck for transport and deployment to disaster or war zone sites. The initial model manufactured by Pierce integrates our water filtration system into a military-type vehicle we call the Tactical Water Filtration Truck and Pierce calls it their Mobile Water Purification System. The filtration unit uses an eight stage filtration system including a 100 micron filter, ozone generation, sand, carbon, cartridge, ultra violet, ultra filtration and reverse osmosis filtration. The system also incorporates an on-board generator so that it is not dependent upon outside sources of power to operate. The generator holds 100 gallons of fuel and will operate for 26 hours without refueling. Virtually no set up is required. Once the system is delivered to a site all that is required is for the input hose to be connected to a source of water and for the generator to be started. It then takes approximately 15 minutes for the system to begin delivering clean drinking water. Further, the system requires only one person to operate. The system is also flexible enough to adapt to the changing requirements of the incoming water being processed.
Our Strategy
We believe that the growing global need for clean water and air, developing disaster preparedness and response plans, and military applications will provide us with opportunities to grow this aspect of our business. Our strategy is to target areas of immediate need for clean water such as disaster relief efforts, and then leverage the demonstrated success of our mobile water filtration system in providing immediate relief into creating opportunities in our target markets.
The Bioterrorism Act presents a unique opportunity for us since it requires the 8,552 community water systems, each of which serves more than 3,300 people, to develop a plan to remediate the impact of a terrorist event on, among other things, their water systems. The devastation that Hurricane Katrina caused included destruction and impairment of local water systems and demonstrated that local governments had inadequate disaster response plans and did not properly implement the plans they had. One of the keys to penetrating this market is to locate funds that local water systems can use to comply with the Bioterrorism Act. We are hopeful that as the result of Hurricane Katrina, Congress will enact legislation to provide this funding. We cannot assure you that the funding will be appropriated, that the Bioterrorism Act will be enforced or that local water systems or other government agencies will order our disaster recovery unit.
A very important milestone was reached on December 5, 2005 when we entered into a Joint Marketing and Supply Agreement with Pierce Manufacturing, a subsidiary of the Oshkosh Truck Corporation. Oshkosh is a leading United States defense contractor. We are hopeful that through the Pierce Agreement and the services of the President of Ecosphere Systems, Mr. Joe M. Allbaugh, we can be successful in selling water filtration systems to the Department of Homeland Security, municipalities and United States and foreign military customers as they prepare to respond to future man-made or natural disasters. Pierce is a leading North American manufacturer of custom fire trucks and homeland security vehicles which enable police, fire and emergency management personnel to respond effectively to terrorism and natural disasters and to mitigate their effects. Annually, Pierce builds between 1,600-1,800 specialized emergency vehicles. With our exclusive Agreement with Pierce, it will manufacture and market Ecosphere's Tactical Water Filtration Truck, although we cannot assure you that we will derive any material revenues from it.
Pierce is marketing the Tactical Water Filtration Truck to the Department of Homeland Security, state and local governments and United States and foreign militaries. Additionally, Oshkosh is marketing our water filtration system to the United States and foreign militaries as a product that can be loaded onto Oshkosh's HEMTT, a military truck built for challenging military missions. In March 2007, we and Pierce demonstrated the Tactical Water Filtration Truck to officials of United States Federal Emergency Management Agency, which is part of the Department of Homeland Security.
Mr. Joe M. Allbaugh was Director of the Federal Emergency Management Agency or FEMA from 2001 to 2003. Mr. Allbaugh served as Chairman of Bush-Cheney 2000 and was Chief of Staff to President George W. Bush when he was Governor of Texas. His consulting company's clients include some of the largest government contractors which serve governments in the United States and overseas. His consulting company has provided consulting services to us since July 1, 2005 and was responsible for introducing us to and helping finalize the Agreement with Pierce. Mr. Allbaugh became a director of Ecosphere in October 2005 and President of Ecosphere Systems in September 2006. For further information, see the discussion under Item 10, "Executive Compensation," and Item 12, "Certain Relationships and Related Transactions, and Director Independence" sections of this Report.
In order to take full advantage of the opportunities presented by our mobile water filtration system, in April 2005 we formed Ecosphere Systems, a wholly-owned subsidiary, whose sole focus is commercializing the mobile water filtration system. We are just beginning to commercialize the mobile water filtration system.
We also intend to develop relationships with complementary service providers in the logistics industries as well as military and humanitarian organizations worldwide in order to achieve our goals.
We have outsourced the manufacturing of the water filtration vehicle and through our Joint Marketing and Supply Agreement with Pierce Manufacturing, provided Pierce with primary marketing responsibility of the mobile water filtration vehicles based upon Pierce's ability to secure significant sales in the military, homeland security and municipality sectors. Pierce markets our Tactical Water Filtration Truck through its large network of dealers to governments and other potential users in exchange for fees. Ecosphere Systems has a verbal agreement with another company to manufacture the water filtration systems. Additionally, Ecosphere Systems retains the engineering drawings and there are several other companies with which we have a business relationship which are available to manufacture the water filtration systems. By creating a motorized version, we have enhanced the mobility of our water filtration system and its ability to quickly respond to natural disasters, terrorist events, and military applications.
The Hurricane Katrina Opportunity
After Hurricane Katrina struck the Gulf Coast, the Shaw Group, one of the prime government contractors responsible for assisting in disaster relief in Louisiana, asked us to deliver our water filtration unit to Baton Rouge, Louisiana. We did and it remained awaiting a location assignment for 10 days. We received a payment of $125,000 for this effort from the Shaw Group.
On Friday evening, September 9, 2005, NBC's Dateline featured the unfortunate plight of Waveland, Mississippi, a small town on the Gulf Coast. The story quoted the Mayor as saying the town needed water for bathing and cleaning. Our management flew to Mississippi on Saturday, met with the Mayor and delivered the mobile water filtration system to Waveland on Sunday. Shortly thereafter, we began purifying contaminated water, and supplying it to the first responders, relief workers and local residents who had not been evacuated. Portable showers fabricated by Ecosphere personnel in Waveland permitted people to bathe. Volunteer relief workers used a tanker truck to deliver clean water from our filtration system to residents outside of Waveland. Our water filtration system operated in Waveland for six weeks until the local water system began operating. Waveland received $234,000 from the Mississippi Emergency Management Agency and paid that sum to us.
Waveland has also served another important function. In using our water filtration system on a real-time basis, we have learned important lessons. We believe these lessons will be valuable in improving our ability to provide disaster and terrorist act relief. As a result, we designed our new disaster filtration unit, which we call the Tactical Water Filtration Truck, and it is one-half the size of the original unit. This unit is based upon a military or industrial truck chassis provided by Pierce Manufacturing. We have designed another version of the disaster filtration unit which contains living quarters. Our current plans are to primarily market the Tactical Water Filtration Truck, but also have the version with living quarters available to market to customers. Either way, Waveland, Mississippi serves as a demonstration project for us and Ecosphere Systems. We are hopeful that it will cause water systems and other entities such as hospitals to carefully examine their emergency water needs in the event of future natural disasters and terrorist events. In that regard, Ecosphere Systems, to which we have transferred our mobile water filtration technology, provides a solution to their remediation plans.
