UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[x] Quarterly report pursuant to
Section 13 or
15(d) of the Securities
Exchange Act of 1934 for the
quarterly period ended - March 31, 2007.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the
Transition period from ______________ to _______________.
COMMISSION FILE NUMBER 000-30392
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
(Exact name of small business issuer as specified in its charter)
Florida 98-0346454
- ------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
335 Connie Cr.
Concord Ontario Canada L4K 5R2
(Address of principal executive offices, including postal code.)
(905) 695-4142
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the 12 months (or for such shorter period
that the Company was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. YES [x] NO [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [x]
The issuer had 59,949,962 shares of common stock, par value $0.001 outstanding
as of May 2, 2007.
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION
PAGE NO.
ITEM 1 Financial Statements (unaudited)
Consolidated Condensed Balance Sheet as of March 31, 2007 F2
Consolidated Condensed Statements of Operations for the F3
Three Months Ended March 31, 2007 and 2006
Consolidated Condensed Statement of Changes in Stockholders' F4
Equity for the Three Months Ended March 31, 2007
Consolidated Condensed Statements of Cash Flows for the F5
Three Months Ended March 31, 2007 and 2006
Notes to Consolidated Condensed Financial Statements F6 - F19
ITEM 2 Management's Discussion and Analysis of Operations 2
ITEM 3 Controls and Procedures 15
PART II OTHER INFORMATION
ITEM 6 Exhibits 16
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
MARCH 31, 2007
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents (Note 5) $ 1,747,590
Accounts receivable (Note 2) 2,044,506
Inventory (Note 6) 1,325,894
Prepaid expenses and sundry assets 149,379
------------
Total current assets 5,267,369
Property, plant and equipment under construction (Note 7) 149,296
Property, plant and equipment, net of accumulated
depreciation of $ 1,654,110 (Note 7) 4,439,745
Patents and trademarks, net of accumulated
amortization of $1,315,795 797,808
------------
$ 10,654,218
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Bank loan (Note 8) $ 692,881
Accounts payable and accrued liabilities 758,011
Notes payable (Note 9) 3,310,737
Redeemable Class A special shares (Note 10) 453,900
Convertible debentures (Note 11) 6,020,197
Current portion of capital lease obligation (Note 16) 3,476
------------
Total current liabilities 11,239,202
Long Term Liabilities
Capital lease obligation (Note 16) 11,253
Total liabilities 11,250,455
------------
Stockholders' Deficit (Note 13)
Common stock, $0.001 par value, 125,000,000
shares authorized; 59,903,240 shares
issued and outstanding 59,902
Additional paid-in capital 19,060,331
Accumulated deficit (19,716,470)
------------
Total stockholders' deficit (596,237)
------------
$ 10,654,218
============
The accompanying notes are an integral part of these financial statements
F2
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS PERIOD ENDED MARCH 31,
(UNAUDITED)
2007 2006
------------ ------------
Revenue
Net sales $ 3,326,845 $ 235,143
Cost of sales 1,353,997 346,819
------------ ------------
Gross profit 1,972,848 (111,676)
------------ ------------
Operating expenses
Marketing, office and general costs 932,969 919,654
Research and development costs 122,506 71,495
Officers' compensation and directors fees 126,905 117,222
Consulting and professional fees 22,237 23,843
Interest on long term debt 61,000 61,000
Interest on notes 59,787 --
Foreign exchange loss / (gain) (2,210) 2,999
Depreciation and amortization 262,740 83,791
Stock based compensation (Note 14) 776,271 0
------------ ------------
2,362,205 1,280,004
------------ ------------
Loss before interest income (389,357) (1,391,680)
Interest Income 4,442 19,469
------------ ------------
Net (Loss) $ (384,915) $ (1,372,211)
============ ============
(Loss) per share $ (0.01) $ (0.02)
============ ============
Weighted average number of shares outstanding 58,941,393 57,537,083
============ ============
The accompanying notes are an integral part of these financial statements
F3
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS PERIOD ENDED MARCH 31, 2007
Common Stock Additional Accumulated
Shares Amount Paid-In Capital Deficit Total
January 1, 2007 59,753,240 $ 59,752 $ 18,243,710 $(19,331,555) $ (1,028,093)
Net loss -- -- -- (384,915) (384,915)
Common stock issued from exercise of options 150,000 150 40,350 -- 40,500
Stock based compensation -- -- 776,271 -- 776,271
------------ ------------ ------------ ------------ ------------
March 31, 2007 59,903,240 $ 59,902 $ 19,060,331 $(19,716,470) $ (596,237)
============ ============ ============ ============ ============
See accompanying notes to the consolidated financial statements
F4
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS PERIOD ENDED MARCH 31,
2007 2006
----------- -----------
Net earnings / (loss) $ (384,915) $(1,372,211)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 245,754 128,130
Amortization 52,876 52,731
Provision (Recovery) for uncollectible accounts -- (2,343)
Interest on debentures 61,000 61,000
Interest on notes 59,787 --
Amortization of debenture warrant fair value 44,000 44,000
Stock Based Compensation 776,271 --
Increase (decrease) in cash flows from operating activities resulting from
changes in:
Accounts receivable (1,615,006) 213,389
Insurance proceeds recoverable -- (1,802)
Inventory 380,352 (160,757)
Prepaid expenses 5,030 (2,505)
Accounts payable and accrued liabilities (434,827) (259,900)
----------- -----------
Net cash used in operating activities (809,678) (1,300,268)
----------- -----------
Investing activities:
Property, plant and equipment under construction (43,246) --
Acquisition of property, plant and equipment, net (134,266) (758,032)
Increase in patents and trademarks (1,900) (639)
----------- -----------
Net cash used in investing activities (179,412) (758,671)
----------- -----------
Financing activities:
Bank loan 692,881
Notes payable 610,737 --
Issuance of common stock, net 40,500 70,250
Capital lease obligation (732) (893)
----------- -----------
Net cash provided by financing activities 1,343,386 69,357
----------- -----------
Net increase (decrease) in cash 354,296 (1,989,582)
Cash and cash equivalents, beginning of year 1,393,294 3,083,373
----------- -----------
Cash and cash equivalents, end of period $ 1,747,590 $ 1,093,791
=========== ===========
Supplemental disclosures:
Interest received $ 4,442 $ 19,469
=========== ===========
The accompanying notes are an integral part of these financial statements
F5
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
The Company is engaged in the design, development, manufacturing and sales of
environmental technologies and testing services with it's primary focus on the
international on-road and off-road diesel market. ESW currently manufactures and
markets a line of catalytic emission control and enabling technologies for a
number of applications.
