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 - June 30, 2005.
[ ] 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)
Florida 98-0346454
- ------------------------------ ------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
335 Connie Crescent
Concord, Ontario
L4K 5R2 CANADA
(Address
of principal executive offices, including postal code.)
(905) 695-4142
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the 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 [ ]
The issuer had 54,754,254 shares of common stock, par value $0.001 outstanding
as of August 8, 2005.
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1 Financial Statements (unaudited)
Consolidated Condensed Balance Sheet as of June 30, 2005 F2
Consolidated Condensed Statements of Operations for the Three F3
and Six Months Ended June 30, 2005 and 2004
Consolidated Condensed Statement of Changes in Stockholders' F4
Equity for the Six Months Ended June 30, 2005
Consolidated Condensed Statements of Cash Flows for the F5
Six Months Ended June 30, 2005 and 2004
Notes to Consolidated Condensed Financial Statements F6- F12
ITEM 2 Management's Discussion and Analysis of Operations 2
ITEM 3 Controls and Procedures 10
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 11
ITEM 6 Exhibits and Reports on Form 8-K 12
ITEM 1. FINANCIAL STATEMENTS
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
June 30, 2005
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents (Note 4) $ 3,834,004
Accounts receivable - net of allowance of $12,116 (Note 2) 411,749
Inventory (Note 5) 853,801
Prepaid expenses 313,711
------------
Total current assets 5,413,265
Property, plant and equipment, net of accumulated
depreciation of $558,982 (Note 6) 2,349,805
Patents and trademarks, net of accumulated
amortization of $967,334 1,185,289
------------
$ 8,948,359
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, accrued liabilities and
customer deposits $ 1,063,275
Redeemable Class A special shares (Note 7) 453,900
------------
Total current liabilities 1,517,175
------------
Convertible debentures (Note 8) 5,712,197
------------
Stockholders Equity
Common stock, $0.001 par value, 125,000,000
shares authorized; 52,577,784 shares
issued and outstanding 52,577
Additional paid-in capital 14,658,761
Accumulated deficit (12,992,351)
------------
Total stockholders' equity 1,718,987
------------
$ 8,948,359
============
The accompanying notes are an integral part of these financial statements
F2
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue
Net sales $ 1,310,826 $ 926,178 $ 844,095 $ 430,748
Cost of sales 744,151 524,846 493,258 246,489
------------ ------------ ------------ ------------
Gross profit 566,675 401,332 350,837 184,259
------------ ------------ ------------ ------------
Operating expenses
Marketing, office & general costs 1,317,792 550,177 723,400 280,306
Officers' compensation and directors fees 174,423 228,269 100,000 97,019
Consulting and professional fees 227,894 165,457 110,754 81,387
Interest on long term debt 122,000 -- 61,000 --
Foreign exchange loss (gain) (3,711) (11,890) 5,196 (3,691)
Depreciation and amortization 199,035 167,662 101,445 83,681
------------ ------------ ------------ ------------
2,037,433 1,099,675 1,101,795 538,702
------------ ------------ ------------ ------------
Loss from operations $ (1,470,758) $ (698,343) $ (750,958) $ (354,443)
Interest Income 39,689 -- 23,807 --
Net Loss $ (1,431,069) $ (698,343) $ (727,151) $ (354,443)
============ ============ ============ ============
Loss per share $ (0.028) $ (0.014) $ (0.014) $ (0.007)
============ ============ ============ ============
Weighted average number of shares outstanding 51,147,820 49,738,685 52,060,654 50,097,096
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
F3
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTH PERIOD ENDED JUNE 30,2005
COMMON STOCK ADDITIONAL ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
January 1, 2005 50,224,843 $ 50,224 $ 12,661,114 $(11,561,282) $ 1,150,056
Net Loss -- -- -- (1,431,069) (1,431,069)
Proceeds from traunche of private placement 2,352,941 2,353 1,997,647 -- 2,000,000
-------------------------------------------------------------------------
June 30, 2005 52,577,784 $ 52,577 $ 14,658,761 $(12,992,351) $ 1,718,987
========================================================================
See accompanying notes to the consolidated financial statements
F4
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30,
(UNAUDITED)
2005 2004
------------ ------------
Net loss $(1,431,069) $ (698,343)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 91,445 60,400
Amortization 107,590 107,262
Provision for uncollectable accounts (recovery) (3,389) 7,500
Amortization of debenture warrant fair value 88,000 --
Options issued for services provided -- 22,000
Increase (decrease) in cash flows from operating
activities resulting from changes in:
Accounts receivable (76,756) 75,456
Inventory (477,123) 17,850
Prepaid expenses (31,356) (2,729)
Other assets -- 12,251
Accounts payable, accrued liabilities
and Customer deposits 689,400 134,369
----------- -----------
Net cash used in operating activities (1,043,258) (263,984)
----------- -----------
Investing activities:
Acquisition of property, plant and equipment (1,752,489) (1,246)
Increase in patents and trademarks (3,262) --
----------- -----------
Net cash used in investing activities (1,755,751) (1,246)
----------- -----------
Financing activities:
Issuance of common stock 2,000,000 225,107
----------- -----------
Net cash provided by financing activities 2,000,000 225,107
----------- -----------
Net increase (decrease) in cash (799,009) (40,123)
Cash & cash equivalents, beginning of year 4,633,013 86,886
----------- -----------
Cash & cash equivalents, end of period $ 3,834,004 $ 46,763
=========== ===========
Supplemental disclosures:
Interest received $ 39,689 $ --
=========== ===========
The accompanying notes are an integral part of these financial statements
F5
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
The Company develops, manufactures and sells environmental technology solutions,
and is currently focused on the international automotive, transportation and
utility engine industries. It manufactures and markets a line of catalytic
control products including a boutique line of finished products, proprietary
catalytic converter substrates and catalytic conversion technologies for a
number of applications as well as providing engine testing and certification
services.
The accompanying consolidated condensed financial statements have been prepared
without audit in conformity with U.S. generally accepted accounting principles.
