SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUATERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended - March 31, 2008.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-30392
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
(Exact name of Company as specified in its charter)
Florida 13-4172059
- ------------------------------ ------------------
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
(Registrant's telephone number, including area code)
COMMON STOCK, $0.001 PAR VALUE
(Title of class)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Company was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | | Accelerated Filer | |
Non-Accelerated Filer | | (Do not check if a smaller reporting
Smaller reporting company [x] company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
There were 72,973,851 shares of the registrant's Common Stock outstanding as of
May 9, 2008.
FORM 10-Q
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
TABLE OF CONTENTS
PAGE #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets as of
March 31, 2008 (unaudited) and December 31, 2007 F2
Consolidated Condensed Statements of Operations and
Comprehensive Loss for the Three Months Ended
March 31, 2008 and 2007 (unaudited) F3
Consolidated Condensed Statements of Changes in
Stockholders Equity (Deficit) for the Three Months
Ended March 31, 2008 F4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2008 and 2007 (unaudited) F5
Notes to Consolidated Condensed Financial Statements
(unaudited) F6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 2
Item 3. Quantitative and Qualitative Disclosures About Market Risk. N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. N/A
Item 1A. Risk Factors N/A
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. N/A
Item 5. Other Information. N/A
Item 6. Exhibits. 11
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
MARCH 31, DECEMBER 31,
2008 2007
------------ ------------
ASSETS
Current assets
Cash and cash equivalents (Note 4) $ 1,256,062 $ 2,891,088
Accounts receivable (Note 2) 77,916 271,703
Inventory (Note 5) 1,037,360 1,030,843
Prepaid expenses and sundry assets 191,297 138,713
------------ ------------
Total current assets 2,562,635 4,332,347
Property, plant and equipment under construction (Note 6) 196,413 18,622
Property, plant and equipment, net of accumulated
depreciation (Note 6) 3,959,718 4,105,746
Patents and trademarks, net of accumulated
depreciation 598,930 649,196
------------ ------------
$ 7,317,696 $ 9,105,911
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 362,615 $ 145,352
Accrued liabilities 461,611 459,533
Notes payable to related party (Note 7) 3,310,737 3,310,737
Redeemable class A special shares (Note 8) 453,900 453,900
Current portion of capital lease obligation (Note 13) 9,439 13,032
------------ ------------
Total current liabilities 4,598,302 4,382,554
Long Term Liabilities
Capital lease obligation (Note 13) 30,180 29,482
------------ ------------
Total liabilities 4,628,482 4,412,036
------------ ------------
Commitments and contingencies (Note 13)
Stockholders' Equity (Note 10)(Note 11)
Common stock, $0.001 par value, 125,000,000
shares authorized; 72,973,851 shares
issued and outstanding 72,972 72,972
Additional paid-in capital 25,679,407 25,665,761
Accumulated other comprehensive income 387,944 450,318
Accumulated deficit (23,451,109) (21,495,176)
------------ ------------
Total stockholders' equity 2,689,214 4,693,875
------------ ------------
$ 7,317,696 $ 9,105,911
============ ============
The accompanying notes are an integral part of these financial statements
F2
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS PERIOD ENDED MARCH 31,
(UNAUDITED)
2008 2007
------------ ------------
Revenue
Net sales $ 80,322 $ 3,326,845
Cost of sales 56,027 1,353,997
------------ ------------
Gross profit 24,295 1,972,848
------------ ------------
Operating expenses
Marketing, office and general costs 1,023,383 998,910
Research and development costs 453,849 122,506
Officers' compensation and directors fees 150,590 837,235
Consulting and professional fees 52,186 22,237
Foreign exchange gain (35,851) (2,210)
Depreciation and amortization 279,972 262,740
------------ ------------
1,924,129 2,241,418
------------ ------------
Loss from operations (1,899,834) (268,570)
Interest on convertible debentures -- (61,000)
Interest on notes payable to related party (74,288) (59,787)
Interest Income 18,189 4,442
------------ ------------
Net loss and Comprehensive loss $ (1,955,933) $ (384,915)
============ ============
Loss per share $ (0.03) $ (0.01)
============ ============
Weighted average number of shares outstanding 72,973,851 58,941,393
============ ============
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, 2008
(UNAUDITED)
Accumulated
other
Common Stock Additional comprehensive Accumulated
Shares Amount Paid-In Capital income Deficit Total
----------------------------------------------------------------------------------------
December 31, 2006 59,753,240 $ 59,752 $ 18,243,710 $ -- $(19,331,555) $ (1,028,093)
Net Loss -- -- -- -- (2,163,621) (2,163,621)
Stock based compensation -- -- 776,271 -- -- 776,271
