As filed with the Securities and Exchange Commission on May 3, 2006
Registration No. 333-129579
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post Effective Amendment No. 1 to Form SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
(Exact name of registrant as specified in charter)
Florida 3714 98-0346454
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Code) Identification Number)
335 Connie Crescent
Concord , Ontario L4K 5R2 Canada
905-695-4142
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
David Johnson
President and Chief Executive Officer
Environmental Solutions Worldwide, Inc.
335 Connie Crescent
Concord , Ontario L4K 5R2 Canada
905-695-4142
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
JOSEPH A. BARATTA, ESQ.
BARATTA & GOLDSTEIN
597 FIFTH AVENUE
NEW YORK, NEW YORK 10017
(212) 750-9700 (PHONE)
(212) 750-8297 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [x].
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ].
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, as amended, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ].
If delivery of this Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ].
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MAY 3, 2006
Explanatory Note
This Post-Effective Amendment No. 1 to our Registration Statement on Form SB-2
(Registration No. 333-129579) amends our Registration Statement declared
effective by the Securities and Exchange Commission on December 22, 2005 to
include information from our Form 10-KSB, filed with the Commission on April 3,
2006 and our Form 10-KSB/A (No. 1) filed with the Commission on April 27, 2006,
and to update our financial information to include our December 31, 2005
results.
PROSPECTUS
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
39,559,508 Shares of Common Stock
o This Prospectus relates to the resale of our common stock by the
selling security holders of up to 39,559,508 shares of our common
stock of which 13,008,821 shares of common stock have been previously
issued; 2,502,500 shares of common that may be issued upon the
exercise of 2,502,500 warrants issued to certain selling stockholders
with an exercise price of $0.90 per warrant; 385,000 shares of common
stock that may be issued upon the exercise of 385,000 warrants issued
to certain selling stockholders with an exercise price of $2.00 per
warrant; 385,000 shares of common stock that may be issued upon the
exercise of 385,000 warrants issued to certain selling stockholders
with an exercise price of $3.00 per warrant; 12,200,000 shares of
common stock that may be issued upon the conversion of $6,100,000 of
debentures previously issued to certain selling security holders; up
to 1,045,713 shares of our common stock issued for interest earned on
debentures, as well as a good faith estimate of additional shares that
may be issued for interest earned on the debentures; 3,050,000 shares
of common stock that may be issued upon the exercise of 3,050,000
warrants previously issued to certain selling stockholders with an
exercise price of $0.85 per warrant; 3,215,807 shares of common that
were issued upon the exercise of 6,732,356 warrants issued to certain
selling stockholders; 750,000 shares of common stock that were issued
upon the exercise of 750,000 warrants issued to certain selling
stockholders with an exercise price of $0.17 per warrant; and
3,016,667 shares of common that may be issued upon the exercise of
3,016,667 options issued to certain officers, directors, employees and
consultants with exercise prices ranging from of $0.45 to $0.66 per
option.
o We will not receive any proceeds from the sale of these shares as we
previously received payment from selling stockholders when they
purchased their shares, debentures and warrants from us. We may
however receive proceeds from the exercise of warrants and options
issued to the selling stockholders and those proceeds will be used for
general corporate purposes.
o Certain selling stockholders may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection
with their sales.
o Our common stock is traded on the Over-the-Counter Bulletin Board
under the symbol "ESWW". The last reported sales price for our common
stock on May 1, 2006 was $0.64 per share.
Each of the selling stockholders may offer the shares from time to time and in
any of several different ways, including:
o through brokers or other agents;
o to underwriters or dealers on a "firm commitment" or "best efforts"
basis;
o directly to one or more purchasers; or by a combination of these
methods of sale; and
o in any other lawful manner.
All of the common shares, debentures and warrants were previously issued in
private placement transactions. Our common stock is registered under Section
12(g) of the Securities Exchange Act of 1934, and is listed on the Over the
Counter Bulletin Board Market under the symbol "ESWW".
See "Plan of Distribution" for a further description of how generally selling
security holders may dispose of the shares covered by this prospectus.
The selling stockholders may sell their shares at whatever prices are current at
the time of a sale or at other prices to which they agree.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 3.
We may amend or supplement this Prospectus from time to time by filing
amendments or supplements as required. You should read the entire Prospectus and
any amendments or supplements carefully before you make your investment
decision.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is ____________, 2006
TABLE OF CONTENTS
Page
SUMMARY INFORMATION 1
FORWARD-LOOKING STATEMENTS 1
RISK FACTORS 3
USE OF PROCEEDS 10
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 10
DESCRITPITON OF BUSINESS 11
DESCRIPTION OF PROPERTY 19
MANAGEMENT'S DISCUSSION AND ANALYSIS 19
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 32
EXECUTIVE COMPENSATION 33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 38
DESCRIPTION OF SECURITIES 38
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES 38
PLAN OF DISTRIBUTION 38
SELLING STOCKHOLDERS 40
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 44
LEGAL MATTERS 45
EXPERTS 45
WHERE YOU CAN FIND MORE INFORMATION 45
INDEX TO FINANCIAL STATEMENTS 46
EXHIBITS 49
You should rely only on the information contained in this document or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document. However, in the event of a material change, this
prospectus will be amended or supplemented accordingly.
SUMMARY INFORMATION
The following summary is qualified in its entirety by the more detailed
information, financial statements and other data appearing elsewhere in this
Prospectus. At various places in this Prospectus, we may make reference to the
"company" or "us" or "we." When we use those terms, unless the context otherwise
requires, we mean Environmental Solutions Worldwide, Inc. and its subsidiaries.
FORWARD LOOKING STATEMENTS
Except for historical information, the information contained in this prospectus
and in our reports filed with the SEC are "forward looking" statements about our
expected future business and financial performance. These statements involve
known and unknown risks, including, among others, risks resulting from economic
and market conditions, the regulatory environment in which we operate, pricing
pressures, accurately forecasting operating and capital expenditures and trial
costs, competitive activities, uncertainties of litigation and other business
conditions, and are subject to uncertainties and assumptions contained elsewhere
in this prospectus. We base our forward-looking statements on information
currently available to us, and , in accordance with the requirements of federal
securities laws, we will disclose to you material developments affecting such
statements. Our actual operating results and financial performance may prove to
be very different from what we have predicted as of the date of this prospectus
due to certain risks and uncertainties. The risks are described in the section
entitled "Risk Factors" beginning on page 3 and specifically address factors
that may affect our future operating results and financial performance.
About Environmental Solutions Worldwide, Inc.
Environmental Solutions Worldwide, Inc. ("ESW"), was formed in 1987 in the State
of Florida as BBC Stock Market, Inc. ("BBC") as a development stage enterprise.
ESW did not engage in any significant business until January 1999 when it
acquired all the issued and outstanding shares of BBL Technologies Inc., a
private company based in Ontario, Canada ("BBL"). BBC subsequently changed its
name to Environmental Solutions Worldwide, Inc. From 1999 to 2001, ESW was a
development stage company based in Ontario Canada. In 2005, ESW relocated its
principal executive offices and commenced the preparation for manufacturing at
its facility located at 335 Connie Crescent, Concord, Ontario L4K 5R2 Canada
while maintaining manufacturing and testing facilities in Telford, Pennsylvania
and Montgomeryville, Pennsylvania. ESW's telephone number is (905)695-4142.
ESW, through its wholly owned subsidiaries, is the assignee of Canadian and U.S.
patents and/or patent pending applications covering catalytic converter
technology for automotive and non-automotive uses. ESW's subsidiaries also are
the assignee of both Canadian and U. S. patents on spark plug/fuel injector
technology for automotive use.
ESW's performance and growth is directly related to certain trends, within the
global market, for the need to reduce emissions emanating from internal
combustion engines. This need is directly related to the global response and
efforts by world governments, at all levels, to implement the legislative
requirements upon sellers of internal combustion engines, to comply with the
more stringent requirements, they demand, for reducing emissions being emitted
from these engines into our environment.
ESW's primary business objective is to capitalize on the growing global
requirement of reducing emissions, by offering catalyst technology solutions to
the market. We intend to execute on the following key strategies in order to
leverage our strengths and position ourselves for long-term growth and success:
o Focusing on our core business, ESW intends to continue to strengthen
its growth strategy by seeking complimentary partnerships and
investments that provide a competitive advantage and growth
opportunities for its core businesses.
o Investing in new product and process technologies, ESW intends to
accelerate its investments in new product and manufacturing process
technologies to strengthen and differentiate its product portfolio.
ESW also intends to continue its efforts to develop innovative
products and manufacturing processes to serve its customers better
globally and improve its product mix and profit margins.
o Maximizing production capabilities, ESW is currently implementing
strategic initiatives designed to improve product quality while
reducing manufacturing costs. In addition, ESW periodically evaluates
opportunities to maximize its facility and asset utilization. ESW also
evaluates on opportunities to expand its manufacturing capabilities in
low-cost regions of the world, which are projected to develop into
future domestic sales to emerging markets.
o ESW intends to focus on strategic partnerships and alliances that do
not require significant upfront cash investments to pursue new
business opportunities in other environmental products and sectors.
o ESW will continue to invest in development opportunities across the
Company and strive to achieve the best practices in organizational
vitality, diversity, and sales force strength.
-1-
About the Offering
We are registering the resale of our common stock by certain selling
stockholders. The selling stockholders and the specific number of shares that
they each may resell through this prospectus are listed on page 40. The shares
offered for resale by this prospectus include the following:
o 13,008,821 shares of common stock that is currently issued and
outstanding.
o a maximum of 3,272,500 shares of common stock issuable upon exercise
of warrants previously issued in connection with our spring 2005 unit
private placement;
o a maximum of 12,200,000 shares of common stock issuable upon
conversion of debentures previously issued in connection with our
September 2004 private placement;
o a maximum of 1,045,713 shares of common stock of which 348,571 shares
have been issued for interest earned on debentures, as well as a good
faith estimate of 697,142 additional shares that may be issued for
interest earned on the debentures.
o a maximum of 3,050,000 shares of common stock issuable upon exercise
of warrants previously issued in connection with our September 2004
private placement;
o 3,215,807 shares of common stock that were issued upon the exercise
of warrants previously issued in connection with our 2002 unit private
placement;
o 750,000 shares of common stock that were issued upon the exercise of
warrants previously issued in connection with our 2000 unit private
placement; and
o a maximum of 3,016,667 shares of common stock issuable upon exercise
of options previously have issued to officers, directors, employees
and consultants.
Information on Outstanding Shares
The number of shares of our common stock outstanding before and after this
offering is set forth below:
o Common stock outstanding before this offering: 59,265,938 shares
o Common stock outstanding after this offering, assuming the exercise or
conversion of all outstanding derivative securities which underlying
shares are subject to this registration, would be 80,805,105 shares.
-2-
RISK FACTORS
The shares of our common stock being offered for sale are highly speculative and
involve a high degree of risk. Only those persons able to lose their entire
investment should purchase these shares. Before purchasing any of these shares,
you should carefully consider the following factors relating to our business and
prospects. You should also understand that this prospectus contains
"forward-looking statements." These statements appear throughout this prospectus
and include statements as to our intent, belief or current expectations or
projections with respect to our future operations, performance or position. Such
forward-looking statements are not guarantees of future events and involve risks
and uncertainties. Actual events and results, including the results of our
operations, could differ materially from those anticipated by such
forward-looking statements as a result of various factors, including those set
forth below and elsewhere in this prospectus.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING, WE MAY HAVE TO SIGNIFICANTLY
CURTAIL THE SCOPE OF OUR OPERATIONS AND ALTER OUR BUSINESS MODEL.
Management believes that profitable operations are essential for ESW to become
viable. However, our sales and revenues continue to be unpredictable. In the
event that profitable operations are not achieved, our present financial
resources should allow us to continue operations through at least the next six
months. Should we receive a large order (defined by management as one in which
monthly production and deliveries would exceed $1 million), we believe that we
would need to either negotiate extremely favorable payment terms providing for
at least some advance payment or we will need to obtain either debt or equity
financing to allow us to purchase sufficient raw materials and meet our working
capital needs. If additional financing is required and not available when
required or is not available on acceptable terms, we may be unable to continue
our operations at current levels or satisfy the requirements necessary to fill a
large order. We are engaged in seeking additional financing in a variety of
venues and formats and we continue to impose actions designed to minimize our
operating loses. We would consider strategic opportunities, including investment
in us, a merger or other acceptable transactions, to sustain our operations.
There can be no assurances that additional capital will be available to us on
acceptable terms, or at all. If we are unable to obtain additional financing or
to arrange a suitable strategic opportunity, our business may be placed in
significant financial jeopardy.
OUR FORMER INDEPENDENT PUBLIC ACCOUNTANTS, RESIGNED EFFECTIVE OCTOBER 20, 2004
WHICH MAY LIMIT YOUR ABILITY TO SEEK RECOURSE AGAINST THEM IN THE EVENT OF A
CLAIM.
On October 20, 2004, our former public accountants informed us that they were
resigning as our independent registered public accounting firm as they were no
longer able to service our needs as a public company. The resignation was not
sought or recommended by our audit committee or our Board of Directors. We
subsequently learned that our prior auditors discontinued accounting practice
and no longer is an active operating entity engaged in the practice of public
accounting and auditing work. Due to our prior auditor's resignation and
discontinuation of public practice, investors and shareholders of our common
stock may have limited recourse against our prior auditor in the event of any
claims associated with prior work performed on behalf of the Company.
-3-
WE HAVE INCURRED LOSSES IN THE PAST AND WE EXPECT TO INCUR LOSSES IN THE FUTURE.
We have incurred losses in each year since our inception. Our net loss for the
fiscal year ended December 31, 2005 was $3,347,227 and our accumulated deficit
as of December 31, 2005 was $14,908,509. As our sales and revenue continue to be
unpredictable, we expect to experience additional periods with operating losses.
THE PRICE OF OUR SHARES MAY BE ADVERSELY AFFECTED BY THE PUBLIC SALE OF A
SIGNIFICANT NUMBER OF THE SHARES ELIGIBLE FOR FUTURE SALE.
Of the 39,559,508 shares included in this post-effective amendment to our SB-2
registration statement Reg No.333-129579, declared effective by the SEC on
December 22, 2005, approximately 13.3 million shares may under certain
circumstances be eligible for resale pursuant to Rule 144. Sales of a large
amount of our common stock in the public market could materially adversely
affect the market price of our common stock. Such sales may also inhibit our
ability to obtain future equity or equity-related financing on acceptable terms.
At our Annual Meeting of Stockholders on June 23, 2005, our stockholders
approved an increase in the number of authorized shares of the common stock from
100,000,000 to 125,000,000. The issuance of additional shares could have a
significant adverse effect on the trading price of our common stock.
WE HAVE PREVIOUSLY ISSUED CERTAIN WARRANTS THAT CONTAIN PRICE ADJUSTMENT
PROTECTION THAT MAY HAVE AN ADVERSE EFFECT ON THE TRADING PRICE OF OUR COMMON
STOCK.
We have previously issued warrants that if exercised would result in 6,322,500
shares of our common stock being issued. These warrants have various price
protections that allow for reduction in the exercise price in the event we
undertake an offering with more favorable terms.
THE SALE OF MATERIAL AMOUNTS OF OUR COMMON STOCK TO FINANCE THE CONTINUING
OPERATIONS OF THE COMPANY MAY SUBSTANTIALITY DILUTE OUR COMMON STOCK AND PLACE
SIGNIFICANT DOWNWARD PRESSURE ON ITS TRADING PRICE.
Our need to raise funds through the sale of equity may result in the issuance of
a significant number of shares of common stock in relation to the number of
shares currently outstanding. In the past, we have raised money through the sale
of shares of our common stock and derivative securities at a discount to the
current market price of our common stock. These arrangements have taken various
forms including Private Investments in Public Equities or "PIPE" transactions.
The perceived risk of dilution may cause our existing stockholders and other
holders to sell their shares of stock, which would contribute to a decrease in
our stock price. In that regard, significant downward pressure on the trading
price of our stock may also cause investors to engage in short sales, which
would further contribute to significant downward pressure on the trading price
of our stock.
-4-
RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK
THE PRICE OF OUR COMMON STOCK HAS BEEN HIGHLY VOLATILE.
Our common stock has traded as low as $0.44 per share and as high as $1.24 per
share in the twelve (12) month ended December 31, 2005 and as high as $0.80 per
share in our current fiscal year. Some of the factors leading to the volatility
include:
o price and volume fluctuation in the stock market at large which do not
relate to our operating performance;
o fluctuation in our operating results;
o concerns about our ability to finance our continuing operations;
o financing arrangements which may require the issuance of a significant
number of shares in relation to the number shares of our common stock
currently outstanding;
o announcements of agreements, technological innovations or new products
which we or our competitors make;
o costs and availability of precious metals used in the production of our
products; and
o fluctuations in market demand and supply of our products.
OUR COMMON STOCK IS CURRENTLY TRADED ON THE OVER-THE-COUNTER-BULLETIN-BOARD AND
AN INVESTOR'S ABILITY TO TRADE OUR COMMON STOCK MAY BE LIMITED BY TRADING
VOLUME.
The trading volume in our common stock has been relatively limited. A
consistently active trading market for our common stock may not continue on the
Over-The-Counter-Bulletin-Board. The average daily trading volume in our common
stock on the Over-The-Counter-Bulletin-Board for the month ended April 28,
2006 was approximately 41,937 shares.
-5-
RISKS RELATED TO OUR BUSINESS
OUR QUARTERLY RESULTS MAY FLUCTUATE DUE TO CERTAIN REGULATORY, MARKETING AND
COMPETITIVE FACTORS OVER WHICH WE HAVE LITTLE OR NO CONTROL.
The factors listed below some of which we cannot control may cause our revenues
and result of operations to fluctuate significantly:
o Actions taken by foreign regulatory bodies relating to the certification
of our products.
o The extent to which our "Clean Cat(R)" and "Quiet Cat(TM)" catalytic
converter products obtain market acceptance.
o The timing and size of customer purchases.
o Customer concerns about the stability of our business which could cause
them to seek alternatives to our product.
WE ARE CURRENTLY DEPENDENT ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF
OUR REVENUES.
While we began commercial sales of our products during the first quarter of
fiscal 2001, we recorded sales from approximately 29 customers in fiscal 2005.
Three of these customers accounted for 50%, 11% and 11%, respectively of our
revenue in fiscal 2005. 26 other customers each accounted for approximately 6%
or less. We intend to establish long-term relationships with our customers and
continue to expand our customer base. While we diligently seek to become less
dependent on any one customer, it is likely that certain contractual
relationships may result in one or more customers contributing to a significant
portion of our revenue in any given year for the foreseeable future. The loss of
one or more of these significant customers may result in a material adverse
effect on our revenues and our ability to become profitable or our ability to
continue our business operations.
WE HAVE LIMITED EXPERIENCE SELLING AND MARKETING OUR PRODUCTS.
Although we have entered into exclusive marketing and distribution agreements
with Fleetguard Emission Solutions, at the current time, we have limited
marketing capability as compared with many of our competitors and we do not have
a large sales, promotion and marketing budget as we are constrained by our lack
of working capital and our ability to raise the necessary cash flow from our
business operations to re-invest in our marketing programs. As a result of our
limited marketing capabilities, we are forced to rely upon customer referrals,
trade publications and a small sales force. Our competitors have direct
advertising and sales promotion programs for their products as well as sales and
marketing personnel that may have a competitive advantage over us in contacting
prospective customers. Our position in the industry is considered minor in
comparison to that of our competitors, and while we continue to develop and
explore new marketing methods and techniques such as, trade show representation
and programs directed toward foreign customers, our ability to compete at the
present time is limited. Our success depends upon the ability to market,
penetrate and expand markets and form alliances with third party international
distributors. However, there can be no assurances that:
-6-
o our direct selling efforts will be effective;
o we will obtain an expanded degree of market acceptance;
o we will be able to successfully form relationships with international
distributors to market our products.
WE DEPEND UPON THE MARKETABILITY OF TWO PRIMARY PRODUCTS - CLEAN CAT(R) AND
QUIET CAT.(TM)
Our Clean Cat(R) and Quiet Cat(TM) catalytic converters are our two primary
products. We may have to cease operations if either of our primary products
fails to achieve market acceptance and/or generates significant revenues.
Additionally, the marketability of our products is dependent upon obtaining
certifications as well as the effectiveness of the product in relation to
various environmental regulations in the various jurisdictions we market and
sell our products.
WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND MARKET NEW PRODUCTS THAT WE PLAN
TO INTRODUCE OR OBTAIN DIRECT OR INDIRECT CERTIFICATION APPROVALS WITH RESPECT
TO OUR PRODUCTS.
We plan to develop other catalytic converter products and technologies. There
are numerous developmental and certification issues that may preclude the
introduction of these products into commercial sale. If we are unable to
demonstrate the feasibility of these products or obtain certifications for our
products from such agencies as the Environmental Protection Agency (EPA), the
Mexico Department of Ecology, or the California Air Resources Board (CARB), we
may have to abandon them or alter our business plan. Such modifications to our
business plan will likely delay achievement of milestones related to revenue
increases and achievement of profitability.
WE FACE CONSTANT CHANGES IN GOVERNMENTAL STANDARDS BY WHICH OUR PRODUCTS ARE
EVALUATED.