The accompanying consolidated condensed financial statements have been prepared
without audit 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.
The Company has had recurring losses. The company believes the cash flows from
operations, together with continued borrowing and financial support from
financial institutions will be sufficient to fund anticipated operations for the
next 12 months. These consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern for a reasonable
period of time.
These statements have not been audited and should be read in conjunction with
the financial statements and the notes thereto included in our Annual Report on
Forms 10-KSB and 10-KSB/A, as filed with the Securities and Exchange Commission
for the year ended December 31, 2006. The methods and policies set forth in the
year-end audited consolidated financial statements are followed in these interim
consolidated financial statements.
All adjustments considered necessary for fair presentation and of a normal
recurring nature have been included in these interim consolidated financial
statements. Revenues and operating results for the three months ended March 31,
2007 are not necessarily indicative of the results to be expected for the full
year.
F6
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated condensed financial statements include the accounts of the
Company and its wholly owned subsidiaries, ESW America, Inc., ESW Technologies,
Inc., ESW Canada, Inc. and BBL Technologies, Inc. All inter-company transactions
have been eliminated.
ESTIMATES
The preparation of consolidated condensed 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 customers accounted for
93.0%, 3.0% and 1.2% of the Company's revenue for the three months ended March
31, 2007. Three customers accounted for 93.0%, 2.5% and 1.8% of the Company's
accounts receivable as at March 31, 2007.
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 nil was appropriate as at March 31, 2007 and
that a $25,071 allowance for doubtful accounts was required as at March 31,
2006.
PROPERTY, PLANT AND EQUIPMENT UNDER CONSTRUCTION
The Company capitalizes at cost, customized equipment built to be used in the
future day to day operations. Once complete and available for use, the cost for
accounting purposes is transferred to property, plant and equipment, where
normal depreciation rules apply.
F7
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 March 31,
2007 and 2006 were $52,876 and $52,731 respectively.
REVENUE RECOGNITION
The Company derives revenue primarily from the sale of its catalytic products.
In accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition
in Financial Statements", revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the amount is fixed and determinable,
risk of ownership has passed to the customer and collection of the resulting
receivable is reasonably assured.
The Company also derives revenue (less than 0.8% of total revenue) from
providing air testing and environmental certification services. Revenues from
these services are recognized upon performance.
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. For the three month period
ended March 31, 2007 and 2006 the Company expensed $122,506 and $71,495
respectively towards research and development costs.
NOTE 3 - CHANGE IN ACCOUNTING POLICY
In December 2004, the FASB issued Revised Statement of Financial Accounting
Standards No. 123, Share-Based Payment (FAS 123R), which replaced FAS 123 and
superseded APB Opinion No. 25, Accounting for Stock Issued to Employees. FAS
123R requires companies to measure the cost of services received in exchange for
an award of equity instruments based on the grant-date fair value of the award,
and to recognize the cost over the requisite service period.
Effective January 1, 2006, the Company adopted SFAS 123 (revised 2004),
SHARE-BASED PAYMENT ("SFAS 123R"), which revises SFAS 123 and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires
all share-based payments to employees to be recognized in the financial
statements based on their fair values using an option-pricing model, such as the
Black-Scholes model, at the date of grant. The cost will be recognized over the
period during which an employee is required to provide services in exchange for
the award, known as the requisite service period (usually the vesting period).
The Company elected to use the modified prospective method for adoption, which
requires compensation expense to be recorded for all unvested stock options and
restricted shares beginning in the first quarter of adoption. Compensation cost
for awards granted prior to, but not vested as of, the date the Company adopted
SFAS 123R were based on the grant date fair value and attributes originally used
to value those awards.
F8
NOTE 4 - RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Interpretation No. 48 ("FIN 48"),
"Accounting FOR UNCERTAINTY IN INCOME TAXES -- AN INTERPRETATION OF FASB
STATEMENT NO. 109", specifies how tax benefits for uncertain tax positions are
to be recognized, measured, and derecognized in financial statements; requires
certain disclosures of uncertain tax matters; specifies how reserves for
uncertain tax positions should be classified on the balance sheet; and provides
transition and interim-period guidance, among other provisions. FIN 48 is
effective for fiscal years beginning after December 15, 2006 and as a result is
effective in the first quarter of calendar 2007. We adopted FIN No. 48 as of
January 1, 2007, and the Company does not anticipate that total unrecognized tax
benefits will change significantly within 12 months of the date of adoption.
In February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - including an amendment
of FASB Statement No. 115," (SFAS 159). SFAS 159 permits entities to choose to
measure many financial instruments and certain other assets and liabilities at
fair value on an instrument-by-instrument basis (the fair value option). SFAS
159 becomes effective for the Company on January 1, 2008. The Company is
currently evaluating the potential impact of SFAS 159 on the financial
statements.
NOTE 5 - 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 6 - INVENTORY
Inventory as at March 31, 2007 are summarized as follows:
Raw materials $ 793,734
Work-In-Process 209,166
Finished goods 322,994
----------
$1,325,894
==========
Included in Finished goods Inventory is $306,007 of Generators acquired for
resale.
