SIGNIFICANT ACCOUNTING POLICIES (Policies) | 9 Months Ended |
Sep. 30, 2013 |
Accounting Policies [Abstract] | ' |
BASIS OF CONSOLIDATION | ' |
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BASIS OF CONSOLIDATION |
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The unaudited consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiaries, ESW America Inc. (“ESWA”), ESW Technologies Inc. (“ESWT”), ESW Canada Inc. (“ESWC”), ESW CleanTech Inc. (“ESWCT”) and Technology Fabricators Inc. (“TFI”). All inter-company transactions and balances have been eliminated on consolidation. Amounts in the unaudited consolidated condensed financial statements are expressed in U.S. dollars. |
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On April 18, 2013, ESW formed ESWCT, a wholly owned subsidiary. ESWCT, a Delaware corporation, is the entity that houses ESW’s San Diego manufacturing operations. ESWCT is located 7706 Trade Street, San Diego, CA, 92121. |
REVERSE STOCK-SPLIT | ' |
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REVERSE STOCK-SPLIT |
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On May 24, 2013, ESW affected a one-for-two thousand reverse stock split of its common stock. As a result all outstanding common stock, and per share amounts contained in the unaudited consolidated condensed financial statements and related notes have been retroactively adjusted to reflect this reverse stock-split for all periods presented. No fractional shares were issued resulting in a decrease to the outstanding shares on a post-split basis. In lieu of fractional shares, holders were paid cash equal to the number of shares of common stock held by any such holder immediately prior to the reverse stock split that were not combined into whole shares, multiplied by the fair market value of one pre-reverse stock split share. In lieu of issuing fractional shares, the Company paid holders cash in aggregate of $51,516 (Note 13). |
ESTIMATES | ' |
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ESTIMATES |
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The preparation of unaudited consolidated condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated condensed financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant estimates include amounts for inventory valuation, elements of an asset acquisition as of the date of acquisition, impairment of and useful lives of property plant and equipment, and the valuation of the stock-based compensation, conversion option derivative liability and warranty provisions. |
ALLOWANCE FOR DOUBTFUL ACCOUNTS | ' |
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ALLOWANCE FOR DOUBTFUL ACCOUNTS |
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The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated credit risk by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is estimated and recorded based on management’s assessment of the credit history with the customer and the current relationships with them. On this basis management has determined that an allowance for doubtful accounts of $221,212 was appropriate as of both September 30, 2013 and December 31, 2012, respectively. |
INVENTORY | ' |
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INVENTORY |
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Inventory is stated at the lower of cost or market determined using the first-in, first-out method. Inventory is periodically reviewed for use and obsolescence, and adjusted as necessary. Inventory consists of raw materials, work-in-process, finished goods and parts. |
PROPERTY, PLANT AND EQUIPMENT UNDER CONSTRUCTION | ' |
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PROPERTY, PLANT AND EQUIPMENT UNDER CONSTRUCTION |
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The Company capitalizes customized equipment built to be used in the future day to day operations at cost. Once complete and available for use, the cost for accounting purposes is transferred to property, plant and equipment, where normal depreciation rates apply. |
PROPERTY, PLANT AND EQUIPMENT | ' |
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PROPERTY, PLANT AND EQUIPMENT |
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Property, plant and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, generally 5 to 7 years. Maintenance and repairs are charged to operations as incurred. Significant renewals and betterments are capitalized. |
IMPAIRMENT OF LONG-LIVED ASSETS | ' |
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IMPAIRMENT OF LONG-LIVED ASSETS |
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The Company follows the Accounting Standards Codification (“ASC”) Topic 360, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the assets’ carrying amounts may not be recoverable. In performing the review for recoverability, if future undiscounted cash flows (excluding interest charges) from the use and ultimate disposition of the assets are less than their carrying values, an impairment loss represented by the difference between its fair value and carrying value, is recognized. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. Management reviewed certain assets for impairment in the first quarter of 2012 (see Note 7 for details). |
PATENTS AND TRADEMARKS | ' |
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PATENTS AND TRADEMARKS |
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Patents and trademarks are measured at the cost incurred to acquire them from an independent third party (see Note 3). Topic 350-20, Goodwill, and 350-30, General Intangibles Other than Goodwill, in the Accounting Standards Codification (“ASC”) requires intangible assets with a finite life be tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated discounted cash flow used in determining the fair value of the asset. Future impairment tests for patents and trademarks will be performed annually in the fiscal fourth quarter, or sooner if warranted. |
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Patents and trademarks were acquired as part of the Cleaire asset acquisition (Note 3) and are being amortized on a straight-line basis over their estimated useful lives of five years. For the period ended September 30, 2013 and 2012, patents and trademarks amount to $39,900 and $0 respectively. Amortization expense was $2,100 for the nine and three month periods ended September 30, 2013 (September 30, 2012 - $0). |