We believe that due to the constant focus on the environment and clean air
standards throughout the world, we will be required in the future to adhere to
new and more stringent regulations both domestically and abroad as governmental
agencies seek to improve standards required for certification of products
intended to promote clean air. In the event our products fail to meet these ever
changing standards, some or all of our products may become obsolete.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND LITTLE EXPERIENCE
IN MANUFACTURING OUR PRODUCTS IN COMMERCIAL QUANTITIES.
We may encounter difficulties in ramping up our production of our current and
any future products due to such reasons as:
o lack of working capital necessary to gain market acceptance;
o quality control and assurance;
o raw material supplies;
o shortages of qualified personnel;
o equipment capable of producing large quantities; and
o sufficient manufacturing space.
Any of the foregoing would effect our ability to meet increases in demand should
our products gain market acceptance and reduce growth in our sales revenues.
-7-
WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL ADVANCES BY COMPETITORS.
Competition among companies that provide solutions for pollutant emissions from
diesel, leaded and unleaded engines is intense. Several companies market
products that compete directly with our products. Other companies offer products
that potential customers may consider to be acceptable alternatives to our
products and services. We face direct competition from companies with far
greater financial, technological, manufacturing and personnel resources,
including Corning, NGK and Emitec. Corning and NGK are the two major
manufacturers of ceramic cores, which are integral components in current
catalytic converter production, and Emitec is the major manufacturer of metal
cores. We also face direct competition with companies like Engelhard and Johnson
Matthey, who purchase their substrates from others, and do further processing
with their own formulas and fabrication for direct sale to the market place.
Newly developed products could be more effective and cost efficient than our
current products or those we may develop in the future. Many of our current and
potential future competitors have substantially more engineering, sales and
marketing capabilities, substantially greater financial technological and
personnel resources, and broader product lines than we do. We also face indirect
competition in the form of alternative fuel consumption vehicles such as those
using methanol, hydrogen, ethanol and electricity.
WE CLAIM CERTAIN PROPRIETARY RIGHTS IN CONNECTION WITH THE DESIGN AND
MANUFACTURE OF OUR PRODUCTS.
The protections provided by patents and those sought by pending patents are
important to our business, although we believe that no individual right is
material to our business at the present time. There can be no assurance that
these patents, combined with pending patent applications or existing or future
trade secret protections that we seek will survive legal challenge, or provide
meaningful levels of protection. Additionally, there can be no assurances when
these patents or pending patents may be assigned to ESW directly. The Canadian
patent only affords protection against the manufacture, use or sale of the
patented technology within Canada. The US patent application for our diesel
catalytic converter, Clean Cat(R) was filed on October 31, 2000 and has not been
challenged as of this date. We do not presently have any worldwide patent
protection nor do we have any immediate plans to file for protection in any
foreign countries other than Canada. There can be no assurances that any patents
we may have or have applied for or any agreements we have in place or enter into
will protect our technology and or prevent competitors from employing the use of
our design and production information.
ATTRACTION AND RETENTION OF KEY PERSONNEL.
Our future success depends in significant part on the continued services of key
technical sales and senior management personnel. The loss of any of our
executive officers or other key employees could have materially adverse effects
on our business, results of operations and financial condition. Our success
depends upon our continued ability to attract and attain highly qualified
technical sales and managerial personnel. There can be no assurances that we can
attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.
WE ARE DEPENDANT UPON KEY SUPPLIERS FOR CERTAIN PRECIOUS METALS WHICH ARE A
NECESSARY COMPONENT OF OUR PRODUCTS.
An element of the production process of our products includes certain raw
materials including:
o stainless steel;
o steel tubing;
o precious metals; and
o components.
An extended interruption of the supply of precious metals necessary for the
production of our products could have an adverse effect on us. Further, a
substantial price increase of the raw materials that are components of our
products could also have an adverse effect on our business. We currently rely on
third party vendors to provide certain components of our products. We currently
do not have any fixed commitments from suppliers to provide supplies.
-8-
WE DO NOT HAVE A SIGNIFICANT LEVEL OF PRODUCT LIABILITY INSURANCE DUE TO ITS
HIGH COST.
We develop, market and sell catalytic converter products. Any failure of our
products may result in a claim against us. Due to the high cost of product
liability insurance, we do not maintain significant amounts of insurance to
protect against claims associated with use of our product. Any claim against us,
whether or not successful, may result in our expenditure of substantial funds
and litigation. Further, any claims may require management's time and use of our
resources and may have a materially adverse impact on us.
-9-
USE OF PROCEEDS
We will not realize any proceeds from the sale of the common stock by the
selling stockholders; rather, the selling stockholders will receive those
proceeds directly. However, we will receive cash upon the exercise of warrants
and options by selling stockholders. We intend to use the proceeds received from
the exercise of the warrants and options, if any, for general working capital
purposes including the development of new products and services.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted under the symbol "ESWW.OB" on the OTC Bulletin Board
operated by the National Association of Securities Dealers, Inc. Our stock is
considered penny stock. Penny stock is defined as any equity security not traded
on a national stock exchange or quoted on NASDAQ and that has a market price of
less than $5.00 per share. Additional disclosure is required in connection with
any trades involving a stock defined as a penny stock (subject to certain
exceptions); including the delivery, prior to any such transaction, of a
disclosure schedule explaining the penny stock market and the associated risks.
Broker-dealers who recommend such low-priced securities to persons other than
established customers and accredited investors satisfy special sales practice
requirements, including a requirement that they make an individualized written
suitability determination for the purchase and receive the purchaser's written
consent prior to the transaction.
The following table sets forth the high and low bid prices for our common stock
for the fiscal years ended December 31, 2005 and 2004 as well as the quarter
indicated, as reported by Bloomberg Reporting Service. Such market quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission and
may not necessarily represent actual transactions:
Fiscal 2006 HIGH LOW
1ST QUARTER $0.80 $0.55
Fiscal 2005 HIGH LOW
1ST QUARTER $1.24 $0.44
2ND QUARTER 1.01 0.59
3RD QUARTER 0.85 0.63
4TH QUARTER 0.87 0.54
FISCAL 2004 HIGH LOW
1ST QUARTER $0.62 $0.45
2ND QUARTER 0.48 0.21
3RD QUARTER 0.66 0.25
4TH QUARTER 0.58 0.38
-10-
At April 28, 2006, there were approximately 285 holders of record of our
common stock. We estimate that there are approximately 4,500 additional
stockholders with stock held in street name. On April 28, 2006, there were
59,265,938 shares of common stock outstanding.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business. As a result, we do not anticipate paying any cash dividends in the
foreseeable future.
DESCRIPTION OF BUSINESS
Environmental Solutions Worldwide, Inc. ("ESW"), was formed in 1987 in the State
of Florida as BBC Stock Market, Inc. ("BBC") as a development stage enterprise.
ESW did not engage in any significant business until January 1999 when it
acquired all the issued and outstanding shares of BBL Technologies Inc., a
private company based in Ontario, Canada ("BBL"). BBC subsequently changed its
name to Environmental Solutions Worldwide, Inc. From 1999 to 2001, ESW was a
development stage company based in Ontario Canada. In 2002, ESW relocated its
executive offices to its manufacturing facility located at 132 Penn Avenue,
Telford, Pennsylvania 18969. In 2005, ESW relocated its principal executive
offices and a manufacturing facility located at 335 Connie Crescent, Concord,
Ontario L4K 5R2 Canada while maintaining manufacturing and testing facilities in
Montgomeryville, Pennsylvania. ESW's telephone number is (905) 695-4142.
ESW is engaged through its wholly owned subsidiaries in the design, development,
manufacture and sale of environmental technologies currently focused on the
international automotive and transportation industries. ESW currently
manufactures and markets a line of catalytic emission control products and
catalytic conversion technologies for a number of applications. Our main line of
business is the production of catalyzed substrates. Catalyzed substrates are an
integral part of catalytic converter systems sold worldwide. Our company serves
original equipment vehicle manufacturers ("OEMs") the retrofit markets, and
aftermarkets, worldwide.
ESW, through its wholly owned subsidiaries, is the assignee of Canadian and U.S.
patents and/or patent pending applications covering catalytic converter
technology for automotive and non-automotive uses. ESW's subsidiaries also are
the assignee of both Canadian and U. S. patents on spark plug/fuel injector
technology for automotive use.
In 2001, ESW formed three wholly owned subsidiaries:
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o ESW America, Inc. (a Delaware corporation) is our technical,
research and development division. ESW America houses our U.S.
Environmental Protection Agency ("EPA")/ California Air Resources
Board ("CARB") recognized engine emissions testing laboratory and
certification services "Air Testing Services(TM)" ("ATS"). ESW
America can do certification and verifications of internal
combustion engines ranging from 0.5 to 600 horse power. ESW America
also currently manufactures our Quiet Cat(TM) line of utility engine
catalysts as well as the various custom heavy-duty on and off road
catalysts for our customers. ESW America is an ISO 9001:2000
certified manufacturing facility.
o ESW Canada, Inc. (an Ontario corporation) serves as our sales
division, managing all sales and marketing globally for our
catalytic product lines. ESW Canada also serves as a manufacturing
facility producing catalysts for our OEM and distribution partners
worldwide.
o ESW Technologies, Inc. (a Delaware corporation) holds our
intellectual property, and or rights to same.
INDUSTRY TRENDS
Our performance and growth is directly related to certain trends, within the
global market, for the need to reduce emissions emanating from all types of
internal combustion engines. This need is directly related to the global
response and efforts by world governments, at all levels, to implement the
legislative requirements upon sellers of internal combustion engines, to comply
with the more stringent requirements, they demand, for reducing emissions being
emitted from these engines into our environment.
The internal combustion engines relate to on road applications such as cars,
trucks and busses, as well as numerous off road applications such as
construction equipment, farm equipment, industrial equipment, lawn and garden
equipment, railway trains and recreational vehicles. Pressure continues to build
for lower emissions being emitted from engines in all of these sectors, with
diesel Particulate Matter ("PM") standing out as a major contributor to these
toxic emissions.
The U.S. Environmental Protection Agency (EPA), the California Air Resources
Board (CARB) and individual country environmental agencies continue to place
great emphasis on compliance of emission reductions. Since PM is now recognized
as a toxic air contaminant, there has been a push to further reduce Particulate
Matter (PM) emissions from existing diesel vehicles.
Both the U.S. federal and California governments currently impose stringent
emission control requirements on motor vehicles sold in their respective
jurisdictions, and it is anticipated that these emission requirements will
become even more stringent in the future. As a result, we believe that the
markets for off-road vehicles, utility engines and retrofitting existing
vehicles will also have great potential for our products in future years.
The global expansion into emerging market regions such as Asia, Latin America
and Eastern Europe are expected to experience significant growth in vehicle
demand over the next ten years. Suppliers and OEMs of internal combustion
engines are looking for cost effective ways to have their engines meet the
emissions reduction targets demanded upon them. OEMs, resellers of engines and
buyers of retrofit applications, increasingly are requiring their suppliers to
have the capability to design and manufacture their products to help meet with
this demand.
BUSINESS STRATEGY
Our primary business objective is to capitalize on the growing global
requirement of reducing emissions, by offering catalyst technology solutions. We
intend to continue to execute on the following key strategies in order to
leverage our strengths and position ourselves for long-term growth and success:
-12-
o Focusing on our core business, we intend to continue to strengthen our
growth strategy by seeking complimentary partnerships and investments that
provide a competitive advantage and growth opportunities for our core
businesses.
o Investing in new product and process technologies, we intend to accelerate
our investments in new product and manufacturing process technologies to
strengthen and differentiate our product portfolio. We also intend to
continue our efforts to develop innovative products and manufacturing
processes to serve our customers better globally and improve our product
mix and profit margins.
o Maximizing production capabilities, we are currently implementing
strategic initiatives designed to improve product quality while reducing
manufacturing costs. In addition, we periodically evaluate opportunities
to maximize facility and asset utilization. We also evaluate our
opportunities to expand our manufacturing capabilities in low-cost regions
of the world, which are projected to develop into future domestic sales to
emerging markets.
o We intend to focus on strategic partnerships and alliances that do not
require significant upfront cash investments to pursue new business
opportunities in other environmental products and sectors.
o We will continue to invest in development opportunities and strive to
achieve the best practices in organizational vitality, diversity, and
sales force strength.
COMPANY HISTORY
We initially sought to develop ceramic based catalytic converter technologies
based on the manufacture of catalytic converters with a reduced or no use of
precious metals. During late 2000 and early 2001, we acquired specific equipment
and technology that helped us implement a new business model which focused on
the production of unique metallic based catalytic converter products containing
metallic wire based substrates, chemical formulas and precious metals.
In early 2001, we launched our first commercially viable product, The Quiet
Cat(TM), a product for small engine applications, which serves as a catalytic
converter within the muffler unit. We also developed commercially viable
catalytic converter technologies both for diesel and gasoline products. The
Clean Cat(R) product line is utilized in diesel applications and the Enviro
Cat(TM) product line is employed in gasoline applications. The market for our
products include OEM of engines for automotive, off-road and utility products
and other manufacturers of equipment using internal combustion engines together
with the replacement and retrofit markets for these products. We also launched
our Air Sentinel(TM) product line targeted at the large-scale off-road diesel
engine market in late 2001. Pro Cat(TM) was also launched during 2001, this
catalyst product was designed specifically for CNG/LPG (alternative fuels)
engines for the customers in the utility, on-road, off-road and heavy-duty
markets. In 2005 we launched our two stroke diesel engine XTRM Cat(TM) product,
aimed toward the locomotive and marine industry.
PRINCIPAL PRODUCTS AND THEIR MARKETS:
The combined technologies of our wire mesh substrate and chemical wash coat form
the basis for our woven stainless steel mesh catalytic converter. This product
can be produced in almost any size and shape. The wire mesh substrate creates a
turbulent environment, which increases catalytic activity, and when manufactured
for diesel applications are designed to serve as a partial filter of particulate
matter, important in diesel emission control. We believe that our chemical wash
coat formula is proprietary.
-13-
Our customers have integrated our products as a component to meet their own
needs, and have, where appropriate, received certification by the EPA, the CARB
and other authorities for engine products containing our catalyst products as a
component in the certification. Customers have had their engines certified using
the our Clean Cat (R), Pro Cat (TM), Quiet Cat (TM) products. Our products are
now being marketed both domestically and internationally, including Asia, Europe
and Mexico. We offer, and are developing catalyst products which we believe will
permit our customers to comply with environmental regulations in effect now and
to become effective in the future.
Our catalyst products have been EPA/CARB certified in numerous customer diesel
and gas powered engines. Our product has been used for third party engine /
vehicle certification programs by the Mexico Government for a 1.4; 1.6; 1.8; 2.8
liter on-road application, as well as certification programs by the Mexico
Government for a 5.7; 5.9; 6.8 liter on-road application utilizing CNG/LPG
fuels. In March 2003, we became the first company to receive a Performance
Verification from ETV Canada for our High Performance Diesel Oxidation Catalyst
("DOC"), for utility engines, achieving a 66.7% PM reduction by weighted
average. In 2004 we received an ETV Canada Certificate in an award ceremony at
the Globe 2004 Environmental Exposition. We received a Gasoline Passenger
Vehicle CARB Verification in August 2004.We are the first company in the world
to achieve the Level II designation and received in September 2004 an over the
road Heavy Duty Diesel DOC Level II CARB Verification.
The EPA's Voluntary Diesel Retrofit Program signed a Memorandum of Agreement
("MOA") with the State of California Air Resources Board ("ARB") for the
coordination and reciprocity in diesel retrofit device verification. The EPA
recognizes and accepts those retrofit hardware strategies or device-based
systems that have been verified by CARB. This reciprocity agreement allows our
CARB verified technology to be used in the remaining 49 states and it allows us
to participate in EPA funded programs worldwide.
Our target markets include the following sectors:
o On road vehicle sector generally comprised of on road trucks, school buses
and waste haulers regulated in North America by EPA and CARB standards.
o Small engine utility sector comprised of lawn and garden utility diesel
engines and regulated in North America by EPA and CARB standards.
o Off road engine / vehicle sector defined as construction equipment,
tractors, power generators, trains and others.
Through our subsidiaries we possess the rights to U.S. and Canadian patents
and/or pending patent applications, which combine spark plug and fuel injector
technology. By combining the two devices to work together, it is believed that
greater fuel efficiency and reduced toxic emissions can be achieved. However
this device has not been confirmed in laboratory emissions tests to date. We
believe that a successfully developed product combining spark plug and fuel
injector technology could be less expensive than separate individual devices.
Direct injection is widely recognized by many OEM's as "next generation"
technology that substantially boosts the efficiency of conventional gasoline
internal combustion engines enabling them to run a highly stratified, lean-burn
combustion process over a wider operating range.
We market our catalyst products using the trade names, Clean Cat(R), Enviro-Cat
(TM), Quiet Cat(TM), Pro Cat(TM), Air Sentinel(TM) and XTRM Cat(TM). These
products are marketed for spark ignited gasoline, CNG/LPG (alternative fuels)
and diesel engine emissions control, and range in sizes from utility
applications to large industrial uses. Some of our products are presently being
used by customers who have had their engines certified using ESW catalysts. In
addition to manufacturing our own products, we have established relationships
with outside catalytic converter assemblers and marketers that fabricate ready
to install products that can incorporate our substrates. This has allowed us to
concentrate on what we believe is our core technological competency, which is in
the development and manufacture of catalyzed substrates.
Prior to 2001, we were a development stage company. Since 2001, when we began
selling our spark and compression ignited engine emission control products, we
have introduced:
o Clean Cat(R) is a High Performance DOC designed to be utilized on diesel
engines.
o Particulate Reactor(TM) is a high efficiency CARB certified Level II
(greater than 50% PM) diesel substrate designed to reduce particulate
matter in diesel exhaust. It is also designed to reduce hydrocarbons,
carbon monoxide and unpleasant odors.
-14-
o Quiet Cat(TM) is a combination of our catalyst substrates products with a
muffler. These systems are primarily manufactured for alternate fuel
powered small utility engines. They can be manufactured for diesel and
gasoline fueled internal combustion utility engines as well.
o Enviro Cat(TM) is a three-way gasoline catalytic converter specifically
designed for spark ignited internal combustion engine applications.
o Pro Cat(TM) is a three-way catalytic converter specifically designed for
internal combustion engine applications that use liquid propane gas or
liquid natural gas.
o Air Sentinel(TM) is a heavy-duty industrial catalytic converter/silencer
for stationary engines. The Air Sentinel(TM) can be used on diesel,
propane, natural gas and diesel fuel.
o RC-2 Cleaning Console(TM) is our patented catalyst cleaning system. It was
designed to remove carbon buildup (masking) from the surface of our
catalyst substrate.
o XTRM Cat(TM) is a heavy duty oxidation catalytic converter used to reduce
Particulate Matter. It is designed for large two stroke diesel engines
typically found in the locomotive or marine industries.
The expansion of our Air Testing Services (ATS) testing facility will enable us
to expand our existing certification and verification services to OEM's by
providing advanced research, engineering and testing capabilities.
DISTRIBUTION METHODS OF PRODUCTS
We have developed certain relationships with OEM's of engines for both
automotive and other markets. ESW has developed and employs a strategy whereby
it sells products in three principal markets; direct to OEM, producers such as
automotive and industrial equipment manufacturers, and in sales to the retrofit
and aftermarket or the replacement equipment market through centralized
distributors with existing distributions within their individual countries. We
also utilize our own sales personnel, local trade magazines and trade shows to
complement distribution of our products globally into key markets.
We have also allied ourselves with distribution and engine groups throughout the
world. We are currently working with key OEM's to develop first fit catalyst
applications. We also are currently working with key distributors in both the
European and Asian Markets at the government and local levels to develop
retrofit catalyst applications. Our sales and marketing staff works closely with
our design and engineering personnel to prepare the materials used for bidding
on new business as well as to provide a consistent interface between us and our
key customers.
COMPETITION
Currently there is intense competition among companies that provide solutions
for pollutant emissions for diesel, gasoline and CNG/LPG alternate fueled
engines. We compete primarily on the basis of technology, performance, price,
quality, reliability, distribution, customer service, and support. We face
direct competition from companies that market products that compete directly
with our products with stronger financial, technological, manufacturing and
personnel resources. Other companies offer products that potential customers may
consider to be acceptable alternatives to our products and services. ESW also
faces direct competition with companies who purchase their substrates from
others, and do further processing with their own formulas and fabrication for
direct sale to the market place. Newly developed products could be more
effective and cost efficient than our current products or those we may develop
in the future. ESW also faces indirect competition in the form of alternative
fuel consumption vehicles, such as those using methanol, hydrogen, ethanol and
electricity. Corning and NGK are the two major manufacturers of ceramic cores,
which are integral components in current catalytic converter production, and
Emitec is the major manufacturer of metal cores. We also face direct competition
with companies like Engelhard and Johnson Matthey, who purchase their substrates
from others, and do further processing with their own formulas and fabrication
for direct sale to the market place.
-15-
We believe that Corning Industries is a competitor to ESW products as Corning
produces ceramic substrates on a worldwide basis. We believe that we are cost
competitive to Corning's ceramic laminar/flow based substrates and that our
product uses less precious metals to achieve similar emission reductions when
compared to many Corning based catalyzed substrates. ESW's Particulate
Reactor(TM) has proven it has higher emissions reductions compared to
conventional catalyzed ceramic diesel oxidation catalyst (DOC) substrates.