Common stock issued from
exercise of options 655,000 655 292,345 -- -- 293,000
Common stock issued for
services 6,722 6 4,994 -- -- 5,000
Issuance of common stock for
interest on debentures 338,889 339 243,661 -- -- 244,000
Issuance of common stock for
principalon debentures 12,200,000 12,200 6,087,800 -- -- 6,100,000
Common stock issued from
exercise of warrants 20,000 20 16,980 -- -- 17,000
Foreign currency translation
of Canadian subsidiaries -- -- -- 450,318 -- 450,318
December 31, 2007 72,973,851 $ 72,972 $ 25,665,761 $ 450,318 $(21,495,176) $ 4,693,875
------------ ------------ ------------ ------------ ------------ ------------
Net loss -- -- -- -- (1,955,933) (1,955,933)
Stock based compensation -- -- 13,646 -- -- 13,646
Foreign currency translation
of Canadian subsidiaries -- -- -- (62,374) -- (62,374)
------------ ------------ ------------ ------------ ------------ ------------
March 31, 2008 72,973,851 $ 72,972 $ 25,679,407 $ 387,944 $(23,451,109) $ 2,689,214
============ ============ ============ ============ ============ ============
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,
(UNAUDITED)
2008 2007
----------- -----------
Net Loss $(1,955,933) $ (384,915)
----------- -----------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 264,376 245,754
Amortization 53,251 52,876
Interest on debentures -- 61,000
Interest on notes 74,288 85,184
Amortization of debenture warrant fair value -- 44,000
Stock based compensation 13,646 776,271
----------- -----------
405,561 1,265,085
Increase (decrease) in cash flows from operating activities resulting from
changes in:
Accounts receivable 193,787 (1,615,006)
Inventory (6,517) 380,352
Prepaid expenses and sundry assets (52,584) 5,030
Accounts payable and accrued liabilities 145,053 (434,827)
----------- -----------
279,739 (1,664,451)
----------- -----------
Net cash used in operating activities (1,270,633) (784,281)
----------- -----------
Investing activities:
Acquisition of property, plant and equipment (118,348) (43,246)
Property, plant and equipment under construction (177,791) (134,266)
Increase in patents and trademarks (2,985) (1,900)
----------- -----------
Net cash used in investing activities (299,124) (179,412)
----------- -----------
Financing activities:
Bank Loan -- 692,881
Repayment of notes payable to related party -- (500,000)
Notes payable from related party -- 1,085,340
Issuance of common stock -- 40,500
Capital lease obligation (2,895) (732)
----------- -----------
Net cash provided (used) by financing activities (2,895) 1,317,989
----------- -----------
Net increase (decrease) in cash (1,572,652) 354,296
Effect of foreign currency exchange rate on Canadian subsidiaries (62,374) --
Cash and cash equivalents, beginning of year 2,891,088 1,393,294
----------- -----------
Cash and cash equivalents, end of period $ 1,256,062 $ 1,747,590
=========== ===========
Supplemental disclosures:
Interest received $ 18,189 $ 4,442
=========== ===========
The accompanying notes are an integral part of these financial statements
F5
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
Environmental Solutions Worldwide Inc. (the "Company" or "ESW") 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 unaudited condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United Sates of
America ("US GAAP"), which contemplate continuation of the company as a going
concern. The Company, however, has sustained 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 has accumulated significant
losses as it has been developing its current and next generation products. 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 amendments thereto, as filed with the Securities and Exchange
Commission for the year ended December 31, 2007. 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,
2008 are not necessarily indicative of the results to be expected for the full
year.
F-6
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The condensed 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
and balances have been eliminated on consolidation. Amounts in the condensed
consolidated financial statements are expressed in U.S. dollars.
ESTIMATES
The preparation of consolidated financial statements in conformity with
Generally Accepted Accounting Principles in the United States 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. Significant estimates include amounts for valuation of intangible
assets, share-based compensation and inventory and accounts receivable
exposures.
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 31.0%, 21.5%, and 21.0%, respectively of the Company's revenue for
the three months ended March 31, 2008 and 14.1%, 12.2%, and 2.7%, respectively
of its accounts receivable as at March 31, 2008. Three of those customers
accounted for 90%, 2%, and 1%, respectively of the Company's revenue as at
December 31, 2007 and 56%, 2%, and 0%, respectively of its accounts receivable
as at December 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 $23,035 was appropriate as at March 31, 2008
and that a reserve of nil was appropriate as at December 31, 2007.
F-7
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.
