SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A (No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended - March 31, 2009.
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 | |
Smaller reporting company [x]
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 20, 2009
FORM 10-Q/A
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
TABLE OF CONTENTS
PAGE #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets as of March 31, 2009 F1
(unaudited) and December 31, 2008
Consolidated Condensed Statements of Operations and
Comprehensive Loss for the Three Months Ended March 31,
2009 and 2008 (unaudited) F2
Consolidated Condensed Statements of Changes in Stockholders
Equity (Deficit) for the Three Months Ended March 31, 2009 F3
Consolidated Condensed Statements of Cash Flows for the Three
Months Ended March 31, 2009 and 2008 (unaudited) F4
Notes to Consolidated Condensed Financial Statements (unaudited) F5-F15
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations 4
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 12
Item 4. Controls And Procedures 13
PART II. OTHER INFORMATION
Item 1A. Risk Factors 14
Item 5. Other Information. 14
Item 6. Exhibits. 15
Explanatory Note
This Amendment No. 1 to the Quarterly Report on Form 10-Q/A (No. 1) for
Environmental Solutions Worldwide Inc. for the quarterly period ended March 31,
2009 is being filed as the original 10-Q filed for the quarterly period was
inadvertently filed by the Company's financial printer prior to the Company's
Audit Committee's formal approval. The Company's Audit Committee has now
formally approved the 10-Q and this Amendment does not change any previously
reported financial results, update disclosures or reflect events occurring after
the date of the filing of the original 10-Q except for the disclosure related to
the Company's change in certifying accountants appearing in Note 17 - Subsequent
Events and Part II, Item 5 Other Information.
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
MARCH 31, DECEMBER 31,
2009 2008
------------ ------------
ASSETS
Current assets
Cash and cash equivalents (Note 4) $ 751,461 $ 2,247,623
Accounts receivable, net of allowance 170,127 103,728
for doubtful accounts of $NIL (2008 - $1,901) (Note 2)
Inventory (Note 5) 776,744 723,812
Prepaid expenses and sundry assets 270,017 313,936
------------ ------------
Total current assets 1,968,349 3,389,099
Property, plant and equipment under construction (Note 6) 188,068 171,445
Property, plant and equipment, net of accumulated
depreciation of $ 3,782,924 (Note 6) 3,123,162 3,324,364
(2008 - $3,530,182) (Note 6)
Patents and trademarks, net of accumulated
amortization of $1,741,342 388,656 440,734
(2007 - $1,528,328) (Note 2)
------------ ------------
$ 5,668,235 $ 7,325,642
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 336,898 $ 420,277
Accrued liabilities 417,589 258,155
Bank loan (Note 7) 20,504 77,168
Redeemable class A special shares (Note 8) 453,900 453,900
Current portion of capital lease obligation (Note 14) 8,692 12,001
------------ ------------
Total current liabilities 1,237,583 1,221,501
------------ ------------
Long Term Liabilities
Convertible Debentures net of deferred costs 8,948,560 8,943,581
of $51,440 (2008 - $56,419) (Note 9)
Capital lease obligation (Note 14) 19,390 19,005
------------ ------------
Total Long Term liabilities 8,967,950 8,962,586
------------ ------------
Total liabilities 10,205,533 10,184,087
------------ ------------
Commitments and contingencies (Note 14)
Stockholders' Equity (Note 11)(Note 12)
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 25,403,485 25,403,485
Accumulated other comprehensive income 200,957 251,526
Accumulated deficit (30,214,712) (28,586,428)
------------ ------------
Total stockholders' (deficit) / equity (4,537,298) (2,858,445)
------------ ------------
$ 5,668,235 $ 7,325,642
============ ============
The accompanying notes are an integral part of these financial statements
F-1
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(UNAUDITED)
2009 2008
------------ ------------
Revenue
Net sales $ 370,118 $ 80,322
Cost of sales 206,018 56,027
------------ ------------
Gross profit 164,100 24,295
------------ ------------
Operating expenses
Marketing, office and general costs 812,085 1,023,383
Research and development costs 384,707 453,849
Officers' compensation and directors fees 155,048 150,590
Consulting and professional fees 590 52,186
Foreign exchange gain (27,734) (35,851)
Depreciation and amortization 260,676 279,972
------------ ------------
1,585,372 1,924,129
------------ ------------
Loss from operations (1,421,272) (1,899,834)
Interest on long term debt (202,499) --
Amortization of deferred costs (4,979) --
Interest on notes payable to related party -- (74,288)
Interest Income 466 18,189
------------ ------------
Net loss $ (1,628,284) $ (1,955,933)
============ ============
Other comprehensive (loss)/gain:
Foreign currency translation of Canadian subsidiaries (50,569) $ (62,374)
------------ ------------
Comprehensive loss $ (1,678,853) $ (2,018,307)
------------ ------------
Loss per share (Basic and diluted) $ (0.02) $ (0.03)
============ ============
Weighted average number of shares outstanding 72,973,851 72,973,851
============ ============
The accompanying notes are an integral part of these financial statements
F-2
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS PERIOD ENDED MARCH 31, 2009
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL INCOME DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2007 72,973,851 $ 72,972 $ 25,665,761 $ 450,318 $(21,495,176) $ 4,693,875
Net loss -- -- -- -- (7,091,252) (7,091,252)
Stock-based compensation -- -- 13,646 -- -- 13,646
Loss on extinguishment of debt
with related party -- -- (275,922) -- -- (275,922)
Foreign currency translation
of Canadian subsidiaries -- -- -- (198,792) -- (198,792)
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2008 72,973,851 $ 72,972 $ 25,403,485 $ 251,526 $(28,586,428) $ (2,858,445)