RAW MATERIALS
The primary raw materials used in the manufacture of our products includes, but
is not limited to stainless steel, aluminized steel tubing, precious metals such
as platinum and palladium and other components. ESW does not carry large
inventories of raw materials or finished products in excess of those reasonably
required to meet production and shipping schedules. Overall, raw steel and
precious metals accounted for the most significant component of ESW's raw
materials costs in 2005. We do spot buys of steel from suppliers to meet
customer demand. Steel prices increased slightly during 2005. Platinum prices
increase to their highest levels in 2005. Due to a possible increase in steel
and precious metal prices in 2006, we expect to implement a strategy in an
effort to mitigate the effect of rising steel prices on our results of
operations. This strategy includes delaying increases from raw material
suppliers; selling steel off cuts and scrap at the highest possible price;
increase cost reduction programs throughout the business; and lastly negotiate
price relief from customers. We do not currently hedge any of our raw materials;
however we would consider this approach as demand for our products increase.
ESW's results of operations will continue to be adversely affected by higher
steel and precious metal prices unless it is successful in passing along these
increases to customers or otherwise offset these operating costs.
Other raw materials or components purchased by ESW include tools, jigs,
fasteners, and other steel and component products, all of which are available
from numerous sources.
CUSTOMERS
While we only began the commercial sale of our products during Fiscal 2001, we
recorded sales from approximately 29 customers in Fiscal 2005 as compared to 26
in Fiscal 2004. One of these customers accounted for 50% and two other customers
each accounted for 11% of our revenue in Fiscal 2005. In Fiscal 2004, one
customer accounted for 30% and two other customers each accounted for 17% and
12% of our revenue. We anticipate continuing our program of establishing
long-term relationships with our existing customers. Our sales and marketing
efforts are designed to create overall awareness of our technology solutions and
our manufacturing capabilities in order to have ESW considered and selected to
supply its products for new and retrofit applications. Most of our sales and
marketing personnel have engineering backgrounds which enable them to understand
and participate in the design and engineering aspects of acquiring new business
as well as ongoing customer service. When deemed appropriate, ESW also
participates in industry trade shows. The loss of, or major reduction in
business from, one or more of our major customers could have a material adverse
effect on our liquidity, financial position, or results of operations.
PATENT AND TRADEMARKS
We are developing technologies or furthering the development of acquired
technologies through internal research and development efforts by our engineers.
Where practical we are seeking to obtain the exclusive rights to use technology
related to our industry through patents or licenses for proprietary technologies
or processes.
Through our wholly owned subsidiaries, we hold both Canadian and US patents and
pending applications covering our catalytic converter technology. The
protections provided by patents and those sought by pending patents are
important to our business, although management believes that no individual right
is material to our business at the present time. There can be no assurance that
these patents, combined with pending patent applications or existing or future
trade secret protections that we seek will survive legal challenge, or provide
meaningful levels of protection.
-16-
The Canadian patent only affords protection against the manufacture, use or sale
of the patented technology within Canada. The US patent application for our
diesel catalytic converter, Clean Cat(R) was filed on October 31, 2000 and has
not been challenged as of this date. There can be no assurances that any patents
we may have or have applied for or any agreements we have in place or enter into
will protect our technology and or prevent competitors from employing the use of
our design and production information. Moreover, there is no guarantee that our
proprietary rights will provide any significant competitive advantages.
Additionally, we possess certain registered, pending and common law trademarks.
We consider the goodwill associated with our trademarks to be an important part
of our developing product identity.
PRODUCT CERTIFICATION
To date, our customers have acquired, where necessary, engine certifications and
catalyst certifications using our products from such authorities as the EPA,
Mexico Department of Ecology, and CARB; ESW currently has certification in its
own name from the EPA, CARB and the Canada ETV for gasoline and diesel products.
We have become the first catalytic substrate manufacturer and catalyst coating
company in North America to verify a metallic wire mesh substrate based
catalytic converter system as a gasoline retrofit replacement device. It is
believed that the receipt of this exemption may allow for potential sales
opportunities into the replacement catalytic converter and retrofit market in
California.
ESW has become the first catalytic substrate manufacturer and catalyst coating
company in the world to verify a metallic wire mesh substrate based catalytic
converter system as a passive stand alone Level II diesel retrofit replacement
device. To date, no other catalyst manufacturer has received this status without
the usage of secondary technologies.
The California Air Resource Board ("CARB") has established three primary
technology levels for diesel catalyst verifications.
LEVEL I: Particulate Matter (PM) reduction greater than 25%
LEVEL II: PM reduction greater than 50%
LEVEL III: PM reduction greater than 85%
In September 2004, we received a Level II CARB Executive Order for our 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, we have 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 currently pursuing the expansion of its current product verification for
a wider vehicle application range.
Our metallic wire mesh substrate catalytic converter system has been used by a
customer to obtain verification as a gasoline retrofit device in the Mexico
Government initiated on-road PIREC program. This verification covers engine
sizes from 1.4 displacement liter to 2.8 liter.
Our metallic wire mesh substrate catalytic converter system has been used by a
customer to obtain verification as a CNG/LPG retrofit device. This certification
is valid when our product is used in conjunction with an IMPCO or a LOVATO fuel
management technology. This certification has been issued by the Mexico
Government for on-road vehicles with engine sizes ranging from 5.7 liter
displacement to 6.8 liter.
ESW's products are generally sold according to appropriate government
application regulations; however, we do not necessarily need government approval
to sell our products into unregulated markets.
-17-
WARRANTY MATTERS
We may face an inherent business risk of exposure to product liability and
warranty claims in the event that our products fail to perform as expected. We
cannot assure that we will not experience any material warranty or product
liability losses in the future or that we will not incur significant costs to
defend such claims. In addition, if any of the products are or are alleged to be
defective; we may be required to participate in a recall involving such
products. Each of our customers has its own policy regarding product recalls and
other product liability actions relating to its suppliers. A successful claim
brought against us or a requirement to participate in a product recall may have
a material adverse effect on our business. Some OEMs and emission solution
customers are also increasingly requiring their outside suppliers to guarantee
or warrant their products and bear the costs of repair and replacement of such
products. Depending on the terms under which we supply products to these
customers, the customer may hold us responsible for some or all of the repair or
replacement costs of defective products, when the product supplied did not
perform as represented.
We carry insurance for certain legal matters including product liability;
however, we do not carry insurance for recall matters, as the cost and
availability for such insurance, in the opinion of management, is cost
prohibitive or not available.
To date we have not had any product warranty matters.
MANUFACTURING
We are making capital investments in manufacturing capability to support our
products. We are in the final stages of the process of setting up the production
line equipment necessary to produce our metallic substrates from the base
materials, along with the equipment needed to apply the final chemical wash coat
and catalyst materials. Our new substrate manufacturing plant located in Concord
Ontario, Canada, is intended to enable us to control the complete manufacturing
process required for production of catalyzed substrates. Catalyzed substrates
are the integral part of all catalytic converter systems sold worldwide.
We are also making a capital investment in our Tech Center based in
Montgomeryville Pennsylvania. This facility will be manufacturing and providing
the catalytic and chemical wash coat solutions for the new Concord Ontario
plant. As well all of our emission testing laboratories and testing capabilities
are located there. The new 40,200 sq ft facility houses a state of the art
18,000 sq ft expansion of "Air Testing Services", our EPA/CARB recognized
engine/vehicle emissions testing lab. The new facilities when fully operational
will include several new testing systems, including nine dedicated engine and
vehicle chassis test cells. These cells are used for certification and
verification for engines ranging from 0.5 to 600 horse power.
It is believed that the Air Testing Services ("ATS") group will now be equipped
to better service our clientele for engine testing as well as EPA/CARB emissions
testing and certification programs. ATS will also be in a better position to
provide additional testing support for our internal research and development
("R&D") programs.
The upgrading of our manufacturing and testing capabilities are required to
increase the flexibility, efficiency and improve the operating quality, while
minimizing the overall effective costs, to produce our products.
We utilize our ISO 9001:2000 protocols and structured communication meetings at
all levels of manufacturing to provide training and instruction as well as to
assure a cohesive, focused effort toward common goals. ESW encourages employee
involvement in all aspects of its business and views such involvement as a key
element in its future success. ESW also pursues involvement from its suppliers
and customers, which it believes is necessary to assure a consistent high
quality and on time delivery of raw materials, components and finished products.
-18-
RESEARCH AND DEVELOPMENT
Prior to fiscal 2001, we were a development stage company. Starting in fiscal
2001, we began the transition from a development stage to an operating
(manufacturing) company. During the last three fiscal years, $546,038 was spent
on research and development activities. In 2005 this amount was $541,811, as we
aggressively pursued testing and research and development for new products to
serve potential customers. We believe that, through a combination of proprietary
methods for improving our catalyzed substrates there are prospects for the
development of innovative applications outside of our present product line. We
continue to expense further resources on new research and development projects.
ENVIRONMENTAL MATTERS
ESW is presently engaged in a business that does not generate significant
hazardous wastes. Our facilities may have tanks for storage of diesel fuel and
other petroleum products that are subject to laws regulating such storage tanks.
Federal, state, and local provisions relating to the protection of the
environment have not had, and are not expected to have, a material adverse
effect on our liquidity, financial position, and results of operations. However,
like all manufacturers, if a release of hazardous substances occurs ESW may be
held liable for the contamination, and the amount of such liability could be
material. While ESW devotes resources designed to maintaining compliance with
these requirements, there can be no assurance that ESW operates at all times in
complete compliance with all such requirements.
EMPLOYEES
ESW and its subsidiaries presently employ 51 full-time and 2 part-time
employees. We do not have any collective bargaining agreements and considers our
relationship with our employees to be good.
DESCRIPTION OF PROPERTY
We do not own real property. Through our subsidiary ESW Canada, Inc. we lease
our executive, sales and marketing offices as well as our production center
which total approximately 50,000 square feet located at 335 Connie Crescent,
Concord, Ontario Canada under an offer to lease that expires July 14, 2010.
Additionally, our wholly owned subsidiary ESW America, Inc. leases approximately
40,200 square feet at 2 Bethlehem Pike Industrial Center, Montgomery Township,
Pennsylvania. The leasehold space houses our research and development
facilities. The lease expires January 31, 2010.
MANAGEMENT DISCUSSION AND ANALYSIS
This Registration Statement contains forward-looking statements that involve a
number of risks and uncertainties as well as assumptions that if they never
materialize or prove incorrect, could cause our results to differ materially
from those expressed or implied by such forward-looking statements. Although our
forward looking statements reflect the good faith judgment of our management,
these statements can only be based on facts and the factors currently known by
us. Consequently, forward looking statement are inherently subject to risks and
uncertainties, and actual results and outcomes may differ materially from
results and outcomes discussed in the forward looking statements.
GENERAL
We develop, manufacture and sell environmental technology solutions, and are
currently focused on the international automotive, transportation and utility
engine industries. We manufacture and market 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.
Our main line of business is the production of catalyzed substrates. Catalyzed
substrates are an integral part of catalytic converter systems sold worldwide.
Our company serves both original equipment vehicle manufacturers ("OEMs") and
the replacement markets, or aftermarket, worldwide. For 2006 we are organizing
into two major operating segments of business. The manufacturing of catalytic
converters and the emissions certification and verification of internal
combustion engines ranging from 0.5 to 600 horse power.
Our primary business objective is to capitalize on the growing global
requirement of reducing emissions, by offering catalyst technology solutions to
the market. We have developed certain relationships with OEM's of engines for
both automotive and other markets. As part of our efforts to grow our business,
as well as to achieve increased production and distribution efficiencies we are
making capital investments in manufacturing capability to support our products
as well as expensing money on research and development for new products to serve
potential customers.
Factors that are critical to our success include winning new business, managing
our manufacturing to ensure proper levels in line with business needs,
maintaining competitive wages and benefits, maximizing efficiencies in
manufacturing processes, and reducing overall costs. In addition, our ability to
adapt to key industry trends, such as increasing technologically sophisticated
products, changing aftermarket distribution partners, and increasing
environmental standards, also plays a critical role in our success. Other
factors that are critical to our success include adjusting to environmental and
economic challenges such as increases in the cost of raw materials and our
ability to successfully reduce the impact of any such cost increases through
material substitutions, cost reduction initiatives and other methods.
We have a substantial amount of indebtedness. As such, our ability to generate
cash, both to fund operations and service our debt, is also a significant area
of focus for our company. See "Liquidity and Capital Resources" below for
further discussion of cash flows.
Total revenues for 2005 were $3.07 million, a sixty one percent increase over
2004. The increase in orders for our Quiet Cat (TM) line and diesel substrate
products primarily drove this increase.
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We have developed commercially viable proprietary catalytic converter
technologies for diesel, gasoline and alternative (CNG/LPG) fueled combustion
engines. Our 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 which increases catalytic activity and serves as a
filter of particulate matter, important in diesel emission control.
Our catalyst products have been extensively tested in house, as well as by
Original Equipment Manufactures (OEM's) and by independent third parties. We
believe they demonstrate superior performance to comparable competing products.
Our customers have incorporated our 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 our Clean Cat
(R), Pro Cat (TM), Quiet Cat (TM) catalyst products and services. Our 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, we received a Level II California Air Resources Board (CARB)
Executive Order for our 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, we have
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.
Our subsidiary ESW America Inc. 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 we follow strict quality guidelines, administrative
protocol and safety procedures to a recognized international standardized code.
ISO auditors confirm compliance by auditing us periodically. We passed our most
recent surveillance audit in June 2005, and are in full compliance with the ISO
requirements. We currently hold a full registration certificate effective until
March of 2007. Our subsidiary ESW Canada Inc. in it's new manufacturing
facility, is in the implementation process of the ISO 9001:2000 standard
Management considers an ISO certification essential for us to do business with
many export customers.
COMPARISON OF YEAR ENDED DECEMBER 31, 2005 TO YEAR ENDED DECEMBER 31, 2004
RESULTS OF OPERATIONS
Revenues for the year ended December 31, 2005 increased by $1,165,532, or 61.1
percent, to $3,072,236 from $1,906,704 for the year ended December 31, 2004. The
primary factor that favorably impacted revenue during the year ended December
31, 2005 included repeat orders from existing customers for our Quiet Cat(TM)
line and diesel substrate products.
Cost of sales for the year ended December 31, 2005 increased by $769,058, or
65.9 percent, to $1,935,711 from $1,166,653 for the year ended December 31,
2004. Cost of sales as a percentage of revenues for the year ended December 31,
2005 was 63.0 percent, which is higher as compared to 61.2 percent for the year
ended December 31, 2004. The gross margin for the year ended December 31, 2005
was 37.0 percent as compared to a gross margin of 38.8 percent for the year
ended December 31, 2004. The reason for the slight decrease in the gross margins
percentage is due to increased steel and precious metal prices in 2005. We have
implemented a strategy in an effort to mitigate the effect of rising steel
prices on our results of operations. This strategy included delaying increases
from raw material suppliers; selling steel off cuts and scrap at the highest
possible price; increase cost reduction programs throughout the business; and
lastly negotiate price relief from customers. We do not currently hedge any of
our precious metals materials; however we would consider this approach as demand
for our products increase. Our results of operations will continue to be
adversely affected by higher steel and precious metal prices unless we are
successful in passing along these increases to our customers or otherwise offset
these operating costs.
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Marketing, office and general expenses for the year ended December 31, 2005
increased by $1,344,156, or 101.1 percent, to $2,674,282 from $1,330,126 for the
year ended December 31, 2004. The increase is primarily due to additional staff
hired with the opening of the Canadian plant, as well as the expenses involved
in ramping up the two new facilities, which resulted in an increase in costs of
$509,063. There was an increase of $123,803 from the warrant amortization
interest, which is a non-cash item, as it related to the issuance of the
convertible debentures in September 2004. There was an increase of $120,571 in
investor relations. An increase of $100,709 related to travel and general costs
due to building the two new facilities. There was an increase of $490,010 due to
rent, insurance general plant and utility costs for the two new facilities in
Montgomeryville Pennsylvania and in Concord, Ontario, Canada. As a percentage of
revenue, marketing, office and general expenses increased to 87.0 percent for
the year ended December 31, 2005, compared to 69.8 percent for the year ended
December 31, 2004.
R & D for the year ended December 31, 2005 increased by $538,445 to $541,811
from $3,366 for the year ended December 31, 2004. We aggressively pursued
testing and research and development in our efforts to develop innovative
products to serve our customers better globally and improve our product mix and
profit margins. We believe that this expenditure will result in increase orders
for our products. As a percentage of revenue R & D expense increased to 17.6%
for the year ended December 31, 2005 compared to 0.2% for the year ended
December 31, 2004.
Officer's compensation and director's fees for the year ended December 31, 2005
decreased by $3,987, or 1.0 percent, to $390,191 from $394,178 for the year
ended December 31, 2004. As a percentage of revenue, officer's compensation and
director's fees decreased to 12.7 percent for the year ended December 31, 2005,
compared to 20.7 percent for the year ended December 31, 2004. The decrease was
due to a change in management.
Consulting and professional fees for the year ended December 31, 2005 decreased
by $46,471, or 12.7 percent, to $319,244 from $365,715 for the year ended
December 31, 2004. The decrease is due to higher fees paid in 2004 for
consulting fees related to the development and implementation of our two new
facilities. As a percentage of revenue, consulting and professional fees
decreased to 10.4 percent for the year ended December 31, 2005, compared to 19.2
percent for the year ended December 31, 2004.
Interest expense on long-term debt was $244,000 for the year ended December 31,
2005 as opposed to $72,364 for the year ended December 31, 2004. In September
2004, we issued $6.1 million of convertible debentures in which the basis of
conversion into our 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% per annum.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of operating capital have been the proceeds of our various
financing transactions. As of December 31, 2005, the Company had cash and cash
equivalents of $3,083,373.
Net Cash used in operating activities for the year ended December 31, 2005
amounted to $3,221,231 which was mainly attributable to the loss, net of
depreciation, amortization, amortization of the fair value of the debenture
warrant and others of $2,356,933. As well as an increase in operating assets and
liabilities of $864,298 which was primarily due to an increase of inventory as
we begin to position ourselves 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.
Net Cash used in investing activities was $2,850,841 for the year ended December
31, 2005 as compared to $355,807 for the year ended December 31, 2004. The
capital expenditures in the year 2005 were primarily dedicated to the purchase
of equipment and leaseholds for our research and development facilities located
in Montgomery Township, Pennsylvania, and the manufacturing facility in Concord
Ontario, Canada.
Net cash provided in financing activities totaled $4,522,432 for the year ended
December 31, 2005 as compared to $6,362,606 for the year ended December 31,
2004. On April 21, 2005, we closed an initial traunche of a private placement
offering. Pursuant to a subscription agreement with one accredited investor, we
received $2,000,000 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, we 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
who is also a director of our company from $1.00 per share to $0.85 per share in
accordance with the terms of the warrants previously issued by us on September
15, 2004.
-21-
On July 5, 2005, we completed a second traunche of a private placement offering.
Pursuant to subscription agreements with three accredited investors, we received
$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, we entered into registration rights agreements
with the investors and agreed to use our 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.
On November 7, 2005, we elected to issue shares of common stock as payment of
interest earned on our 4% convertible debentures issued in September 2004. A
total of 348,571 shares of common stock were issued to 10 debenture holders per
the debentures.
On December 2, 2005 we received $26,000 for the exercise of options at $0.50 per
share and issued 50,000 shares of common stock.
In December 2005 the Company received $661,147 from the exercise of 4,672,352
warrants to purchase 2,269,999 shares of common stock. The warrants were issued
as a part of the Unit Placements in 2002 in which participants received one
warrant for each unit purchased, that allows for the purchase of one-half share
of common stock for each share of common stock purchased in the Unit Placement.
Warrants can only be exercised in even lots for full shares for an exercise
price of $0.30 per share.
We made substantial capital investments in manufacturing capability to support
our products. We are in the final stages of the completion of the plants. When
fully complete, our new substrate manufacturing plant located in Concord
Ontario, Canada, is intended to enable us to control the complete manufacturing
process required for production of catalyzed substrates. Catalyzed substrates
are the integral part of all catalytic converter systems sold worldwide.
We have also made a substantial capital investment in our new Tech Center based
in Montgomeryville Pennsylvania. This facility provides the catalytic and
chemical wash coat products for the new Concord Ontario plant. As well all of
our emission testing laboratories and testing capabilities is located there. The
new 40,200 sq ft facility houses a state of the art 18,000 sq ft expansion of
"Air Testing Services", our EPA/CARB recognized engine/vehicle emissions testing
lab. The facilities include several new testing systems. In addition to our
existing laboratory testing capabilities, we have acquired additional heavy duty
and light duty truck chassis dynamometers, as well as a heavy-duty-diesel
transient engine emissions test dynamometer, and additional analytical test
instruments.
We used part of the proceeds from these placements for due diligence and
investigating compliance issues for potential listing of our securities on new
exchanges, further capital expenditures and for general corporate purposes.
Our principal source of liquidity is cash provided by financing activities. Our
principal use of liquidity will be to finance capital expenditures and to
provide working capital availability. We expect that total capital expenditures
for 2006 will be approximately $800,000. These capital expenditures will be used
primarily for equipment and the completion of the facilities.