PATENTS AND TRADEMARKS
Patents and trademarks consist primarily of the costs incurred to acquire them
from an independent third party. SFAS No. 142 "Goodwill and Other Intangible
Assets," requires intangible assets with a finite 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. We conducted our test for impairment
in the fourth quarter of 2007 and found no impairment.
Patents and trademarks are being amortized on a straight-line basis over their
estimated life of ten years. Amortization expense for the period ended March 31,
2008 and 2007 were $53,251 and $52,876 respectively.
INVENTORY
Inventory is stated at the lower of cost (first-in first-out) or market.
Inventory is periodically reviewed for use and obsolescence, and adjusted as
necessary. Inventory consists of raw materials, work in progress and finished
goods.
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",
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 9.3% 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 property, plant, and
equipment, are charged as operating expense of the Company as incurred. Any
grant money received for research and development work will be used to offset
these expenditures. For the three month period ended March 31, 2008 and 2007 the
Company expensed $453,849 and $122,506 respectively towards research and
development costs. For the three month period ended March 31, 2008 and 2007,
grant money amounted to $8,719, and nil respectively.
F-8
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2008, the FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, AN AMENDMENT OF FASB STATEMENT NO. 133
("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (1) how and why an entity uses derivative instruments, (2) how
derivative instruments and related hedged items are accounted for under SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"),
and its related interpretations, and (3) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. SFAS 161 is effective for fiscal years beginning after November 15,
2008. We will be required to adopt SFAS 161 in the first quarter of 2009. We
currently do not have any derivative financial instruments subject to accounting
or disclosure under SFAS 133; therefore, we do not expect the adoption of SFAS
161 to have any effect on our consolidated statement of financial position,
results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements
for how a company recognizes assets acquired, liabilities assumed, contractual
contingencies and contingent consideration measured at fair value at the
acquisition date. The Statement also establishes disclosure requirements which
will enable users to evaluate the nature and financial effect of the business
combination. SFAS 141R is effective for fiscal years beginning after December
15, 2008. We will consider the effect of SFAS 141 and it's impact on any future
acquisitions.
In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent's ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. The
Statement also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interest of the
parent and the interest of the noncontrolling owners. SFAS 160 is effective for
fiscal years beginning after December 15, 2008. The Company does not expect the
adoption of SFAS 160 to have any impact on its financial position, results of
operation or cash flows.
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 has
evaluated the adoption of this statement and concluded that it did not have any
material impact on the financial statements.
F-9
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments purchased
with an original or remaining maturity of three months or less at the date of
purchase.
NOTE 5 - INVENTORY
Inventory is summarized as follows:
MARCH 31, 2008 DECEMBER 31, 2007
--------------- -----------------
Raw materials $ 796,086 $ 761,832
Work-In-Process 224,188 251,358
Finished goods 17,086 17,653
---------- ----------
$1,037,360 $1,030,843
========== ==========
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
MARCH 31, 2008 DECEMBER 31, 2007
--------------- -----------------
Plant, machinery and equipment $ 4,992,226 $ 4,966,177
Office equipment 280,530 242,098
Furniture and fixtures 421,938 421,550
Vehicles 12,014 12,014
Leasehold improvements 977,951 924,472
----------- -----------
6,684,659 6,566,311
Less: accumulated depreciation (2,724,941) (2,460,565)
----------- -----------
$ 3,959,718 $ 4,105,746
=========== ===========
As at March 31, 2008 and December 31, 2007, the Company had $196,413 and
$18,622, respectively, of customized equipment under construction.
The office equipment above includes $17,665 in assets under capital lease with a
corresponding accumulated depreciation of $8,879 at the period ended March 31,
2008. As at December 31, 2007 office equipment included $17,665 in assets under
capital lease with a corresponding accumulated depreciation of $7,879
The Plant, machinery and equipment above includes $33,957 in assets under
capital lease with a corresponding accumulated depreciation of $6,245 at the
period ended March 31, 2008. As at December 31, 2007 Plant, machinery and
equipment above includes $33,957 in assets under capital lease with a
corresponding accumulated depreciation of $4,347
F-10
NOTE 7 - NOTES PAYABLE
The Company has two unsecured subordinated promissory notes in the principal
amount of $2,308,148 and $1,002,589.
In accordance with the terms of the Consolidated Note in the principal amount of
$2,308,148, same will be due and payable to Holder upon demand. The Consolidated
Note bears 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 repay the Consolidated Note without
penalty at any time. The Note was issued to a company controlled by a trust of
which a director and shareholder of our Company is the beneficiary. The holder
of the 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.