------------ ------------ ------------ ------------ ------------ ------------
Net loss -- -- -- -- (1,628,284) (1,628,284)
Foreign currency translation
of Canadian subsidiaries -- -- -- (50,569) -- (50,569)
------------ ------------ ------------ ------------ ------------ ------------
March 31, 2009 72,973,851 $ 72,972 $ 25,403,485 $ 200,957 $(30,214,712) $ (4,537,298)
------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements
F-3
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS PERIOD ENDED MARCH 31,
(UNAUDITED)
2009 2008
----------- -----------
Net Loss $(1,628,284) $(1,955,933)
----------- -----------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property, plant and equipment 252,742 264,376
Amortization of patents and trademarks 53,185 53,251
Provision (Recovery) for uncollectible accounts -- 23,035
Interest on long term debt 202,499 --
Interest on notes to related party -- 74,288
Amortization of deferred costs 4,979 --
Stock based compensation -- 13,646
Increase (decrease) in cash flows from operating activities resulting
from changes in:
Accounts receivable (66,399) 170,752
Inventory (52,932) (6,517)
Prepaid expenses and sundry assets 43,919 (52,584)
Accounts payable and accrued liabilities (126,444) 145,053
----------- -----------
Net cash (used in) / provided by operating activities (1,316,735) (1,270,633)
----------- -----------
Investing activities:
Acquisition of property, plant and equipment (51,540) (118,348)
Property, plant and equipment under construction (16,623) (177,791)
Increase in patents and trademarks (1,107) (2,985)
----------- -----------
Net cash used in investing activities (69,270) (299,124)
----------- -----------
Financing activities:
Repayment of bank loan (56,664) --
Repayment of capital lease obligation (2,924) (2,895)
----------- -----------
Net cash provided by financing activities (59,588) (2,895)
----------- -----------
Net (decrease) / increase in cash and equivalents (1,445,593) (1,572,652)
Effect of foreign currency translation of Canadian subsidiaries (50,569) (62,374)
Cash and cash equivalents, beginning of year 2,247,623 2,891,088
----------- -----------
Cash and cash equivalents, end of period $ 751,461 $ 1,256,062
=========== ===========
Supplemental disclosures:
Interest received $ 466 $ 18,189
=========== ===========
The accompanying notes are an integral part of these financial statements
F-4
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
Environmental Solutions Worldwide Inc. (the "Company" or "ESW") through its
wholly owned subsidiaries is engaged in the design, development, manufacturing
and sales of environmental technologies and testing services with its 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
accordance with accounting principles generally accepted in the United States of
America ("US GAAP"), which contemplates 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 incurred significant losses to date. As of March 31, 2009, the
Company has an accumulated deficit of $30,214,712, there is no assurance that
the Company will be successful in achieving sufficient cash flow from
operations. The ability of the Company to continue as going concern is dependent
upon the Company obtaining regulatory approvals for its new line of products,
during the current year the company has expensed significant resources and
completed the development of products to meet the new 2009 emission standards
enforced by the regulators. The Company expects the regulatory approvals to come
to fruition in the second quarter of 2009. Any significant delay in achieving or
absence of the regulatory approvals would impact the ability of the Company to
generate sufficient cash flow from its operations, the Company will be required
to significantly reduce or limit operations and /or seek additional financing to
fund its continuing operations and meet its obligations as they come due.
These unaudited condensed 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 ESW's Annual Report
on Forms 10-K, and amendments thereto, as filed with the United States
Securities and Exchange Commission for the year ended December 31, 2008. 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 month period ended
March 31, 2009 are not necessarily indicative of the results to be expected for
the full year.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, ESW America Inc., ESW Technologies Inc., ESW
Canada Inc. and BBL Technologies Inc. All inter-company transactions and
balances have been eliminated on consolidation. Amounts in the consolidated
financial statements are expressed in U.S. dollars.
ESTIMATES
The preparation of consolidated financial statements in conformity with US GAAP
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 impairment of
property plant and equipment, intangible assets, share based compensation,
inventory and accounts receivable exposures.
CONCENTRATION 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 ($250,000 per depositor through December 31, 2009) 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 its customers. Three of its customers accounted
for 59%, 22%, and 5%, respectively of the Company's revenue for the three month
period ended March 31, 2009 and 49%, 13%, and 9%, respectively of its accounts
receivable as at March 31, 2009. Three of its customers accounted for 32%, 29%,
and 15%, respectively of the Company's revenue in the fiscal year 2008 and 32%,
31%, and 0%, respectively of its accounts receivable as at December 31, 2008.
F-5
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, 2009 and
that a reserve of $1,901 was appropriate as at December 31, 2008.
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.
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 rates apply.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is computed on
a straight-line basis over the estimated useful lives of the assets, generally 5
to 7 years. Maintenance and repairs are charged to operations as incurred.
