[OBJECT OMITTED]
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[x] Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 for
the quarterly period ended - September 30, 2002.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the
transition period from ______________ to _______________.
COMMISSION FILE NUMBER 000-30392
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
(Exact name of Company as specified in its charter)
132 Penn Avenue
Telford, PA 18969
(Address of principal
executive offices, including postal code.)
Florida 98-0346454
- ------------------------------ -----------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
(215) 721-2188
--------------
(Issuer's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ x ] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING SEPTEMBER 30, 2002
COMMON STOCK, PAR VALUE $.001 40,057,374
TRANSACTIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES [ ] NO [ X ]
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2002 2
Consolidated Statements of Operations for the
Nine Months Ended September 30, 2002 and 2001 3
Consolidated Statement of Changes in
Stockholders' Equity For the Nine Months ended
September 30, 2002 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001 5
Notes to Financial Statements 6-8
Item 2. Management's Discussion and Analysis or
Plan of Operations 9-11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports 13
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Sept 30, December 31,
2002 2001
---- ----
(Unaudited)
ASSETS
- ------
Current assets
Cash and cash equivalents $ 19,585 $ 243,830
Accounts receivable 583,745 116,518
Inventory 111,286 133,701
Prepaid expenses 13,128 69,256
Other current assets 47,500 53,490
------------ ------------
Total current assets 775,244 616,795
Property and equipment, net of accumulated depreciation of
of $198,047 - 2002; $114,374 - 2001 557,550 611,946
Patents and trademarks, net of accumulated amortization
of $373,925 - 2002; $213,835 - 2001 1,766,746 1,926,415
------------ ------------
$ 3,099,540 $ 3,155,156
============ ============
LIABILITIES AND STOCKHOLDERS & EQUITY
- -------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 345,271 $ 153,411
Officer's travel allowance payable 267,974 196,500
Notes payable 379,000 140,000
------------ ------------
Total current liabilities 992,245 489,911
------------ ------------
Class A special shares, no par value, 700,000 shares
authorized, issued and outstanding 453,900 453,900
------------ ------------
Stockholders - Equity
Common stock, $.001 par value, 100,000,000 shares authorized; 40,057,374 -
2002 and 39,467,374 - 2001;shares
issued and outstanding 40,057 39,467
Additional paid-in-capital 10,414,254 10,118,419
Accumulated deficit (8,800,916) (7,946,541)
------------ ------------
Total stockholders' equity 1,653,395 2,211,345
------------ ------------
$ 3,099,540 $ 3,155,156
============ ============
-2-
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
Sept 30, 2002 Sept 30, 2001 Sept 30, 2002 Sept 30, 2001
------------- ------------- ------------- -------------
Revenues
Net sales $ 1,537,804 $ 397,994 $ 613,260 $ 125,162
Cost of sales 943,750 236,329 293,280 97,121
------------ ------------ ------------ ------------
Gross profit 594,054 161,665 319,980 28,041
------------ ------------ ------------ ------------
Operating expenses
Research and development 15,189 89,985 8,220 14,957
Professional fees 114,665 104,096 54,427 20,618
Consulting fees 123,187 887,828 11,042 370,800
Marketing, office & general costs 1,034,709 1,364,802 320,597 462,342
Officer's Compensation and Director's Fees 160,679 9,150 37,954 0
------------ ------------ ------------ ------------
1,448,429 2,455,861 432,240 868,717
------------ ------------ ------------ ------------
Net loss from Operations (854,375) ( 2,294,196) (112,260) ( 840,676)
Other Income -0- $ 137,460 0 $ 6,559
------------ ------------ ------------ ------------
Net Loss $ (854,375) ($ 2,156,736) ($ 112,260) ($ 834,117)
============ ============ ============ ============
Loss per share information:
Basic and diluted $ (.022) ($ 0.057) ($ .003) ($ 0.022)
============ ============ ============ ============
Weighted average number of shares outstanding 39,168,262 38,154,874 39,075,318 38,154,874
============ ============ ============ ============
-3-
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------- -----
January 1, 2002 39,467,374 $ 39,467 $ 10,118,419 $ (7,946,541) $ 2,211,345
Net loss -- -- -- (854,375) (854,375)
Issuance of shares upon
exercise of options 1,235,000 1,235 11,115 -- 12,350
Options and warrants issued
for services rendered -- -- 79,085 -- 79,085
Stock subscriptions receipts -- -- 204,990 -- 204,990
Cancellation Of Stock
Subscription (645,000) (645) 645 -- --
------------ ------------ ------------ ------------ ------------