These statements should be read in conjunction with the financial statements and
the notes thereto included in our Annual Report on Forms 10-KSB and 10-KSB/A
(No. 1), as filed with the Securities and Exchange Commission for the year ended
December 31, 2004.
Revenues and operating results for the six months ended June 30, 2005 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The Consolidated Condensed financial statements include the accounts of the
Company and its wholly owned subsidiaries, ESW America, Inc., ESW Technologies,
Inc., ESW Canada, Inc. and BBL Technologies, Inc. All significant inter-company
transactions are eliminated.
ESTIMATES
The preparation of financial statements in conformity with U. S. generally
accepted accounting principles 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 financial
statements and the reported amounts of revenue and expense during the reported
period. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Accounts Receivable and Concentrations of Credit Risk: The Company performs
on-going credit evaluations of its customer's financial condition and generally
does not require collateral from those customers. Three of those customers
accounted for 42%, 21% and 13%, respectively of the Company's revenue in the six
month period ended June 30, 2005 and 27%, 38% and 18%, respectively of its
accounts receivable as of June 30, 2005.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
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 current relationships with them. On this basis management
has determined that a reserve of $12,116 was appropriate as of June 30, 2005 and
that a $7,500 allowance for doubtful accounts was required as of June 30, 2004.
F6
PATENTS AND TRADEMARKS
Patents and trademarks consist primarily of the costs incurred to acquire them
from an independent third party. SFAS No. 142 requires intangible assets with a
definite life be tested for impairment whenever events or circumstances indicate
that a 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.
Patents and trademarks are being amortized on a straight-line basis over their
estimated life of ten years. Amortization expense for the six month period ended
June 30, 2005 and 2004 were $107,590 and $107,262 respectively. Amortization
expenses for the three month period ended June 30, 2005 and 2004 were $53,801
and $53,620 respectively.
REVENUE RECOGNITION
The Company derives revenue primarily from the sale of its catalytic products.
In accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition
in Financial Statements", revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the amount is fixed and determinable,
risk of ownership has passed to the customer and collection of the resulting
receivable is reasonably assured.
The Company also derives revenue (less than 1% of total revenue) from providing
air testing and environmental certification services. Revenues from these
services are recognized upon performance.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred in accordance with SFAS
No. 2. However, materials and equipment are capitalized and depreciated over
their useful lives if they have alternative future uses.
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2005, the FASB issued SFAS 154, which replaces APB Opinion No. 20,
"Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in
Interim Financial Statements." The statement applies to all voluntary changes in
accounting principle and changes resulting from adoption of a new accounting
pronouncement that does not specify transition requirements. SFAS 154 requires
retrospective application to prior periods' financial statements for changes in
accounting principle unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 also
requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. Indirect effects of a change in
accounting principle should be recognized in the period of the accounting
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005 with early implementation
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date this statement is issued. SFAS 154 is effective for us
beginning January 1, 2006 and will be applied when applicable.
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments purchased
with an original or remaining maturity of three months or less at the date of
purchase.
NOTE 5 - INVENTORY
Inventories as of June 30, 2005 are summarized as follows:
Raw materials $ 602,159
Work-In-Process 110,137
Finished goods 141,505
------------
$ 853,801
============
F7
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property plant and equipment at June 30, 2005 consists of the following:
2005
------------
Plant, machinery and equipment $ 1,966,855
Office equipment 122,840
Furniture and fixtures 314,122
Vehicles 39,046
Leasehold improvements 465,924
------------
2,908,787
Less: accumulated depreciation 558,982
------------
$ 2,349,805
===========
NOTE 7 - REDEEMABLE CLASS A SPECIAL SHARES
700,000 Class A special shares $ 453,900 (based on the historical exchange rate
at the time of issuance.)Authorized, issued, and outstanding
The Class A special shares are issued by the Company's wholly-owned subsidiary
BBL Technologies, Inc. ("BBL") without par value, and are redeemable on demand
by the Holder of the shares which is a private Ontario Corporation at $700,000
CDN (which translates to $570,497 USD at June 30, 2005). As the Class A special
shares were issued by the Company's wholly-owned subsidiary, BBL the maximum
value upon which the Company is liable is the net book value of BBL. As at June
30, 2005 BBL has an accumulated deficit of $ 1,163,892 USD ($1,810,338 CDN as at
June 30, 2005) and therefore would be unable to redeem the Class A special
shares at their ascribed value.
NOTE 8 - CONVERTIBLE DEBENTURES
In September 2004, the Company issued $6.1 million of convertible debentures in
which the basis of conversion into the Company's common stock is $0.50 per
share. In conjunction with the debentures, the Company issued warrants to
purchase an additional 3.05 million shares of common stock at $1.00 per share.
The debentures are for a term of three (3) years and earn interest at the rate
of 4%. The Company has computed the fair-value of the warrants utilizing the
Black-Scholes method and apportioned the fair value of the debt and warrants
accordingly. As a result, the debentures were discounted by $528,000, which is
being amortized over the three (3) year life of the debentures. The effective
yield on the debentures is 4.38%. The warrant agreements provide that should the
company at any time after the date the warrants are first issued sell additional
shares of common stock or equivalents below the then current exercise price,
then the Company is required to reduce the current exercise price of the warrant
to the price of the new issuance (See Note 10).
NOTE 9 - INCOME TAXES
As of June 30, 2005, there are loss carryforwards for Federal income tax
purposes of approximately $9,221,245 available to offset future taxable income
in the United States. The carryforwards expire in various years through 2023.
The Company does not expect to incur a Federal income tax liability in the
foreseeable future. Accordingly, a valuation allowance for the full amount of
the related deferred tax asset of approximately $3,311,568 has been established
until realizations of the tax benefit from the loss carryforwards are assured.
Additionally, as of June 30, 2005, the Company's two wholly owned Canadian
subsidiaries had net operating losses of approximately $1,837,802 that may be
used, in future periods, to offset taxable income. The deferred tax asset of
approximately $663,969 has been fully offset by a valuation allowance until
realization of the tax benefit from the loss carryforwards are assured.