FAIR VALUE OF FINANCIAL INSTRUMENTS | ' |
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FAIR VALUE OF FINANCIAL INSTRUMENTS |
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ASC Topic 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Included in the ASC Topic 820 framework is a three level valuation inputs hierarchy with Level 1 being inputs and transactions that can be effectively fully observed by market participants spanning to Level 3 where estimates are unobservable by market participants outside of the Company and must be estimated using assumptions developed by the Company. The Company discloses the lowest level input significant to each category of asset or liability valued within the scope of ASC Topic 820 and the valuation method as exchange, income or use. The Company uses inputs which are as observable as possible and the methods most applicable to the specific situation of each company or valued item. |
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The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short-term nature. Per ASC Topic 820 framework these are considered Level 2 inputs where inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
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Our conversion option derivative liability, which is measured at fair value on a recurring basis, is measured using Level 3 inputs. |
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Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. The promissory notes payable and loan payable both have fixed interest rates therefore the Company is exposed to interest rate risk in that they could not benefit from a decrease in market interest rates. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposure through its normal operating and financing activities. |
DERIVATIVE FINANCIAL INSTRUMENTS | ' |
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DERIVATIVE FINANCIAL INSTRUMENTS |
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The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. |
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The Company reviews the terms of convertible debt, equity instruments and other financing arrangements to determine whether there are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. Also, in connection with the issuance of financing instruments, the Company may issue freestanding options or warrants to employees and non-employees in connection with consulting or other services. These options or warrants may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. |
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Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. To the extent that the initial fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received an immediate charge to income is recognized in order to initially record the derivative instrument liabilities at their fair value. |
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The discount from the face value of the convertible debt or equity instruments resulting from allocating some or all of the proceeds to the derivative instruments, together with the stated rate of interest on the instrument, is amortized over the life of the instrument through periodic charges to income, using the effective interest method. |
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The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument, as of the determination date, is reclassified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the unaudited consolidated condensed balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date. |
REVENUE RECOGNITION | ' |
REVENUE RECOGNITION |
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The Company derives revenue primarily from the sale of its catalytic products. In accordance with Staff Accounting Bulletin No. 104, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the amount is fixed or determinable and collection is reasonably assured. |
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The Company also derives revenue (approximately 4.8% and 7.9% of total revenue during the nine month period ended September 30, 2013 and 2012, respectively) from providing air testing and environmental certification services. Revenues are recognized upon delivery of testing services when persuasive evidence of an arrangement exists and collection of the related receivable is reasonably assured. |
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LOSS/EARNINGS PER SHARE OF COMMON STOCK | ' |
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LOSS/EARNINGS PER SHARE OF COMMON STOCK |
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Loss per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Common stock equivalents are excluded from the computation of diluted loss per share when their effect is anti-dilutive. |
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Basic and diluted earnings per share have been determined by dividing the consolidated net earnings available to shareholders for the applicable period by the basic and diluted weighted average number of shares outstanding, respectively. The diluted weighted average number of shares outstanding is calculated as if all dilutive options and restricted stock grants had been exercised or vested at the later of the beginning of the reporting period or date of grant, using the treasury stock method. The dilutive effect of convertible notes has been reflected in diluted weighted average number of shares using the if-converted method. |
INCOME TAXES | ' |
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INCOME TAXES |
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Income taxes are computed in accordance with the provisions of ASC Topic 740, which requires, among other things, a liability approach to calculating deferred income taxes. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company is required to make certain estimates and judgments about the application of tax law, the expected resolution of uncertain tax positions and other matters. In the event that uncertain tax positions are resolved for amounts different than the Company’s estimates, or the related statutes of limitations expire without the assessment of additional income taxes, the Company will be required to adjust the amounts of the related assets and liabilities in the period in which such events occur. |