We believe this capital expenditure will improve our retention of small to
medium-sized customers while at the same time provide us with added sales
capacity for higher-end selling solutions. It is anticipated that the expansion
of our testing facilities will bring increase revenue, as ATS will now have the
capacity to service larger customers.
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 December 31,
2005 is sufficient to meet operating needs for at least the next six months.
-22-
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.
Our 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.
A top priority for us in fiscal 2006 is core growth, which is the gaining of
market share in underrepresented markets, and the targeting of our product
segments in which demand is growing the fastest. We are seeking to expand into
markets such as Europe and Asia, as new opportunities within that region are
opening up, in an effort to build solidly on our core business. To ensure that
we capture the fastest growing product technologies, we continue to explore
possible joint venture agreements and or the introduction of new products and or
technologies. Our success is dependent upon our ability to charge adequate
prices for the products and services we offer. Depending on competitive market
factors, future prices we can charge for our products and services we offer may
vary and may impact our profitability. Competition is based largely upon
technology, performance, pricing, quality, reliability, distribution, and
customer support. A number of companies worldwide with significant financial
resources or customer relationships compete with us to provide similar products
and services, such as Johnson Matthey, Engelhard and OMG (Degussa) Our
competitors may be positioned to offer more favorable product and service terms
to the marketplace, resulting in reduced profitability and loss of market share
for us. Financial pressures faced by our competitors may cause them to engage in
uneconomic pricing practices, which could cause the prices that we are able to
charge in the future for our products and services to be less than we have
historically charged. Our future success is based in large part upon our ability
to successfully compete in the markets we currently serve and to expand into
additional product and service offerings. Our failure to do so could lead to a
loss of market share for us, resulting in a material adverse effect on our
results of operations.
The principal raw materials that we use are steel, and precious metals such as
platinum. The metals industry as a whole is cyclical and at times pricing and
availability of raw materials in the metals industry can be volatile due to
numerous factors beyond our control, including general, domestic and
international economic conditions, labor costs, production levels, competition,
import duties and tariffs and currency exchange rates. This volatility can
significantly affect the availability and cost of raw materials, and may,
therefore, adversely affect our net sales, and operating margin. During periods
of rising raw materials pricing, there can be no assurance that we will be able
to pass any portion of such increases on to our customers. When raw material
prices decline, customer demands for lower prices could result in lower sale
prices and, as we use existing inventory, resulting in lower margins. Changing
steel and platinum prices could adversely affect our operating margin and net
income.
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, 2007.
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.
-23-
We have 700,000 Class A special shares of $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 our 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 ($600,395 USD) at December 31, 2005. As the Class A special
shares were issued by our wholly-owned subsidiary BBL, the maximum value upon
which we are liable is the net book value of BBL. At December 31, 2004 BBL had
an accumulated deficit and therefore would be unable to redeem the Class A
special shares at their ascribed value.
DEBT STRUCTURE
In September 2004, we issued $6.1 million of convertible debentures in which the
basis of conversion into our 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. We have 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 our option,
in shares of common stock, par value $0.001 per share, at $.50 per share. At our
option, interest on the debenture will be payable in cash or shares of common
stock under a conversion formulas as provided in the debenture. We elected to
issue shares of our common stock as payment of interest earned on our 4%
convertible debentures issued in September 2004. A total of 348,571 shares of
common stock were issued to 10 debenture holders for the $244,000 of accrued
interest through September 13, 2005, as per the terms of the debentures.
Our ability to service our indebtedness in cash will depend on our future
performance, which will be affected by prevailing economic conditions and
financial, business, regulatory and other factors. Certain of these factors are
beyond our control. We believes that, based upon our current business plan, we
will be able to meet our debt service obligations when due. Significant
assumptions underlie this belief, including, among other things, that we will be
successful in implementing our business strategy and that there will be no
material adverse developments in our business, liquidity or capital
requirements. If we cannot generate sufficient cash flow from operations to
service our indebtedness and to meet our other obligations and commitments, we
might be required to refinance our 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, our debt would be impaired. On such
circumstance, we would have to issue shares of our common stock as repayment of
this debt, which would be of a dilutive nature to its present shareholders.
CONTRACTUAL OBLIGATIONS
Effective November 24, 2004, our wholly owned subsidiary ESW America, Inc.
entered into a lease agreement for approximately 40,200 square feet of leasehold
space, which houses our research and development facilities in Montgomery
Township, Pennsylvania. The lease commenced on January 15, 2005 and expires
January 31, 2010. Effective December 20, 2004, our wholly owned subsidiary ESW
Canada, Inc. entered into an offer to lease agreement for approximately 50,000
square feet of leasehold space which houses our executive offices and a
manufacturing plant located in Concord, Ontario Canada.
The following breakdown as at December 31, 2005 is the total, of the minimum
annual lease payments, for both leases.
2006 $441,390
2007 $441,390
2008 $446,815
2009 $452,240
2010 $150,707
-24-
SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING STANDARDS
GENERAL
Our discussion and analysis of the financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with United States Generally Accepted Accounting Principles.
A critical accounting policy is defined as one that is both material to the
presentation of our financial statements and requires management to make
difficult, subjective or complex judgments that could have a material effect on
our financial condition and results of operations. Specifically, critical
accounting estimates generally require us to make assumptions about matters that
are highly uncertain at the time of the estimate; and if different estimates or
judgments were used, the use of these estimates or judgments would have a
material effect on our financial condition or results of operations.
The estimates and judgments we make that affect the reported amount of assets,
liabilities, revenues and expenses are based on our historical experience and on
various other factors, which we believe to be reasonable in the circumstances
under which they are made. Actual results may differ from these estimates under
different assumptions or conditions. We consider our accounting policies related
to revenue recognition, the valuation of inventories and accounting for the
value of long-lived assets and intangible assets to be critical accounting
policies.
REVENUE RECOGNITION
We recognize revenue when it is realized or realized and earned. We consider
revenue realized or realizable and earned 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.
On a monthly basis, an aged account receivable report is produced and we review
all account receivables. We review all amounts outstanding greater than sixty
days. Based on previous customers payment history, we determine whether an (or
portion of an) allowance needs to be provided on each customers' outstanding
balance.
INVENTORIES
Raw materials are stated at the lower of cost and replacement cost. Work in
process and finished goods inventories are stated at the lower of cost and net
realizable value. These costs include the cost of materials plus direct labor
applied to the product and the applicable share of overhead. Cost is determined
on a first-in-first-out basis.
Our policy for valuation of inventory, including the determination of obsolete
or excess inventory, requires management to estimate the future demand for the
Company's product. Inventory is subject to inexact estimates by management.
We purchase on a "buy to order" basis. When a customer orders a product, then we
purchase the majority of the materials to start manufacturing the product.
VALUATION OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS
We assess the impairment on long lived assets and intangible assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable.
Intangible assets are stated at cost less accumulated amortization and are
comprised of licenses and patents. Unforeseen events, changes in circumstances
and market conditions, and material differences in the value of long-lived and
intangible assets due to changes in estimates of future cash flows could affect
the fair value of the our assets and require an impairment charge. Intangible
assets are reviewed annually to determine if any events have occurred that would
warrant further review. In the event that a further assessment is required, we
will analyze estimated undiscounted future cash flows to determine whether the
carrying value of the intangible asset will be recovered and if an impairment
charge will be required.
-25-
Patents include all costs necessary to acquire intellectual property such as
patents and trademarks, as well as legal costs arising out of litigation
relating to the assertion of any Company-owned patents.
RESEARCH AND DEVELOPMENT
We are engaged in research and development work. Research and development costs
for the acquisition of capital assets that have a future benefit have been
capitalized. Due to uncertainties all other costs relating to research and
development have been expensed as incurred.
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 our
consolidated financial statements, and we modified our disclosures in our
quarterly reports commencing with the quarter ended March, 2003 as provided for
in that standard.
In December 2004, FASB Statement No.153, "Exchanges of Non-monetary Assets - An
Amendment to APB Opinion No. 29" was issued. The Statement eliminates the
exception to fair value for exchanges of similar productive assets and replaces
it with a general exception for exchange transactions that do not have
commercial substance - that is, transactions that are not expected to result in
significant changes in the cash flows of the reporting entity. The requirements
of FASB 153 do not have an effect on our Consolidated Financial Statements.
In November 2004, FASB Statement No. 151, "Inventory Costs - An Amendment of ARB
No.43, Chapter 4" was issued. The Statement clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. Additionally, allocation of fixed overheads to the costs of conversion
should be based on the normal capacity of production facilities. The
requirements of FASB 151 do not effect on our Consolidated Financial Statements.
In July 2004, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force ("EITF") reached a consensus on EITF No. 02-14, "Whether an
Investor Should Apply the Equity Method of Accounting to Investments Other Than
Common Stock". EITF 02-14 addresses circumstances in which companies acquire the
right to significantly influence the operations of another entity without owning
a voting interest in that entity. The Financial Accounting Standards Board at
its July 16, 2004 meeting ratified EITF 02-14. The adoption of EITF 02-14 is not
expected to have a material effect on our financial position or results of
operations.
-26-
In April 2004, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force ("EITF") reached a consensus on EITF No. 03-06, "Participating
Securities and the Two-class Method Under FASB Statement No. 128, Earnings Per
Share". EITF 03-06 addresses a number of questions regarding the computation of
earnings per share by companies that have issued securities other than common
stock that contractually entitle the holder to participate in dividends and
earnings of the company when, and if, it declares dividends on its common stock.
The issue also provides further guidance in applying the two-class method of
calculating earnings per share, clarifying what constitutes a participating
security and how to apply the two-class method of computing earnings per share
once it is determined that a security is participating, including how to
allocate undisturbed earnings to such a security. EITF 03-06 is effective for
fiscal periods beginning after March 31, 2004. The requirements of EITF 03-06 do
not have an effect on our Consolidated Financial Statements.
No new accounting pronouncements have been issued during the fiscal year ended
December 31, 2005 that would have a material impact on our financial statements.
We has reviewed the status of its accounting pronouncements and believe there
are no significant changes from that disclosed in this report.
FOREIGN CURRENCY TRANSACTIONS
Some of our revenues were derived from manufacturing operations in Canada. The
results of operations and the financial position of our 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 would be higher or lower
depending on a weakening or strengthening of the U.S. dollar against the
Canadian currency.
A portion of our assets 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, our consolidated stockholders' investment will
fluctuate depending upon the weakening or strengthening of the U.S. dollar
against the Canadian currency.
Our strategy for management of currency risk relies primarily upon conducting
our operations in the countries' respective currency and we may, from time to
time, engage in hedging intended to reduce our exposure to currency
fluctuations. At December 31, 2005, we had no outstanding forward exchange
contracts.
FORMER AUDITORS FOR FISCAL YEARS 2003 AND 2002
The auditors for the years ended December 31, 2003 and 2002 were Goldstein and
Morris Certified Public Accountants, P.C., the Company's former auditors.
Goldstein and Morris resigned as the Company's auditors effective October 20,
2004 as the firm no longer had the resources to service a public client and
subsequently the firm of Goldstein and Morris discontinued operations effective
January 2, 2005. As a result, Goldstein and Morris has not reissued its report
for the years ended December 31, 2003 and 2002, and the financial statements for
those years have not be re-audited. Readers of the financial statements for the
years ended December 31, 2003 and 2002 are cautioned that there are certain
inherent risks in relying upon said results in that there is limited recourse
available against Goldstein and Morris should readers rely upon the prior report
of Goldstein and Morris. For further information, please refer to "Item 8.
Changes in and Disagreements with Accountants on Accounting and Financing
Disclosure" contained herein.
-27-
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003
RESULTS OF OPERATIONS
Revenues for the year ended December 31, 2004 increased by $166,988, or 10
percent, to $1,906,704 from $1,739,715 for 2003. We experienced an overall
revenue growth in both the gas and diesel finished converter lines of $215,634.
Factors that favorably impacted revenue in 2004 are attributable to our
continuing efforts at gaining acceptance of our products by our customers and
the CARB certification of one of our products, which lead to two orders from new
customers, based on this certification. The factor that offset these favorable
items was the impact of lower revenue from our ATS testing services of $48,646
as we focused much of its attention and effort at completing and subsequently in
the second half of 2004 obtaining two CARB executive exemption orders for its
products.
Cost of sales for the year ended December 31, 2004 increased by $313,555, or
36.7 percent, to $1,166,653 from $853,098 for 2003. Cost of sales as a
percentage of revenues for the year ended December 31, 2004 was 61.1 percent,
which is up compared to 49.0 percent for 2003. The increase is due to an
elevation of prices across the board for both steel prices and precious metals
that are the two main components used in our products. An increase in direct
labor costs also contributed to the higher overall costs, leading to a lower
gross margin. The gross margin for 2004 was 38.9 percent as compared to a gross
margin of 51.0 percent for 2003. Due to increased steel and precious metal
prices in 2004 and continuing into 2005, we expect to implement a strategy in an
effort to mitigate the effect of rising steel prices on our results of
operations. This strategy includes delaying increases from raw material
suppliers; selling steel off cuts and scrap at the highest possible price;
increase cost reduction programs throughout the business; and lastly negotiate
price relief from customers. We do not currently hedge any of our precious
metals materials; however we would consider this approach as demand for its
products increase. Our results of operations will continue to be adversely
affected by higher steel and precious metal prices unless it is successful in
passing along these increases to our customers or otherwise offset these
operating costs.
Marketing, office and general expenses for the year ended December 31, 2004
increased by $415,085, or 45.2 percent, to $1,333,492 from $918,407 in 2003. As
a percentage of revenue, marketing, office and general expenses increased to
68.6 percent for 2004, compared to 52.8 percent for 2003. The increase as a
percentage of sales is primarily the result of an increase in payroll costs of
$193,653 as we added employees in conjunction with its certification programs
and sales efforts, as well as the result of higher wages paid. An increase of
$46,096 from investor relations and warrant amortization interest as it related
to the issuance of the convertible debentures in September 2004. An increase of
$78,677 related to travel and general costs as we planned our expansion of two
new facilities and an increase of $71,957 due to higher shop and research and
development related costs.
Officer's compensation and director's fees for the year ended December 31, 2004
increased by $172,178, or 77.5 percent, to $394,178 from $222,222 in 2003. As a
percentage of revenue, officer's compensation and director's fees increased to
20.6 percent for 2004, compared to 12.8 percent for 2003.The increase was due to
employment contracts that became effective in 2004.
Consulting and professional fees for the year ended December 31, 2004 increased
by $163,597, or 81 percent, to $365,715 from $202,118 in 2003. As a percentage
of revenue, consulting and professional fees increased to 19.2 percent for 2004,
compared to 11.6 percent for 2003. The increase is due in part to consulting
fees related for the work necessary for the CARB certifications received by us
in September 2004 as well as costs related to the development and implementation
of our two new facilities.
Interest expense on long-term debt was $72,364 in 2004 as opposed to nil in
2003. In September 2004, we issued $6.1 million of convertible debentures in
which the basis of conversion into our 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 were subsequently reset to an exercise price of $0.85
per share. The debentures are for a term of three (3) years and earn interest at
the rate of 4%.
-28-
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of operating capital have been the proceeds of our various
financing transactions. As of December 31, 2004, we had cash and cash
equivalents of $4,633,013. Our cash and cash equivalents increased by $4,546,127
to $4,633,013 from $86,886 at December 31, 2003.
Net Cash used in operating activities in 2004 amounted to $1,460,672 which was
mainly attributable to the loss, net of depreciation, amortization, amortization
of the fair value of the debenture warrant, and the compensation value of option
grants of $1,295,870 and the increase in operating assets and liabilities of
$164,802.
Net Cash used in investing activities was $355,807 for 2004 as compared to
$46,204 in 2003. The capital expenditures in 2004 were primarily dedicated to
the purchase of equipment and leaseholds for the our research and development
facilities located in Montgomery Township, Pennsylvania.
Net cash provided in financing activities totaled $6,362,606 for 2004 as
compared to $247,000 for 2003. The net cash provided in 2004 was primarily to
support general corporate purposes, including capital expenditures and for
working capital needs. Net cash provided in 2004 was primarily related to
financing activities during 2004 as a result of cash received from the offering
of 4 percent unsecured convertible debentures due September 13, 2007 of
$6,100,000 and proceeds from warrant exercises of $262,607.
We made substantial capital investments in manufacturing capability to support
our products. We are in the process of setting up the production line equipment
necessary to produce our proprietary metallic substrates from the base
materials, along with the equipment needed to apply the final chemical wash coat
and catalyst materials. When complete, this new substrate manufacturing plant
located in Concord Ontario, Canada, is intended to enable us to control the
complete manufacturing process required for production of catalyzed substrates.
Catalyzed substrates are the integral part of all catalytic converter systems
sold worldwide.
We are also making a capital investment in our new Tech Center based in
Montgomeryville Pennsylvania. This facility will be manufacturing and providing
the catalytic and chemical wash coat products for the new Concord Ontario plant.
As well all of our emission testing laboratories and testing capabilities will
be located there. The new 40,200 sq ft facility will house a state of the art
18,000 sq ft expansion of "Air Testing Services", our EPA/CARB recognized
engine/vehicle emissions testing lab. The new facilities will include several
new testing systems. In addition to ESW's existing laboratory testing
capabilities, we have acquired additional heavy duty and light duty truck
chassis dynamometers, as well as a heavy-duty-diesel transient engine emissions
test dynamometer, and additional analytical test instruments.
We have proposed a budget for an estimated capital expenditure of $1,500,000 to
put into operation the new manufacturing facility in Concord Ontario Canada. As
well, an estimated budget of $800,000 has been proposed to upgrade our emissions
testing and research and development department in Montgomeryville Pennsylvania.
Both these plans are currently being implemented and as at the end of December
31, 2004, approximately $350,000 has been spent on these projects. We believe
this capital expenditure will improve our retention of small to medium-sized
customers while at the same time provide us with added sales capacity for
higher-end selling solutions. It is anticipated that the expansion of our
testing facilities will bring increase revenue, as ATS will now have the
capacity to service larger customers.
The proposed 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.
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.
-29-
A top priority for us in fiscal 2005 is core growth which is the gaining of
market share in underrepresented markets, and the targeting of our product
segments in which demand is growing the fastest. We are seeking to expand into
markets such as Europe and Asia, as new opportunities within that region are
opening up, in an effort to build solidly on our core business. To ensure that
we capture the fastest growing product technologies, we continue to explore
possible joint venture agreements and or the introduction of new products and or
technologies. Our success is dependent upon our ability to charge adequate
prices for the products and services we offer. Depending on competitive market
factors, future prices we can charge for our products and services we offer may
vary and may impact our profitability. Competition is based largely upon
technology, performance, pricing, quality, reliability, distribution, and
customer support. A number of companies worldwide with significant financial
resources or customer relationships compete with us to provide similar products
and services, such as Johnson Matthey, Engelhard and OMG (Degussa) Our
competitors may be positioned to offer more favorable product and service terms
to the marketplace, resulting in reduced profitability and loss of market share
for us. Financial pressures faced by our competitors may cause them to engage in
uneconomic pricing practices, which could cause the prices that we are able to
charge in the future for our products and services to be less than we have
historically charged. Our future success is based in large part upon our ability
to successfully compete in the markets we currently serve and to expand into
additional product and service offerings. Our failure to do so could lead to a
loss of market share for us, resulting in a material adverse effect on our
results of operations.
Our 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.
The principal raw materials that we use are steel, and precious metals such as
platinum. The metals industry as a whole is cyclical and at times pricing and
availability of raw materials in the metals industry can be volatile due to
numerous factors beyond our control, including general, domestic and
international economic conditions, labor costs, production levels, competition,
import duties and tariffs and currency exchange rates. This volatility can
significantly affect the availability and cost of raw materials, and may,
therefore, adversely affect our net sales, and operating margin. During periods
of rising raw materials pricing, there can be no assurance that we will be able
to pass any portion of such increases on to our customers. When raw material
prices decline, customer demands for lower prices could result in lower sale
prices and, as we use existing inventory, resulting in lower margins. Changing
steel and platinum prices could adversely affect our operating margin and net
income.
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, 2007.
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.
We have 700,000 Class A special shares of $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 ESW'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 ($583,333 USD) at December 31, 2004. As the Class A special
shares were issued by ESW's wholly-owned subsidiary BBL, the maximum value upon
which ESW is liable is the net book value of BBL. At December 31, 2004 BBL had
an accumulated deficit and therefore would be unable to redeem the Class A
special shares at their ascribed value.
-30-
DEBT STRUCTURE
In September 2004, we issued $6.1 million of convertible debentures in which the
basis of conversion into our 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. The debentures are for a term of three (3) years and earn interest at
the rate of 4% per annum. We have 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, at $.50 per
share. At ESW'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.
Our 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 our control. We believe 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 we 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 we cannot generate sufficient cash flow from operations to
service its indebtedness and to meet its other obligations and commitments, we
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, our debt would be impaired. On such
circumstance, we 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.
CONTRACTUAL OBLIGATIONS
Effective November 24, 2004, our wholly owned subsidiary ESW America, Inc.
entered into a lease agreement for approximately 40,200 square feet of leasehold
space, intended to house our research and development facilities in Montgomery
Township, Pennsylvania. The lease commenced on January 15, 2005 and expires
January 31, 2010. Effective December 20, 2004, our wholly owned subsidiary ESW
Canada, Inc. entered into a lease agreement for approximately 50,000 square feet
of leasehold space intended to house the Company's executive offices and a
manufacturing plant located in Concord, Ontario Canada.