Significant renewals and betterments are capitalized.
PATENTS AND TRADEMARKS
Patents and trademarks consist primarily of the costs incurred to acquire them
from an independent third party. The Statement of Financial Accounting Standards
("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. ESW conducted a test for impairment in
the fourth quarter of 2008 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 three month period
ended March 31, 2009 and 2008 were $53,185 and $53,251 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 10% 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, 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, 2009 and
2008 the Company expensed $384,707 and $453,849 respectively towards research
and development costs. For the three month period ended March 31, 2009 and 2008,
grant money amounted to $nil and $8,719 respectively.
F-6
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This statement does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information; SFAS No.
157 is effective for fiscal years beginning after November 15, 2007, and all
interim periods within those fiscal years. In February, 2008, the FASB released
FASB Staff Position (FSP FAS 157-2 - Effective Date of FASB Statement No. 157)
which delays the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), to
fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. The implementation of SFAS No. 157 for financial assets and
liabilities, effective January 1, 2008, did not have an impact on the Company's
financial position and results of operations. The Company has also evaluated the
impact of SFAS No. 157 on non-financial assets and liabilities, and the adoption
of this statement does not have a significant effect on the Company's financial
statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115". SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. This statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. The Company has evaluated the impact of SFAS No. 159 on
its financial statements, and has chosen not to adopt SFAS No.159.
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. The Company is required to adopt SFAS 161 on January 1,
2009. The Company currently does not have any derivative financial instruments
subject to accounting or disclosure under SFAS 133; therefore, the Company does
not expect the adoption of SFAS 161 to have a significant effect on the
Company's consolidated statement of financial position, results of operations or
cash flows.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles". The new standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles
(GAAP) for nongovernmental entities. SFAS 162 became effective November 15,
2008. Adoption of SFAS 162 is not expected to have a significant impact on ESW's
results of operations or financial position.
F-7
In May 2008, the FASB issued Staff Position ("FSP") APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlements)." This FSP requires a portion of this type
of convertible debt to be recorded as equity and to record interest expense on
the debt portion at a rate that would have been charged on nonconvertible debt
with the same terms. This FSP takes effect in the first quarter of fiscal years
beginning after December 15, 2008 and will be applied retrospectively for all
periods presented. It is effective for the Company starting January 1, 2009. The
Company has evaluated the impact of FSP APB 14-1 on its financial statements,
and the adoption of this statement does not have a significant effect on the
Company's financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities."
Securities participating in dividends with common stock according to a formula
are participating securities. This FSP determined that unvested shares of
restricted stock and stock units with nonforfeitable rights to dividends are
participating securities. Participating securities require the "two-class"
method to be used to calculate basic earnings per share. This method lowers
basic earnings per common share. This FSP takes effect in the first quarter of
fiscal years beginning after December 15, 2008 and will be applied
retrospectively for all periods presented. It will be effective for the Company
on January 1, 2009. The Company does not expect FSP EITF 03-6-1 to have a
significant effect on its consolidated financial statements.
In June 2008, the FASB ratified the consensus reached on EITF Issue No. 07-05,
"Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity's Own Stock" ("EITF No. 07-05"). EITF No. 07-05 clarifies the
determination of whether an instrument (or an embedded feature) is indexed to an
entity's own stock, which would qualify as a scope exception under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. EITF No. 07-05 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. It will be effective for the Company on January 1, 2009.
Early adoption for an existing instrument is not permitted. The Company does not
expect EITF No. 07-05 to have a significant effect on its consolidated financial
statements.
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments purchased
with an original or remaining maturity of 90 days or less at the date of
purchase.
NOTE 5 - INVENTORY
Inventory is summarized as follows:
MARCH 31, DECEMBER 31,
INVENTORY 2009 2008
---------------------------------------------
Raw materials $ 525,581 $ 503,129
Work-In-Process 219,315 201,173
Finished goods 31,848 19,510
---------------------------------------------
TOTAL $ 776,744 $ 723,812
=============================================
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
MARCH 31, DECEMBER 31,
CLASSIFICATION 2009 2008
-----------------------------------------------------------
Plant, machinery and equipment $ 5,177,648 $ 5,126,108
Office equipment 294,250 294,250
Furniture and fixtures 424,426 424,426
Vehicles 12,014 12,014
Leasehold improvements 997,748 997,748
--------------------------
$ 6,906,086 $ 6,854,546
Less: accumulated depreciation (3,782,924) (3,530,182)
--------------------------
$ 3,123,162 $ 3,324,364
--------------------------
F-8
At March 31, 2009 and December 31, 2008, the Company had $188,068 and $171,445,
respectively, of customized equipment under construction.
The office equipment above includes $17,665 in assets under capital lease with a
corresponding accumulated depreciation of $12,476 for the period ended March 31,
2009. As at year ended December 31, 2008 office equipment included $17,665 in
assets under capital lease with a corresponding depreciation of $11,668.
The plant, machinery and equipment above includes $33,957 in assets under
capital lease with a corresponding accumulated depreciation of $13,072 for the
period ended March 31, 2009. As at year ended December 31, 2008, plant,
machinery and equipment included $33,957 in assets under capital lease with a
corresponding accumulated depreciation of $11,539.