NOTE 10 - ISSUANCE OF COMMON STOCK
On April 21, 2005, the Company closed an initial traunche of a private placement
offering. Pursuant to a subscription agreement with one accredited investor, the
Company received $2 million and issued 2,352,941 shares of common stock; three
year warrants to purchase 1,300,000 shares of common stock at $0.90 per share;
three year warrants to purchase 200,000 shares of common stock at $2.00 per
share; and three year warrants to purchase 200,000 shares of common stock at
$3.00 per share pursuant to Regulation D of the Securities Act of 1933,
F8
as amended. On April 21, 2005, in conjunction with the offering, the Company
adjusted the exercise price of 3,050,000 three year warrants previously issued
to nine (9) accredited investors including AB Odnia an entity affiliated with
Bengt Odner a director of the Company from $1.00 per share to $0.85 per share in
accordance with the terms of the warrants previously issued by the Company
September 15, 2004.
NOTE 11 - STOCK OPTIONS AND WARRANT GRANTS
The Company adopted Statement of Financial Accounting Standards No. 123 (SFAS
No. 123), "Accounting for Stock-Based Compensation" since its inception and
adopted Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB No.
123", in December 2002. In conjunction with the adoption of these standards, the
Company will continue to apply the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" with pro forma disclosure of net income and earnings per
share as if the fair-value based method prescribed by SFAS No. 123 had been
applied. In general, no compensation cost related to the Company's non-qualified
stock option plan is recognized as options are issued for no less than 100% of
fair market value on date of grant.
In August 2003, the board of directors ratified the Compensation Committees
granting of 650,000 options in the aggregate at an exercise price of $0.27
(fair-market-value on date of grant) per share to Directors and key employees as
consideration for their service. The options expire ten years from the date of
grant and vest over a three-year period. Of these options 150,000 were granted
to the former President and Chief Executive Officer who resigned on May 1, 2004.
As a result, these 150,000 options have lapsed and were cancelled.
In November 2003, the board of directors ratified the employment contract of the
then President and Chief Executive Officer, which included the granting of
2,000,000 options at an exercise price of $0.66 (110% of fair-market value on
the date of grant) per share. The options expire five years from the date of
grant and vest over a two-year period with one-third vesting immediately and
thereafter on the first and second anniversary of the employment contract
provided the contract is in force and effect. On April 30, 2004, the then
Chairman, President and Chief Executive Officer resigned from the Company
effective May 1, 2004. Consequently, all unvested options (1,333,334 of the
2,000,000) granted under the November 2003 contract lapsed and were cancelled.
In addition, the Company awarded 50,000 options to its former Chairman,
President and Chief Executive Officer to purchase 50,000 shares of common stock
at $0.45 per share (fair market value on the date of grant) for consulting
services subsequent to his resignation. The fair-market value for the 2,000,000
options (determined under the Black-Scholes method) was approximately $1,200,000
of which $500,000 was reflected as pro-forma compensation expense in the pro
forma information presented for the year ended December 31, 2003. The $700,000
balance, which will no longer vest, is not reflected in the accompanying pro
forma data.
In December 2003, the board of directors ratified the issuance of 25,000 options
at an exercise price of $0.17 (fair-market value at the date of grant) and
85,000 options at an exercise price of $0.60 (fair-market value at the date of
grant) to certain key employees during the year. These options expire three
years from the date of grant.
In August 2004 the board of directors approved the aggregate award of 2,300,000
stock options to seven (7) employees, two (2) executive officer/directors two
(2) outside directors, and two (2) consultants. The options have immediate
vesting with an exercise price of $0.50 per share (fair-market value at the date
of grant) with exercise periods ranging from three to five years from the date
of award.
In December 2004, the Company issued 300,000 stock options to two employees at
an exercise price of $0.50 per share (fair-market value at the date of grant).
These options expire five years from the date of grant.
In January 2005, the Company issued 35,000 stock options to one employee at an
exercise price of $0.50 per share (fair-market value at the date of grant).
These options expire three years from the date of grant.
Had compensation cost for the Company's stock options that were issued, been
determined on the fair value at grant date consistent with the provisions of
SFAS No. 123, the Company's net loss and loss per share would have been as
follows:
F9
PRO FORMA INFORMATION
SIX MONTHS ENDED JUNE 30,
2005 2004
-------------------------------
Number for basic and diluted
earnings (loss) per share available
to common stockholders $ (1,431,069) $ (676,343)
Deduct: Total stock-based
Compensation expense
determined under fair
value based method, net (9,800) (36,758)
-------------------------------
Net loss - pro forma $ (1,440,869) $ (713,101)
===============================
Denominator for basic earnings
(loss) per share -
Weighted average shares outstanding 51,147,820 49,738,685
Effect of dilutive securities:
Employee stock option -- --
Warrants -- --
Convertible debt conversion -- --
Denominator for basic and diluted
earnings (loss) per share -
Weighted average shares outstanding 51,147,820 49,738,685
Earnings (loss) per share
Basic $ (0.028) $ (0.014)
Potential common shares of 4,245,001 related to ESW's outstanding stock options
and potential common shares of 8,998,531 related to ESW's outstanding Warrants
and potential common shares of 12,200,000 related to ESW's 4 percent Convertible
debentures were excluded from the computation of diluted earnings/(loss) per
share for the six month period ended June 30, 2005, as the effect of inclusion
of these shares and the related interest expense would have been anti-dilutive.
Potential common shares of 1,610,001 related to ESW's outstanding stock options
and potential common shares of 4,423,531 related to ESW's outstanding Warrants
were excluded from the computation of diluted earnings/(loss) per share for the
six month period ended June 30, 2004, as the effect of inclusion of these shares
would have been anti-dilutive.
SFAS No. 123 requires that the fair value of options and warrants issued to
non-employees for goods and services be recorded in the financial statements as
an expense.