The following breakdown (as of March 31, 2005) is the total, of the minimum
annual lease payments, for both leases.
2005 $342,079
2006 $433,569
2007 $433,569
2008 $440,585
2009 $444,093
2010 $102,784
FOREIGN CURRENCY TRANSACTIONS
None of our revenue during the year ended December 31, 2004 were derived from
manufacturing operations in Canada. The results of operations and the financial
position of our 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 small portion of our assets at December 31, 2004 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, our consolidated
stockholders' investment will fluctuate depending upon the weakening or
strengthening of the U.S. dollar against the Canadian currency.
-31-
Our strategy for management of currency risk relies primarily upon conducting
its operations in the countries' respective currency and we may, from time to
time, engage in hedging intended to reduce our exposure to currency
fluctuations. At December 31, 2004, we had no outstanding forward exchange
contracts.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Name Position Date Elected/Appointed
- ---- -------- ----------------------
Nitin Amersey Chairman January 2003
David J. Johnson Director, President and September 2000
Chief Executive Officer
Stan Kolaric Director, Chief June 2005
Operating Officer
Joey Schwartz Director, Chief June 2005
Financial Officer
and Corporate
Secretary
Michael F. Albanese Director February 2006
Bengt G. Odner Director September 2000
NITIN M. AMERSEY, age 54, has over thirty years of experience in international
trade, marketing and corporate management. Mr. Amersey was elected as a director
and commenced serving on the board in January 2003. Mr. Amersey was appointed
interim Chairman of the Board in May 2004 and subsequently was appointed
Chairman of the Board in December 2004. Since 1978, Mr. Amersey has been
Chairman of Scothalls Limited, a private trading firm. Mr. Amersey served as
President of Circletex Corp., a financial consulting management firm since 2001.
From 1988 to 2000, he was Chairman and CEO of the Caribbean Sea Island Cotton
Company LTD. From 2003 to 2006 he was Chairman of RMD Entertainment Group. He is
also a director of Hudson Engineering Industries Pvt. LTD. in India and other
private companies. He also is Chairman of Wide E-Convergence Technology America
Corp. of Midas Touch Global Media Corp. Mr. Amersey has a Masters of Business
Administration degree from the University of Rochester, Rochester, N.Y. and a
Bachelor of Science in Business from Miami University , Oxford, Ohio. He
graduated from Miami University as a member of Phi Beta Kappa and Phi Kappa Phi.
DAVID J. JOHNSON, age 43, served as the Company's Chief Operating Officer from
August 2000 through November 2001 and served as Senior Vice President of Sales
and Marketing from November 2001 until May 2004. Mr. Johnson was elected as a
director in September 2000. In addition to serving as a director, On May 1, 2004
he was appointed as the Interim Chief Executive Officer and President and was
subsequently appointed President, Chief Executive Officer. Mr. Johnson also
served as acting Chief Financial Officer from December 2004 through May 2005.
From 1989 to 1999, Mr. Johnson was a strategy and marketing consultant to
National Warehousing, Inc. Toronto, Ontario. Mr. Johnson attended Tollgate Tech.
Secondary, Mohawk Collage and Devry Institute of Technologies.
STAN KOLARIC, age 59, was appointed as Chief Operating Officer effective May 23,
2005. Mr. Kolaric served as a consultant to the Company and it's wholly owned
subsidiary ESW Canada Inc. since September 2004. Over the past thirty years, Mr.
Kolaric has worked with BIC Incorporated as the Engineering Manager for North
America from 1972 to 1984, Sommerville Belkin Group (currently Cascade Inc.) as
their Engineering-Operation Manager from 1984 to 1996 and Thermo Tech
Technologies (TTRIF) as Vice-President of Engineering 1996 to 1997. Since 1997
Mr. Kolaric has consulted with various companies. He currently is a director of
IBL Structural Steel, Inc. Mr. Kolaric graduated from the University of
Ljubljana with Master Degree of Science and Mechanics.
-32-
JOEY SCHWARTZ, age 45, has 23 years experience in financial management, business
strategy development and marketing. Mr. Schwartz was appointed as Chief
Financial Officer effective May 23, 2005. During various periods from February
2001 to September 2004, Mr. Schwartz served in various consulting positions
involving organizational development, corporate compliance, legal affairs and
finance for ESW and it's wholly owned subsidiary ESW Canada, Inc. Prior to his
association with the Company, Mr. Schwartz consulted for several companies in
different industries including Identicam Systems Canada Ltd., which was acquired
under the GE Infrastructure security group of companies. He was President of
Empereau Manufacturing, for over 18 years, a manufacturing company supplying
products to the commercial specification and construction industry as well as
government procurement. Mr. Schwartz graduated on the dean's honor roll from
York University where he received a Bachelor of Arts Degree in Economics and
Mathematics.
MICHAEL F. ALBANESE, CPA, age 52, has over 30 years financial experience
including roles as CFO and COO. Currently he is the president of Cost Reduction
Solutions (CRS), a CPA consulting firm providing services to both private &
public companies as well as to the banking industry. From 1978-1986 Mr. Albanese
was instrumental in the development of Hertz Penske's One Way Consumer Rental
business. Since 2000 he has performed auditing and collateral examination
services for such banks as PNC Business Credit, North Fork Bank, Sterling
National Bank, Sovereign Bank and many others. Mr. Albanese received a Bachelors
of Science degree in Accounting and is a licensed CPA practicing in New Jersey.
He is a member of the AICPA and NJSCPA, The Garden State Credit Association and
is a registered accountant with the SEC's Public Company Accounting Oversight
Board (PCAOB).
BENGT G. ODNER, age 53, has served as a director since September 2000. He served
as the Company's Chairman from September 2000 through October 2002. Mr. Odner
has also served as our Chief Executive Officer from August 1999 through
September 2000 and as interim Chief Executive Officer from February 2002 to July
2002. Mr. Odner was a director of Crystal Fund Ltd., a Bermuda mutual fund, and
was a director of Crystal Fund Managers, Ltd. from 1996 until January 2003. From
1990 through 1995, Mr. Odner was the Chairman of Altus Nord AB, a property
holding company specializing in Scandinavian properties and a wholly owned
subsidiary of Credit Lyonais Bank Paris. Mr. Odner holds a masters degree in
Business Administration from Babson College.
EXECUTIVE COMPENSATION
The following table sets forth the compensation for each of the last three (3)
fiscal years earned by the Chief Executive Officer and each of the most highly
compensated executive officers (the "Named Executives").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
UNDERLYING
ANNUAL OTHER STOCK OTHER SECURITIES
YEAR SALARY BONUS COMPENSATION AWARDS COMPENSATION OPTIONS
-----------------------------------------------------------------------------
NAME AND PRINCIPAL POSITION
David Johnson (1) 2005 $150,000 $ -- $17,538 -- -- 200,000
Director, Chief Executive Officer 2004 $150,000 $3,125 $17,538 -- -- 600,000
And President 2003 $ 72,000 $ -- $ -- -- --
Joey Schwartz (2) 2005 $ 72,500 -- $ 9,230 -- -- 200,000
Director and, Chief 2004
Financial Officer 2003
Stan Kolaric 2005 $ 72,500 -- -- -- -- 200,000
Director and Chief 2004
Operating Officer 2003
Robert R. Marino (4) 2005 $ 74,423 $ -- -- -- --
2004 $150,000 $3,125 $ 7,325 -- -- 150,000
2003 $ 75,000 $ -- $ -- -- -- 150,000
1 In 2003, Mr. Johnson as an employee of the Company's wholly owned
subsidiary, ESW Canada, Inc. was paid at the annual rate of $72,000. He
also received options to purchase 150,000 shares of common stock under the
Company's 2002 Stock Option Plan with a per share exercise price of $0.27
(fair market value at the date of grant). The options expire ten years
from the date of issuance and vest over three years. In August 2004, Mr.
Johnson also received options to purchase 600,000 shares with a per share
exercise price of $0.50 (fair market value on the date of grant). The
options expire five years from issuance. In December 2005, Mr. Johnson
also received options to purchase 200,000 shares of Common Stock with a
per share exercise price of $1.00 (above the fair market value on the date
of grant). The options expire five years from issuance.
2 Prior to his appointment as an executive officer and election to the Board
of Directors, Mr. Schwartz served as a consultant and received consulting
fees. He became an executive officer of the Company in May 2005. In
December 2005, Mr. Schwartz received options for 200,000 shares of Common
Stock with a per share exercise price of $1.00 (above the fair market
value on the date of grant). The options expire five years from issuance.
3 Prior to his appointment as an executive officer and election to the Board
of Directors, Mr. Kolaric served as a consultant and received consulting
fees. He became an executive officer of the Company in May 2005. In
December 2005, Mr. Kolaric received options for 200,000 shares of Common
Stock with a per share exercise price of $1.00 (above the fair market
value on the date of grant). The options expire five years from issuance.
4 In fiscal 2002, Mr. Marino became a full time employee of the Company's
subsidiary, ESW America, Inc. and received and continues to be paid
compensation of $150,000 per annum. Mr. Marino also received options to
purchase 150,000 shares under the Company's 2002 Stock Option Plan with a
per share exercise price of $0.27 (fair market value at the date of
grant). The options expire ten years from the date of issuance and vest
over three years. In August 2004, Mr. Marino was granted options to
purchase 150,000 shares with a per share exercise price of $0.50.
(fair market value on the date of grant). The options expire five years
from issuance. Mr. Marino elected not to stand for re-election to the
Board and effective with the Company's annual meeting of shareholders on
June 23, 2005, and resigned his position as an executive officer of the
Company. Mr. Marino did not have any disputes or disagreements with the
Company and its business practices. He remains employed by the Company's
wholly owned subsidiary ESW America, Inc.
-33-
OPTION GRANTS DURING FISCAL 2005
In December 2005, the board of directors approved the aggregate award of 900,000
stock options to three executive officer/directors and two outside directors.
The options have immediate vesting with an exercise price of $1.00 per share
(above the fair market value at the date of grant) with an exercise period of
five years from the date of award.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ---------------------------------------------------------------------------------------------------------------------
NAME NUMBER OF PERCENT OF TOTAL EXERCISE OR EXPIRATION POTENTIAL REALIZABLE VALUE
SECURITIES OPTIONS/SAR'S BASE PRICE DATE AT ASSSUMED ANNUAL RATES
UNDERLYING GRANTED TO ($/SH) OF STOCK PRICE APPRECIATION
OPTIONS/SAR'S EMPLOYEES IN FOR OPTION TERM
GRANTED (#) FISCAL YEAR ---------------------------
5%($) 10%($)
- ---------------------------------------------------------------------------------------------------------------------
David J. Johnson 200,000 19.42% $1.00 December 30, 2010 $(21,320) $25,470
Joey Schwartz 200,000 19.42% $1.00 December 30, 2010 $(21,320) $25,470
Stan Kolaric 200,000 19.42% $1.00 December 30, 2010 $(21,320) $25,470
Bengt Odner 150,000 14.56% $1.00 December 30, 2010 $(15,990) $19,102
Nitin Amersey 150,000 14.56% $1.00 December 30, 2010 $(15,990) $19,102
- ---------------------------------------------------------------------------------------------------------------------
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the exercise of options
during the last fiscal year and unexercised options held as of the end of the
fiscal year with respect to each of the named directors and executives:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
SHARES NUMBER OF SHARES VALUE OF UNEXERCISED
ACQUIRED VALUE UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
ON EXERCISE REALIZED AT DECEMBER 31, 2005 AT DECEMBER 31, 2005 (1)
NAME # $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
David Johnson -- -- 1,150,000 50,000 $213,000 $21,500
Joey Schwartz -- -- 600,000 -- $80,000 --
Stan Kolaric -- -- 350,000 -- $30,000 --
Bengt Odner -- -- 1,033,333 16,667 $184,333 $7,166
Nitin Amersey -- -- 333,333 16,667 $44,333 $7,166
Robert Marino* -- -- 250,000 50,000 $73,000 $21,500
(1) Calculated by multiplying the number of shares underlying options by the
difference between the closing price of the Common Stock as quoted on the
Over-The-Counter Bulletin Board on December 31, 2005 and the exercise price of
the options.
* Denotes a former director or executive officer who resigned during fiscal
2005.
COMPENSATION OF NON-MANAGEMENT DIRECTORS
During 2005 the Company did not compensate its directors for their attendance at
meetings of the Board of Directors, however, non-management directors were
reimbursed for verifiable expenses incurred during the course of service to the
board and/or Company provided said expenses were approved by the Company. In
2006 the Company instituted monthly compensation for outside directors of
$2,500, as well as reimbursement for verifiable expenses incurred during the
course of service to the Company provided said expenses are approved by the
Company.
APPOINTMENT/ RESIGNATION OF OFFICERS AND DIRECTORS
Effective the close of business April 30, 2004, John A. Donohoe, Jr. resigned
from his position as Chief Executive Officer, President, Interim Chief Financial
Officer and as a member of the Company's Board of Directors to pursue other
business opportunities. Mr. Donohoe resigned from his positions without any
dispute or disagreement with the Company and its business practices or policies.
-34-
On May 3, 2004 the Company appointed David J. Johnson as its Interim President
and Chief Executive Officer and Nitin M. Amersey as its Interim Chairman of its
Board of Directors. Both appointments were effective May 1, 2004. Subsequently
in December 2004, Mr. Johnson was appointed President, Chief Executive Officer
and acting Chief Financial Officer and Mr. Amersey was appointed Chairman of the
Board.
On July 12, 2004 Messrs. Barry Gross and William Sifer tendered their
resignations from the Board of Directors. Neither Mr. Gross nor Mr. Sifer had
any disputes or disagreements with the Company and its business practices or
policies.
On May 23, 2005 Mr. Joey Schwartz was appointed Chief Financial Officer of the
Company and Mr. Stan Kolaric was appointed Chief Operating Officer of the
Company.
Mr. Robert Marino elected not to stand for election as a member at the annual
meeting of shareholders on June 23, 2005. Concurrent with the annual meeting,
Mr. Marino resigned as an executive officer of ESW without dispute or
disagreement with the Company and its business practices.
EMPLOYMENT AGREEMENTS
Effective September 10, 2003, the Company entered into Employment Agreements
with Robert R. Marino, Vice President and Technical Director of Research and
Development and David J. Johnson, Senior Vice President of Sales and Business
Development of the Company for a period of two (2) years and twenty (20) days
from the effective date. Both Messrs. Marino and Johnson were paid a base salary
of $150,000 in accordance with the Company's payroll practices. Additionally,
both Messrs. Marino and Johnson were entitled to a vehicle allowance of $6,000
annually. Mr. Johnson was appointed interim President and Chief Executive
Officer in May 2004, and was subsequently appointed President and Chief
Executive Officer, and served as Acting Chief financial Officer from December
2004 through May 2005.
The term of Mr. Johnson's employment agreement with the Company has lapsed;
however, he continues to receive annual compensation of $150,000 for his service
as Chief Executive Officer and President under the terms of the expired
agreement.
The term of Mr. Marino's employment agreement with the Company has also lapsed.
In addition, Mr. Marino has resigned from his position as an executive officer
with the Company. Mr. Marino continues to be employed by the Company's wholly
owned subsidiary ESW America, Inc. and receives annual compensation of $150,000.
In 2005 Messrs. Kolaric and Schwartz, each received total compensation that
would be $120,000 on an annual basis. Both Mr. Kolaric, our Chief Operating
Officer and Mr. Schwartz, our Chief Financial Officer continue to receive
compensation in their current positions in accordance with the terms of their
prior agreements with the Company and its subsidiary.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to the best knowledge of the Company, as of
April 13, 2006, certain information with respect to (1) beneficial owners of
more than ten percent (10%) of the outstanding common stock of the Company, (2)
beneficial ownership of shares of the Company's common stock by each director
and named executive, (3) beneficial ownership of shares of common stock of the
Company by all directors and officers as a group.
Unless otherwise noted, all shares are beneficially owned and the sole voting
and investment power is held by the persons/entities indicated.
Based upon the aggregate of all shares of common stock issued and outstanding as
of April 13, 2006 in addition to shares issuable upon exercise of options or
warrants currently exercisable or becoming exercisable within 60 days and which
are held by the individuals named on the table.
-35-
SHARES OF TOTAL % OF
COMMON OPTIONS/ BENEFICIAL COMMON STOCK
NAME OF BENEFICIAL OWNER STOCK OTHER OWNERSHIP(1) OUTSTANDING
Nitin M. Amersey, Chairman 155,000 333,333(2) 488,333 0.84%
335 Connie Crescent
Concord, ON L4K 5R2
David Johnson, -- 1,150,000(3) 1,150,000 1.95%
Chief Executive Officer,
President and Director
335 Connie Crescent
Concord, ON L4K 5R2
Bengt Odner, Director 4,848,134 4,158,333 9,006,467(4) 14.55%
335 Connie Crescent
Concord, ON L4K 5R2
Joey Schwartz, 10,000 600,000(14) 610,000 1.05%
Chief Financial Officer and
Director
335 Connie Crescent
Concord, ON L4K 5R2
Stan Kolaric 20,000 350,000(15) 370,000 0.64%
Chief Operation Officer and
Director
335 Connie Crescent
Concord, ON L4K 5R2
Black Family 1997 Trust (5) 1,614,286 5,000,000(13) 6,614,286 10.54%
1301 Avenue of the Americas
New York, NY 10019
Leon D. Black (6) 178,571 8,014,286 8,192,857 12.78%
1301 Avenue of the Americas
New York, NY 10019
Leon D. Black Trust UAD (8) 517,647 333,823(7) 851,470 1.47%
11/30/92 FBO Alexander Black
1301 Avenue of the Americas
New York, NY 10019
Leon D. Black Trust UAD (9) 517,647 333,823(7) 851,470 1.47%
11/30/92 FBO Benjamin Black
1301 Avenue of the Americas
New York, NY 10019
Leon D. Black Trust UAD (10) 517,647 333,823(7) 851,470 1.47%
11/30/92 FBO Joshua Black
1301 Avenue of the Americas
New York, NY 10019
Leon D. Black Trust UAD (11) 517,647 333,823(7) 851,470 1.47%
11/30/92 FBO Victoria Black
1301 Avenue of the Americas
New York, NY 10019
Robert C. Fanch(12) 3,513,024 3,180,000 6,693,024 10.99%
All current directors and 5,033,134 6,591,666 11,624,800 18.07%
executive officers as a group
(five persons)
(1) On the basis of 57,724,492 shares of common stock outstanding, plus, in
the case of any person deemed to own shares of common stock as a result of
owning options, warrants, or rights to purchase common stock exercisable
within 60 days of April 13, 2006.
-36-
(2) Includes options to purchase 33,333 shares of common stock at $0.27 per
share expiring August 6, 2013, options to purchase 150,000 shares of
common stock at $0.50 per share expiring August 11, 2009,and options to
purchase 150,000 shares of common stock at $1.00 per share expiring
December 30, 2010.
(3) Includes 250,000 options exercisable at $0.50, which expire May 4, 2006.
Also includes options to purchase 100,000 shares of common stock at $0.27
per share expiring August 6, 2013. Also includes options to purchase
600,000 shares of common stock at $0.50 per share expiring August 11,
2009. Also includes options to purchase 200,000 shares of common stock at
$1.00 per share expiring December 30, 2010.
(4) Mr. Bengt George Odner is a director of Environmental Solutions Worldwide,
Inc. as well as AB Odnia and the beneficiary of a trust that controls
Ledelle Holdings Limited. Includes 2,096,429 shares of common stock,
2,500,000 shares of common stock underlying a convertible debenture and
625,000 shares of common stock underlying warrants directly beneficially
owned by AB Odnia. Also includes 517,000 shares of common stock directly
owned by Ledelle Holdings Limited, a corporation organized under the Laws
of Cyprus. Further includes: (i) 2,234,705 shares of common stock and (ii)
1,033,333 shares of common stock underlying options.
(5) Includes shares and warrants owned by Leon D. Black, Leon D. Black Trust
UAD 11/30/92 FBO Alexander Black, Leon D. Black Trust UAD 11/30/92 FBO
Benjamin Black, Leon D. Black Trust UAD 11/30/92 FBO Joshua Black and Leon
D. Black Trust UAD 11/30/92 FBO Victoria Black for which beneficial
ownership is disclaimed.
(6) Includes shares and warrants owned by Black Family 1997 Trust, Leon D.
Black Trust UAD 11/30/92 FBO Alexander Black, Leon D. Black Trust UAD
11/30/92 FBO Benjamin Black, Leon D. Black Trust UAD 11/30/92 FBO Joshua
Black and Leon D. Black Trust UAD 11/30/92 FBO Victoria Black which the
beneficial ownership is disclaimed.
(7) Warrants to purchase 333,823 shares of common stock.
(8) Excludes shares and warrants owned by Black Family 1997 Trust, Leon D.
Black, Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black, Leon D. Black
Trust UAD 11/30/92 FBO Joshua Black and Leon D. Black Trust UAD 11/30/92
FBO Victoria Black for which beneficial ownership is disclaimed.
(9) Excludes shares and warrants owned by Black Family 1997 Trust, Leon D.
Black, Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, Leon D. Black
Trust UAD 11/30/92 FBO Joshua Black and Leon D. Black Trust UAD 11/30/92
FBO Victoria Black for which beneficial ownership is disclaimed.