SEPTEMBER 30, 2002 40,057,374 $ 40,057 $ 10,414,254 $ (8,800,916) $ 1,653,395
============ ============ ============ ============ ============
-4-
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Nine Months Nine Months
Ended Ended
SEPT 30, 2002 SEPT 30, 2001
------------- -------------
Net Loss ($ 854,375) ($2,156,736)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 83,673 251,827
Amortization 160,090 --
Non cash compensation and services 79,085 711,357
----------- -----------
(531,527) (1,193,552)
Change in operating assets and liabilities
Changes in non-cash working capital (190,834) (39,157)
----------- -----------
Net cash used in operating activities (722,361) (1,232,709)
----------- -----------
Investing activities:
Acquisition property and equipment (29,277) (529,355)
Contract deposit -- 100,000
Patents and trademarks (421) (54,114)
----------- -----------
Net cash used in investing activities (29,698) (483,469)
----------- -----------
Financing activities:
Notes payable 239,000 120,000
Issuance of common stock and subscription receipts 217,340 1,785,500
Officer's note, shareholder and
advances payable 71,474 136,500
----------- -----------
Net cash provided by financing activities 527,814 2,042,000
----------- -----------
Net increase (decrease) in cash (224,245) 325,822
Cash, beginning of period 243,830 673,776
----------- -----------
Cash, end of period $ 19,585 $ 999,598
=========== ===========
Supplementary Disclosures:
Non-cash investing and financing activities
Purchase of assets and technology
Common stock $ -- $ 2,052,450
Note payable -- $ 100,000
-5-
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. The condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual report on Form 10KSB for the
year ended December 31, 2001 filed by the Company on April 1, 2002.
The condensed consolidated financial statements included herein reflect, in the
opinion of management, all adjustment (consisting primarily only of normal
recurring adjustments) necessary to present fairly the results for the interim
periods. The results of operations for the nine months ended September 30, 2002
and for the three months ended September 30, 2002, are not necessarily
indicative of results to be expected for the entire year ending December 31,
2002.
The Company was incorporated in the state of Florida. On February 19, 1999 the
Company changed its name to Environmental Solutions Worldwide, Inc. (the Company
or ESWW). On January 11, 2001, the Company purchased certain assets and
established a manufacturing facility in Telford, Pennsylvania. (See Note 2).
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the company as a going concern. The Company, however, has
sustained continuing operating losses and lacks a sufficient source of
commercial income, which creates uncertainty about the Company's ability to
continue as a going concern. The Company's ability to continue operations as a
going concern and to realize its assets and to discharge its liabilities is
dependent upon obtaining additional financing sufficient for continued
operations as well as the achievement and maintenance of a level of profitable
operations. Management believes that the current business plan if successfully
implemented may provide the opportunity for the Company to continue as a going
concern.
2. PURCHASE OF ASSETS
On January 11, 2001, the Company acquired equipment and technology (including a
patent and patents pending) from an unrelated third party. Through this purchase
the Company has brought products to market. The Company paid $400,000 in cash,
$100,000 in notes, incurred approximately $43,035 in closing costs and issued
2,000,000 shares of restricted Company stock valued at $.6875 per share plus
contingent options valued at $.6775 per share to purchase up to an additional
one million shares exercisable at $0.01 to the sellers.
(See Note 3)
The purchase price was allocated as follows:
Equipment $500,000
- -------------------------------------------------------------------------------
Patents and technology 2,093,035
---------
- -------------------------------------------------------------------------------
$2,593,035
==========
- -------------------------------------------------------------------------------
-6-
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. ISSUANCE OF COMMON STOCK
During July 2001, the Company entered into equity financing agreements with
accredited investors for $525,000, totaling 1,312,500 shares of common stock in
the Company. During the second quarter of 2002, a subscription for 500,000
shares of Common Stock was deemed to be in default and was cancelled. The
terminated subscription agreement was for the sum of $200,000 of which $195,000
was in default. During the third quarter of 2002, a subscription for 145,000
shares for the sum of $58,000 was deemed to be in default and was also canceled.