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Such adjustments may have a material impact on ESW’s income tax provision and results of operations. |
SHIPPING AND HANDLING COSTS | ' |
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SHIPPING AND HANDLING COSTS |
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The Company’s shipping and handling costs of $97,301 and $74,145 are included in cost of revenues for the nine month periods ended September 30, 2013 and 2012, respectively. For the three month periods ended September 30, 2013 and 2012 shipping and handling costs amounted to $49,024 and $27,084, respectively. Additionally, the Company has recorded recoveries of these costs amounting to $69,709 and $59,324, which are included in revenues for the nine month periods ended September 30, 2013 and 2012, respectively. For the three month periods ended September 30, 2013 and 2012 shipping and handling revenues amounted to, $29,332 and $23,327, respectively. |
RESEARCH AND DEVELOPMENT | ' |
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RESEARCH AND DEVELOPMENT |
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The Company is engaged in research and development work. Research and development costs are charged as operating expense of the Company as incurred. Any grant money received for research and development work is used to offset these expenditures. For the nine month periods ended September 30, 2013 and 2012, the Company expensed $455,235 and $ 477,582, net of grant revenues, respectively, towards research and development costs. For the three month periods ended September 30, 2013 and 2012, the Company expensed $214,624 and $163,264, net of grant revenues, respectively, towards research and development costs. For the nine month periods ended September 30, 2013 and 2012, gross research and development expense, excluding any offsetting grant revenues, amounted to $496,181 and $ 477,582, respectively, and grant revenues amounted to $40,946 and $0, respectively. For the three month periods ended September 30, 2013 and 2012, grant revenues amounted to $0. |
FOREIGN CURRENCY TRANSLATION | ' |
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FOREIGN CURRENCY TRANSLATION |
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The functional currency of the Company and its foreign subsidiaries is the U.S. dollar. All of the Company’s revenue and materials purchased from suppliers are denominated in, or linked to, the U.S. dollar. Transactions denominated in currencies other than the functional currency are converted to the functional currency on the transaction date, and any resulting assets or liabilities are further translated at each reporting date and at settlement. Gains and losses recognized upon such translations are included within foreign exchange gain (loss) in the unaudited consolidated condensed statements of operations and comprehensive (loss) / income. |
PRODUCT WARRANTIES | ' |
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PRODUCT WARRANTIES |
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The Company provides for estimated warranty costs at the time of sale and accrues for specific items at the time their existence is known and the amounts are determinable. The Company estimates warranty costs using standard quantitative measures based on industry warranty claim experience and evaluation of specific customer warranty issues. The Company currently estimates warranty costs as 2% of revenue for on-road products and, effective July 1, 2013, the Company revised its warranty accrual for off-road products to 4% of revenue from the prior warranty accrual estimate of 2% of revenue. ESW has estimated a one-time charge of $1,000,000 related to its assumption of warranties for legacy Cleaire products in the field. ESW has also estimated a one-time warranty charge of $504,900 associated with certain verification procedures relating to the ThermaCat. The actual amount of loss associated with such assumption of warranties and/or verification procedures, however, could be materially different. Both of these warranty charges are based on the estimated number of operational units, average remaining warranty life and cost of warrantable failure. These amounts, as well as the on-road and off-road provision have been included in the warranty provision of $1,717,019 as of September 30, 2013. |
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As of September 30, 2013 and December 31, 2012, $1,717,019 and $143,564, respectively, were accrued as warranty provisions on the balance sheet. For the nine month periods ended September 30, 2013 and 2012, the total warranty, service, service travel and installation costs included in cost of revenue were $1,687,128 and $216,745, respectively. For the three month periods ended September 30, 2013 and 2012, the total warranty, service, service travel and installation costs included in cost of revenue were $105,294 and $74,311 respectively. |
SEGMENT REPORTING | ' |
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SEGMENT REPORTING |
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ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information”, establishes standards for the way that public business enterprises report information about operating segments in the Company’s unaudited consolidated condensed financial statements. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. ESW operates in two reportable segments; medium and heavy duty diesel retrofit operations and air testing services (see Note 17). ESW’s chief operating decision maker is the Company’s Executive Chairman. |
COMPARATIVE FIGURES | ' |
COMPARATIVE FIGURES |
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Certain immaterial 2012 figures have been reclassified to conform to the current consolidated condensed financial statement presentation. |
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