(10) Excludes shares and warrants owned by Black Family 1997 Trust, Leon D.
Black, Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, Leon D. Black
Trust UAD 11/30/92 FBO Benjamin Black, Leon D. Black Trust UAD 11/30/92
FBO Victoria Black for which beneficial ownership is disclaimed.
(11) Excludes shares and warrants owned by Black Family 1997 Trust, Leon D.
Black, Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, Leon D. Black
Trust UAD 11/30/92 FBO Benjamin Black and Leon D. Black Trust UAD 11/30/92
FBO Joshua Black for which beneficial ownership is disclaimed.
(12) Includes (i) 750,000 shares of Common Stock beneficially owned by Robert
C. Fanch., (ii) 2,763,024 shares of Common Stock directly beneficially
owned by Robert C. Fanch Revocable Trust ("Trust"), a trust of which
Robert C. Fanch is the trustee and beneficiary, (iii) 1,180,000 shares of
Common Stock issuable upon the exercise of warrants directly beneficially
owned by Trust and(iv) 2,000,000 shares of Common Stock issuable upon
conversion of convertible debentures directly beneficially owned by the
Trust.
(13) Includes 1,000,000 shares of Common Stock issuable upon the exercise of
warrants, and 4,000,000 shares of Common Stock issuable upon conversion of
convertible debentures.
-37-
(14) Includes 250,000 options exercisable at $0.50, which expire May 4, 2006
and 150,000 options exercisable at $0.50 which expire December 1, 2009.
Also includes options to purchase 200,000 shares of common stock at $1.00
per share expiring December 30, 2010.
(15) Includes 150,000 options exercisable at $0.50 which expire December 1,
2009. Also includes options to purchase 200,000 shares of common stock at
$1.00 per share expiring December 30, 2010.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 2004 the Company issued a $1.25 million unsecured subordinated
promissory note to AB Odnia, an entity that is affiliated with Mr. Odner, a
director of the Company. AB Odnia subsequently exchanged its unsecured
subordinated promissory note to a $1.25 million convertible debenture, in
September 2004 as a part of the $6.1 million in convertible debentures issued by
the Company.
Mr. Amersey the Company's Chairman of the Board is the owner of Langford
Business Services LLC, a company that is party to a sales representative
agreement dated March 15, 2002, with the Company's wholly owned subsidiary, ESW
Canada, Inc. whereby Langford and its subagent, Hudson Engineering Industries
Pvt. Ltd. (Bombay), also owned by Mr. Amersey and his family, serve as ESW
Canada's exclusive representative in India for the sale and after sale support
of certain products of the Company in India. To date, no sales transactions have
taken place under the agreement between ESW Canada and Langford.
DESCRIPTION OF SECURITIES
Common Stock
We have 125,000,000 shares of common stock $.001 par value authorized. Each
holder of common stock is entitled to one vote for each share held of record on
all matters submitted to a vote of the stockholders. The holders of common stock
are not entitled to cumulative voting rights with respect to the election of
directors, and, as a consequence, minority stockholders will not be able to
elect directors on the basis of their votes alone. Holders of common stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefore.
In the event of a liquidation, dissolution or winding up of the company, holders
of our common stock would be entitled to share ratably in all assets remaining
after payment of liabilities and the satisfaction of any liquidation preference
of any then outstanding series of preferred stock. Holders of common stock have
no preemptive rights and no right to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable.
As of April 28, 2006, there were 59,265,938 shares of common stock outstanding
held by approximately 285 shareholders of record and approximately 4500
additional shareholders in street name. 16,974,628 shares which are subject to
this registration statement are already included in the shares of common stock
that are issued and outstanding, as of April 28, 2006.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
PLAN OF DISTRIBUTION
ESW is registering the shares of common stock on behalf of the selling security
holders. A selling security holder may sell its shares from time to time by any
method permitted by the Securities Act of 1933. Each selling security holder
will act independently of ESW in making decisions with respect to the timing,
manner and size of each sale.
-38-
The shares of our common stock covered by this prospectus will be sold, if at
all, by each of the selling security holders named herein or their respective
pledges, donees, transferees or other successors in interest and not by us.
Each selling security holder may sell the shares of common stock covered by this
prospectus from time to time at market prices prevailing at the time of sale, at
prices related to market prices, at a fixed price or prices subject to change or
at negotiated prices, by a variety of methods including the following:
o in the over-the-counter market or on a national securities exchange
(any of which may include crosses and block transactions);
o in privately-negotiated transactions;
o through broker dealers, who may act as agents or principals, including
through ordinary brokerage transactions and transactions in which
broker solicits purchasers;
o in a block trade in which a broker-dealer will attempt to sell a block
of shares of common stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
o through one or more underwriters, dealers and agents, on a firm
commitment or best effort basis, who may receive compensation in the
form of underwriting discounts, concessions or omissions from a seller
and/or the purchasers of the shares for whom they may act as agent;
o through exchange distributions in accordance with applicable rules;
o directly to one or more purchasers;
o through agents;
o through option transactions, forward contracts, equity swaps or other
derivative transactions relating to the securities;
o to cover permissible short sales made of the securities;
o in any combination of the above; and
o in any other lawful manner.
To the extent required, this prospectus may be amended or supplemented from time
to time to describe a specific plan of distribution. In effecting sales,
broker-dealers engaged by a selling security holder may arrange for other
broker-dealers to participate in a resale.
Certain shares may also be sold pursuant to Rule 144. The selling security
holder shall have the sole and absolute discretion not to accept any purchase
offer or make any sale of shares if it deems the purchase price to be
unsatisfactory at any particular time.
The selling security holders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling security
holders and/or the purchasers of shares for whom such broker-dealers may act as
agents or to whom they sell as principal or both, which compensation as to a
particular broker-dealer might be in excess of customary commissions. Market
makers and block purchasers purchasing the shares will do so for their own
account and at their own risk. It is possible that the selling security holders
will attempt to sell shares of common stock in block transactions to market
makers or other purchasers at a price per share which may be below the then
market price. The selling security holders cannot assure that all or any of the
shares offered in this Prospectus will be issued to, or sold by, the selling
security holders. The selling security holders and any brokers, dealers or
agents, upon effecting the sale of any of the shares offered in this Prospectus,
may be deemed "underwriters" as that term is defined under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, or the
rules and regulations under such acts.
-39-
As noted above, the selling security holders, alternatively, may sell all or any
part of the shares offered in this prospectus through an underwriter. The
selling security holders have not entered into any agreement with a prospective
underwriter and there is no assurance that any such agreement will be entered
into. If the selling security holders enter into such an agreement or
agreements, the relevant details will be set forth in a supplement or revisions
to this prospectus.
Each selling security holder and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, a selling security holder. Furthermore, under Regulation
M, persons engaged in a distribution of securities are prohibited form
simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions or
exemptions. All of these limitations may affect the marketability of the shares.
We will not receive any of the proceeds from the sale of these shares of common
stock, although we have paid the expenses of preparing this prospectus and the
related registration
We have agreed to indemnify certain selling security holder, and its transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments a selling
security holder and its respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
SELLING STOCKHOLDERS
The number of shares set forth in the table for the selling security holders
represents the number of shares of common stock to be offered by each selling
security holder, assuming that all warrants and options are exercised, and
debentures are converted. The actual exercise price of warrants may be subject
to adjustment (See Risk Factors). The actual number of shares of common stock
offered in this prospectus, and included in the registration statement of which
this prospectus is a part, includes such additional number of shares of common
stock as may be issued or issuable upon exercise of related warrants by reason
of any stock split, stock dividend or similar transaction involving the common
stock, in accordance with Rule 416 under the Securities Act of 1933, as amended.
The applicable percentage of ownership listed below is based on 59,265,938
shares of common stock outstanding as of April 28, 2006.
Common Stock Common Stock to be Sold Common Stock Beneficially Owned
Beneficially Owned After Offering*
Prior to Offering
Holder Number Number Number Percent
AB Odnia 5,221,429 3,196,429 (1) 2,025,000 3.26%
Anthony C. Naso 100,000 100,000 (2) -0- -0-
Arthur Sagoskin 44,118 44,118 (3) -0- -0-
Arthur V. Conover, III 15,000 15,000 (4) -0- -0-
Arvind Peehal 15,000 15,000 (5) -0- -0-
Barry Gross 110,294 110,294 (6) -0- -0-
Bengt G. Odner 3,635,038 2,614,705 (7) 1,020,333 1.64%
Black Family 1997 Trust 6,614,286 6,614,286 (8) -0- -0-
David J. Johnson 600,000 600,000 (9) -0- -0-
Duane Gulick 1,430,881 100,000 (10) 1,330,881 2.24%
Ernie L. Green 150,000 150,000 (11) -0- -0-
Financial Trust Company Inc. 4,052,941 4,052,941 (12) -0- -0-
Frank Haas 324,750 250,000 (13) 74,750 0.13%
Jack T. and Judith E. Pottle Trust 895,428 558,424 (14) 337,004 0.57%
Joseph Baratta 15,000 15,000 (15) -0- -0-
Joe Marino 25,000 25,000 (16) -0- -0-
John A. Donohoe, Jr. 1,316,667 1,316,667 (17) -0- -0-
-40-
John J Hannan 1,278,571 1,278,571 (18) -0- -0-
Leon D. Black 1,578,571 1,578,571 (19) -0- -0-
Leon D. Black Trust UAD 11/30/92 851,471 851,471 (20) -0- -0-
FBO Alexander Black
Leon D. Black Trust UAD 11/30/92 851,471 851,471 (20) -0- -0-
FBO Benjamin Black
Leon D. Black Trust UAD 11/30/92 851,471 851,471 (20) -0- -0-
FBO Joshua Black
Leon D. Black Trust UAD 11/30/92 851,471 851,471 (20) -0- -0-
FBO Victoria Black
Linda Smith 100,000 100,000 (21) -0- -0-
LMWW Cust. FBO John S. Newsome 255,714 255,714 (22) -0- -0-
Traditional IRA
Louis E. Edmondson, Trust Dated 2,026,470 2,026,470 (23) -0- -0-
July 26th 2000
Louis E. Edmondson 2,550,488 153,429 (24) 2,397,059 4.07%
Michael J. Doyle 477,286 102,286 (25) 375,000 0.63%
Nitin M. Amersey 305,000 150,000 (26) 155,000 0.26%
Rae Cowan 296,688 296,688 (27) -0- -0-
Richard Ressler 1,278,571 1,278,571 (28) -0- -0-
Robert C. Fanch 750,000 750,000 (29) -0- -0-
Robert C. Fanch Revocable Trust 5,943,024 5,943,024 (30) -0- -0-
Robert J. and Linda M. Smith 450,000 450,000 (31) -0- -0-
Robert R. Marino 1,255,882 1,255,882 (32) -0- -0-
Sheldon Sagoskin 29,412 29,412 (33) -0- -0-
Teena D'Alessio 15,000 15,000 (34) -0- -0-
Tom Ferello 15,000 15,000 (34) -0- -0-
<FN>
* Assumes the exercise of all warrants, options and /or convertible debentures,
and the sale of all shares offered by the selling security holder.
(1) Includes 2,500,000 shares of common stock underlying a $1,250,000
convertible debenture. The Debenture is for a term of three (3) years and issued
as of September 13, 2004 and is convertible into shares of the Company's common
stock at the option of the holder by dividing the principal amount of the
Debenture to be converted by $0.50. Also includes 625,000 shares of common stock
underlying 625,000 warrants issued in connection with the September 2004 PIPE.
Each warrant is exercisable for one (1) share of common stock at $0.85 per
share. These warrants expire on September 13, 2007. Also includes 71,429 shares
of common stock issued for interest earned on a Debenture and a good faith
estimate of 142,858 additional shares that may be issued for interest earned on
the debenture.
(2) Includes 100,000 shares of common stock subscribed to in the Company's 2002
unit private placement. These shares may be eligible for resale by selling
security holder pursuant to Rule 144 of the Securities Act.
(3) Includes 44,118 shares of common stock that were issued from the exercise of
warrants from the Company's 2002 unit private placement.
(4) Includes 15,000 options to purchase 15,000 shares of common stock at $0.50
per share expiring August 11, 2007.
(5) Includes 15,000 options to purchase 15,000 shares of common stock at $0.50
per share expiring August 11, 2007.
(6) Includes 110,294 shares of common stock that were issued from the exercise of
warrants from the Company's 2002 unit private placement.
-41-
(7) Includes 1,176,470 shares of common stock subscribed to in the Company's
2002 unit private placement. These shares may be eligible for resale by selling
security holder pursuant to Rule 144 of the Securities Act. Also includes
588,235 shares of common stock that were issued from the exercise of warrants
from the Company's 2002 unit private placement. Also includes 850,000 options to
purchase 850,000 shares of common stock at $0.50 per share expiring August 11,
2009.
(8) Includes 1,500,000 shares of common stock subscribed to at $0.40 per share
in the Company's 2001 private placement. Shares may be eligible for resale by
selling security holder pursuant to Rule 144 of the Securities Act. Also
includes 4,000,000 shares of common stock underlying a $2,000,000 convertible
debenture. The Debenture is for a term of three (3) years and issued as of
September 13, 2004 and is convertible into shares of the Company's common stock
at the option of the holder by dividing the principal amount of the Debenture to
be converted by $0.50. Also includes 1,000,000 shares of common stock underlying
1,000,000 warrants issued in connection with the September 2004 PIPE. Each
warrant is exercisable for one (1) share of common stock at $0.85 per share.
These warrants expire on September 13, 2007. Also includes 114,286 shares of
common stock issued for interest earned on a Debenture and a good faith
estimate of 228,572 additional shares that may be issued for interest earned on
the debenture.
(9) Includes 600,000 options to purchase 600,000 shares of common stock at $0.50
per share expiring August 11, 2009.
(10) Includes 100,000 options to purchase 100,000 shares of common stock at
$0.50 per share expiring August 11, 2007.
(11) Includes 150,000 shares of common stock subscribed to in the Company's 2002
unit private placement. These shares may be eligible for resale by selling
security holder pursuant to Rule 144 of the Securities Act.
(12) Includes 2,352,941 shares of common stock, issued in connection with the
spring 2005 PIPE. Also includes 1,300,000 shares of common stock underlying
1,300,000 warrants exercisable at $0.90 per share, includes 200,000 shares of
common stock underlying 200,000 warrants at $2.00 per share and includes 200,000
shares of common stock underlying 200,000 warrants at $3.00 per share, issued in
connection with the Spring 2005 PIPE. Each warrant is exercisable for one (1)
share of common stock. These warrants expire on April 21, 2008.
(13) Includes 250,000 options to purchase 250,000 shares of common stock at
$0.50 per share expiring August 11, 2007.
(14) Includes 73,529 shares of common stock that were issued from the exercise
of warrants from the Company's 2002 unit private placement. Also includes
300,000 shares of common stock underlying a $150,000 convertible debenture. The
Debenture is for a term of three (3) years and issued as of September 13, 2004
and is convertible into shares of the Company's common stock at the option of
the holder by dividing the principal amount of the Debenture to be converted by
$0.50. Also includes 75,000 shares of common stock underlying 75,000 warrants
issued in connection with the September 2004 PIPE. Each warrant is exercisable
for one (1) share of common stock at $0.85 per share. These warrants expire on
September 13, 2007. Also includes 8,571 shares of common stock issued for
interest earned on a Debenture and a good faith estimate of 17,142 additional
shares that may be issued for interest earned on the debenture. Also includes
58,824 shares of common stock, issued in connection with the spring 2005 PIPE.
Also includes 32,500 shares of common stock underlying 32,500 warrants
exercisable at $0.90 per share, includes 5,000 shares of common stock underlying
5,000 warrants at $2.00 per share and includes 5,000 shares of common stock
underlying 5,000 warrants at $3.00 per share, issued in connection with the
Spring 2005 PIPE. Each warrant is exercisable for one (1) share of common stock.
These warrants expire on July 5, 2008.
(15) Includes 15,000 options to purchase 15,000 shares of common stock at $0.50
per share expiring August 11, 2007.
(16) Includes 25,000 options to purchase 25,000 shares of common stock at $0.50
per share expiring August 11, 2007.
(17) Includes 600,000 shares of common stock that were issued from the exercise
of warrants from the Company's 2002 unit private placement. Also includes
666,667 options to purchase 666,667 shares of common stock at $0.66 per share
expiring September 10, 2008. Also includes 50,000 options to purchase 50,000
shares of common stock at $0.45 per share expiring April 20, 2009.
(18) Includes 1,000,000 shares of common stock underlying a $500,000 convertible
debenture. The Debenture is for a term of three (3) years and issued as of
September 13, 2004 and is convertible into shares of the Company's common stock
at the option of the holder by dividing the principal amount of the Debenture to
be converted by $0.50. Also includes 250,000 shares of common stock underlying
250,000 warrants issued in connection with the September 2004 PIPE. Each warrant
is exercisable for one (1) share of common stock at $0.85 per share. These
warrants expire on September 13, 2007. Also includes 28,571 shares of common
stock issued for interest earned on a Debenture and a good faith estimate of
57,142 additional shares that may be issued for interest earned on the
debenture.
-42-
(19) Includes 150,000 shares of common stock subscribed to in the Company's
October 10, 2000 unit private placement. Shares may be eligible for resale by
selling security holder pursuant to Rule 144 of the Securities Act. Also
includes 150,000 shares of common stock that were issued from the exercise of
warrants from the Company's October 10, 2000, unit private placement. Also
includes 1,000,000 shares of common stock underlying a $500,000 convertible
debenture. The Debenture is for a term of three (3) years and issued as of
September 13, 2004 and is convertible into shares of the Company's common stock
at the option of the holder by dividing the principal amount of the Debenture to
be converted by $0.50. Also includes 250,000 shares of common stock underlying
250,000 warrants issued in connection with the September 2004 PIPE. Each warrant
is exercisable for one (1) share of common stock at $0.85 per share. These
warrants expire on September 13, 2007. Also includes 28,571 shares of common
stock issued for interest earned on a Debenture and a good faith estimate of
57,142 additional shares that may be issued for interest earned on the
debenture.
(20) Includes 150,000 shares of common stock subscribed to in the Company's
October 10, 2000 unit private placement. Shares may be eligible for resale by
selling security holder pursuant to Rule 144 of the Securities Act. Also
includes 150,000 shares of common stock that were issued from the exercise of
warrants from the Company's October 10, 2000, unit private placement. Also
includes 367,647 shares of common stock subscribed to in the Company's 2002 unit
private placement. These shares may be eligible for resale by selling security
holder pursuant to Rule 144 of the Securities Act. Also includes 183,824 shares
of common stock that were issued from the exercise of warrants from the
Company's 2002 unit private placement.
(21) Includes 100,000 options to purchase 100,000 shares of common stock at
$0.50 per share expiring August 11, 2007.
(22) Includes 200,000 shares of common stock underlying a $100,000 convertible
debenture. The Debenture is for a term of three (3) years and issued as of
September 13, 2004 and is convertible into shares of the Company's common stock
at the option of the holder by dividing the principal amount of the Debenture to
be converted by $0.50. Also includes 50,000 shares of common stock underlying
50,000 warrants issued in connection with the September 2004 PIPE. Each warrant
is exercisable for one (1) share of common stock at $0.85 per share. These
warrants expire on September 13, 2007. Also includes 5,714 shares of common
stock issued for interest earned on a Debenture and a good faith estimate of
11,428 additional shares that may be issued for interest earned on the
debenture.
(23) Includes 1,176,470 shares of common stock, issued in connection with the
spring 2005 PIPE. Also Includes 650,000 shares of common stock underlying
650,000 warrants exercisable at $0.90 per share, includes 100,000 shares of
common stock underlying 100,000 warrants at $2.00 per share and includes 100,000
shares of common stock underlying 100,000 warrants at $3.00 per share, issued in
connection with the Spring 2005 PIPE. Each warrant is exercisable for one (1)
share of common stock. These warrants expire on July 5, 2008.
(24) Includes 120,000 shares of common stock underlying a $60,000 convertible
debenture. The Debenture is for a term of three (3) years and issued as of
September 13, 2004 and is convertible into shares of the Company's common stock
at the option of the holder by dividing the principal amount of the Debenture to
be converted by $0.50. Also includes 30,000 shares of common stock underlying
30,000 warrants issued in connection with the September 2004 PIPE. Each warrant
is exercisable for one (1) share of common stock at $0.85 per share. These
warrants expire on September 13, 2007. Also includes 3,429 shares of common
stock issued for interest earned on a Debenture and a good faith estimate of
6,858 additional shares that may be issued for interest earned on the debenture.
(25) Includes 80,000 shares of common stock underlying a $40,000 convertible
debenture. The Debenture is for a term of three (3) years and issued as of
September 13, 2004 and is convertible into shares of the Company's common stock
at the option of the holder by dividing the principal amount of the Debenture to
be converted by $0.50. Also includes 20,000 shares of common stock underlying
20,000 warrants issued in connection with the September 2004 PIPE. Each warrant
is exercisable for one (1) share of common stock at $0.85 per share. These
warrants expire on September 13, 2007. Also includes 2,286 shares of common
stock issued for interest earned on a Debenture and a good faith estimate of
4,572 additional shares that may be issued for interest earned on the debenture.
(26) Includes 150,000 options to purchase 150,000 shares of common stock at
$0.50 per share expiring August 11, 2009.