During the nine months ended September 30, 2002, shares issued upon exercise of
options were as follows:
15,000 shares issued in March 2002
220,000 shares issued in September 2002 (Note 4)
1,000,000 shares issued in September 2002 (Note 2)
4. STOCK OPTIONS AND WARRANT GRANTS
In February 2002, the board of directors authorized the issuance of 50,000
options exercisable at $0.52 per share. The options expire three years from date
of issuance. The Company recorded a compensation expense of $4,285.
In May 2002, the board of directors authorized the issuance of 200,000 options
exercisable at $0.01 per share that were subsequently exercised. The Company
recorded compensation expense of $68,000. An additional 20,000 options, were
approved by the board of directors and the Company recorded a compensation
expense of $6,800 during the quarter ended September 30, 2002 (Note 3).
On January 11, 2001, the Company entered into two consulting agreements. Both
agreements are for a term of three years and provide for annual fees at $75,000
and $50,000, respectively. In addition, the agreements provided for stock
options allowing each consultant to acquire 500,000 shares of common stock
exercisable at $0.01 per share during the first year of the agreement. As of
December 31, 2001, each consultant had exercised their options for 500,000
shares. The issuance of these shares was recorded as compensation expense.
5. RELATED PARTY TRANSACTIONS
As of September 30 2002, a director of the Company was owed $267,974 (December
31, 2001 - $196,500) for reimbursement of business travel expenses (See Note 7).
The amounts expensed in office, travel, and other costs were $102,134 and
$76,500, respectively, for the nine months ended September 30, 2002 and 2001.
This Director also has a non-interest bearing note payable by the Company in the
sum of $15,000 to him. (December 31, 2001 - $40,000).
During the third quarter ended September 30, 2002, the current Chairman advanced
$280,000 to the Company pursuant to a short term note.
The Company is also obligated to a director and a shareholder for an $80,000
non-interest bearing note and a $4,000 loan payable.
During the nine month period ended September 30, 2002 and 2001, the Company paid
shareholders and their affiliates $160,679 and $311,691, respectively for
various services rendered. No single payment to any Shareholder or affiliate
exceeded the sum of $60,000 in any fiscal year.
6. CONTINGENCIES
REGULATORY MATTERS
The Securities and Exchange Commission (SEC) has filed a civil suit on August 8,
2002 in the United States District Court for the District of Columbia alleging
that the Company, a current director and others purportedly associated both
directly and or indirectly with the Company, allegedly violated certain
anti-fraud, securities registration, periodic reporting, record keeping,
beneficial ownership reporting, misleading statements to auditors and stock
touting disclosure provisions of the federal securities laws from 1998 through
2000. The complaint seeks injunctive relief against all defendants and
discouragement and civil penalties from certain individual defendants. The
Company and the current director named have submitted offers of settlement and
are awaiting SEC approval regarding same.
-7-
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
LITIGATION
In January, 2002, an action was filed in Ontario, Canada against the Company for
breach of an agreement claiming approximately $50,000 (U.S.) plus costs. The
Company is vigorously contesting this action.
In March, 2002, an action was filed in the United States District Court for the
Eastern District of Pennsylvania against the Company, ESW America the Company's
wholly owned subsidiary and a current and former director by stockholders
claiming violations of Federal Securities laws, fraud, misrepresentation and
breach of fiduciary duty. The claim is for an unspecified amount in excess of
$75,000. The Company and all named defendants have interposed answers in the
Pennsylvania action. The Company has also interposed counterclaims against all
plaintiffs in the action.
The Ontario and Pennsylvania actions are indirectly related in that the
principal of the claimant in the Ontario action is also a plaintiff in the
Pennsylvania action.
7. SUBSEQUENT EVENTS
On October 10, 2002, the Company completed the first traunch of a unit private
placement (the "Placement") under Regulation D of the Securities Act of 1933,
whereby 15 accredited investors subscribed to units (the "Units") at a per Unit
price of $0.17. Each Unit is comprised of one share of the Company's restricted
common stock, par value $0.001 (the "Common Stock") and one warrant that can be
exercised for a period of three years at an exercise price of $0.15 per warrant
(the "Warrant") to purchase one-half (1/2) share of Common Stock. Warrants are
exercisable only in even lots for an aggregate exercise price of $0.30 for one
share of Common Stock. The Warrants contain certain anti-dilution protections.
The Company received an aggregate of $884,120 in the first traunch of the
Placement and sold an aggregate of 5,200,705 Units. The terms of the Placement
involved a minimum offering of $800,000 and a maximum of $1,500,000.