A summary of option and warrant transactions, including those granted pursuant
to the terms of certain employment and other agreements, is as follows:
STOCK WEIGHTED
PURCHASE AVERAGE
OPTIONS EXERCISE PRICE
---------------- ----------------
Outstanding, January 1, 2004 3,932,500 $0.63
Granted 2,650,000 $0.50
Expired (2,055,833) ($0.72)
---------- --------
Outstanding, December 31, 2004 4,526,667 $0.51
Granted 35,000 $0.50
Expired (50,000) $1.50
---------- --------
Outstanding, June 30, 2005 4,511,667 $0.50
F10
All of the options and warrants granted are exercisable on date of grant, except
500,000 options granted in August of 2003 that vest over a 3 year period. Of
these 500,000 options, 233,334 are currently vested, 133,332 will vest in August
2005 and 133,334 will vest in August 2006.
At June 30, 2005, the outstanding options have a weighted average remaining life
of 45 months.
The weighted average fair value of options granted during the first quarter of
2005 was $0.50 and was estimated using the Black-Scholes option-pricing model,
and the following assumptions:
2005
-------
Expected volatility 108.00%
Risk-free interest Rate 3.00%
Expected life 3.0 yrs
Dividend yield 0.00%
Forfeiture rate 0.00%
The Black-Scholes model used by the Company to calculate options and warrant
values, as well as other currently accepted option valuation models, were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock purchase options and warrants. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the calculated values. Accordingly,
management believes that this model does not necessarily provide a reliable
single measure of the fair value of the Company' s stock options and warrants.
At June 30, 2005, the Company had outstanding options as follows:
NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE
- ---------------- -------------- ---------------
25,000 0.17 February 12, 2006
500,000 0.27 August 6, 2013
50,000 0.45 April 20, 2009
250,000 0.50 April 18, 2006
250,000 0.50 May 4, 2006
550,000 0.50 August 11, 2007
1,750,000 0.50 August 11, 2009
300,000 0.50 December 1, 2009
50,000 0.52 November 23, 2005
85,000 0.60 December 10, 2006
666,667 0.66 September 10,2008
35,000 0.50 January 6, 2008
---------------
4,511,667
In addition, the Company has warrants outstanding as follows:
These warrants, issued in connection with various private placements of equity
securities, are treated as a cost of capital and no income statement recognition
is required.
NUMBER OF WARRANTS EXERCISE PRICE EXPIRATION DATE
- ------------------ -------------- -----------------
750,000 0.17 (A) October 10, 2005
2,107,355 0.30 (B) October 10, 2005
1,047,058 0.30 (B) November 14, 2005
344,118 0.30 (B) March 31, 2006
3,050,000 0.85 (C)& (D) September 13, 2007
1,300,000 0.90 (B) April 21, 2008
200,000 2.00 April 21, 2008
200,000 3.00 April 21, 2008
---------
8,998,531
F11
(A) Originally exercisable at $1.20 per share and repriced in September 2001 and
subsequently in 2002.
(A, B &C) Contain certain antidilutive protections.
(D) Originally exercisable at $1.00 per share and adjusted in April 2005.
During 2002, the Company discontinued its 2000 Nonqualified Stock Option Plan,
which was comprised of 10,000,000 shares of common stock (of which 6,035,000
shares had not been granted), and was replaced, with shareholder approval by the
2002 Stock Option Plan with 1,000,000 shares of common stock.
On June 23, 2005, the company, with shareholder approval, amended its 2002 Stock
Option Plan, to increase the underlying shares available under the plan to
5,000,000 shares of common stock.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the period ended June 30, 2005 and 2004, the Company paid shareholders
and their affiliates nil and $9,141, respectively for various services rendered
in addition to salaries and reimbursement of business expenses. No one
transaction or combination attributed to one individual or entity exceeded
$60,000 on an annual basis.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company currently leases its office and factory located in Telford,
Pennsylvania for $5,000 per month on a month-to-month basis.
Effective November 24, 2004, the Company's wholly owned subsidiary ESW America,
Inc. entered into a lease agreement with Nappen & Associates for approximately
40,220 square feet of leasehold space at 2 Bethlehem Pike Industrial Center,
Montgomery Township, Pennsylvania. The leasehold space is intended to house the
Company's research and development facilities. The lease commenced on January
15, 2005 and expires January 31, 2010.
Effective December 20, 2004, the Company's wholly owned subsidiary ESW Canada,
Inc. entered into an offer to Lease agreement with Dufcon Developments Inc. for
approximately 50,000 square feet of leasehold space in Concord, Ontario Canada.
The leasehold space houses the Company's executive offices and a high volume
manufacturing plant. The possession of the leasehold space took place on May 24,
2005 and the term of the lease will run for a period of 5 years from the
commencement date of July 15, 2005.
The following breakdown is the total, of the minimum annual lease payments, for
both leases.
2005 $214,211
2006 $428,423
2007 $428,423
2008 $433,578
2009 $438,732
2010 $143,954
NOTE 14 - COMPARATIVE FIGURES
Certain 2004 figures have been reclassified to conform to the financial
statements adopted in 2005.
NOTE 15 SUBSEQUENT EVENTS
ISSUANCE OF COMMON STOCK
F12
Effective July 5, 2005, the Company completed a second traunche of a private
placement offering. Pursuant to subscription agreements with three accredited
investors, the Company received an aggregate of $1,850,000 and issued 2,176,470
shares of common stock; three year warrants to purchase 1,202,500 shares of
common stock at $0.90 per share; three year warrants to purchase 185,000 shares
of common stock at $2.00 per share; and three year warrants to purchase 185,000
shares of common stock at $3.00 per share pursuant to Regulation D of the
Securities Act of 1933, as amended.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements and Notes thereto included elsewhere in this Report.
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. This report should be
read in conjunction with the Company's Annual Report on Forms 10-KSB and
10-KSB/A (No. 1) for the year ended December 31, 2004 as filed with the
Securities and Exchange Commission.