(27) Includes 296,688 shares of common stock that were issued from the exercise
of warrants from the Company's 2002 unit private placement.
(28) Includes 1,000,000 shares of common stock underlying a $500,000 convertible
debenture. The Debenture is for a term of three (3) years and issued as of
September 13, 2004 and is convertible into shares of the Company's common stock
at the option of the holder by dividing the principal amount of the Debenture to
be converted by $0.50. Also includes 250,000 shares of common stock underlying
250,000 warrants issued in connection with the September 2004 PIPE. Each warrant
is exercisable for one (1) share of common stock at $0.85 per share. These
warrants expire on September 13, 2007. Also includes 28,571 shares of common
stock issued for interest earned on a Debenture and a good faith estimate of
57,142 additional shares that may be issued for interest earned on the
debenture.
-43-
(29) Includes 750,000 shares of common stock subscribed to at $0.40 per share in
the Company's 2001 private placement. Shares may be eligible for resale by
selling security holder pursuant to Rule 144 of the Securities Act.
(30) Includes 1,176,470 shares of common stock subscribed to in the Company's
2002 unit private placement. These shares may be eligible for resale by selling
security holder pursuant to Rule 144 of the Securities Act. Also includes
588,235 shares of common stock that were issued from the exercise of warrants
from the Company's 2002 unit private placement. Also includes 2,000,000 shares
of common stock underlying a $1,000,000 convertible debenture. The Debenture is
for a term of three (3) years and issued as of September 13, 2004 and is
convertible into shares of the Company's common stock at the option of the
holder by dividing the principal amount of the Debenture to be converted by
$0.50. Also includes 500,000 shares of common stock underlying 500,000 warrants
issued in connection with the September 2004 PIPE. Each warrant is exercisable
for one (1) share of common stock at $0.85 per share. These warrants expire on
September 13, 2007. Also includes 57,143 shares of common stock issued for
interest earned on a Debenture and a good faith estimate of 114,286 additional
shares that may be issued for interest earned on the debenture. Also includes
941,176 shares of common stock, issued in connection with the spring 2005 PIPE.
Also includes 520,000 shares of common stock underlying 520,000 warrants
exercisable at $0.90 per share, includes 80,000 shares of common stock
underlying 80,000 warrants at $2.00 per share and includes 80,000 shares of
common stock underlying 80,000 warrants at $3.00 per share, issued in connection
with the Spring 2005 PIPE. Each warrant is exercisable for one (1) share of
common stock. These warrants expire on July 5, 2008.
(31) Includes 300,000 shares of common stock subscribed to in the Company's 2002
unit private placement. These shares may be eligible for resale by selling
security holder pursuant to Rule 144 of the Securities Act. Also includes
150,000 shares of common stock that were issued from the exercise of warrants
from the Company's 2002 unit private placement.
(32) Includes 900,000 shares of common stock and also includes 205,882 shares of
common stock subscribed to in the Company's 2002 unit private placement. All
these shares may be eligible for resale by selling security holder pursuant to
Rule 144 of the Securities Act. Also includes 102,941 shares of common stock
underlying 205,882 warrants. Two warrants are exercisable at the aggregate price
of $0.30 for one (1) share of common stock. Warrants are only exercisable in
even lots. These warrants expire on April 27, 2006. Also includes 150,000
options to purchase 150,000 shares of common stock at $0.50 per share expiring
August 11, 2009.
(33) Includes 29,412 shares of common stock that were issued from the exercise
of warrants from the Company's 2002 unit private placement.
(34) Includes 15,000 options to purchase 15,000 shares of common stock at $0.50
per share expiring August 11, 2007.
</FN>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On October 20, 2004, our former certified accountants, Goldstein and Morris
Certified Public Accountants, P.C. resigned as they advised us that they no
longer had the resources available to service the company. Goldstein and Morris
was previously appointed as our certifying accountants on February 5, 2001.
Goldstein and Morris' reports on the financial statements for our fiscal years
ended December 31, 2003 and 2002 did not contain an adverse opinion or a
disclaimer of opinion nor were such reports qualified or modified as to
uncertainty, audit scope or accounting principles except as previously disclosed
in our 10-KSB reports for our fiscal years ended December 31, 2003 and 2002
which included the following statement:
"The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has suffered recurring losses
from operations and lacks a sufficient source of revenue, which raises
substantial doubts about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note1. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty."
During the period in which Goldstein and Morris audited our financial statements
and the interim period in which Goldstein and Morris served as our certifying
accountants, there were no disagreement(s) with Goldstein and Morris on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement(s), if not resolved to the
satisfaction of Goldstein and Morris, would have caused Goldstein and Morris to
make reference to the subject matter of such disagreement(s) in connection with
its audit report.
-44-
On November 5, 2004, our Board of Directors engaged Mintz & Partners LLP to
audit our consolidated financial statements. During the two most recent fiscal
years and through November 5, 2004, we had not consulted with Mintz regarding
either the application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that might be
rendered on our financial statements, and neither a written report nor oral
advice was provided that was an important factor considered in our reaching a
decision as to the accounting, auditing or financial reporting issue; or any
matter that was either the subject of a disagreement.
LEGAL MATTERS
The validity of the issuance of the shares being offered hereby will be passed
upon for us by Baratta & Goldstein, New York, New York. A portion of the shares
being registered herein are being issued to ESW's attorney in such law firm for
services provided to ESW.
EXPERTS
The consolidated financial statements and schedule of Environmental Solutions
Worldwide, Inc. and subsidiaries as of December 31, 2004, have been incorporated
by reference herein and in the registration statement in reliance upon the
reports of Mintz and Partners LLP, Chartered Accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing. The auditor for the Company's 2002 and 2003 financial statements
have not permitted use of their report in the Company's registration statement.
The Company's prior auditors resigned effective October 20, 2004 as the firm
advised that it was no longer able to service our needs as a public company. The
resignation was not sought or recommended by our audit committee or our Board of
Directors. We subsequently learned that our prior auditors were no longer an
active operating entity engaged in the practice of public accounting and
auditing work. Due to our prior auditor's resignation and discontinuation of its
public practice, investors and shareholders of our common stock may have limited
recourse against our prior auditors in the event of any claims associated with
prior work performed on our behalf. (See Risk Factors).
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act of 1933, relating to the shares of our common stock being offered
by this prospectus. For further information pertaining to our common stock and
the shares of common stock being offering by this prospectus, reference is made
to such registration statement. This prospectus constitutes the prospectus we
filed as a part of the registration statement and it does not contain all
information in the registration statement, certain portions of which have been
omitted in accordance with the rules and regulations of the SEC.
In addition, we are subject to the informational requirements of the Securities
Exchange Act of 1934, and, in accordance with such requirements, we file
reports, proxy statements and other information with the SEC relating to our
business, financial statements and other matters.
Reports and proxy and information statements filed under Section 14(a) and 14(c)
of the Securities Exchange Act of 1934 and other information filed with the SEC
as well as copies of the registration statement can be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 100 F Street, N.E. Washington, D.C. 20549, and at the SEC's Midwest
Regional Offices at 500 West Madison Street, Chicago, Illinois 60606. Copies of
such material can also be obtained at prescribed rates from the Public Reference
Section of the SEC at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1.800.SEC.0330 for further
information on the operation of the public reference room. Such material may
also be obtained electronically by visiting the SEC's web site on the Internet
at http://www.sec.gov. Our common stock is traded on the Over the Counter
Bulletin Board under the symbol "ESWW."
-45-
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Heritage Trust Company,
1320-4 King St. West, Toronto, Ontario M5H-1B6 Canada.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F 1
Consolidated Balance Sheet -- December 31, 2005 F 2
Consolidated Statements of Operations -- Years Ended December 31, 2005
and 2004 F 3
Consolidated Statements of Stockholders' Equity -- Years Ended
December 31, 2005 and 2004 F 4
Consolidated Statements of Cash Flows -- Years Ended December 2005
and 2004 F 5
Notes to Consolidated Financial Statements F 6--F 18
-46-
Mintz & Partners LLP
Chartered Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
Environmental Solutions Worldwide, Inc.
We have audited the accompanying consolidated balance sheet of Environmental
Solutions Worldwide, Inc. as of December 31, 2005, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years ended December 31, 2005 and December 31, 2004. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Environmental
Solutions Worldwide, Inc. as of December 31, 2005, and the results of its
operations and its cash flows for each of the years ended December 31, 2005 and
December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America.
Toronto, Ontario
March 28, 2006 /S/ MINTZ & PARTNERS LLP
------------------------
Chartered Accountants
F-1
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
Current assets
Cash and cash equivalents (Note 4) $ 3,083,373
Accounts receivable - net of allowance of $27,414 (Note 2) 821,005
Insurance proceeds recoverable (Note 5) 148,500
Inventories (Note 6) 1,028,634
Prepaid expenses 259,277
------------
Total current assets 5,340,789
Property, plant and equipment, net of accumulated
depreciation of $725,833 (Note 7) 3,289,541
Patents and trademarks, net of accumulated
amortization of $1,051,817 1,055,313
------------
$ 9,685,643
============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 830,271
Redeemable Class A special shares (Note 8) 453,900
Current portion of capital lease obligation (Note 14) 3,120
------------
Total current liabilities 1,287,291
Long Term Liabilities
Captial lease obligation (Note 14) 14,545
Convertible debentures (Note 9) 5,800,197
------------
Total liabilities 7,102,033
------------
Stockholders Equity
Common stock, $0.001 par value, 125,000,000
shares authorized; 57,422,824 shares
issued and outstanding 57,422
Additional paid-in capital 17,434,697
Accumulated deficit (14,908,509)
------------
Total stockholders' equity 2,583,610
------------
$ 9,685,643
============
The accompanying notes are an integral part of these financial statements
F-2
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2005 2004
------------ ------------
Revenue
Net sales $ 3,072,236 $ 1,906,704
Cost of sales 1,935,711 1,166,653
------------ ------------
Gross profit 1,136,525 740,051
------------ ------------
Operating expenses
Marketing, office and general costs 2,674,282 1,330,126
Research and development costs 541,811 3,366
Officers' compensation and directors fees 390,191 394,178
Consulting and professional fees 319,244 365,715
Interest on long term debt 244,000 72,364
Foreign exchange gain (3,460) (24,128)
Depreciation and amortization 350,376 344,447
------------ ------------
4,516,444 2,486,068
------------ ------------
Loss from operations (3,379,919) (1,746,017)
Write down of property, plant and equipment and patents (66,191) --
Interest Income 98,883 24,704
------------ ------------
Net Loss $ (3,347,227) $ (1,721,313)
============ ============
Loss per share $ (0.06) $ (0.03)
============ ============
Weighted average number of shares outstanding 53,056,422 49,978,095
============ ============
The accompanying notes are an integral part of these financial statements
F-3
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
January 1, 2004 49,349,490 $ 49,348 $ 11,880,083 $ (9,839,969) $ 2,089,462
Net loss -- -- -- (1,721,313) (1,721,313)
Common stock issued from exercise of warrants 875,353 876 261,730 -- 262,606
Fair value of warrants on convertible debentures -- -- 528,000 -- 528,000
net of amortization
Write-off options receivable -- -- (37,500) -- (37,500)
Options issued for services rendered -- -- 28,800 -- 28,800
----------------------------------------------------------------------
December 31, 2004 50,224,843 50,224 12,661,113 (11,561,282) 1,150,055
Net Loss -- -- -- (3,347,227) (3,347,227)
Net proceeds from private placements 4,529,411 4,529 3,830,756 -- 3,835,285
Common stock issued from exercise of options 50,000 50 25,950 -- 26,000
Common stock issued from exercise of warrants 2,269,999 2,270 658,877 -- 661,147
Issuance of common stock against interest on debentures 348,571 349 243,651 -- 244,000
Fair value on extension of warrants -- -- 14,350 -- 14,350
-----------------------------------------------------------------------
December 31, 2005 57,422,824 $ 57,422 $ 17,434,697 $(14,908,509) $ 2,583,610
======================================================================
See accompanying notes to the consolidated financial statements
F-4
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2005 2004
----------- -----------
Net loss $(3,347,227) $(1,721,313)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 262,470 129,847
Amortization 215,373 214,599
Provision for uncollectible accounts 11,910 15,504
Interest on debentures 244,000 72,364
Amortization of debenture warrant fair value 176,000 52,197
Options issued for services provided -- 28,800
Warrant extension expense 14,350 --
Write down of Property, plant and equipment and patents 66,191 --
Increase (decrease) in cash flows from operating
activities resulting from changes in:
Accounts receivable (501,311) 24,832
Insurance proceeds recoverable (148,500) --
Options receivable -- (37,500)
Inventories (651,956) (117,707)
Prepaid expenses (18,926) (267,736)
Other assets -- 39,982
Accounts payable and accrued liabilities 456,395 105,459
----------- -----------
Net cash used in operating activities (3,221,231) (1,460,672)
----------- -----------
Investing activities:
Acquisition of property, plant and equipment, net (2,846,434) (355,807)
Increase in patents and trademarks (4,407) --
----------- -----------
Net cash used in investing activities (2,850,841) (355,807)
----------- -----------
Financing activities:
Issuance of common stock 4,522,432 262,606
Issuance of convertible debentures -- 6,100,000
----------- -----------
Net cash provided by financing activities 4,522,432 6,362,606
----------- -----------
Net increase (decrease) in cash (1,549,640) 4,546,127
Cash & cash equivalents, beginning of year 4,633,013 86,886
----------- -----------
Cash & cash equivalents, end of period $ 3,083,373 $ 4,633,013
=========== ===========
Supplemental disclosures:
Interest received $ 98,883 $ 24,704
=========== ===========
The accompanying notes are an integral part of these financial statements
F-5
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 financial statements have been prepared in
conformity with United States generally accepted accounting principles.
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 presently 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 profitable level of
operations. Management believes the current business plan if successfully
implemented may provide an opportunity for the Company to achieve profitable
operations and allow it to continue as a going concern.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The Consolidated 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 inter-company transactions have been
eliminated.
ESTIMATES
The preparation of consolidated 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
The Company's cash balances are maintained in various banks in Canada and the
United States. Deposits held in banks in the United States are insured up to
$100,000 for each bank by the Federal Deposit Insurance Corporation. The
balances at times may exceed these limits.
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 50%, 11% and 11%, respectively of the Company's revenue in Fiscal
2005 and 57%, 9% and 4%, respectively of its accounts receivable as at December
31, 2005. Four of those customers accounted for 30%, 17%, 12% and 11%,
respectively of the Company's revenue in Fiscal 2004 and 62%, 9%, 5% and 2%,
respectively of its accounts receivable as of December 31, 2004.
F-6
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 $27,414 was appropriate as at December 31, 2005
and that a $15,504 allowance for doubtful accounts was required as at December
31, 2004.
INVENTORIES
Inventories are stated at the lower of cost (first-in first-out) or market.
Inventories are periodically reviewed for use and obsolescence, and adjusted as
necessary.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation of property,
plant and equipment is computed on a straight-line basis over the estimated
useful lives of the assets, generally 5 to 7 years. Maintenance and repairs are
charged to operations as incurred. Significant renewals and betterments are
capitalized. An impairment loss would be recognized when the carrying amount of
an asset exceeds its fair value.
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 year ended December
31, 2005 and 2004 were $215,373 and $214,599 respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
insurance proceeds recoverable, accounts payable and accrued liabilities,
redeemable Class A special shares, and current portion of capital lease
obligation approximate fair value because of the short-term nature of these
items.
Interest rate risk is the risk that the value of a financial instrument might be
adversely affected by a change in the interest rates. In seeking to minimize the
risks from interest rate fluctuations, the Company manages exposure through its
normal operating and financing activities.
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 2% of total revenue) from providing
air testing and environmental certification services. Revenues from these
services are recognized upon performance.
EARNINGS (LOSS) PER COMMON SHARE
Basic Earnings (loss) per common share is computed by dividing the net income
(loss) by the weighted average number of common shares outstanding during the
year. Common stock equivalents are excluded from the computation of diluted
earnings (loss) per share when their effect is antidilutive. Therefore diluted
loss per share has not been calculated for 2005 and 2004.
INCOME TAXES
Income taxes are computed in accordance with the provisions of Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes"
("SFAS 109"), which requires, among other things, a liability approach to
calculating deferred income taxes. SFAS 109 requires a company to recognize
deferred tax liabilities and assets for the expected future tax consequences of
events that have been recognized in a company's financial statements or tax
returns.
F-7
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement carrying amounts and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
STOCK-BASED COMPENSATION
The Company accounts for common stock purchase options and warrants granted to
non- employees pursuant to Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS No. 123) and Emerging Issues Task
Force ("EITF") No. 96-18, "Accounting for Equity Instruments That Are issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." These standards require that the fair value of equity instruments,
including options and warrants, be recognized in the financial statements.
FAS No. 123 permits a company to account for employee stock options under the
method specified by the previous standard, Accounting Principles Board Opinion
No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees." Under APB No.
25, which the Company follows, if the exercise price of fixed employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recorded. For such options, FAS No. 123
requires disclosure of, among other things, the fair value of options granted,
the assumptions used in determining the fair value and the pro-forma effect on
earnings as if the measurement provisions of FAS No. 123 had been applied.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows SFAS No. 144, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the assets' carrying amounts may not be recoverable.
In performing the review for recoverability, if future undiscounted cash flows
(excluding interest charges) from the use and ultimate disposition of the assets
are less than their carrying values, an impairment loss is recognized.
RESEARCH AND DEVELOPMENT
The Company is engaged in research and development work. Research and
development costs, other than for the acquisition of capital assets, are charged
as operating expense of the Company as incurred. In 2005 the Company expensed
$541,811 towards research and development costs.
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements have been translated into United States
dollars in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. All
current balance sheet items have been translated using the exchange rates in
effect at the balance sheet date. All Non current balance sheet items have been
translated using the historical exchange rates at the time of transactions.
Income statement amounts have been translated using the average exchange rate
for the year.
F-8
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No.130 (SFAS 130), "Reporting
comprehensive income" establishes standards for reporting and display of
comprehensive income and its components. For the years ended December 31, 2005
and 2004 comprehensive income was the same as net earnings.
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.
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 company
plans to adopt recommendations in FASB 123 (revised) effective its first interim
period in 2006.
In December 2004, FASB Statement No.153, "Exchanges of Non-monetary Assets - An
Amendment to APB Opinion No. 29" was issued. The Statement eliminates the
exception to fair value for exchanges of similar productive assets and replaces
it with a general exception for exchange transactions that do not have
commercial substance - that is, transactions that are not expected to result in
significant changes in the cash flows of the reporting entity. The requirements
of FASB 153 do not have an effect on the Company's Consolidated Financial
Statements.
In November 2004, FASB Statement No. 151, "Inventory Costs - An Amendment of ARB
No.43, Chapter 4" was issued. The Statement clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. Additionally, allocation of fixed overheads to the costs of conversion
should be based on the normal capacity of production facilities. The
requirements of FASB 151 do not effect the Company's Consolidated Financial
Statements.
In July 2004, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force ("EITF") reached a consensus on EITF No. 02-14, "Whether an
Investor Should Apply the Equity Method of Accounting to Investments Other Than
Common Stock". EITF 02-14 addresses circumstances in which companies acquire the
right to significantly influence the operations of another entity without owning
a voting interest in that entity. The Financial Accounting Standards Board at
its July 16, 2004 meeting ratified EITF 02-14. The adoption of EITF 02-14 is not
expected to have a material effect on the Company's financial position or
results of operations.
In April 2004, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force ("EITF") reached a consensus on EITF No. 03-06, "Participating
Securities and the Two-class Method Under FASB Statement No. 128, Earnings Per
Share". EITF 03-06 addresses a number of questions regarding the computation of
earnings per share by companies that have issued securities other than common
stock that contractually entitle the holder to participate in dividends and
F-9
earnings of the company when, and if, it declares dividends on its common stock.
The issue also provides further guidance in applying the two-class method of
calculating earnings per share, clarifying what constitutes a participating
security and how to apply the two-class method of computing earnings per share
once it is determined that a security is participating, including how to
allocate undisturbed earnings to such a security. EITF 03-06 is effective for
fiscal periods beginning after March 31, 2004. The requirements of EITF 03-06 do
not have an effect on the Company's Consolidated Financial Statements.
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 - INSURANCE PROCEEDS RECOVERABLE
During the year, a flood caused damage to a machine in the plant. This
particular machinery was written off and a claim has been submitted to the
Company's insurance company.
NOTE 6 - INVENTORIES
Inventories as at December 31, 2005 are summarized as follows:
Raw materials $ 884,159
Work-In-Process 126,769
Finished goods 17,706
----------
$1,028,634
==========
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2005 consists of the following:
2005
-----------
Plant, machinery and equipment $ 2,775,088
Office equipment 166,393
Furniture and fixtures 374,613
Vehicles 12,014
Leasehold improvements 687,266
-----------
4,015,374
Less: accumulated depreciation 725,833
-----------
$ 3,289,541
===========
The office equipment above includes $ 17,665 in assets under capital lease with
a corresponding accumulated depreciation of $ 571 at year ended December
31,2005.
F-10
NOTE 8 - REDEEMABLE CLASS A SPECIAL SHARES
700,000 Class A special shares $ 453,900 (based on the historical
Authorized, issued, and exchange rate at the time of
outstanding. issuance.)