NOTE 7 - BANK LOAN
Effective September 2, 2008, the Company's wholly owned subsidiary ESW Canada,
Inc., completed its negotiations with a Canadian Chartered Bank and entered into
an amendment to a secured commercial loan agreement (the "Agreement") originally
entered into on March 19, 2007. The amendment to the Agreement extends the term
of the Agreement from June 30, 2008 through to June 30, 2009. In addition to
extending the term of the Agreement, certain financial covenants have also been
amended. The new arrangement in the Agreement provides for a revolving facility
available by way of a series of term loans of up to $750,000 to finance future
production orders 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 ("EDC") pre-shipment financing program. Borrowings under the
revolving credit agreement bear interest at 1.5% above the bank's prime rate of
interest. 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.
For the period ended March 31, 2009, $20,504 was owed under the aforementioned
facility. As at December 31, 2008, $77,168 was owed under the facility.
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 redeemable 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 Canadian Dollars (which translates to $ 554,983 at March 31, 2009).
As the redeemable 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, 2009 BBL has an accumulated
deficit of $ 1,183,532 USD ($1,835,424 Canadian dollars as at March 31, 2009)
and therefore, the holder would be unable to redeem the redeemable Class A
special shares at their ascribed value.
F-9
NOTE 9 - CONVERTIBLE DEBENTURES
On November 3, 2008, the Company completed a transaction whereby it issued $6.0
million of 9% convertible debentures (the "Debentures") to six accredited
investors. The Debentures are for a term of three (3) years and are convertible
into shares of the Company's common stock at the option of the holder at any
time six (6) months after the date of issuance of the Debenture by dividing the
principal amount of the Debenture to be converted by $0.25. The Debentures earn
interest at a rate of 9% per annum payable in cash or in shares of the Company's
common stock at the option of the holder. If the Holder elects to receive
interest in shares of common stock, the number of shares of common stock to be
issued for interest shall be determined by dividing accrued interest by $0.25.
Subject to the holder's right to convert, the Company has the right to redeem
the Debentures at a price equal to one hundred and ten percent (110%) multiplied
by the then outstanding principal amount plus unpaid interest to the date of
redemption. Upon maturity, the debenture and interest is payable in cash or
common stock at the option of the Holder. The Debentures contain customary price
adjustment protections.
From the proceeds, the Company repaid $2,200,000, the principal portion only, of
a previously issued Consolidated Note in the amount of $2,308,148 to a company
controlled by a trust to which a director and shareholder of the Company is the
beneficiary. The debt holder agreed to have the remaining amount of $433,923,
due under the Consolidated Note, applied to a subscription of a Debenture under
the November 3, 2008 offering.
Concurrently, the Company repaid a Consolidated Subordinated Note that it had
previously issued to a debt holder who is a director and shareholder of the
Company, in the principal amount of $1,002,589. The debt holder has agreed to
have the full amount of principal and accumulated interest, in the amount of
$1,158,024 due under the Consolidated Subordinated Note, applied to a
subscription of a Debenture under the offering. Additionally the Company's $1.5
million credit facility also provided by the same debt holder, from which the
Company had drawn down the sum of $1,103,000 as of November 3, 2008, was also
satisfied by way of issuance of Debentures under the November 3, 2008 offering.
With the agreement to settle all the notes previously issued by the Debt holder
is subscribing to an aggregate of $2,566,077 of Debentures under the offering.
As at March 31, 2009, the Convertible Debenture amounted to $8,948,560 net of
deferred costs of $51,440, with corresponding accrued interest of $328,252. As
at December 31, 2008, the Convertible Debenture amounted to $8,943,581 net of
deferred costs of $56,419, with corresponding accrued interest of $125,753.
LEGAL FEES RELATED TO CONVERTIBLE DEBENTURES
The Company has recorded a deferred cost asset of $59,738 for legal fees paid in
relation to the issuance of the Convertible Debentures. The deferred costs will
be amortized over the term of the Convertible Debenture. As at March 31, 2009,
the deferred cost asset and related amortization was $51,440 and $8,298
respectively. As at December 31, 2008, the deferred cost asset and related
amortization was $56,419 and $3,319 respectively. Legal fees have been presented
net against the related instrument.
F-10
NOTE 10- INCOME TAXES
As at March 31, 2009, there are tax loss carry forwards for Federal income tax
purposes of approximately $21,461,191 available to offset future taxable income
in the United States. The tax loss carry forwards expire in various years
through 2029 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 $7,511,417 has been
established until realizations of the tax benefit from the loss carry forwards
are more likely than not.
Additionally, as at March 31, 2009, the Company's two wholly owned Canadian
subsidiaries had non-capital tax loss carry forwards of approximately $4,238,548
to be used, in future periods, to offset taxable income. The loss carry forwards
expire in various years through 2029 The deferred tax asset of approximately
$1,419,914 has been fully offset by a valuation allowance until realization of
the tax benefit from the non-capital tax loss carry forwards are more likely
than not.