Additionally, as a part of the $884,120, both the current and former chairman of
the board, who are directors, converted certain loans and advances they made to
the Company, $204,000 and $200,000 respectively, into a total of 2,376,470 Units
as a part of the initial closing.
On November 14, 2002, the Company completed a second traunch of the Placement,
whereby the Company received the sum of $356,000. Of the $356,000, a director of
the Company converted $35,000 in moneys due to him from the Company pursuant to
a promissory note into 205,882 Units. Additionally included in the second
traunch was $45,000 due to a consultant to the Company, pursuant to a promissory
note, which was converted into units. He received 264,705 units as a part of the
second closing.
The Placement has been extended by the Company through November 29, 2002.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements and Notes thereto included elsewhere in this Form 10-QSB.
This Form 10-QSB contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release any modifications or revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events. In
connection with the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, the Company cautions investors that actual financial and
operating results may differ materially from those projected in forward-looking
statements made by, or on behalf of, the Company. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause the actual results, performance, or achievements of the Company
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements.
GENERAL
In 2001 the Company made the transition from a development stage enterprise to a
sales and manufacturing company. The Company started to generate revenues from
operations during its first quarter of fiscal year 2001. Below are comparisons
with operating results from prior periods. Due to the transition from a
development stage company and the initial generation of revenues during fiscal
year 2001 there is no meaningful comparisons of results from the first nine
months of the current and prior fiscal years.
Revenue in the third quarter of 2002 was $613,260 compared to the third quarter
of 2001 of $125,162. As previously noted, this substantial increase in revenue
can be attributed to the transition from a development stage company to one that
generates revenues.
Of total sales in the third quarter of 2002, Catalyzed Substrate sales
contributed 74%, Boutique converters such as Enviro-Cat(TM), Clean Cat(R), Quiet
Cat(TM) and Air Sentinel contributed 18%. ESW's services, such as
certifications, testing and consulting, contributed the remaining 8%.
Gross profit margin in third quarter 2002 was 52% compared to third quarter 2001
of 22%. The gross profit margin in the second quarter of 2002 was 44%. The
increase in margin achieved is mainly due to expenses previously absorbed in the
initial ramp-up of production, as well as delays in the receipt of raw
materials, which increased overtime and resulted in additional unexpected
production runs, as well as the use of outside subcontract sources in the first
quarter. Management believes that those costs can be attributed as initial start
up cost, which should be non-recurring. Management further believes that those
non-recurring costs have been addressed as current production runs have
demonstrated significant improvements in operating margin.
The Company has made significant progress in its capability to produce catalyst
substrates. Current capacity to produce and catalyze substrates is approximately
60,000 units per month. As our current capacity is not being maximized, the
Company believes that it is well positioned to attract high volume customers
requiring catalyzed substrates.
The Company is now adjusting its sales strategy in favor of high volume
customers needing catalyzed substrates. This change means less emphasis on
selling finished catalytic converters. As such, the Company has established
relationships with outside catalytic converter assemblers and marketers that
fabricate ready to install products that can incorporate ESW'S substrates. This
has allowed the Company to concentrate on its core technological competency,
which is manufacturing catalyzed substrates.
The Company intends to continue to invest in development programs, in order to
have more of its catalytic products meet EPA certification, on as many engine
groups as possible. Any capital expenditures to support the ongoing operations
needed during the coming year will be evaluated as the need arises. The Company
expects to finance part of the capital expenditure requirements through cash
flows generated from operations and through the sale of our securities.
On October 16, 2002, John A. Donohoe Jr., Chief Executive Officer and President
of the Company, was named Chairman of the Board. Mr. Donohoe succeeded Mr. Bengt
Odner, who had been serving as ESW's Chairman since September 2000. Mr. Odner
will continue to serve as a member of the Board.
-9-
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPT. 30, 2002 TO THE THREE MONTHS ENDED
SEPT. 30, 2001
Revenue for the third quarter ended September 30, 2002 was $613,260 compared to
$125,162 for the same period ended September 30, 2001.
Net loss from operations for the 3 months period ended September 30, 2002 was
$112,260 compared to $840,676 for the 3 months period ended September 30, 2001,
a decrease of $728,416. The loss for the three months period ended September 30,
2002 was $112,260 compared to $ 834,117, a decrease of $721,857.