GENERAL
The Company develops, manufactures and sells environmental technology solutions,
and is currently focused on the international automotive, transportation and
utility engine industries. It manufactures and markets a line of catalytic
control products including a line of finished catalytic muffler products,
proprietary catalytic converter substrates and catalytic conversion technologies
for a number of applications. The Company also offers emissions testing and
certification services.
The Company has developed commercially viable proprietary catalytic converter
technologies for diesel, gasoline and alternative (CNG/LPG) fueled combustion
engines. The unique technology consists of a wire based mesh substrate and wash
coat formulas, which form the basis for the catalyzed substrate. The finished
product can be produced in a myriad of sizes and shapes. The substrate creates a
turbulent flow environment. This increases catalytic activity and serves as a
filter of particulate matter, important in diesel emission control.
-2-
The Company's catalyst products have been extensively tested in house, as well
as by Original Equipment Manufactures (OEM's) and by independent third parties.
Management believes they demonstrate superior performance to comparable
competing products. ESW's customers have incorporated the Company's products to
meet their own needs, and have, in specific instances, received certification
for their product applications from the Environmental Protection Agency (EPA)
and the California Air Resources Board (CARB). Customers have had their engines
certified using the Company's Clean Cat (R), Pro Cat (TM), Quiet Cat (TM)
catalyst products and services. The Company's catalyst products are being
marketed both domestically and internationally, including in such continents as
Asia, Europe and countries as Canada and Mexico.
In September 2004, the Company received a Level II California Air Resources
Board (CARB) Executive Order for its proprietary advanced Diesel Catalyst
(Particulate Reactor TM) for all diesel engine models from the 1991 through 1993
model years used in on-road applications operating on standard CARB diesel fuel,
and subsequently requested the Executive Order be expanded to include Medium
Heavy Duty applications (up to and including 8 liter) for engine models from
1994 through 1997. CARB is presently reviewing this request. Additionally, the
Company has received an Executive Order from CARB which permits sale of
catalytic converters for use on 4 liter or smaller gas engines for all model
years up to 1995 on which GVW (gross vehicle weight) is 3,750 pounds or less.
ESW is in full compliance with ISO 9001:2000, the ISO standards developed by the
International Organization for Standardization which provide an international
benchmark for quality systems and foundation for continuous improvement and
assurance in design, development and manufacturing. The ISO mandates that the
Company follow strict quality guidelines, administrative protocol and safety
procedures to a recognized international standardized code. ISO auditors confirm
compliance by auditing the Company periodically. The Company passed its most
recent surveillance audit in June 2005, and is in full compliance with the ISO
requirements. The Company currently holds a full registration certificate
effective until March of 2007. Management considers an ISO certification
essential for the Company to do business with many export customers.
COMPARISON OF THREE MONTH PERIOD ENDED JUNE 30, 2005 TO THREE MONTH PERIOD ENDED
JUNE 30, 2004
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations (MD&A) should be read in conjunction with the MD&A
included in our Annual Report on Forms 10-KSB and 10-KSB/A (No. 1) for the year
ended December 31, 2004.
Revenues for the three month period ended June 30, 2005 increased by $ 413,347,
or 96.0 percent, to $ 844,095 from $ 430,748 for the three month period ended
June 30, 2004. Factors that favorably impacted revenue during the three months
ended June 30, 2005 included a large order from one of the Company's customers
for diesel substrates.
Cost of sales for the three month period ended June 30, 2005 increased by
$246,769, or 100.1 percent, to $ 493,258 from $ 246,489 for the three month
period ended June 30, 2004. Cost of sales as a percentage of revenues for the
three month period ended June 30, 2005 was 58.4 percent, which is consistent to
57.2 percent for the three month period ended June 30, 2004. The gross margin
for the three month period ended June 30, 2005 was 41.6 percent as compared to a
gross margin of 42.8 percent for the three month period ended June 30, 2004.
-3-
Marketing, office and general expenses for the three month period ended June 30,
2005 increased by $ 443,094, or 158.1 percent, to $ 723,400 from $ 280,306 for
the three month period ended June 30, 2004. The increase is primarily the result
of an increase in payroll costs of $ 192,114 as the Company added employees in
conjunction with its Research and Development certification programs, sales
efforts, as well as the result of higher wages paid. An increase of $ 77,021
from investor relations and warrant amortization interest, as it related to the
issuance of the convertible debentures in September 2004. An increase of $ 7,438
related to travel and general costs as the company continues it's planned
expansion of two new facilities and an increase of $ 166,521 due to higher rent,
setup and utility costs for the new facility in Montgomeryville PA.,
non-employee related engineering development costs supporting new research and
development programs and the increase general and administrative expenses to
further support organic growth. As a percentage of revenue, marketing, office
and general expenses increased to 85.7 percent for the three month period ended
June 30, 2005, compared to 65.1 percent for the three month period ended June
30, 2004.
Officer's compensation and director's fees for the three month period ended June
30, 2005 increased by $2,981, or 3.1 percent, to $100,000 from $97,019 for the
three month period ended June 30, 2004. As a percentage of revenue, officer's
compensation and director's fees decreased to 11.8 percent for the three month
period ended June 30, 2005, compared to 22.5 percent for the three month period
ended June 30, 2004.
Consulting and professional fees for the three month period ended June 30, 2005
increased by $ 29,367, to $ 110,754 from $ 81,387 for the three month period
ended June 30, 2004. The increase is due in part to consulting fees related to
the development and implementation of the Companies two new facilities currently
underway. As a percentage of revenue, consulting and professional fees decreased
to 13.1 percent for the three month period ended June 30, 2005, compared to 18.9
percent for the three month period ended June 30, 2004.
Interest expense on long-term debt was $61,000 for the three month period ended
June 30, 2005 as opposed to nil for the three month period ended June 30, 2004.
In September 2004, the Company issued $6.1 million of convertible debentures in
which the basis of conversion into the Company's common stock is $0.50 per
share, which includes warrants to purchase an additional 3.05 million shares of
common stock at $1.00 per share which subsequently have been adjusted to $0.85
effective April 21, 2005. The debentures are for a term of three (3) years and
earn interest at the rate of 4%.