The Consolidated Note in the principal amount of $1,002,589 bears interest at a
rate of 9% per annum and is payable upon demand. The Company may repay the
Consolidated Note without penalty at any time. The Note was issued to a director
and shareholder of our Company.
As at March 31, 2008 and December 31, 2007 $333,172 and $258,855 respectively of
interest payable has been accrued on the two promissory notes in the total
principal amount of $3,310,737.
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 $681,929 USD at March 31, 2008). 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, 2008 BBL has an accumulated deficit of $1,197,916 USD ($1,850,695 CDN as at
March 31, 2008) and therefore, the holder would be unable to redeem the Class A
special shares at their ascribed value.
F-11
NOTE 9 - INCOME TAXES
As at March 31, 2008, there are loss carryforwards for Federal income tax
purposes of approximately $18,079,898 available to offset future taxable income
in the United States. The carryforwards expire in various years through 2026.
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 $6,327,964 has been established
until realizations of the tax benefit from the loss carryforwards are more
likely than not.
Additionally, as at March 31, 2008, the Company's two wholly owned Canadian
subsidiaries had loss carryforwards of approximately $1,920,653 be used, in
future periods, to offset taxable income. The deferred tax asset of
approximately $693,356 has been fully offset by a valuation allowance until
realization of the tax benefit from the loss carryforwards are more likely than
not.
For the period ended
March 31,
2008 2007
----------- -----------
Statutory tax rate:
U.S 35.0% 35.0%
Foreign 36.1% 36.1%
Income (loss) before income taxes:
U.S $(1,026,566) $(1,806,930)
Foreign (929,367) 1,422,015
----------- -----------
$(1,955,933) $ (384,915)
----------- -----------
Expected income tax recovery $ (694,800) $ (119,078)
Differences in income tax resulting from:
Depreciation (Foreign operations) $ 10,324 $ 17,804
----------- -----------
$ (684,476) $ (101,274)
Benefit of losses not recognized 684,476 $ 101,274
----------- -----------
Income tax provision (recovery) per financial statements $ 0 $ 0
----------- -----------
Deferred income tax assets and liabilities consist of the
following difference:
As at
March 31,
2008 2007
------------ ------------
Assets
Capital Assets - Tax Basis (Foreign operations only) $ 1,108,818 $ 1,693,916
Capital Assets - Book Value (Foreign operations only) (1,671,656) (1,850,450)
------------ ------------
Net Capital Assets $ (562,838) $ (156,534)
Tax loss carry forwards 20,000,551 18,021,948
------------ ------------
Net temporary differences (foreign operations only) $ 19,437,713 $ 17,865,414
Statutory tax rate:
Foreign 36.1% 36.1%
Temporary differences (foreign operations only) 7,017,014 6,449,414
Valuation Allowance (7,017,014) (6,449,414)
------------ ------------
Carrying Value $ 0 $ 0
============ ============
F-12
Effective January 1, 2007, the company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities.
There was not a material impact on the company's consolidated financial position
and results of operations as a result of the adoption of the provisions of FIN
48. The company does not believe there will be any material changes in its
unrecognized tax positions over the next twelve months.
The Company will recognize interest and penalties related to unrecognized tax
benefits within the income tax expense line in the consolidated statement of
operations. Accrued interest and penalties will be included within the related
tax liability line in the consolidated balance sheet.
In many cases the company's uncertain tax positions are related to tax years
that remain subject to examination by tax authorities. The following describes
the open tax years, by major tax jurisdiction, as of March 31, 2008:
United States - Federal 2004 - present
United States - State 2004 - present
Canada - Federal 2005 - present
Canada - Provincial 2005 - present
Valuation allowances reflect the deferred tax benefits that management is
uncertain of the ability to utilize in the future.
NOTE 10 - ISSUANCE OF COMMON STOCK
For the three months ended March 31, 2008 there was nil issuance of common
shares.
NOTE 11 - STOCK OPTIONS AND WARRANT GRANTS
A total of $13,646 and $776,271 for stock based compensation has been recorded
as at March 31, 2008 and 2007 respectively. The Company used the simplified
method for computing the expected term of the option.
On February 7, 2008 the board of directors granted the aggregate award of
400,000 stock options to five employees, two executive officers and one
director. The options have immediate vesting with an exercise price of $0.71 and
$1.00 per share (above fair-market value at the date of grant) with exercise
periods ranging from three and five years from the date of award.
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.