The decrease in the loss from operations was related to an increase in sales
volume and gross profit margin, a decrease in marketing, office and general
costs of $141,745 which is primarily comprised of expenses relating to initial
cost cutting in relation to the move of the Company's Headquarters to Telford
Pennsylvania. The decrease is also attributed to a reduction in consulting fees
by $359,758.This decrease is mainly due to stock options given in 2001 in
respect of two consulting agreements, which were recorded as compensation
expenses in 2001.
The gross margin for the 3 months period ended September 30, 2002 was 52%. The
gross margin in 2001 for the same period was 22%.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue for the nine-month period ended September 30, 2002 was $1,537,804
compared to $397,994 for the same period ended September 30, 2001.
Net loss from operations for the nine months period ended September 30,2002 was
$854,375 compared to $2,294,196 for the nine months period ended September 30,
2001, a decrease of $1,439,821. The loss for the nine months period ended
September 30, 2002 was $854,375 compared to $2,156,736, a decrease of
$1,302,361.
The decrease in the loss from operations was related to an increase in sales
volume and gross profit margin, a decrease in research and development costs of
$74,796 as the Company made the transition from a development stage company to
an operating company, and a decrease in marketing, office and general costs of
$330,093 which is primarily comprised of expenses relating to initial cost
cutting in relation to the move of the Company's headquarters to Telford PA.
Consulting fees decreased by $764,641. This decrease is mainly due to stock
options given in 2001 under two consulting agreements, which were recorded as
compensation expenses in 2001.
The gross margin for the nine month period ended September 30, 2002 was 39%. The
gross margin in 2001 for the same period was 41%. The decrease in gross margin
was related to initial set up costs in the ramp up of production, delays in the
receipt of raw materials, and increased inventory cost, which increased overtime
and additional unexpected production runs, in the first quarter.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's cash and cash equivalents were $19,585 on September 30, 2002 as
compared to $243,830 at December 31, 2001.
Accounts receivable amounted to $583,745 on September 30, 2002 compared to
$116,518 on December 31, 2001 an increase of $467,227 for the period.
Inventories were $111,286 on September 30, 2002 compared to $133,701 on December
31, 2001 a decrease of $ 22,415 for the period.
Current liabilities amounted to $992,245 on September 30, 2002 as compared to
$489,911 on December 31, 2001 an increase of $502,334. The increase is primarily
attributed to an increase in trade payables and amounts due to an officer and a
shareholder of the Company for the period.
Investing activities amounted to $29,698 during the nine month period ended
September 30, 2002 as compared to $483,469 for the same period in 2001.The
investing activities primarily related to the net purchase of property and
equipment.
Net cash provided by financing activities for the nine month ended September 30,
2002 amounted to $527,814 as compared to $2,042,000 for the same period in 2001.
The financing activities during the nine-month period ended September 30, 2002
is related to loans from an officer and a shareholder of the company of $71,474,
the issuance of common stock of $217,340 which is comprised of $12,350 from an
issuance of shares upon an exercise of options and $204,990 of stock
subscription receipts, and the issuance of a demand note by the Company in the
amount of $239,000.
Net cash used in operating activities amounted to $722,361 during the nine month
ended September 30 2002 as compared to $1,232,709 for the same period in 2001.
This increase in cash flows from operating activities was due primarily to the
increase in accounts receivable, a decrease in inventories and other current
assets combined with a decrease in non-cash compensation.
-10-
Management believes that the Company will increase orders as it moves forward
with the Company business plan.
Although we do not need certification of our products in order to sell them in
many markets, the successful EPA certifications recently received by our
customers, for their utility engines that used our diesel product the Quiet
Cat(TM) is believed to be beneficial in enhancing the marketability of our Quiet
Cat(TM) product. Further successful certifications of our products in North
America, Mexico and the Far East markets should lead to increased sales volumes,
as certifications are required to gain full customer and governmental
acceptance. However there can be no assurances that the Company will obtain
additional sales if it successfully obtains certifications.
We continue to deplete our current cash resources, and do not presently have the
total funds needed to expand our capacity or fully develop our existing and new
technologies and sustain our operations until we anticipate our operating cash
flow will be positive. We presently expect to raise additional money through the
sale of our securities and or operational business lines of credit until such
time as we obtain a positive cash flow. Under our present business plan we
anticipate that we have enough cash and account receivables to sustain our
operations until the end of Q3 of 2003. However, there can be no assurance that
we will be able to sustain our operation, through Q3 of 2003 as our business
plan is subject to variables beyond our control. Accordingly, the successful
completion of the sale of equity securities and/or other financing will be
essential for us to continue in operation until such time as we will be able to
generate positive cash flow.