F9
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 31, 2007 consists of the following:
2007
-----------
Plant, machinery and equipment $ 4,591,748
Office equipment 186,106
Furniture and fixtures 403,362
Vehicles 12,014
Leasehold improvements 900,625
-----------
6,093,855
Less: accumulated depreciation (1,654,110)
-----------
$ 4,439,745
===========
As at March 31, 2007, the Company had $149,296 of customized equipment under
construction.
The office equipment above includes $14,729 in assets under capital lease with a
corresponding accumulated depreciation of $4,979 at the period ended March 31,
2007.
NOTE 8 - BANK LOAN PAYABLE
Effective March 20, 2007 the Company's subsidiary, ESW Canada Inc. entered into
a revolving credit agreement ("Revolving Credit Agreement") with a Canadian
banking institution to provide for up to $2.5 million in secured revolving
loans. The Company's revolving credit agreement allows for available borrowings
of up to $2.5 million, to cover direct costs such as material and labour for
specific sales orders. The facility has been guaranteed to the bank under Export
Development Canada's (EDC) pre shipment financing program. Borrowings under the
revolving credit agreement bear interest at 1 1/2 percent above the
institution's prime rate. Repayments of the loan are required no later than one
year from the date of the advancement of the loan. Obligations under the
revolving credit agreement are collateralized by a first-priority lien on the
assets of the Company and its subsidiary ESW Canada Inc. including, accounts
receivable, inventory, equipment and other tangible and intangible property,
including the capital stock of all direct subsidiaries.
NOTE 9 - NOTES PAYABLE
On January 9, 2007, the Company satisfied the subordinated promissory note it
had previously issued on November 13, 2006 in the principal amount of $500,000
by paying the Holder the sum of $506,780 in cash, representing the $500,000
principal and $6,780 interest.
F10
On January 5, 2007 the Company extended the June 26, 2006 unsecured subordinated
promissory in the principal amount of $1.2 million; and the August 29, 2006
unsecured subordinated promissory note in the principal amount of $1.0 million,
the Notes were extended through to January 31, 2007.
Effective February 9, 2007, the above two unsecured subordinated promissory
notes in the principal amount of $1.2 million and $1.0 million and accrued
interest were consolidated into one unsecured subordinated demand note with
principal amount of $2,308,147. In accordance with the terms of the Consolidated
Note, same will be due and payable to Holder upon demand. As with the original
Promissory Notes, the Consolidated Note will continue to bear interest at a rate
of 9% per annum if principal and interest are paid by the Company in cash, or if
principal and interest are paid in shares of restricted common stock of the
Company, the Consolidated Note will bear interest at a rate of 12% per annum.
The Company may prepay the Consolidated Note without penalty at any time.
On February 15, 2007 the Company issued a $500,000 unsecured subordinated demand
promissory note to a member of the Company's Board of Directors. The Note will
bear interest at 9% per annum and is payable upon demand.
On March 7, 2007 the Company entered into an agreement whereby it borrowed the
sum of $500,000 from a member of the Company's Board of Directors and
consolidated this sum with the principal and accrued interest of the $500,000
unsecured demand promissory note previously issued on February 15, 2007 (the
"Consolidated Note"). This Consolidated Note is in the principal amount of
$1,002,589 and bears interest at a rate of 9% per annum and is payable upon
demand. The Company may prepay the Consolidated Note without penalty at any
time.
F11
NOTE 10 - 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 $606,271 USD at March 31, 2007). 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 March
31, 2007 BBL has an accumulated deficit of $ 1,195,507 USD ($1,848,124 CDN as at
March 31, 2007) and therefore, the holder would be unable to redeem the Class A
special shares at their ascribed value.
NOTE 11 - 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 12). 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. Therefore a
total of 387,302 and 348,571 shares of common stock were issued to 10 debenture
holders for the $244,000 of accrued interest through September 13, 2006 and 2005
respectively. As of March 31, 2007, interest in the amount of $133,364 has
accrued in accounts payable and accrued liabilities.
F12
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
Amortization of the discount 2006 176,000
-----------
December 31, 2006 $5,976,197
Amortization of the discount for the
three months ended March 31, 2007 44,000
-----------
$ 6,020,197
===========
F13
NOTE 12 - INCOME TAXES
As at March 31, 2007, there are loss carryforwards for Federal income tax
purposes of approximately $15,601,729 available to offset future taxable income
in the United States. The carryforwards expire in various years through 2024.
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 $5,460,605 has been established
until realizations of the tax benefit from the loss carryforwards are assured.
Additionally, as at March 31, 2007, the Company's two wholly owned Canadian
subsidiaries had loss carryforwards of approximately $2,420,219 that may be
used, in future periods, to offset taxable income. The carryforwards expire in
various years through 2027. The deferred tax asset of approximately $873,699 has
been fully offset by a valuation allowance until realization of the tax benefit
from the loss carryforwards are assured.
For the period ended March 31, 2007
Statutory tax rate:
U.S 35.0%
Foreign 36.1%
Loss (income) before income taxes:
U.S $ 1,806,930
Foreign (1,422,015)
-----------
$ 384,915
-----------
Expected income tax recovery $ (119,078)
Differences in income taxes resulting from:
Depreciation (Foreign operations) 17,804
-----------
$ (101,274)
Benefit of losses not recognized 101,274
-----------
Income tax provision (recovery) per financial statements $ 0
-----------
F14
Deferred income tax assets and liabilities consist of the following temporary
difference:
As at March 31, 2007
Assets
Capital Assets - Tax Basis (Foreign operations only) $ 1,693,916
Capital Assets - Book Value (Foreign operations only) (1,850,450)
-----------
Net Capital Assets $ (156,534)
Tax loss carry forwards 18,021,948
-----------
Net temporary differences (foreign operations only) $17,865,414
Valuation Allowance (17,865,414)
-----------
Carrying Value $ 0
===========
NOTE 13 - ISSUANCE OF COMMON STOCK
On January 24, 2007 the Company received $13,500 for the exercise of 50,000
options exercisable at $0.27 per share and issued 50,000 shares of common stock.
On February 13, 2007 the Company received $13,500 for the exercise of 50,000
options exercisable at $0.27 per share and issued 50,000 shares of common stock.