F-13
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, 2007 5,246,667 $0.60
Granted 2,450,000 $0.71
Expired (45,000) ($0.50)
Exercised (655,000) ($0.45)
---------- ------
Outstanding, December 31, 2007 6,996,667 $0.65
Granted 100,000 $0.71
Granted 300,000 $1.00
Expired (35,000) ($0.50)
---------- ------
Outstanding, March 31, 2008 7,361,667 $0.67
At March 31, 2008, the outstanding options have a weighted average remaining
life of 28 months.
The weighted average fair value of options granted during 2008 and 2007 was
$0.93 and $0.71 respectively and was estimated using the Black-Scholes
option-pricing model, and the following assumptions:
2008 2007
-------- --------
Expected volatility 49-52% 56-69%
Risk-free interest Rate 3.00% 5.00%
Expected life 1.5 to 2.5 yrs 1.5 to 2.5 yrs
Dividend yield 0.00% 0.00%
Forfeiture rate 0.00% 0.00%
F-14
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, 2008, the Company had outstanding options as follows:
NUMBER OF OPTIONS 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
1,750,000 0.50 August 11, 2009
150,000 0.50 December 1, 2009
150,000 0.50 July 31, 2008
666,667 0.66 September 10,2008
300,000 0.71 February 16, 2010
2,150,000 0.71 February 16, 2012
200,000 1.00 July 31, 2008
795,000 1.00 December 31, 2010
100,000 0.71 February 3, 2011
200,000 1.00 February 7, 2011
100,000 1.00 February 7, 2013
---------------
7,361,667
---------------
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, 2007 6,322,500 $ 0.93
Granted -- --
Exercised (20,000) $ (0.85)
Expired (3,030,000) $ (0.85)
---------- --------
Outstanding, December 31, 2007 3,272,500 $ 1.28
Granted -- --
Exercised -- --
Expired -- --
---------- --------
Outstanding, March 31, 2008 3,272,500 $ 1.28
---------- --------
F-15
Outstanding warrants as of March 31, 2008:
NUMBER OF WARRANT SHARES EXERCISE PRICE EXPIRATION DATE
------------------------ -------------- -----------------
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
---------
3,272,500
---------
(A) Contain certain anti-dilution provisions.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the period ended March 31, 2008 and 2007, the Company paid shareholders
and their affiliates $25,000 and nil, respectively for various services rendered
in addition to salaries and reimbursement of business expenses. All transactions
are recorded at the exchange amounts. A director and shareholder of the company,
provides consulting services to the company under a consulting agreement. The
agreement provides for a monthly retainer of $12,500 per month. Any one
transaction or combination attributed to one individual or entity exceeding
$120,000 on an annual basis has been disclosed.
The Company has two unsecured subordinated promissory notes in the principal
amount of $2,308,147 and $1,002,589. The $2.3 million Note was issued to a
company controlled by a trust of which a director and shareholder of our Company
is the beneficiary. Total interest accrued on the $2.3 million consolidated Note
for the quarter ended March 31, 2008 amounted to $236,759. The $1.0 million Note
was issued to a director and shareholder of our Company. Total interest accrued
on the $1.0 million Note for the quarter ended March 31, 2008 amounted to
$96,413 (See Note 7).
F-16
NOTE 13 - 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.
2008 $ 361,282
2009 487,846
2010 168,511
The Company has no pending lawsuits.
CAPITAL LEASE OBLIGATION
The Company is committed to the following lease payments in connection with the
acquisition of capital assets under capital leases:
2008 $ 12,676
2009 16,902
2010 9,977
2011 2,180
2012 909
---------
$ 42,644
Less imputed interest 3,025
---------
Total obligation under capital lease 39,619
Less current portion 9,439
---------
Total long-term portion $ 30,180
=========
The Company has incurred $3,025 interest expense on capital leases for the year.
NOTE 14 - LOSS PER SHARE
Potential common shares of 7,361,667 related to ESW's outstanding stock options
and potential common shares of 3,272,500 related to ESW's outstanding Warrants
were excluded from the computation of diluted earnings/(loss) per share for the
year ended March 31, 2008, as the effect of inclusion of these shares and the
related interest expense would have been antidilutive.
F-17
The reconciliation of the number of shares used to calculate the diluted loss
per share is estimated as follows:
For the Period ended
Ended March 31,
2008 2007
Numerator
Net Loss for the year $ (1,955,933) $ (384,915)
Interest on debentures $ 0 $ 61,000
Amortization of debenture fair value $ 0 $ 44,000
Interest on note $ 74,288 $ 59,787
-----------------------------
$ (1,881,645) $ (220,128)
Denominator
Weighted average number of shares outstanding 72,973,851 58,941,393
Dilutive effect of :
Stock options -- --
Warrants -- --
Convertible Debt conversion -- --
Note Payable Conversion -- --
-----------------------------
Diluted weighted average shares outstanding -- --
NOTE 15 - COMPARATIVE FIGURES
Certain 2007 figures have been reclassified to conform to the financial
statements presentation adopted in 2008.