During July 2001, the Company entered into equity financing agreements with
accredited investors for the sum of $525,000, totaling 1,312,500 shares of
common stock in the Company. To date, the Company has received $271,990. During
the second quarter of 2002, a subscription for 500,000 shares of Common Stock
was deemed to be in default and was cancelled. The canceled agreement was for
$200,000 of which $195,000 was in default by the subscriber. During the third
quarter of 2002, the remaining subscription for 145,000 shares with a value of
$58,000 was deemed to be in default and was canceled.
On October 10, 2002 the Company completed the first traunch of a unit private
placement (the "Placement") under Regulation D of the Securities Act of 1933, as
amended whereby 15 accredited investors subscribed to units (the "Units") at a
per Unit price of $.17. Each Unit is comprised of one share of the Company's
restricted common stock, par value $.001 (the "Common Stock") and one warrant
that can be exercised for a period of three (3) years at an exercise price of
$.15 per warrant (the "Warrant") to purchase one half (1/2) a share of Common
Stock. Warrants are exercisable only in even lots for an aggregate exercise
price $.30 for one share of Common Stock. There are no fractional shares. For
example, two (2) Warrants can be exercised for an aggregate exercise price of
$.30 for one (1) share of the Company's Common Stock. The Warrants contain
certain anti-dilution protections. The Company received an aggregate of $884,120
recorded in the first traunch, in subscriptions, in the initial closing of the
Placement. The terms of the Placement involved a minimum offering of $800,000
and a maximum of $1,500,000. Additionally, of the $884,120, the current chairman
of the board, Mr. John A. Donohoe and, Mr. Bengt Odner, a director, converted
certain loans and advances they made to the Company, $204,000 and $200,000
respectively into a total of 2,376,470 Units as a part of the first closing.
On November 14, 2002, the Company completed a second traunch of the Placement,
whereby the Company received the sum of $356,000. Of the $356,000, a director of
the Company converted $35,000 in moneys due to him from the Company pursuant to
a promissory note into 205,882 Units. Additionally included in the second
traunch was $45,000 due to a consultant to the Company, pursuant to a promissory
note, which was converted into units. He received 264,705 units as a part of the
second closing.
The Placement has been extended by the Company through November 29, 2002.
The Company May require additional capital in the future in order to fully
implement its operational and marketing plans; however, there is no assurance
that it will be successful in raising the additional capital. If we are unable
to secure the required financing, we may be forced to take steps to reduce
expenses, such as reducing our staff or our research and development efforts
and/or selling off any assets. Any such action, however, may result in an
inability to further develop, sell, and market our catalytic converter
technology. In such event, we may be forced to cease operations.
The Securities and Exchange Commission (SEC), pursuant to an order of
investigation by the Commission, on August 8, 2002, filed a civil law suit in
the United States District Court for the District of Columbia. The SEC claimed
that the Company, its former chairman and others purportedly associated both
directly and or indirectly with the Company, allegedly violated certain
anti-fraud, securities registration, periodic reporting, record keeping,
beneficial ownership reporting, false statements to auditors and stock touting
disclosure provisions of federal securities laws from 1998 through 2000. The
complaint seeks injunctive relief against all defendants and discouragement and
civil penalties from certain individual defendants. The Company has submitted an
offer of settlement and is awaiting SEC approval regarding same.
Additionally, although we have not received any notification of claims from
stockholders, we may potentially face claims for rescission and damages stemming
from a prior offering made under a claimed exemption under Regulation D of the
Securities Act. The Commission has alleged that a specific offering conducted by
our prior management was based upon an inapplicable exemption under Rule 504 of
the Security Act.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2002, an action was commenced against the Company by Royal Extruders
in Ontario Canada for approximately $50,000 U.S. plus cost. The claim by Royal
Extruders alleges breach of an agreement. The principal of the claimant Royal
Extruders is Robert Vivacqua, who is a party to a second action subsequently
commenced against the Company in the U.S. District Court for the Eastern
District of Pennsylvania. The Company is vigorously contesting the Ontario
matter and believes that a final determination of the Ontario claim will not
have an adverse effect on the financial position of the Company.