For the three month period ended March 31,
2009 2008
-----------------------------
Statutory tax rate:
U.S. 35.0% 35.0%
Foreign 33.5% 36.1%
Income (loss) before income taxes:
U.S. $ (1,054,332) $ (1,026,566)
Foreign ( 573,952) (929,367)
-----------------------------
$ (1,628,284) $ (1,955,933)
-----------------------------
Expected income tax recovery $ ( 561,290) $ (694,800)
Differences in income tax resulting from:
Depreciation (Foreign operations) $ 6,409 $ 10,324
Stock Based Compensation $ -- $ 4,776
Accrued interest on loans $ 70,875 $ --
-----------------------------
$ ( 484,006) $ (679,700)
Benefit of losses not recognized $ 484,006 $ 679,700
-----------------------------
Income tax provision (recovery) per financial statements $ -- $ --
-----------------------------
Deferred income tax assets and liabilities consist of the following difference:
As at March 31,
2009 2008
-----------------------------
Assets
Capital Assets - Tax Basis (Foreign operations only) $ 1,333,810 $ 1,108,818
Capital Assets - Book Value (Foreign operations only) (1,099,849) (1,671,656)
-----------------------------
Net Capital Assets $ 233,961 $ (562,838)
Tax loss carry forwards 25,699,740 20,000,551
-----------------------------
Net temporary differences (foreign operations only) $ 25,933,701 $ 19,437,713
Statutory tax rate:
U.S. 35.0% 35.0%
Foreign 33.5% 36.1%
Temporary differences (foreign operations only) $ 9,009,708 $ 7,017,014
Valuation allowance $ (9,009,708) $ (7,017,014)
-----------------------------
Carrying Value $ -- $ --
=============================
F-11
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 an
income 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, 2009:
United States - Federal 2005 - present
United States - State 2005 - present
Canada - Federal 2006 - present
Canada - Provincial 2006 - present
Valuation allowances reflect the deferred tax benefits that management is
uncertain of the Company's ability to utilize in the future.
NOTE 11 - ISSUANCE OF COMMON STOCK
For the three month period ended March 31, 2009 and the year ended December 31,
2008 there was nil issuance of common shares.
NOTE 12 - STOCK OPTIONS AND WARRANT GRANTS
A total of $ nil and $13,646 for stock based compensation has been recorded for
the three month period ended March 31, 2009 and March 31, 2008, respectively.
There were no stock option grants for the three month period ended March 31,
2009.
On February 7, 2008 the Board of Directors granted an aggregate award of 400,000
stock options to five employees, two executive officers and one director. The
options vested immediately with exercise prices of $0.71 and $1.00 per share
(above fair-market value at the date of grant) with expiry ranging from three
and five years from the date of award.
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
DETAILS OPTIONS EXERCISE PRICE
-------------------------------------------------------------
OUTSTANDING, JANUARY 1, 2008 6,996,667 $ 0.60
Granted 100,000 $ 0.71
Granted 300,000 $ 1.00
Expired (1,276,667) ($ 0.72)
---------- ------
OUTSTANDING, JANUARY 1, 2009 6,120,000 $ 0.65
Granted -- --
Expired -- --
---------- ------
OUTSTANDING, MARCH 31, 2009 6,120,000 $ 0.65
========== ======
At March 31, 2009, the outstanding options have a weighted average remaining
life of 20 months.
F-12
The weighted average fair value of options granted during 2008 was $0.93 and was
estimated using the Black-Scholes option-pricing model, and the following
assumptions:
2008
-----------------
Expected volatility 49% - 52%
Risk-free interest Rate 3.00%
Expected life 1.5 yrs - 2.5 yrs
Dividend yield 0.00%
Forfeiture rate 0.00%
The Black-Scholes model used by the Company to calculate options and warrant
values, was 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. The model also requires
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, 2009, the Company had outstanding options as follows:
NUMBER OF EXERCISE
OPTIONS PRICE EXPIRATION DATE
----------------------------------------------------
50,000 $0.45 April-20-09
500,000 $0.50 May-01-09
1,750,000 $0.50 August-11-09
150,000 $0.50 December-01-09
175,000 $0.71 February-16-10
795,000 $1.00 December-31-10
100,000 $0.71 February-06-11
100,000 $1.00 February-06-11
2,150,000 $0.71 February-16-12
100,000 $1.00 February-08-13
250,000 $0.27 August-06-13
----------------------------------------------------
6,120,000
====================================================
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 AVERAGE
DETAILS WARRANT SHARES EXERCISE PRICE
---------------------------------------------------------------------
Outstanding, January 1, 2008 3,272,500 $ 1.28
Granted -- --
Exercised -- --
Expired 3,272,500 $(1.28)
---------------------------------------------------------------------
Outstanding, January 1, 2009 -- --
Granted -- --
---------------------------------------------------------------------
Outstanding, March 31, 2009 -- --
=====================================================================
F-13
There are no outstanding warrants as at of March 31, 2009.
NOTE 13 - RELATED PARTY TRANSACTIONS
During the three month period ended March 31, 2009 and 2008, the Company paid
shareholders and their affiliates $nil and $25,000, respectively for various
services, and fees rendered in addition to salaries and reimbursement of
business expenses. All transactions are recorded at the exchange amounts.
CONSULTING AGREEMENT
In 2008, a director and shareholder of the company provided consulting services
to the company under a consulting agreement. The agreement provides for a
monthly retainer of $12,500 per month. In December 2008 the agreement was
terminated.