F-18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS 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-Q 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
amendments thereto for the year ended December 31, 2007 as filed with the
Securities and Exchange Commission.
GENERAL OVERVIEW
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.
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
U.S. 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 in order for new products to be developed that meet the
new legislative regulations.
-2-
The field of emission control is very complex and requires a variety of
different technologies to be employed. We are currently developing additional
products that meet the needs of our customers and which meet industry standards.
We have partnered with several strategic alliances assuring immediate access to
leading edge technologies that address the needs of our global customer base.
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.
Our largest customer is International Truck and Engine Corporation
(International), the operating company of Navistar International Corporation. On
November 8, 2007 we announced that we signed an Emissions Control and
Technologies Provider and Cooperation agreement with International. Our
relationship with International has been and will continue to be of singular
importance to our near term growth. In 2007 our revenues from sales to end
users, through International, was 90% of total revenues, or approximately $ 8.4
million. We expect this percentage of revenue will be significant in the future
as a result of sales of diesel catalytic converter products that are currently
being verified by the EPA and CARB, and which subsequently will be branded and
marketed by the "Green Diesel Technology" division. Being North America's
biggest diesel engine, truck and bus manufacturer, International has the
potential to capture a significant share of the retrofit truck and bus market in
the U.S. and provides us direct access to that market. We expect that
International will be important to our growth for ESW technology products, and
our other products worldwide.
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. This quarter we expensed $453,849 in research
and development costs, a major increase over last period. We are reducing our
dependence on our current proprietary products by introducing new products and
systems and acquiring other product lines. Sales depend on the success of
efforts to develop and market the products, and there can be no certainty that
those efforts will succeed.
As we have a substantial amount of indebtedness, 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.
-3-
COMPARISON OF THREE MONTH PERIOD ENDED MARCH 31, 2008 TO THREE MONTH PERIOD
ENDED MARCH 31, 2007
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 amendments thereto for the
year ended December 31, 2007
Revenues for the three month period ended March 31, 2008 decreased by $3,246,523
or 97.6 percent, to $80,322 from $3,326,845 for the three month period ended
March 31, 2007. There was a net loss for the quarter which amounted to
$1,955,933. The revenue decline can be attributed to the fact that the last
period included the sale of 300 shroud Scat-R-shield units to the U.S. military
which did not reoccur in the current period. In the current period the company
focused its efforts on developing the next generation of diesel catalyst
products to meet new regulations; these products are expected to generate
revenues in the latter part of 2008.
Cost of sales as a percentage of revenues for the three month period ended March
31, 2008 was 69.8 percent compared to 40.7 percent for the three month period
ended March 31, 2007. The gross margin for the three month period ended March
31, 2008 was 30.2 percent as compared to a gross margin of 59.3 percent for the
three month period ended March 31, 2007. The relatively low orders produced in
this period were mainly sample or prototype orders that have low volumes
associated with production. Efficient economies of scale would be achieved on
higher volumes.
Marketing, office and general expenses for the three month period ended March
31, 2008 increased by $24,473, or 2.4 percent, to $1,023,383 from $998,910 for
the three month period ended March 31, 2007. The increase is primarily due to
increases in sales and marketing salaries and wages of $151,481 as we added more
staff to support our internal sales infrastructure in preparation for the
release of our new products. As well we participated in industry trade shows.
Facility costs were higher over the pervious period by $74,994 as a result of
low sales volumes. These increases were offset by decreases in all of the
following areas. Debt accretion decreased by $44,000 as we had no outstanding
convertible debt this period. General and administration costs were lower by
$18,454, administration salaries and wages were lower by $22,505, plant related
expenses were lower by $49,694 and investor relations expense was lower by
$67,349.
Research and development expenses for the month period ended March 31, 2008
increased by $331,343, or 270.5 percent, to $453,849 from $122,506 for the three
month period ended March 31, 2007. As planned, we continue to aggressively
pursue testing and research and development in our efforts to develop innovative
products to serve our customers and improve our product mix and profit margins.
We believe that this expenditure will result in increase orders for our
products.
-4-
Officer's compensation and director's fees for the three month period ended
March 31, 2008 decreased by $686,645 or 82 percent, to $150,590 from $837,235
for the three month period ended March 31, 2007. The main reason for decrease in
Officers' compensation and directors' fees was the Black Sholes compensation
expense of $710,330 recognised in the previous period for options issuance
compared to $9,773 recognised in the current period. This decrease was offset by
a small increase in Officers Salaries and directors fees as we added two new
officers in February 2008.