On March 7, 2007 the Company received $13,500 for the exercise of 50,000 options
exercisable at $0.27 per share and issued 50,000 shares of common stock.
F15
NOTE 14 - STOCK OPTIONS AND WARRANT GRANTS
On February 13, 2007 the board of directors granted the aggregate award of
2,450,000 stock options to eight employees, two executive officer/directors and
four outside directors. The options have immediate vesting with an exercise
price of $0.71 per share (fair-market value at the date of grant) with exercise
periods ranging from three and five years from the date of award.
A total of $776,270 and Nil for stock based compensation has been recorded as at
March 31, 2007 and 2006 respectively. The 2,450,000 options were issued to four
directors, two director/officer and eight employees. The Company used the
simplified method for computing the expected term of the option.
Potential common shares of 7,546,667 related to ESW's outstanding and
exercisable stock options and potential common shares of 6,322,500 related to
ESW's outstanding and exercisable 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 period ended March
31, 2007 and 2006, as the effect of inclusion of these shares and the related
interest expense would have been anti-dilutive.
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, 2006 5,456,667 $0.59
Expired (85,000) ($0.60)
Exercised (125,000) ($0.25)
---------- ------
Outstanding, December 31, 2006 5,246,667 $0.60
Granted 2,450,000 $0.71
Expired - -
Exercised (150,000) ($0.27)
---------- ------
Outstanding, March 31, 2007 7,546,667 $0.64
At March 31, 2007, the outstanding options have a weighted average remaining
life of 37 months.
The weighted average fair value of options granted during 2007 and 2006 was
$0.71 and nil respectively and was estimated using the Black-Scholes
option-pricing model, and the following assumptions:
2007 2006
-------- --------
Expected volatility 56-69% 81%
Risk-free interest Rate 5.00% 5.58%
Expected life 1.5 to 2.5 yrs 3.0 yrs
Dividend yield 0.00% 0.00%
Forfeiture rate 0.00% 0.00%
F16
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 March 31, 2007, the Company had outstanding options as follows:
NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE
---------------- -------------- ---------------
250,000 0.27 August 6, 2013
50,000 0.45 April 20, 2009
500,000 0.50 May 1, 2009
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
666,667 0.66 September 10,2008
300,000 0.71 February 16, 2010
2,150,000 0.71 February 16, 2012
995,000 1.00 December 31, 2010
---------------
7,546,667
---------------
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, 2006 8,234,855 $ 1.14
Granted -- --
Exercised (1,912,355) ($ 0.25)
---------- --------
Outstanding, December 31, 2006 6,322,500 $ 0.93
Granted -- --
Exercised -- --
---------- --------
Outstanding, March 31, 2007 6,322,500 $ 0.93
---------- --------
F17
Outstanding warrants as of March 31, 2007:
NUMBER OF WARRANT SHARES EXERCISE PRICE EXPIRATION DATE
------------------------ -------------- -----------------
3,050,000 0.85 (A)&(B) September 13, 2007
1,300,000 0.90 (A) April 21, 2008
200,000 2.00 April 21, 2008
200,000 3.00 April 21, 2008
1,202,500 0.90 (A) July 5, 2008
185,000 2.00 July 5, 2008
185,000 3.00 July 5, 2008
---------
6,322,500
---------
(A) Contain certain anti-dilution provisions.
(B) Originally exercisable at $1.00 per share and adjusted in April 2005.
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 15 - RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2007 and 2006, the Company paid
shareholders and their affiliates for salaries and reimbursement of business
expenses. All transactions are recorded at the exchange amounts. No one
transaction or combination thereof attributed to one individual or entity
exceeding $120,000 on an annual basis.
On January 9, 2007, the Company satisfied the subordinated promissory note it
had previously issued, on November 13, 2006, to a member of the Company's Board
of Directors, in the principal amount of $500,000 by paying the Holder the sum
of $506,780 in cash, representing the $500,000 principal and $6,780 interest.
Effective February 9, 2007 a company controlled by a trust of which a director
and shareholder is the beneficiary consolidated two unsecured subordinated
promissory notes in the principal amount of $1.2 million and $1.0 million and
accrued interest into one unsecured subordinated demand note with principal
amount of $2,308,147. Total interest accrued on the consolidated note for the
period amounted to $28,456.(See Note 9).
On February 15, 2007 the Company issued a $500,000 unsecured subordinated demand
promissory note to a member of the Company's Board of Directors. On March 7,
2007 the Company entered into an agreement whereby it borrowed an additional sum
of $500,000 and consolidated this sum with the principal and accrued interest of
the $500,000 unsecured demand promissory note previously issued on February 15,
2007. This Consolidated Note is in the principal amount of $1,002,589. Total
interest accrued on the consolidated note for the period amounted to
$5,933.(See Note 9).
F18
NOTE 16 - COMMITMENTS AND CONTINGENCIES
LEASES
Effective November 24, 2004, the Company's wholly owned subsidiary ESW America,
Inc. entered into a lease agreement 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 for approximately 50,000 square
feet of leasehold space in Concord, Ontario Canada. The leasehold space houses
the Company's executive offices and a high volume manufacturing plant. The
possession of the leasehold space took place on May 24, 2005 and the term of the
lease will run for a period of 5 years from the commencement date of July 15,
2005.
The following breakdown is the total, of the minimum annual lease payments, for
both leases.
2007 332,166
2008 448,345
2009 453,801
2010 151,488
CAPITAL LEASE OBLIGATION
The Company is committed to the following lease payments in connection with the
acquisition of capital assets under capital leases:
2007 3,326
2008 4,436
2009 4,436
2010 3,326
---------
$ 15,524
Less imputed interest at 7.902% (795)
---------
Total obligation under capital lease 14,729
Less current portion (3,476)
---------
Total long-term portion $ 11,253
=========
The Company has incurred $401 interest expense on capital leases for the period.