In March 2002 an action was instituted in the U.S. District Court for the
Eastern District of Pennsylvania by Robert Vivacqua, John Greco and Ronald
Rickett against the Company, its wholly-owned subsidiary ESW America, Inc., Mark
Nicole a former officer and director of the Company and Bengt Odner a current
director of the Company. The complaint alleges certain violations of Federal and
State Securities Laws, fraud, misrepresentation and breach of fiduciary duty in
a sum in excess of $75,000 with respect to securities sold to the plaintiffs by
the Company.
The Company and all named defendants are contesting the action and believe that
there are meritorious defenses to the claims. In August of 2002, plaintiffs made
a motion to amend the complaint to add an additional cause of action based upon
violations of the RICO statute. The Company and all named defendants have
answered the amended complaint and have asserted counterclaims against all of
the plaintiffs.
The Company was initially contacted by the Securities and Exchange Commission
("SEC"), and subsequently on November 29, 2000 the Company's securities counsel,
was notified by the staff of the Commission's Fort Worth, Texas District Office
that it intended to recommend that an enforcement action be instituted against
the Company. On March 7, 2001, the SEC's Fort Worth, Texas District Office, also
notified Mr. Bengt Odner, the Company's current Chairman that it also intended
to recommend an enforcement action against him individually. Subsequently on
August 8, 2002, the SEC filed a civil law suit in the United States District
Court for the District of Columbia claiming that the Company, Mr. Odner and
others purportedly associated both directly and or indirectly with the Company,
allegedly violated certain anti-fraud, securities registration, periodic
reporting, record keeping, beneficial ownership reporting, false statements to
auditors and stock touting disclosure provisions of federal securities laws from
1998 through 2000. The complaint seeks injunctive relief against all defendants
and discouragement and civil penalties from certain individual defendants.
The Company intends to fully cooperate with the Commission to resolve all claims
in the best interest of shareholders. The Company has submitted an offer of
settlement and is awaiting SEC approval regarding same.
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ITEM 2. CHANGE IN SECURITIES NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE
ITEM 5. OTHER INFORMATION
On October 16, 2002, John A. Donohoe Jr., Chief Executive Officer and President
of the Company, was named Chairman of the Board. . Mr. Donohoe replaces Bengt
Odner, who had been serving as ESW's Chairman since September 2000 and elected
to step down. Mr. Odner will continue to serve as a member of the Board.
On November 14, 2002, the Company completed a second traunch of a unit private
placement (the "Placement") under Regulation D of the Securities Act of 1933,
whereby 5 accredited investors subscribed to units (the "Units") at a per Unit
price of $0.17. Each Unit is comprised of one share of the Company's restricted
common stock, par value $0.001 (the "Common Stock") and one warrant that can be
exercised for a period of three (3) years at an exercise price of $0.15 per
warrant (the "Warrant") to purchase one half (1/2) a share of Common Stock.
Warrants are exercisable only in even lots for an aggregate exercise price $0.30
for one share of Common Stock. There are no fractional shares. For example, two
(2) Warrants can be exercised for an aggregate exercise price of $0.30 for one
(1) share of the Company's Common Stock. The Warrants contain certain
anti-dilution protections. The Company received an aggregate of $356,000
recorded in the second traunch, in subscriptions, in the second closing of the
Placement. Additionally, of the $356,000, a director of the Company converted
$35,000 in moneys due to him from the Company pursuant to a promissory note into
205,882 Units. Additionally included in the second traunch was $45,000 due to a
consultant to the Company, pursuant to a promissory note, which was converted
into units. He received 264,705 units as a part of the second closing.
The Placement has been extended by the Company through November 29, 2002.
In accordance with the terms of 1,500,000 warrants issued by the Company on
October 10, 2000, to six (6) accredited investors, the exercise price of the
warrants has been re-priced from $0.40 to $0.17 per warrant, due to the recently
completed traunchs of the Company's Regulation D placement. The warrants
contained an automatic re-price provision in the event the Company issued common
stock at a price less than the original warrant price.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
Exhibit 99.1 Certification pursuant to the Sarbanes-Oxley Act of 2002
(B) REPORTS ON FORM 8-K.
No current reports on Form 8-K were filed for the applicable period.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: NOVEMBER 14, 2002, TELFORD, PA
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
BY: /S/ JOHN A. DONOHOE JR.
-----------------------
JOHN A. DONOHOE JR.
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
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