Consulting and professional fees for the three month period ended March 31, 2008
increased by $29,949 or 134.7 percent, to $52,186 from $22,237 for the three
month period ended March 31, 2007. The increase is mainly attributed to audit
fees, tax consulting fees and fees related to compliance activities for
requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
Foreign exchange gain for the three month period ended March 31, 2008 increased
by $33,641 to $35,851 from $2,210 for the three month period ended March 31,
2007 as a result of the weakening of the Canadian Dollar to the United States
Dollar.
Depreciation and amortization expense for the three month period ended March 31,
2008 increased by $17,232, or 6.6 percent to $279,972 from $262,740 for the
three month period ended March 31, 2007
Interest expense on the two consolidated notes payable was $74,288 for the three
month period ended March 31, 2008 as compared to $59,787 for the three month
period ended March 31, 2007. The Company may prepay the Consolidated Note
without penalty at any time.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 2007, our principal sources of operating capital have been the proceeds
from our various financing transactions. In 2007 we generated cash from
operations. In the first quarter of 2008 we used a substantial amount of cash as
our sales were unusually low. As of March 31, 2008, the Company had cash and
cash equivalents of $ 1,256,062.
Net Cash used in operating activities for the three month period ended March 31,
2008 amounted to $1,270,633. This amount was attributable to the loss of
1,955,933, plus non cash expenses such as depreciation, amortization, and others
of $428,596, and a increase in net operating assets and liabilities of $256,704.
Net Cash used in investing activities was $299,124 for the three month period
ended March 31, 2008 as compared to $179,412 for the three month period ended
March 31, 2007. The capital expenditures this year were primarily dedicated to
enhancement of our production capabilities to meet requirements of our new
products currently being developed.
-5-
Net cash used by financing activities totaled $2,895 for the three month period
ended March 31, 2008 as compared to $1,317,989 provided by financing activities
for the three month period ended March 31, 2007. In the current period no new
debt or share issuances from the exercise of option or warrants took place and
$2,895 was repaid under our capital lease obligation.
In 2007, our 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 us with the working capital to complete larger contracts. On
November 2, 2007 the credit facility which originally had an expiry date of
November 30, 2007 has been extended to June 30, 2008.
The global emissions industry is highly competitive; winning and maintaining new
business requires suppliers to rapidly produce new and innovative products on a
cost-competitive basis. Because of the heavy capital and engineering investment
needed to maintain this competitiveness, the investments made in 2006 and 2007
should help us to capitalize on the numerous supply opportunities considered to
be the core to our future success.
The expansion focused on increasing production capacity, expanding our research
and development facility, and a commitment to develop new products and improving
customer service. As well the expansion and 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 become profitable and generate positive cash
flow. Based on our current operating plan, management believes that at March 31,
2008 cash balances, anticipated cash flows from operating activities, and, the
appropriate borrowings under our 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. Overall, capital adequacy
is monitored on an ongoing basis by our management and reviewed quarterly by the
Board of Directors.
Our industry is capital intensive and there is a timing issue bringing product
to market which is considered normal for our industry. We continue to spend
money on research and development to prove up our technologies and bring them to
the point where our customers have a high confidence level allowing them to
place larger orders. The length of time a customer needs cannot be exactly
predetermined and as a result, during the first quarter of 2008, we sustained an
operating loss as a result of not generating sufficient sales to generate a
profit from operations. Although this indicated a potential working capital
deficiency and a possibility of the company's ability to continue to operate as
going concern, management does not we believe that this is of a substantial
financial concern as we have a good history of receiving capital infusion when
needed. More significantly, we believe that the revenue trend will increase,
once we obtain verification on certain products that are currently in the
testing stages and we believe will be verified by CARB, MSHA and the EPA during
2008.
-6-
Our principal source of liquidity in 2007 was cash provided from prior financing
activities along with a small amount contributed from operations. In 2007 we
also received funds from the exercise of options and warrants. It is anticipated
that we will produce cash from operations in 2008 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
anticipate having any major capital expenditures in 2008 related to the general
operation of our business, however should the need arise for further tooling or
equipment as a result of specific orders or the introduction of new product
lines, we would evaluate the need and make provisions as necessary. Our Board of
Directors may explore alternative listings of our Common Stock if same are
deemed beneficial to our shareholders. If we were to seek an alternative listing
of our Common Stock, we may incur significant capital expenditures beyond those
anticipated for our general business operations. Disciplined capital expenditure
decisions, focused on investments made for maintaining high quality service,
cost structure improvement, and cash flow generation are essential. We do not
expect that total capital expenditures for 2008 will amount to more than
$300,000.