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COMPARISON OF SIX MONTH PERIOD ENDED JUNE 30, 2005 TO SIX MONTH PERIOD ENDED
JUNE 30, 2004
RESULTS OF OPERATIONS
Revenues for the six month period ended June 30, 2005 increased by $ 384,648, or
41.5 percent, to $ 1,310,826 from $ 926,178 for the six month period ended June
30, 2004. Factors that favorably impacted revenue during the six months ended
June 30, 2005 included a large order from one of the Company's customers for
diesel substrates as well as an increase for the company's diesel finished
converter products.
Cost of sales for the six month period ended June 30, 2005 increased by
$219,305, or 41.8 percent, to $ 744,151 from $ 524,846 for the six month period
ended June 30, 2004. Cost of sales as a percentage of revenues for the six month
period ended June 30, 2005 was 56.8 percent, which is in line compared to 56.7
percent for the six month period ended June 30, 2004. The gross margin for the
six month period ended June 30, 2005 was 43.2 percent as compared to a gross
margin of 43.3 percent for the six month period ended June 30, 2004.
Marketing, office and general expenses for the six month period ended June 30,
2005 increased by $ 767,615, or 139.5 percent, to $ 1,317,792 from $ 550,177 for
the six month period ended June 30, 2004. The increase is primarily the result
of an increase in payroll costs of $ 282,364 as the Company added employees in
conjunction with its Research and Development certification programs, sales
efforts, as well as the result of higher wages paid. An increase of $ 138,752
from investor relations and warrant amortization interest, as it related to the
issuance of the convertible debentures in September 2004. An increase of $42,600
related to travel and general costs as the company continues it's planned
expansion of two new facilities and an increase of $ 303,899 due to higher rent
and utility costs for the new facility in Montgomeryville PA., non-employee
related engineering development costs supporting new research and development
programs and the increase general and administrative expenses to further support
organic growth. As a percentage of revenue, marketing, office and general
expenses increased to 100.5 percent for the six month period ended June 30,
2005, compared to 59.4 percent for the six month period ended June 30, 2004.
Officer's compensation and director's fees for the six month period ended June
30, 2005 decreased by $ 53,846, or 23.6 percent, to $ 174,423 from $ 228,269 for
the six month period ended June 30, 2004. As a percentage of revenue, officer's
compensation and director's fees decreased to 13.3 percent for the six month
period ended June 30, 2005, compared to 24.6 percent for the six month period
ended June 30, 2004.The decrease was due to a change in management.
Consulting and professional fees for the six month period ended June 30, 2005
increased by $ 62,437, or 37.7 percent, to $ 227,894 from $ 165,457 for the six
month period ended June 30, 2004. The increase is due in part to consulting fees
related to the development and implementation of the Companies two new
facilities currently underway. As a percentage of revenue, consulting and
professional fees decreased to 17.4 percent for the six month period ended June
30, 2005, compared to 17.9 percent for the six month period ended June 30, 2004.
Interest expense on long-term debt was $ 122,000 for the six month period ended
June 30, 2005 as opposed to nil for the six month period ended June 30, 2004. In
September 2004, the Company issued $6.1 million of convertible debentures in
which the basis of conversion into the Company's common stock is $0.50 per
share, which includes warrants to purchase an additional 3.05 million shares of
common stock exercisable at $1.00 per share which subsequently have been
adjusted to an exercise price of $0.85 a share effective April 21, 2005. The
debentures are for a term of three (3) years and earn interest at the rate of
4%.
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LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of operating capital have been the proceeds of our various
financing transactions. As of June 30, 2005, the Company had cash and cash
equivalents of $ 3,834,004.
Net Cash used in operating activities for the six month period ended June 30,
2005 amounted to $ 1,043,258 which was mainly attributable to the loss, net of
depreciation, amortization, amortization of the fair value of the debenture
warrant of $ 1,144,034. As well as an increase in operating assets and
liabilities of $ 100,776 which was primarily due to an increase of inventory as
the company begins to position itself for ongoing manufacturing , offset by an
increase in accounts payable and accrued liabilities, primarily due to accounts
payable attributed to planned expansions at its manufacturing facilities and
precious metals purchases and accrued debenture interest of $ 194,364.
Net Cash used in investing activities was $ 1,755,751 for the six month period
ended June 30, 2005 as compared to $ 1,246 for the six month period ended June
30, 2004. The capital expenditures in the first half of 2005 were primarily
dedicated to the purchase of equipment and leaseholds for the Company's research
and development facilities located in Montgomery Township, Pennsylvania, and the
manufacturing facility in Concord Ontario, Canada.
Net cash provided in financing activities totaled $ 2,000,000 for the six month
period ended June 30, 2005 as compared to $ 225,107 for the six month period
ended June 30, 2004. On April 21, 2005, the Company closed an initial traunche
of a private placement offering. Pursuant to a subscription agreement with one
accredited investor, the Company received $2 million and issued 2,352,941 shares
of common stock; three year warrants to purchase 1,300,000 shares of common
stock at $0.90 per share; three year warrants to purchase 200,000 shares of
common stock at $2.00 per share; and three year warrants to purchase 200,000
shares of common stock at $3.00 per share pursuant to Regulation D of the
Securities Act of 1933, as amended. Effective April 21, 2005, in conjunction
with the offering, the Company adjusted the exercise price of 3,050,000 three
year warrants previously issued to nine (9) accredited investors including AB
Odnia an entity affiliated with Bengt Odner a director of the Company from $1.00
per share to $0.85 per share in accordance with the terms of the warrants
previously issued by the Company September 15, 2004.
Effective July 5, 2005, the Company completed a second traunche of a private
placement offering. Pursuant to subscription agreements with three accredited
investors, the Company received an aggregate of $1,850,000 and issued 2,176,470
shares of common stock; three year warrants to purchase 1,202,500 shares of
common stock at $0.90 per share; three year warrants to purchase 185,000 shares
of common stock at $2.00 per share; and three year warrants to purchase 185,000
shares of common stock at $3.00 per share pursuant to Regulation D of the
Securities Act of 1933, as amended. In connection with the offering, the Company
entered into registration rights agreements with the investors and agreed to use
its best efforts to file a registration statement for the resale of the common
stock and the shares of common stock issuable upon exercise of the warrants
within one hundred and twenty (120) days of the date of the agreement.