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 $600,395 USD at December 31, 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 December 31, 2005 BBL has an accumulated deficit of $ 1,191,719 USD
($1,843,653 CDN as at December 31, 2005) and therefore, the holder would be
unable to redeem the Class A special shares at their ascribed value.
NOTE 9 - CONVERTIBLE DEBENTURES
In September 2004, the Company issued $6,100,000 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 principal is due at the end of three years from the date of issuance.
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). At the Company's option, the
interest on the debentures can be paid in cash or in shares of common stock. The
Company elected to issue shares of our common stock as payment of interest
earned on our 4% convertible debentures issued in September 2004. A total of
348,571 shares of common stock were issued to 10 debenture holders for the
$244,000 of accrued interest through September 13, 2005, as per the terms of the
debentures.
AMORTIZATION OF THE DISCOUNT:
Face value of convertible debenture 6,100,000
Less: Discounted (528,000)
-----------
Book value upon issuance $ 5,572,000
Amortization of the discount 2004 52,197
-----------
December 31, 2004 $ 5,624,197
Amortization of the discount 2005 176,000
-----------
December 31, 2005 $ 5,800,197
===========
NOTE 10 - INCOME TAXES
As at December 31, 2005, there are loss carryforwards for Federal income tax
purposes of approximately $10,256,594 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 $3,589,808 has been established
until realizations of the tax benefit from the loss carryforwards are assured.
F-11
Additionally, as at December 31, 2005, the Company's two wholly owned Canadian
subsidiaries had loss carryforwards of approximately $2,507,950 that may be
used, in future periods, to offset taxable income. The deferred tax asset of
approximately $905,370 has been fully offset by a valuation allowance until
realization of the tax benefit from the loss carryforwards are assured.
For the year ended December 31, 2005
Statutory tax rate:
U.S 35.0%
Foreign 36.1%
Loss before income taxes:
U.S $ 2,288,682
Foreign 1,058,545
-----------
$ 3,347,227
-----------
Expected income tax recovery $(1,183,173)
Differences in income taxes resulting from:
Write down of property, plant, equipment, and patents 24,188
Depreciation (Foreign operations) 183,820
-----------
$ (975,165)
Benefit of losses not recognized 975,165
-----------
Income tax provision (recovery) per financial statements $ 0
-----------
Deferred income tax assets and liabilities consist of the following temporary
difference:
As at December 31, 2005
Assets
Capital Assets - Tax Basis (Foreign operations only) $ 1,302,055
Capital Assets - Book Value (Foreign operations only) (1,459,267)
-----------
Net Capital Assets $ (157,212)
Tax loss carry forwards 12,764,544
Allowance for doubtful accounts 27,414
-----------
Net temporary differences (foreign operations only) $12,634,746
Valuation Allowance (12,634,746)
-----------
Carrying Value $ 0
===========
NOTE 11 - ISSUANCE OF COMMON STOCK
In March, 2004, the Company received $210,106 from the exercise of 1,400,706
warrants to purchase 700,353 shares of common stock, an additional $15,000 from
the exercise of 100,000 warrants to purchase 50,000 shares in April 2004 and
$37,500 from the exercise of 250,000 warrants to purchase 125,000 shares in
July, 2004. The warrants were issued as a part of the Unit Placements in 2002
and 2003 in which participants received one warrant for each unit purchased,
that allows for the purchase of one-half share of common stock for each share of
common stock purchased in the Unit Placement. Warrants can only be exercised in
even lots for full shares for an exercise price of $0.30 per share.
F-12
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 gross proceeds $2,000,000 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. 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.
On July 5, 2005, the Company completed a second traunche of the placement.
Pursuant to subscription agreements with three accredited investors, the Company
received gross proceeds 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.
On November 7, 2005, the Company elected to issue shares of common stock as
payment of interest earned on our 4% convertible debentures issued in September
2004. A total of 348,571 shares of common stock were issued to 10 debenture
holders per the debentures.
On December 2, 2005 the Company received $26,000 for the exercise of options at
$0.50 per share and issued 50,000 shares of common stock.
In December 2005 the Company received $661,147 from the exercise of 4,672,352
warrants to purchase 2,269,999 shares of common stock. The warrants were issued
as a part of the Unit Placements in 2002 in which participants received one
warrant for each unit purchased, that allows for the purchase of one-half share
of common stock for each share of common stock purchased in the Unit Placement.
Warrants can only be exercised in even lots for full shares for an exercise
price of $0.30 per share.
NOTE 12 - 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 applied 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. 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 May 2004, 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 as an executive officer and director. The
Company recorded $18,000 as compensation expense.
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. The Company recorded $10,800 as compensation expense for the two (2)
consultants.
F-13
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.
In December 2005, the board of directors approved the aggregate award of 995,000
stock options to three employees, three executive officer/directors and two
outside directors. The options have immediate vesting with an exercise price of
$1.00 per share (fair-market value at the date of grant) with an exercise period
of five years from the date of award.
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:
PRO FORMA INFORMATION
YEAR ENDED DECEMBER 31,
2005 2004
-------------------------------
Number for basic and diluted
earnings (loss) per share available
to common stockholders $ (3,347,227) $ (1,721,313)
Deduct: Total stock-based
Compensation expense
determined under fair
value based method, net (544,118) (857,336)
-------------------------------
Net loss - pro forma $ (3,891,345) $ (2,578,649)
===============================
Denominator for basic earnings
(loss) per share -
Weighted average shares outstanding 53,056,422 49,978,095
Effect of dilutive securities:
Employee stock option -- --
Warrants -- --
Convertible debt conversion -- --
Denominator for basic and diluted
earnings (loss) per share -
Weighted average shares outstanding 53,056,422 49,978,095
Earnings (loss) per share
Basic - Pro forma $ (0.07) $ (0.03)
F-14
Potential common shares of 5,323,333 related to ESW's outstanding stock options
and potential common shares of 8,234,855 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 year ended December 31, 2005 and 2004, as the effect of inclusion
of these shares and the related interest expense 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 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 1,030,000 $0.98
Expired (50,000) ($1.50)
Exercised (50,000) ($0.50)
---------- ------
Outstanding, December 31, 2005 5,456,667 $0.59
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, 333,332 are currently vested, and 166,668 will vest in
August 2006.
At December 31, 2005, the outstanding options have a weighted average remaining
life of 43 months.
The weighted average fair value of options granted during 2005 and 2004 was
$0.49 and $0.31 respectively and was estimated using the Black-Scholes
option-pricing model, and the following assumptions:
2005 2004
-------- --------
Expected volatility 98% 108.00%
Risk-free interest Rate 4.00% 3.00%
Expected life 5.0 yrs 5.0 yrs
Dividend yield 0.00% 0.00%
Forfeiture rate 0.00% 0.00%
F-15
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 December 31, 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 May 4, 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
35,000 0.50 January 6, 2008
85,000 0.60 December 10, 2006
666,667 0.66 September 10,2008
995,000 1.00 December 31, 2010
---------------
5,456,667
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. A summary of warrant transactions is as follows:
WEIGHTED
WARRANT AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Outstanding, January 1, 2004 5,873,881 $0.33
Granted 3,050,000 $1.00
Exercised (1,625,350) ($0.24)
---------- -------
Outstanding, December 31, 2004 7,298,531 $0.58
Granted 3,272,500 $1.28
Exercised (2,336,176) ($0.30)
---------- -------
Outstanding, December 31, 2005 8,234,855 $1.14
F-16
Outstanding warrants as of December 31, 2005 :
NUMBER OF WARRANT SHARES EXERCISE PRICE EXPIRATION DATE
- ------------------------ -------------- -----------------
750,000 0.17 (A)&(E) April 27, 2006
838,237 0.30 (B)&(F) April 27, 2006
324,118 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
1,202,500 0.90 (B) July 5, 2008
185,000 2.00 July 5, 2008
185,000 3.00 July 5, 2008
---------
8,234,855
(A) Originally exercisable at $1.20 per share and re-priced 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.
(E) Effective October 3, 2005 the Company extended the expiry date from October
10, 2005 to April 27, 2006, for 750,000 warrants issued in the Company's October
2000 Private Placement.
(F) Effective November 3, 2005, the Company extended the expiry date from
November 14, 2005 to April 27, 2006, for these warrants previously issued in the
second traunch of the Company's Unit Private Placement in October 2002. The
Company recorded $14,350 as warrant extension expense.
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 13 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2005 and 2004, the Company paid shareholders
and their affiliates nil and $25,028, respectively for various services rendered
in addition to salaries and reimbursement of business expenses. All transactions
are recorded at the exchange amounts. No one transaction or combination
attributed to one individual or entity exceeding $60,000 on an annual basis.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
LEASES
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 houses 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.
F-17
The following breakdown is the total, of the minimum annual lease payments, for
both leases.
2006 441,390
2007 441,390
2008 446,815
2009 452,240
2010 150,707
CAPITAL LEASE OBLIGATION
The Company is committed to the following lease payments in connection with the
acquisition of capital assets under capital leases:
2006 $ 4,393
2007 4,393
2008 4,393
2009 4,393
2010 3,294
---------
$ 20,864
Less imputed interest at 7.902% 3,199
---------
Total obligation under capital lease 17,665
Less current portion 3,120
---------
Total long-term portion $ 14,545
=========
The Company has incurred $162 interest expense on capital leases for the year.
NOTE 15 - COMPARATIVE FIGURES
Certain 2004 figures have been reclassified to conform to the financial
statements presentation adopted in 2005.
NOTE 16 - SUBSEQUENT EVENTS
On February 10, 2006, the Company received $4,250 from the exercise of options
to purchase 25,000 shares of common stock.
Until March 28, 2006, the Company received $72,000 from the exercise of 688,235
warrants to purchase 296,668 shares of common stock. The warrants were issued as
a part of the Unit Placements in 2002.
F-18
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
In accordance with the Florida Corporation Act (the "Act"), the Company's
Articles of Incorporation (the "Articles") contain provisions which state that,
to the fullest extent permitted by law, no director or officer shall be
personally liable to the Company or its shareholders for damages for breach of
any duty owned to the Corporation or its shareholders. The Company also has the
power, by a by-law provision or a resolution of its stockholders or directors,
to indemnify the officers and directors against any contingency or peril as may
be determined to be in the Company's best interests and in connection therewith
to secure policies of insurance.
Item 25. Other Expenses of Issuance and Distribution.
SEC registration fees $ 2,757.57
Legal fees and expenses $15,000.00*
Accountants' fees $ 5,000.00*
Miscellaneous $ 2,500.00*
----------
Total $25,257.57*
* Estimated
Item 26. Recent Sales of Unregistered Securities
Effective April 21, 2005, the Company received an aggregate of $2,000,000 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 to an
accredited investor pursuant to Rule 506 of Regulation D of the Securities Act
of 1933, as amended. Subsequently, on July 5, 2005, the Company completed a
second traunche with three (3) accredited investors whereby the Company received
an aggregate of $1,850,000 and issued 2,176,471 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.
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On September 15, 2004, the Company issued $6.1 million of convertible debentures
and 3,050,000 three (3) year warrants to purchase 3,050,000 shares of common
stock at $1.00 per share to nine (9) accredited investors under Rule 506 of
Regulation D. The debentures are for a term of three (3) years and issued as of
September 13, 2004 and are convertible into shares of the Company's common stock
at the option of the holder by dividing the principal amount of the debenture to
be converted by $0.50. The Debentures earn interest at a rate of 4% per annum
payable in cash or shares of the Company's common stock at the discretion of the
Company. If the Company elects to pay interest in shares of common stock, the
number of shares of common stock to be issued shall be determined by dividing
accrued interest by the average fair market value over a period of twenty one
(21) trading days consisting of the day as of which fair market value is being
determined and the twenty (20) consecutive trading days prior to such day.
Subject to the holder's right to convert, the Company has the right to redeem
the debentures at a price equal to one hundred and ten percent (110%) multiplied
by the then outstanding principal amount plus unpaid interest to the date of
redemption. Upon maturity, the debenture and interest is payable in cash or
common stock at the option of the Company in accord with the determination of
interest as provided for in the debenture. The warrants contain customary price
adjustment protections which were triggered with the April 21, 2005 offering by
the Company, whereby the Company adjusted the exercise price of the 3,050,000
three year warrants previously issued from $1.00 per share to $0.85 per share.
On October 10, 2002, the Company completed the first traunche of a unit private
placement pursuant to Regulation D of the Securities Act of 1933, as amended,
whereby 15 accredited investors purchased units at a price of $0.17 per unit.
Each unit is comprised of one share of the Company's 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 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. The warrants
contain anti-dilution protection granted to the holders. The Company received an
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aggregate of $884,120 in the initial closing of the unit placement and issued
5,200,705 shares of common stock and 5,200,705 warrants that can be exercised
for a period of three (3) years at an exercise price of $0.15 per warrant to
purchase one half (1/2) share of common stock. Effective October 3, 2005, the
Company extended the expiration date of the outstanding warrants issued in the
first traunche from October 3, 2005 to April 27, 2006. The Company completed the
second traunche of the unit placement on November 14, 2002. The Company received
an aggregate of $356,000 from 5 accredited investors and issued 2,094,115 shares
of common stock and 2,094,115 warrants that can be exercised for a period of
three (3) years at an exercise price of $0.15 per warrant to purchase one half
(1/2) a share of Common Stock. Effective November 3, 2005, the Company extended
the expiration date of the outstanding warrants issued in the second traunche
from October 3, 2005 to April 27, 2006. In March of 2003, the Company completed
the third and final traunche of the placement and received $247,000 from two
accredited investors who were issued 1,452,941 shares of common stock and
1,452,941 warrants that can be exercised for a period of three (3) years at an
exercise price of $0.15 per warrant to purchase one half (1/2) a share of Common
Stock.
Item 27. Exhibits.
The exhibits filed as part of this Registration Statement are as follows:
EXHIBIT NUMBER DESCRIPTION
3.1 Articles of Incorporation of the Company. (1)
3.2 Bylaws of the Company. (1)
3.3 Articles of Incorporation of the Company, as amended as of November
29, 2001.(Originally filed as exhibit 3.2) (5)
3.4 Articles of Incorporation of the Company as amended July 20, 2005.
(Originally filed as exhibit 3.3) (13)
3.5 Bylaws of the Company as amended January 3, 2006 (15)
4.1 Form of Warrant Certificate issued April, 1999. (1)
4.2 Form of Warrant Certificate for 2002 Unit Private Placement (7)
4.3 Form of three (3) year Warrant Certificate exercisable at $0.90 per
share issued on April and July 2005. (13)
4.4 Form of three (3) year Warrant Certificate exercisable at $2.00 per
share issued on April and July 2005. (13)
4.5 Form of three (3) year Warrant Certificate exercisable at $3.00 per
share issued on April and July 2005. (13)
4.6 Specimen of Common Stock Certificate.(Originally filed as
exhibit 4.1)
5.1 Opinion of Baratta & Goldstein.**
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10.1 Agreement dated January 29, 1999 by and between the shareholders of
BBL Technologies, Inc. and the Company. (1)
10.2 Consulting Agreement dated March 31, 1999 by and between May Davis
Group and the Company. (1)
10.3 Commission Agreement dated March 31, 1999 by and between May Davis
Group and the Company. (1)
10.4 Option Agreement dated June 21, 1999, between David Coates o/a Fifth
Business and the Company. (1)
10.5 Option Agreement dated June 21 1999 between Zoya Financial Corp. and
the Company. (1)
10.6 Consulting Agreement with Bruno Liber dated January 29, 2000. (2)
10.7 Office Offer to Lease for Environmental Solutions Worldwide Inc.
dated October 6, 1999. (2)
10.8 Financial relations agreement with Continental Capital & Equity
Corporation dated December 5, 2000. (4)
10.9 Employment Agreement between John A. Donohoe, Jr. and the Company
dated as of September 10, 2003. (6)
10.10 Employment Agreement between Robert R. Marino and the Company dated
as of September 10, 2003. (6)
10.11 Employment Agreement between David J. Johnson and the Company dated
as of September 10, 2003. (6)
10.12 Subscription Agreement for 2001 Common Stock Placement. (7)
10.13 Subscription Agreement for 2002 Unit Private Placement and related
representation letters. (7)
10.14 Form of unsecured subordinated promissory note issued by the Company
to AB Odinia, dated August 27,2004.(Originally filed as exhibit
10.1) (8)
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10.15 Form of Securities Subscription Agreement between the Company and
Investor for the purchase of 4% Convertible Debentures and three (3)
year warrant exercisable at $1.00 per share dated September,
2004.(Originally filed as exhibit 10.1) (9)
10.16 Form of 4% Three (3) Year Debenture issued by the Company dated
September, 2004.(Originally filed as exhibit 10.2) (9)
10.17 Form of Three (3) Year Warrant to purchase the Company's Common
Stock at $1.00 a share dated September, 2004.(Originally filed as
exhibit 10.3) (9)
10.18 Form of Registration Rights Agreement dated September,
2004.(Originally filed as exhibit 10.4) (9)
10.19 Lease agreement and amended lease agreement between the Company's
wholly owned subsidiary ESW America Inc. and Nappen & Associates
dated on November 16, 2004. (12)*
10.20 Form of Subscription Agreement dated April and July 2005 for Common
Stock at $0.85 and Warrants exercisable at $0.90, $2.00 and $3.00
per share. (13)
10.21 Form of Registration rights Agreement dated April and July 2005.
(13)
14.1 Code of ethics adopted March 28, 2005 by the Company's Board Of
directors. (12)
14.2 Code of ethics as amended March 28, 2006 by the Company's Board Of
directors. (15)
16.1 Letter from James E. Scheifley & Associates, P. C. (1)
16.2 Letter from Daren, Martenfeld, Carr, Testa and Company LLP dated
February 2001. (3)
16.3 Letter of resignation from Goldstein and Morris Certified Public
Account P.C. dated October 20, 2004 (10)
16.4 Letter from Goldstein and Morris Certified Public Account P.C. dated
November 23, 2004 (11)
21.1 List of subsidiaries. (1)
23.1 Consent of Mintz & Partners, LLP
23.2 Consent of Baratta & Goldstein (included in opinion filed as part of
Exhibit 5.1)
24.1 Power of Attorney **
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(1) Incorporated herein by reference from the Registrant's Form 10
Registration Statement (SEC File No. 000-30392) filed with the Securities
and Exchange Commission of November 18, 1999
(2) Incorporated herein by reference from the Registrant's 10-K filed with
the Securities and Exchange Commission on March 30, 2000.
(3) Incorporated herein by reference from the Registrant's Form 8-K/A filed
with the Securities and Exchange Commission on March 14, 2001.
(4) Incorporated herein by reference from the Registrant's 10-KSB filed with
the Securities and Exchange Commission on April 16, 2001.
(5) Incorporated herein by reference from the Registrants Form 10-KSB filed
with the Securities and Exchange Commission on April 01, 2002.
(6) Incorporated herein by reference from the Registrant's Form 10-QSB/A
filed with the Securities and Exchange Commission on November 26, 2003.
(7) Incorporated by reference from an exhibit filed with the Registrant's
Registration Statement on Form S-2 (File No. 333-112125) filed on January
22, 2004.
(8) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on September 2, 2004.
(9) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on September 17, 2004.
(10) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on October 22, 2004.
(11) Incorporated herein by reference from the Registrants Form 8-K/A filed
with the Securities and Exchange Commission on December 2, 2004.
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(12) Incorporated by reference to the Registrant's Form 10-KSB filed with the
Securities and Exchange Commission on March 31, 2005.
(13) Incorporated herein by reference from the Registrants Form 10-QSB filed
with the Securities and Exchange Commission on August 15,2005.
(14) Incorporated herein by reference from the Registrants Form S-8
Registration Statement SEC File No. 333-127549) filed on August 15, 2005.
(15) Incorporated herein by reference from the Registrants Form 10-KSB filed
with the Securities and Exchange Commission on April 3, 2006.
* Confidential treatment requested for a portion of this exhibit
** Previously filed with Form SB-2.
Item 28. Undertakings
(a) The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof), which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
4. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as
amended, each filing of the Registrant's Annual Report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934,
as amended, that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
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5. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant
to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
6. The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to
and meeting the requirements of Rule 14-a or Rule 14c-3 under the
Securities Exchange Act of 1934, as amended; and, where interim
financial information required to be presented by Article 3 of
Regulations S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically incorporated
by reference in the prospectus to provide such interim financial
information.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant, Environmental Solutions Worldwide, Inc. certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form SB-2 and has duly caused this post-effective Registration Statement on
Form SB-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Concord, Province of Ontario, on the 3rd day of May,
2006.
Environmental Solutions Worldwide, Inc.
By /s/ David J. Johnson
=============================================
David J. Johnson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
========================== =========================== ===================
/s/ Nitin Amersey Chairman of the May 3, 2006
========================= Board of Directors
Nitin Amersey
/s/ David J. Johnson Director, President and May 3, 2006
========================= Chief Executive Officer
David J. Johnson
/s/ Stan Kolaric Chief Operating Officer May 3, 2006
========================= and Director
Stan Kolaric
/s/ Joey Schwartz Chief Financial Officer May 3, 2006
========================= and Director
Joey Schwartz
/s/ Bengt G. Odner Director May 3, 2006
=========================
Bengt G. Odner
/s/ Michael F. Albanese DIRECTOR May 3, 2006
=========================
Michael F. Albanese
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