Should we not be profitable, we will need 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.
We believe the success of our newly developed products will continue to motivate
others to develop similar designs, many of the same functional and physical
characteristics as our product. We have patents covering the technology embodied
in our products, and intend to enforce those patents as appropriate. If we are
not successful in enforcing our patents, competition from such products could
adversely affect our market share and prices for our products. Although overall
pricing has been stable recently, the average price of our products may decline
in the future. There is no assurance that our current or future products will be
able to successfully compete with products developed by others.
-7-
DEBT STRUCTURE
During the fiscal year 2006, we issued three unsecured subordinated promissory
notes of $0.5 million, $1 million, 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 August 29, 2006 and June 26, 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 $2,308,148. 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. As at March 31, 2007 $333,172 of
interest payable on the $1,002,589, and the $2,308,147 promissory notes has been
accrued. We believe that the terms of the promissory notes are fair and
reasonable and have been negotiated as arms length transactions.
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. Significant
assumptions underlie this belief, including, among other things, that we will be
successful in implementing our business strategy, that some of our new products
receive verification from the appropriate regulatory authorities, 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.
-8-
NEW ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, AN AMENDMENT OF FASB STATEMENT NO. 133
("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (1) how and why an entity uses derivative instruments, (2) how
derivative instruments and related hedged items are accounted for under SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"),
and its related interpretations, and (3) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. SFAS 161 is effective for fiscal years beginning after November 15,
2008. We will be required to adopt SFAS 161 in the first quarter of 2009. We
currently do not have any derivative financial instruments subject to accounting
or disclosure under SFAS 133; therefore, we do not expect the adoption of SFAS
161 to have any effect on our consolidated statement of financial position,
results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements
for how a company recognizes assets acquired, liabilities assumed, contractual
contingencies and contingent consideration measured at fair value at the
acquisition date. The Statement also establishes disclosure requirements which
will enable users to evaluate the nature and financial effect of the business
combination. SFAS 141R is effective for fiscal years beginning after December
15,2 008. We will consider the effect of SFAS 141 and its impact on any future
acquisitions.
In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in
Consolidated Financial Statements -- an amendment of ARB No. 51" (SFAS 160").
SFAS 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent's ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. The
Statement also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interest of the
parent and the interest of the noncontrolling owners. SFAS 160 is effective for
fiscal years beginning after December 15, 2008. The Company does not expect the
adoption of SFAS 160 to have any impact on its financial position, results of
operation or cash flows.
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 has
evaluated the adoption of this bulletin and concluded that it did not have any
material impact on the financial statements.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are summarized in Note 2 to the Consolidated
Financial Statements included in our 2007 Annual Report to Shareholders. In
preparing our financial statements, we make estimates and assumptions that
affect the expected amounts of assets and liabilities and disclosure of
contingent assets and liabilities. We apply our accounting policies on a
consistent basis. As circumstances change, they are considered in our estimates
and judgments, and future changes in circumstances could result in changes in
amounts at which assets and liabilities are recorded.
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 certain 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. The Company has a net gain on foreign exchange due the
weakening of the Canadian dollar to the U.S. Dollar during the first quarter of
2008.
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 Canadian currency
against the U.S. dollar.
Adjustments resulting from our foreign subsidiaries' financial statements are
included as a component of other comprehensive income within stockholders
equity because the functional currency of subsidiaries are non-USD.
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, 2008, we had no outstanding forward exchange
contracts.
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ITEM 4. 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 Accounting Officer
("CAO").
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.
CONCLUSIONS
Based on our evaluation the CEO and CAO 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.
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PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS.
In evaluating an investment in our common stock, investors should consider
carefully, among other things, the risk factors previously disclosed in Part I,
Item 1 of our Annual Report to the Securities and Exchange Commission for the
year ended December 31, 2007, as well as the information contained in this
Quarterly Report and our other reports and registration statements filed with
the Securities and Exchange Commission. There have been no material changes in
the risk factors as previously disclosed under "Risk Factors" in Part I, Item 1
of our Annual Report to the Securities and Exchange Commission for the year
ended December 31, 2007.
ITEM 6. EXHIBITS
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.
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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 15, 2008
Concord, Ontario Canada
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
BY: /S/ DAVID J. JOHNSON
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DAVID J. JOHNSON
CHIEF EXECUTIVE OFFICER AND PRESIDENT
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