-6-
The Company intends to use the proceeds from these placements for due diligence
and investigating compliance issues for potential listing of the Company's
securities on new exchanges and for general corporate purposes.
ESW's principal source of liquidity is cash provided by financing activities.
ESW's principal use of liquidity will be to finance capital expenditures and to
provide working capital availability. ESW expects that total capital
expenditures for 2005 will be approximately $2.7 million. These capital
expenditures will be used primarily for equipment and facility improvements.
These capital expenditures and our intent to capitalize on an anticipated
increase in demand for our products are the steps that we are taking to try to
become profitable and generate positive cash flow. However, there can be no
assurances that these steps will be completed or that we will become profitable.
Based on ESW's current operating plan, management believes cash at June 30, 2005
is sufficient to meet operating needs for at least the next twelve months.
Should we not become profitable before this money is expensed, we will need to
continue to finance our operations through other capital financings. We continue
to seek, equity financing and/or debt financing in the form of private
placements at favorable terms, or the exercise of currently outstanding options
or warrants that would provide additional capital in order to make available all
opportunities and keep our options flexible. However, such additional financing
may not be available to us, when and if needed, on acceptable terms or at all.
We intend to retain any future earnings to retire debt, finance the expansion of
our business and any necessary capital expenditures, and for general corporate
purposes.
ESW's operating profitability requires that we increase our sales and lower our
overall cost to manufacture our products and improve both sales and
administrative productivity through process, and system enhancements. This will
be largely dependent on the success of our initiatives to streamline our
infrastructure and drive our operational efficiencies across our company. Our
failure to successfully implement these initiatives, or the failure of such
initiatives to result in improved profit margins, could have a material adverse
effect on our liquidity, financial position, and results of operations.
We expect an increase in consulting and audit fees related to the impact of our
Sarbanes-Oxley internal control certification efforts, with which we are
required to be in compliance by December 31, 2006.
In December 2004, the Financial Accounting Standards Board (the "FASB") issued
its final standard on accounting for share-based payments, SFAS 123R (Revised
2004), "Share-Based Payments" ("SFAS 123R"). SFAS 123R requires companies to
expense the fair value of employee stock options and other similar awards,
effective for interim and annual periods beginning on or after December 15,
2005. Accordingly, we have not yet determined the impact on our consolidated
financial statements of adopting SFAS 123R.
-7-
DEBT STRUCTURE
In September 2004, the Company issued $6.1 million of convertible debentures in
which the basis of conversion into the Company's common stock is $0.50 per
share, which includes warrants to purchase an additional 3.05 million shares of
common stock at $1.00 per share which was subsequently adjusted to $0.85 on
April 21, 2005, in accordance with the terms of the warrants previously issued
by the Company September 15, 2004. The debentures are for a term of three (3)
years and earn interest at the rate of 4% per annum. The Company has computed
the fair-value of the warrants utilizing the Black-Scholes method and
apportioned the fair value of the debt and warrants accordingly. As a result,
the debentures were discounted by $528,000, which is being amortized over the
three (3) year life of the debentures. The effective yield on the debenture is
4.38%.
The principal of this Debenture is payable in U.S. currency or, at the option of
the Company, in shares of Common Stock, par value $0.001 per share (the "Common
Stock"), at $.50 per share. At the Company's option, interest on the Debenture
will be payable in cash or shares of Common Stock under a conversion formulas as
provided in the debenture.
ESW's ability to service its indebtedness in cash will depend on its future
performance, which will be affected by prevailing economic conditions and
financial, business, regulatory and other factors. Certain of these factors are
beyond ESW's control. ESW believes that, based upon its current business plan,
it will be able to meet its debt service obligations when due. Significant
assumptions underlie this belief, including, among other things, that ESW will
be successful in implementing its business strategy and that there will be no
material adverse developments in its business, liquidity or capital
requirements. If ESW cannot generate sufficient cash flow from operations to
service its indebtedness and to meet its other obligations and commitments, ESW
might be required to refinance its debt or to dispose of assets to obtain funds
for such purpose. There is no assurance that refinancing or asset dispositions
could be effected on a timely basis or on satisfactory terms, if at all, or
raise funds through asset sales, sales of equity or otherwise, its ability to
pay principal of, and interest on, its debt would be impaired. On such
circumstance, ESW would have to issue shares of its Common stock as repayment of
this debt which would be of a dilutive nature to its present shareholders.
-8-
NEW ACCOUNTING PRONOUNCEMENTS.
In May 2005, the FASB issued SFAS 154, which replaces APB Opinion No. 20,
"Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in
Interim Financial Statements." The statement applies to all voluntary changes in
accounting principle and changes resulting from adoption of a new accounting
pronouncement that does not specify transition requirements. SFAS 154 requires
retrospective application to prior periods' financial statements for changes in
accounting principle unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 also
requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. Indirect effects of a change in
accounting principle should be recognized in the period of the accounting
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005 with early implementation
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date this statement is issued. SFAS 154 is effective for us
beginning January 1, 2006 and will be applied when applicable.
In December 2004, FASB Statement No.123 (revised), "Share-based Payment" was
issued. This Statement requires an entity to recognize the grant-date fair value
of stock options and other equity-based compensation issued to employees in the
income statement. FASB 123 (revised) eliminates the ability to account for
share-based compensation transactions using the intrinsic value method in APB
Opinion No.25. The Company will as required adopt as of the first interim or
annual reporting period that begins after December 15th, 2005, FASB Statement
123, "Accounting for Stock-based Compensation" as amended by FASB Statement 148,
"Accounting for Stock-based Compensation Transition and Disclosure". The
adoption of the provisions of SFAS No.148 did not have a material impact on the
Company's consolidated financial statements, and the Company modified its
disclosures in its quarterly reports commencing with the quarter ended March,
2003 as provided for in that standard.