CONVERTIBLE DEBENTURE ISSUED TO RELATED PARTY
On November 3, 2008, the Company completed a transaction whereby it issued $6.0
million of 9% convertible debentures to six accredited investors. Based on the
beneficial ownership position in the Company, The Leon Black 1997 Family Trust
is included as a related party, all other entities participating in the November
convertible debenture offering disclaim beneficial ownership (see beneficial
ownership table PART III - ITEM 12 of the Company's 10K report filed with the
Securities Exchange Commission for the year ended December 31, 2008). The Leon
Black 1997 Family Trust participated in the November convertible debenture
offering with a principal investment of $2,000,000.
Further information required by this item is included under the caption "NOTE 9
- - CONVERTIBLE DEBENTURES".
As at March 31, 2009, the principal amount of Convertible Debenture due to
related party amounted to $5,000,000 with a corresponding accrued interest of
$181,048. At December 31, 2008, Convertible Debenture due to related party
amounted to $5,000,000 with a corresponding accrued interest of $68,548.
NOTE 14 - 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 five (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.
YEAR $
2009 $323,042
2010 $139,949
LEGAL MATTERS
From time to time, the Company may be involved in a variety of claims, suits,
investigations and proceedings arising from the ordinary course of our business,
breach of contract claims, labor and employment claims, tax and other matters.
Although claims, suits, investigations and proceedings are inherently uncertain
and their results cannot be predicted with certainty, ESW believes that the
resolution of current pending matters will not have a material adverse effect on
its business, consolidated financial position, results of operations or cash
flow. Regardless of the outcome, litigation can have an adverse impact on ESW
because of legal costs, diversion of management resources and other factors. In
addition, it is possible that an unfavourable resolution of one or more such
proceedings could in the future materially and adversely affect ESW's financial
position, results of operations or cash flows in a particular period.
F-14
CAPITAL LEASE OBLIGATION
The Company is committed to the following lease payments in connection with the
acquisition of capital assets under capital leases:
YEAR $
2009 15,081
2010 11,870
2011 2,594
2012 1,081
-------
TOTAL $30,626
Less imputed interest (2,544)
-------
Total obligation under capital lease $28,082
Less current portion (8,692)
-------
TOTAL LONG-TERM PORTION $19,390
=======
The Company has incurred $2,058 of interest expense on capital leases for the
three month period ended March 31, 2009.
NOTE 15 - LOSS PER SHARE
Potential common shares of 6,120,000 related to ESW's outstanding stock options
were excluded from the computation of diluted loss per share for the three month
period ended March 31, 2009. As at March 31, 2008, 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 as the effect of inclusion of
these shares and the related interest expense would have been antidilutive.
The reconciliation of the number of shares used to calculate the diluted loss
per share is calculated as follows:
For the three month period ended
March 31, 2009 March 31,2008
-------------- -------------
NUMERATOR
Net (loss) for the period $ (1,628,284) $ (1,995,933)
Interest on debentures & amortization $ 207,478 $ --
Interest on notes to related party $ -- $ 74,288
------------ ------------
$ (1,420,806) $ (1,881,645)
DENOMINATOR
Weighted average number of shares outstanding 72,973,851 72,973,851
Dilutive effect of :
Stock options -- --
Warrants -- --
Convertible Debt conversion -- --
Notes Payable to related party conversion -- --
------------ ------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING -- --
------------ ------------
NOTE 16 - COMPARATIVE FIGURES
Certain 2008 figures have been reclassified to conform to the financial
statements presentation adopted in 2009. The presentation includes Other
Comprehensive Income in the Consolidated Condensed Statement of Operations and
Consolidated Condensed Statement Of Changes In Stockholders Equity (Deficit).
NOTE 17 - SUBSEQUENT EVENTS
On April 07, 2009 ESW announced that the company has been awarded a Grant for
Environmental Protection Agency (EPA) Verification of its XTRM Cat(TM) Marine /
Locomotive Catalyst. This new grant is intended to support ESW in the final
testing of the XTRM Cat(TM) technology in real-world applications along with
providing a platform for EPA verification.
On May 04, 2009, ESW announced that its wholly owned subsidiary ESW Canada Inc.
has received notification from the California Air Resources Board (CARB) that
the Company's ThermaCat(TM) Active Level III Diesel Particulate Filter has been
approved for off-road applications.
Effective May 15, 2009, the Registrant (the "Company") dismissed the firm of
Deloitte & Touche LLP who was previously engaged as the Company's principal
auditor. Effective May 15, 2009 the Company upon approval of its Audit Committee
and Board of Directors elected to retain the firm of MSCM LLP as its principal
independent accountants. Further information required by this item is included
under Part II, Item 5 Other Information.
F-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with ESW's Financial
Statements and Notes thereto included elsewhere in this Report.
This Form 10-Q/A contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of ESW's business.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. ESW undertakes no obligation
to publicly release any modifications or revisions to these forward-looking
statements to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events. In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, ESW
caution investors that actual financial and operating results may differ
materially from those projected in forward-looking statements made by, or on
behalf of, ESW. 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 ESW's Annual Report on Forms 10-K, and
amendments thereto for the year ended December 31, 2008 as filed with the
Securities and Exchange Commission.