NOTE 17 - COMPARATIVE FIGURES
Certain 2006 figures have been reclassified to conform to the financial
statements presentation adopted in 2007.
NOTE 18 - SUBSEQUENT EVENTS
On April 18, 2007 the Company issued 6,722 shares of common stock for the
payment of an account payable in the amount of $5,000 for legal fees. The
expense was previously recorded as compensation expense in fiscal year 2005.
On April 12, 2007 the company received $20,0000 for the exercise of 40,000
options exercisable at $0.50 per share and issued 40,000 shares of common stock.
On April 05, 2007 the company repaid the $692,881 outstanding bank loan
including interest it previously borrowed, on March 27, 2007. to its bank (See
note 8)
F19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The following discussion should be read in conjunction with our Financial
Statements and Notes thereto included elsewhere in this Report.
This Form 10-QSB contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of our business.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to publicly release any modifications or revisions to these forward-looking
statements to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events. In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, we
caution investors that actual financial and operating results may differ
materially from those projected in forward-looking statements made by, or on
behalf of, us. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause the actual results, performance,
or achievements to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements. This
report should be read in conjunction with our Annual Report on Forms 10-KSB and
10-KSB/A (No. 1) for the year ended December 31, 2006 as filed with the
Securities and Exchange Commission.
GENERAL
Environmental Solutions Worldwide, Inc. is a publicly traded company engaged
through its wholly owned subsidiaries ESW Canada, Inc. and ESW America, Inc.
(the ESW Group of Companies) in the design, development, ISO 9001:2000 certified
manufacturing and sales of environmental technologies. The ESW Group of
Companies currently manufacture and market a diversified line of catalytic
emission control products and support technologies for diesel, gasoline and
alternative fueled engines. The ESW Group of Companies also operates a
comprehensive EPA/CARB/MSHA recognized emissions testing and verification
laboratory.
We have begun to use the trade style name "The ESW Group of Companies" when
referencing business related to the involvement of our wholly owned subsidiaries
ESW Canada, Inc. and ESW America, Inc. This new trade style is being used to
help identify the Company's potential participation in business opportunities
other than engine emissions controls.
We develop, manufacture and sell internal combustion engine emission reduction
technologies, and are currently focused on the international automotive, utility
engine, off-road, mining and military industries. We also manufacture and market
a line of catalytic control and enabling products including a line of finished
catalytic muffler products, proprietary catalytic converter substrates,
catalytic conversion technologies and exhaust tubes for a number of
applications. We also offer engine and aftertreatment emissions verification
testing and certification services.
-2-
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. We are organized into two
major operating segments of business. The manufacturing of catalytic converters
and emission control solutions and support technologies, as well as the
emissions certification and verification of internal combustion engines and
aftertreatment devices for engines ranging from 0.5 to 600 horse power.
We have developed commercially viable proprietary catalytic converter
technologies for diesel, gasoline and alternative (CNG/LPG) fueled combustion
engines. The unique technology consists of a wire based mesh substrate and wash
coat formulas, which form the basis for the catalyzed substrate. The finished
product can be produced in a myriad of sizes and shapes. The substrate creates a
turbulent flow environment. This increases catalytic activity and serves as a
filter of particulate matter, important in diesel emission control.
We market our catalyst products using the trade names, Clean Cat(R), Enviro-Cat
(TM), Quiet Cat(TM), Pro Cat(TM), Air Sentinel(TM), XTRM Cat(TM), MCat (TM),
Terra Cat (TM) Particulate Reactor(TM), Stlth Cat(TM) and the
Scat-IR-Shield(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.
Our primary business objective is to capitalize on the growing global
requirement of reducing emissions, by offering catalyst technology solutions to
the market and build upon our military product lines to continue sales to the US
and NATO countries. We have and continue to seek to develop 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 have and continue to make 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.
-3-
Factors that are critical to our success include winning new business, managing
our manufacturing capabilities to ensure proper levels correspond 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.
In March, 2007 we announced that the Company's wholly owned subsidiary ESW
Canada Inc. (ESWC), received an order for its proprietary heat/infrared
reduction and exhaust shielding system branded SCAT-IR-SHIELD(TM) valued at US
$7.4 M. The 1000 units are scheduled for completion and delivery by the 3rd
quarter of 2007. This innovative technology, designed by ESWC's
engineering/design division, operates in combination with the Company's
proprietary STLTH CAT(TM), a high performance catalyzed military muffler.
On May 7th, 2007 we announced that the Company re-established its verification
status with the California Air Resource Board (CARB) for our proprietary Level
II PARTICULATE Reactor(TM) catalyst device. This new Executive Order (EO)
DE-04-011-02 allows the Company to market the current Particulate Reactor(TM)
for on-road applications through to January 1, 2009.
On May 9, 2007 we announced that our wholly owned subsidiary ESW America (ESWA)
has been awarded a $250,000.00 research grant for optimization of the Company's
proprietary XTRM Cat(TM) Locomotive & Marine catalyst technology from the Texas
Environmental Research Consortium (TERC) and the Houston Advanced Research
Center (HARC). The grant awarded to ESWA is made possible by the New Technology
Research and Development (NTRD) Program which was created in 2001 by the 77th
Texas Legislature. The NTRD Program is funded by the State of Texas through the
Texas Commission on Environmental Quality (TCEQ). NTRD grants are designed to
expedite the commercialization of new and innovative emission reduction
technologies that will improve the air quality of Texas.
Both our facilities are in full compliance with ISO 9001:2000. We currently hold
a full registration certificate effective until March of 2010 for ESW America
and January 2010 for ESW Canada.
-4-
In the first quarter of 2007 the company engaged the services of an IR firm in
Germany for the purposes of increasing market and shareholder awareness of the
company among European fund mangers. As well as of March 16, 2007 the Company's
Common stock was listed on the Frankfurt exchange.
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 Capitol Resources" below for
further discussion of cash flows.
SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING STANDARDS
GENERAL
Our discussion and analysis of the financial condition and results of operations
is based upon our consolidated condensed 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, research and development
and accounting for the value of long-lived assets and intangible assets to be
critical accounting policies.
-5-
REVENUE RECOGNITION
We recognize revenue when it is realized or realizable 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 annually and
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable.
-6-
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.
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.
COMPARISON OF THREE MONTH PERIOD ENDED MARCH 31, 2007 TO THREE MONTH PERIOD
ENDED MARCH 31, 2006
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations (MD&A) should be read in conjunction with the MD&A
included in our Annual Report on Forms 10-KSB and 10-KSB/A (No. 1) for the year
ended December 31, 2006.
On a cash basis the Company had net income of $854,773 which was derived from
the net loss of $384,915 and adding back all the non-cash expenses, totalling
$1,239,688, which includes depreciation, amortization, amortization of the fair
value of the debenture warrant stock based compensation and others.
Revenues for the three month period ended March 31, 2007 increased by $3,091,702
or 1314.8 percent, to $3,326,845 from $235,143 for the three month period ended
March 31, 2006. This quarter saw the largest sales generated as the Company
began the transition to produce larger contracts and deliver on its
Scat-R-shield and TempMax(TM) products.
-7-
Cost of sales as a percentage of revenues for the three month period ended March
31, 2007 was 40.7 percent compared to 147.5 percent for the three month period
ended March 31, 2006. The gross margin for the three month period ended March
31, 2007 was 59.3 percent as compared to a gross margin of negative 47.5 percent
for the three month period ended March 31, 2006. There are two primary reasons
for the increase in gross margins. Firstly, larger contracts in the current
period enabled us to produce more efficiently and with economies of scale over
the prior year. And secondly, we were able to generate higher margins on product
that are proprietary to us, by selling for higher prices.
Marketing, office and general expenses for the three month period ended March
31, 2007 increased by $13,315 or 1.4 percent, to $932,969 from $919,654 for the
three month period ended March 31, 2006. The increase is primarily due to an
increase in investor relations expense of $91,818 as the Company participated in
an investor show as well as expenses related to Investor relations services and
expenses related to the Company being listed on the Frankfurt exchange. Plant
related expenses increased by $80,195 as we sold more products. This increase
was offset by decreases in the following categories. Rent and facility costs of
$36,854, sales and marketing costs of $67,035, administration salaries and wages
of $37,246 and general cost of $17,563. As a percentage of revenue, marketing,
office and general expenses decreased to 28.0 percent for the three month period
ended March 31, 2007 compared to 391.1 percent for the three month period ended
March 31, 2006.
We experienced an increase in research and development costs. For the three
month period ended March 31, 2007 research and development costs increased by
$51,011 or 71.3 percent to $122,506 from $71,495 for the three month period
ended March 31, 2006. As a percentage of revenue R & D expense decreased to 3.7%
for the three month period ended March 31, 2007 compared to 30.4% for the three
month period ended March 31, 2006.
Officer's compensation and director's fees for the three month period ended
March 31, 2007 increased by $9,683 or 8.3 percent, to $126,905 from $117,222 for
the three month period ended March 31, 2007. As a percentage of revenue,
officer's compensation and director's fees decreased to 3.8 percent for the
three month period ended March 31, 2007, compared to 49.9 percent for the three
month period ended March 31, 2006.
Consulting and professional fees for the three month period ended March 31, 2007
decreased by $1,606 or 6.7 percent, to $22,237 from $23,843 for the three month
period ended March 31, 2007. As a percentage of revenue, consulting and
professional fees decreased to 0.7 percent for the three month period ended
March 31, 2007, compared to 10.1 percent for the three month period ended March
31, 2007.
-8-
Interest expense on long-term debt was $61,000 for the three month period ended
March 31, 2007 which is consistent with the three month period ended March 31,
2006. 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 subsequently have been adjusted to $0.85 effective
April 21, 2005. The debentures are for a term of three (3) years and earn
interest at the rate of 4% per annum.
Interest expense on notes payable was $59,787 for the three month period ended
March 31, 2007 as compared to nil for the three month period ended March 31,
2006. During the current year, we consolidated two unsecured subordinated
promissory notes previously issued in the principal amount of $1 million, and
$1.2 million and accrued interest into one unsecured subordinated demand note
with principal amount of $2,308,148, to a company controlled by a trust to which
a director and shareholder of our Company is the beneficiary. The note bears
interest at 9% per annum. The holder of the consolidated note has the option to
receive payment of principal and all accrued interest in the form of restricted
shares of the Company's common stock, par value ($0.001) with cost free
piggyback registration rights. Under this repayment option, interest will be
calculated at 12% per annum. As well the Company issued a $500,000 unsecured
subordinated demand promissory note to a member of the Company's Board of
Directors and subsequently entered into an agreement whereby it borrowed an
additional sum of $500,000 and consolidated this sum with the principal and
accrued interest of the $500,000 unsecured demand promissory note previously
issued. This Consolidated Note is in the principal amount of $1,002,589 and
bears interest at a rate of 9% per annum and is payable upon demand. The Company
may prepay the Consolidated Note without penalty at any time.
Depreciation and amortization expense for the three month period ended March 31,
2007 increased by $178,949, or 215.6 percent to $262,740 from $83,791 for the
three month period ended March 31, 2006. The increase in depreciation was due to
the additional purchases of property, plant and equipment, in the current period
and depreciation on equipment purchase during fiscal 2006.
Stock based compensation amounted to of $776,271 in the current period compared
to nil in the prior period. On February 13, 2007 the board of directors approved
the aggregate award of 2,450,000 stock options to eight employees, two executive
officer/directors and four outside directors. The options have immediate vesting
with an exercise price of $0.71 per share (fair-market value at the date of
grant) with exercise ranging from three and five years from the date of award.
-9-
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of operating capital have been the proceeds from our
various financing transactions. As of March 31, 2007, the Company had cash and
cash equivalents of $ 1,747,590.