No new accounting pronouncements have been issued during the three-month period
ended June 30, 2005 that would have a material impact on the Company's financial
statements. The Company has reviewed the status of its accounting pronouncements
and believes there are no significant changes from that disclosed in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2004,
except as provided in this Form 10-QSB.
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FOREIGN CURRENCY TRANSACTIONS
None of ESW's revenues during the six month period ended June 30, 2005 were
derived from manufacturing operations in Canada. The results of operations and
the financial position of ESW's operations in Canada is principally measured in
Canadian currency and translated into U.S. dollars. The future effects of
foreign currency fluctuations between U.S. dollars and Canadian dollars will be
somewhat mitigated by the fact that expenses will be generally incurred in the
same currency in which revenues will be generated. The future reported income of
our Canadian subsidiary will be higher or lower depending on a weakening or
strengthening of the U.S. dollar against the Canadian currency.
A portion of ESW's assets at June 30, 2005 are based in its foreign operation
and are translated into U.S. dollars at foreign currency exchange rates in
effect as of the end of each period, Accordingly, ESW's consolidated
stockholders' investment will fluctuate depending upon the weakening or
strengthening of the U.S. dollar against the Canadian currency.
ESW's strategy for management of currency risk relies primarily upon conducting
its operations in the countries' respective currency and ESW may, from time to
time, engage in hedging intended to reduce ESW's exposure to currency
fluctuations. At June 30, 2005, ESW had no outstanding forward exchange
contracts.
ITEM 3. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURE
Under the supervision of and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures within 90 days of the filing date of this 10QSB report. Based on
their evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective in timely
alerting to material information relating to the Company required to be included
in the Company's periodic SEC filings. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
Disclosure controls and procedures are the controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the report that we file under the
Exchange Act is accumulated and communicated to our management, as appropriate,
to allow timely decisions regarding required disclosure.
(b) CHANGES IN INTERNAL CONTROLS
Not applicable.
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PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 23, 2005 the Company held its 2005 annual meeting of shareholders. As of
the May 20, 2005 record date, holders of a total of 52,577,784 shares of common
stock were eligible to vote on the proposals presented at the annual meeting. Of
the shares eligible to vote, a total of 43,488,203 shares were present at the
meeting in person or by proxy. Five (5) proposals were presented to shareholders
at the annual meeting, with all items receiving sufficient votes except for the
proposal to amend the Articles of Incorporation to authorize a class of
preferred stock. The votes cast for the agenda items presented to shareholders
at the annual meeting are set forth below:
o Three (3) incumbent directors, Messrs. Amersey, Johnson and Odner
stood for re-election and two (2) new director nominees, Messrs.
Kolaric and Schwartz stood for election. The votes cast for each
director nominee is as follows:
o Mr. Nitin Amersey - 43,364,203 shares voted in favor and 124,000
shares withheld.
o Mr. David Johnson - 43,414,703 shares voted in favor and 73,500
shares withheld.
o Mr. Stan Kolaric - 43,316,130 shares voted in favor and 92,080
shares withheld.
o Mr. Bengt Odner - 43,298,883 shares voted in favor and 189,320
shares withheld.
o Mr. Joey Schwartz - 43,137,623 shares voted in favor and 150,580
shares withheld.
o The proposal to ratify Mintz & Partners, LLP, as the Company's
independent public accountants for the 2005 fiscal year received the
affirmative vote of 43,358,273 shares, 113,880 votes were cast against
the proposal and there were 16,050 abstentions.
o The proposal to amend the Company's 2002 Stock Option Plan to increase
the underlying shares available for issuance from 1,000,000 to
5,000,000 shares of common stock received the affirmative vote of
23,595,243 shares, 1,254,241 shares were voted in opposition and there
were 18,638,719 abstentions.
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o The proposal to amend the Company's Articles of Incorporation to
increase the number of authorized shares of Common Stock from
100,000,000 to 125,000,000 shares received the affirmative vote of
40,240,661 shares, 3,152,742 shares were voted in opposition and there
were 94,800 abstentions.
o The proposal to amend the Company's Articles of Incorporation to
authorize a class of preferred stock received the affirmative vote of
21,127,468 shares, 3,134,971 shares were voted in opposition and there
were 19,225,764 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
3.3 Articles of Incorporation of the Company, as amended July 20, 2005.
4.3 Form of three (3) year Warrant Certificate exercisable at $0.90 per
share.
4.4 Form of three (3) year Warrant Certificate exercisable at $2.00 per
share.
4.5 Form of three (3) year Warrant Certificate exercisable at $3.00 per
share.
10.20 Form of Subscription Agreement for Common Stock at $0.85 and Warrants
exercisable at $0.90, $2.00 and $3.00 per share.
10.21 Form of Registration rights Agreement.
31.1 Certification of Chief Executive Officer and President pursuant to the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, pursuant to the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K:
A current Report on Form 8-K was filed on April 27, 2005 reporting that the
Company completed the first traunche of a private placement offering.
A current Report on Form 8-K was filed on May 24, 2005 reporting that the
Company appointed two executive officers effective May 23, 2005 and that
effective May 24, 2005 the Company has moved its executive offices to 335 Connie
Crescent, Concord, Ontario, Canada L4K 5R2.
A current Report on Form 8-K was filed on June 28, 2005 reporting that a former
director and executive officer of the Company elected not to stand for
re-election to the Board and effective with the Company's annual meeting of
shareholders on June 23, 2005; retired from the board of directors and resigned
his position as an officer of the Company.
A current Report on Form 8-K was filed on July 11, 2005 reporting that the
Company completed a second traunche of a private placement offering.
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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: August 12, 2005
Concord, Ontario CANADA
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
BY: /S/ DAVID J. JOHNSON
--------------------
DAVID J. JOHNSON
CHIEF EXECUTIVE OFFICER AND PRESIDENT
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