GENERAL OVERVIEW
Environmental Solutions Worldwide Inc. ("ESW" or the "Company") is a publicly
traded company engaged through its wholly owned subsidiaries ESW Canada Inc.,
ESW America Inc. and ESW Technologies Inc. (the ESW Group of Companies) in the
design, development, 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 fuelled engines. The ESW Group of Companies also
operates a comprehensive Environmental Protection Agency (EPA), California Air
Resources Board (CARB) and the Mine Safety and Health Administration (MSHA)
recognized emissions testing and verification laboratory.
ESW's 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 its military product lines for sales to the U.S. and
NATO countries. ESW has and continues to seek to develop relationships with
Original Equipment Manufacturers (OEM's) of engines for both automotive and
other markets. As part of ESW's efforts to grow its business, as well as to
achieve increased production and distribution efficiencies ESW has and continues
to make capital investments in manufacturing capability to support its products
as well as expensing money on research and development in order for new products
to be developed that meet the new legislative regulations.
Through the year ended 2008 and the first quarter of 2009, ESW incurred
significant research and development costs. This investment in ESW's products
was necessary for ESW to comply with new regulations which came into force
starting January of 2009. The products that ESW has developed and/or presented
for verification / certification cover the following primary technology levels
established by CARB:
o Level I + (+ INDICATES 2009 NO2 COMPLIANCE)
o Diesel Oxidation Catalyst - PM reduction greater than 25%
o High performance Diesel Oxidation Catalyst - PM reduction greater
than 30%
o Level II +
o Diesel Oxidation Catalyst with Crank Case Ventilation - PM reduction
greater than 50%
o Level III +
o Off Road Active Diesel Particulate Filter - PM reduction greater
than 85%
o On Road Active Diesel Particulate Filter - PM reduction greater than
85%
ESW believes that with the certifications/verification of the above range of
products will cover a significant portion of the market and give ESW the
competitive advantage to be the technology of first choice in retrofit and OEM
applications. The regulatory approval process with EPA and CARB is complex and
requires a lengthy process of durability testing which must precede final
certification/verification of ESW's products. Durability testing has been
completed for all ESW's Level III+ products to meet the new 2009 regulations and
verification/certification is in process for all of ESW's Level III products.
ESW does not control the timeliness of the certification/verification process;
however, ESW has taken steps to ensure the efficacy of ESW's contribution to the
certification/verification process
On May 04, 2009, ESW announced that its wholly owned subsidiary ESW Canada Inc.
has received notification from CARB that the Company's ThermaCat(TM) Active
Level III Plus Diesel Particulate Filter has been approved for off-road
applications. ESW's ThermaCat(TM) has been verified as a Level III device for
use in a wide variety of medium/heavy-duty diesel off-road engines powering both
tracked and rubber tired equipment. The ThermaCat(TM), as verified, proved
capable of reducing diesel Particulate Matter (PM), Carbon Monoxide (CO) and
Hydro Carbon (HC) in excess of 85%. The ThermaCat(TM) has also met the
nationwide stringent nitrogen dioxide (NO2) limitations. This new NO2 limit,
which came into effect on January 1, 2009, requires that all verified diesel
retrofits sold and installed in North America must not increase NO2 emissions by
more than 20%.
ESW is also actively pursuing the ThermaCat(TM) Active Level III Plus Diesel
Particulate Filter On Road verification, all submissions to CARB have been
completed, ESW has undertaken additional testing, which will allow a wider
demographic of vehicles to be covered by the on road product, the data for this
scope increase is in process and being provided to CARB. ESW expects verified
status for the On Road ThermaCat(TM) Active Level III Diesel Particulate Filter
to be completed in the Second Quarter of 2009.
-4-
ESW to date has shipped 32 ThermaCat(TM) Active Level III Plus Diesel
Particulate Filter Systems to E Global Solutions Inc, of the total 32 systems
sold, 19 systems were sold within the first quarter of 2009 through an exclusive
distributorship arrangement with E Global Solutions Inc, to the New York Market.
The ThermaCat(TM) meets the highest performance and classification level under
the New York City local laws for emission controls, which require the use of
Ultra Low Sulfur Diesel fuel and Best Available Control Technology in on-road
and off-road diesel vehicles used in New York City. Installed applications
include on-highway cement mixers, dump trucks, and off-road excavators and
loaders. This cross section ThermaCat(TM) Systems were sold and installed based
on prior performance demonstrations of the technology.
The ThermaCat(TM) On and Off Road products are anticipated to account for a
significant portion of ESW's future revenues, based on feedback received from
our customers and distribution network, the Level I and Level II product
certification / verification program has been delayed considering more states
are adopting California emission standards which are more stringent and in line
with the Level III requirements. However ESW intends to complete the Level I and
Level II product certification / verification program submissions by the end of
the second quarter of 2009 barring unforeseen events. ESW believes that these
minor adjustments to its business plan are necessary to meet its market and
customers expectations.
On April 07, 2009 ESW announced that the company has been awarded a $731,000
Grant for Environmental Protection Agency (EPA) Verification of its XTRM Cat(TM)
Marine / Locomotive Catalyst. This new grant is intended to support ESW in the
final testing of the XTRM Cat(TM) technology in real-world applications along
with providing a platform for EPA verification. In March of 2009 the EPA
finalized more stringent emissions standards for locomotives and marine
compression-ignition engines opening the door for this newly regulated market.