Net Cash used in operating activities for the for the three month period ended
March 31, 2007 amounted to $809,678. This amount was attributable to the loss of
$384,915 less noncash expenses such as depreciation, amortization, amortization
of the fair value of the debenture warrant, stock based compensation and others
of $1,239,688 and an increase in net operating assets and liabilities of
$1,664,451.
Net Cash used in investing activities was $179,412 for the three month period
ended March 31, 2007 as compared to $758,671 for the three month period ended
March 31, 2006.
Net cash provided in financing activities totaled $1,343,386 for the three month
period ended March 31, 2007 as compared to $69,357 for the three month period
ended March 31, 2006. During the three month period ended March 31, 2007,
$610,737 was received by way of notes payable, $40,500 through the exercise of
options and the company made a draw down on its revolving line of credit in the
amount of $692,881. $732 was repaid under our capital lease obligation. For the
three month period ended March 31, 2006, $70,250 was received through exercise
of options and $892 was repaid under our capital lease obligation.
We made substantial capital investments in manufacturing capability to support
our products. 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 significant 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 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.
-10-
It is our belief 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.
Due to the success of the STLTH Cat(TM) diesel mufflers order shipped in 2006,
we were commissioned by the military with the design and development of a
proprietary heat and infrared reduction shield system, branded as the
Scat-R-shield. A contract order for 7.4 million dollars has been received for
delivery of 1000 units by the third quarter of 2007. Included in sales for the
first quarter are 300 of these units.
We have setup a new internal division to continue to work with the U.S. and
other NATO (North Atlantic Treaty Organization) military organizations on future
programs. We believe that there is a potential for widespread deployment of our
products across a large segment of diesel powered military vehicles, generators
and off-road equipment.
We have also developed a proprietary substrate/catalyst branded M Cat(TM)
specifically for the use in production equipment used in the mining industry.
The M Cat(TM) has been performance tested and approved by the Mine Safety and
Health Administration (MSHA) for applications in the metal/non-metal mining
sector.
We have also received an order for TempMax(TM) catalyst enabling exhaust tubes
for 1.2 million dollars, slated for delivery through 2007.
Effective March 20, 2007, the Company's subsidiary, ESW Canada entered into a
$2.5 Million revolving credit facility with Royal Bank of Canada, to finance
orders on hand. This credit line will provide the Company with the necessary
working capital to complete larger contracts.
The capital expenditures made and our intent to capitalize on an anticipated
increase in demand for our products are the steps that we have taken to try to
become profitable and generate positive cash flow. Based on our current
operating plan, management believes that at March 31, 2007 cash balances,
anticipated cash flows from operating activities, and, if necessary or
appropriate, borrowings under our future credit facility and other available
financing sources, such as the issuance of debt or equity securities will be
sufficient to meet our working capital needs on a short-term basis for at least
the next twelve months. Overall, capital adequacy is monitored on an ongoing
basis by our management and reviewed quarterly by the Board of Directors.
Our principal source of liquidity in 2006 was cash provided from prior financing
activities. It is anticipated that the Company will produce cash from operations
in 2007 to support our expenditures. Our principal use of liquidity will be to
finance any further capital expenditures needed and to provide working capital
availability. We do not expect that total capital expenditures for 2007 will
amount to more than $500,000. These capital expenditures will be used primarily
for equipment.
-11-
Should we not become profitable, 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. 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.
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 were subsequently adjusted to $0.85 on April 21, 2005, in
accordance with the terms of the warrants. 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 $0.50 per share. At
our option, interest on the debenture is payable in cash or shares of common
stock under a conversion formula as provided in the debenture. We elected to
issue shares of our common stock as payment of the first year's 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 well, we elected to issue shares
of our common stock as payment of the second year's interest earned. A total of
387,302 shares of common stock were issued to 10 debenture holders for the
$244,000 of accrued interest through September 13, 2006. It is anticipated that
the principal amount of the debentures, in the amount of $6.1 million, will be
paid to the debenture holders by way of issuance of 12,200,000 shares of common
stock when due.
-12-
During the last fiscal year, we issued three unsecured subordinated promissory
notes of $0.5 million, $1million, and $1.2 million totaling $2.7 million to a
company controlled by a trust to which a director and shareholder of our Company
is the beneficiary. The notes bear interest at 9% per annum. The holder of the
$1 million and $1.2 million notes issued on September 1, 2006 and June 27, 2006
respectively, has the option to receive payment of principal and all accrued
interest in the form of restricted shares of the Company's common stock, par
value ($0.001) with cost free piggyback registration rights. Under this
repayment option, interest will be calculated at 12% per annum. On January 9,
2007, the Company paid back the $0.5 million subordinated promissory note it had
previously issued on November 13, 2006 in the principal amount of $500,000 by
paying the Holder the sum of $506,780 in cash, representing $500,000 principal
and $6,780 interest. Subsequently, On February 9, 2007, the above two unsecured
subordinated promissory notes in the principal amount of $1.0 million and $1.2
million were consolidated into one unsecured subordinated demand note with
principal amount of $2,308,147. This Consolidated Note, is due and payable to
Holder upon demand. As with the original Promissory Notes, the Consolidated Note
will continue to bear interest at a rate of 9% per annum if principal and
interest are paid by the Company in cash, or if principal and interest are paid
in shares of restricted common stock of the Company, the Consolidated Note will
bear interest at a rate of 12% per annum. The Company may prepay the
Consolidated Note without penalty at any time.
On February 15, 2007 the Company issued a $500,000 unsecured subordinated demand
promissory note to a member of the Company's Board of Directors. This Note also
bears interest at 9% per annum and is payable upon demand. Subsequently, on
March 7, 2007, the Company entered into an agreement whereby it borrowed an
additional sum of $500,000 from a member of the Company's Board of Directors and
consolidated this sum with the principal and accrued interest of the $500,000
unsecured demand promissory note previously issued on February 15, 2007. This
Consolidated Note is in the principal amount of $1,002,589 and bears interest at
a rate of 9% per annum and is payable upon demand. The Company may prepay the
Consolidated Note without penalty at any time.
Effective March 20, 2007 the Company's subsidiary, ESW Canada Inc. entered into
a revolving credit agreement ("Revolving Credit Agreement") with a Canadian
banking institution to provide for up to $2.5 million in secured revolving
loans. The Company's revolving credit agreement allows for available borrowings
of up to $2.5 million, to cover direct costs such as material and labour for
specific sales orders. The facility has been guaranteed to the bank under Export
Development Canada's (EDC) pre shipment financing program. Subject to the loan
amount outstanding at any given time the company considers the total cost of the
financing to be on favorable terms.
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Borrowings under the revolving credit agreement bear interest at 1 1/2 percent
above the institution's prime rate. Repayments of the loan are required no later
than one year from the date of the advancement of the loan. Obligations under
the revolving credit agreement are collateralized by a first-priority lien on
the assets of the Company and its subsidiary ESW Canada Inc. including, accounts
receivable, inventory, equipment and other tangible and intangible property,
including the capital stock of all direct subsidiaries. As at March 31, 2007 the
Company had $692,881 outstanding. On April 05, 2007 the company repaid the
$692,881 outstanding bank loan including interest it previously borrowed.
Our ability to service our indebtedness in cash will depend on our future
performance, which will be affected by prevailing economic conditions,
financial, business, regulatory and other factors. Certain of these factors are
beyond our control. We believe that, based upon our current business plan, we
will be able to meet our debt service obligations when due. We believe that by
the third quarter of 2007 we will have a much stronger balance sheet.
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, our ability to
pay principal 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 our present shareholders.
NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Interpretation No. 48 ("FIN 48"),
"Accounting FOR UNCERTAINTY IN INCOME TAXES -- AN INTERPRETATION OF FASB
STATEMENT NO. 109", specifies how tax benefits for uncertain tax positions are
to be recognized, measured, and derecognized in financial statements; requires
certain disclosures of uncertain tax matters; specifies how reserves for
uncertain tax positions should be classified on the balance sheet; and provides
transition and interim-period guidance, among other provisions. FIN 48 is
effective for fiscal years beginning after December 15, 2006 and as a result is
effective in the first quarter of calendar 2007. We adopted FIN No. 48 as of
January 1, 2007, and the Company does not anticipate that total unrecognized tax
benefits will change significantly within 12 months of the date of adoption.
In February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - including an amendment
of FASB Statement No. 115," (SFAS 159). SFAS 159 permits entities to choose to
measure many financial instruments and certain other assets and liabilities at
fair value on an instrument-by-instrument basis (the fair value option). SFAS
159 becomes effective for the Company on January 1, 2008. The Company is
currently evaluating the potential impact of SFAS 159 on the financial
statements.
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FOREIGN CURRENCY TRANSACTIONS
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 March 31, 2007, we had no outstanding forward exchange
contracts.
ITEM 3. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURE
EVALUATION OF THE COMPANY'S DISCLOSURE AND INTERNAL CONTROLS
The Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" as of the end of the period covered by this
report. This evaluation was done with the participation of management, under the
supervision of the Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO").
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a cost
effective control system, misstatements due to error or fraud may occur and not
be detected. The Company conducts periodic evaluations of its internal controls
to enhance, where necessary, its procedures and controls.
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CONCLUSIONS
Based on our evaluation the CEO and CFO concluded that the registrant's
disclosures, controls and procedures are effective to ensure that information
required to be disclosed in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Security Exchange Commission rules and forms.
(b) CHANGES IN INTERNAL CONTROLS
Not applicable.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
31.1 Certification of Chief Executive Officer and
President pursuant to the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Chief Financial Officer, pursuant to the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(B) Reports on Form 8-K
On January 10, 2007 the Company filed a Current Report on Form 8-K/A dated
January 5, 2007 reporting that two Promissory Notes previously issued to Ledelle
Holding Limited in the principal amount of $1.2 Million & $1.0 Million were
extended to January 31, 2007, as well as reporting the satisfaction of a $500,
000 Note previously issued to Ledelle Holding Limited.
On February 2, 2007, the Company filed a Current Report on Form 8-K dated
February 1, 2007 reporting the resignation of Stan Kolaric as a member of the
Company's Board of Directors.
On February 14, 2007 the Company filed a Current Report on Form 8-K dated
February 8, 2007 reporting the appointment of John Dunlap III to the Board of
Directors.
On February 14, 2007 the Company filed a Current Report on Form 8-K dated
February 9, 2007 reporting the ratification of a charter for its Compensation
Committee.
On February 15, 2007 the Company filed a Current Report on Form 8-K/A dated
February, 9, 2007 reporting the extension and consolidation of the previously
issued consolidated Note of $2.3 Million and the issuance of an unsecured
subordinated note for $500 thousand to Bengt Odner, a member of the Company's
Board of Directors.
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On February 23, 2007 the Company filed a Current Report on Form 8-K dated
February 16, 2007 reporting Employment Agreement by and between the Company and
Mr. David Johnson as Chief Executive Officer and President.
On March 13, 2007 the Company filed a Current Report on Form 8-K dated March 7,
2007 reporting the issuance of a new Note in the amount of $500,000 to Bengt
Odner, a Director of the Company and the subsequent consolidation of same with a
previously issued $500,000 Note to Mr. Odner for a consolidated note of $1.002
Million.
On March 20, 2007 the Company filed a Current Report on Form 8-K dated March 16,
2007 reporting that its Common Stock was listed on the Frankfurt Stock Exchange.
On March 23, 2007 the Company filed a Current Report on Form 8-K dated March 19,
2007 reporting a Loan Agreement between the Company's wholly owned Subsidiary
ESW Canada, Inc. and Royal Bank of Canada.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: May 14, 2007
Concord, Ontario CANADA
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
BY: /S/ DAVID J. JOHNSON
--------------------
DAVID J. JOHNSON
CHIEF EXECUTIVE OFFICER AND PRESIDENT
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