The grant is made possible by the New Technology Research and Development (NTRD)
Program. 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. ESW has been awarded the grant in part
due to the significant progress and success that was achieved with the XTRM
Cat(TM) on Electro-Motive Diesel (EMD) 2-stroke diesel engines in during 2007 in
which it was previously awarded a $250,000 TCEQ grant. As per the terms of the
grant the project has a total budget of $731,000, TECQ also has the discretion
to increase the amount of funds available under the budget. Of the total budget
19% is attributed to ESW's cost share and the balance $591,000 will be
reimbursed by TECQ.
Both ESW's facilities are in full compliance with ISO 9001:2000. We currently
hold a full registration certificate effective until March 2010 for ESW America
and January 2010 for ESW Canada.
COMPARISON OF THREE MONTH PERIOD ENDED MARCH 31, 2009 TO THREE MONTH PERIOD
ENDED MARCH 31, 2008
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 ESW's Annual Report on Forms 10-K, and amendments thereto for the
year ended December 31, 2008.
Revenues for the three month period ended March 31, 2009 increased by $289,796
or 361 percent, to $370,118 from $80,322 for the three month period ended March
31, 2008. The increase in revenue is mainly related to sales of ESW's newly
developed products that meet new regulations and increasing customer acceptance.
All sales are for unverified product. In the current period the company focused
its efforts on obtaining verification for its Level III diesel catalyst
products.
Cost of sales as a percentage of revenues for the three month period ended March
31, 2009 was 55.7 percent compared to 69.8 percent for the three month period
ended March 31, 2008. The gross profit for the three month period ended March
31, 2009 was 44.3 percent as compared to a gross margin of 30.2 percent for the
three month period ended March 31, 2008. The improvements in the gross margin
are mainly due to the efforts by ESW to streamline its product installation
capabilities, helped marginally by slightly higher volume orders.
Marketing, office and general expenses for the three month period ended March
31, 2009 decreased by $211,298, or 20.6 percent, to $812,085 from $1,023,383 for
the three month period ended March 31, 2008. The decrease is primarily due to
decreases in sales and marketing salaries and wages and selling expenses of
$33,985. Facility costs were lower over the previous period by $30,333 as a
result of higher sales volumes and higher overhead costs attributed to sales.
Administration salaries and wages were lower by $131,470 and plant related
expenses were lower by $28,073 as support for ESW's research and development
programs declined and a consulting agreement in the prior year was terminated.
Investor relations expense was lower by $17,312. These decreases were offset by
an increase in general and administration cost, the cost increased by $29,875
mainly due to recruitment expenses for high skill air testing technicians.
Research and development expenses for the three month period ended March 31,
2009 decreased by $69,142, or 15.2 percent, to $384,707 from $453,849 for the
three month period ended March 31, 2008. ESW continues to aggressively pursue
the verification of its newly developed products, the decrease in the cost of
research and development is marginally due to the product development cycle
being completed, we are now focusing on obtaining regulatory verifications.
Officer's compensation and director's fees for the three month period ended
March 31, 2009 increased by $4,458 or 3.0 percent, to $155,048 from $150,590 for
the three month period ended March 31, 2008.
-5-
Consulting and professional fees for the three month period ended March 31, 2009
decreased by $51,596 or 98.9 percent, to $590 from $52,186 for the three month
period ended March 31, 2008. The decrease is mainly attributed lower audit fees,
tax and 404 SOX consulting fees in the current period as compared to the prior
year period.
Foreign exchange gain for the three month period ended March 31, 2009 was
$27,734 as compared to a gain of $35,851 for the three month period ended March
31, 2008. This is a result of the fluctuation in the exchange rate of the
Canadian Dollar to the United States Dollar.
Depreciation and amortization expense for the three month period ended March 31,
2009 decreased by $19,296, or 6.9 percent to $260,676 from $279,972 for the
three month period ended March 31, 2008.
Interest expense on long-term debt was $202,499 for the three month period ended
March 31, 2009 as compared to $ nil for the three month period ended March 31,
2008. On November 3, 2008, the Company completed a transaction whereby it issued
$6.0 million of 9% convertible debentures (the "Debentures") to six accredited
investors. The Debentures are for a term of three years and are convertible into
shares of the Company's common stock at the option of the holder at any time six
(6) months after the date of issuance of the Debenture by dividing the principal
amount of the Debenture to be converted by $0.25. The Debentures earn interest
at a rate of 9% per annum payable in cash or in shares of the Company's common
stock at the option of the holder. If the Holder elects to receive interest in
shares of common stock, the number of shares of common stock to be issued for
interest shall be determined by dividing accrued interest by $0.25. Subject to
the holder's right to convert, the Company has the right to redeem the
Debentures at a price equal to one hundred and ten percent (110%) multiplied by
the then outstanding principal amount plus unpaid interest to the date of
redemption. Upon maturity, the debenture and interest is payable in cash or
common stock at the option of the Holder. The Debentures contain customary price
adjustment protections. From the proceeds and concurrent with the offering, the
company settled all previously issued promissory notes, the debt holder of the
promissory notes, a shareholder and director of the company agreed to a
subscription of $3,000,000 of Debentures under the offering with the same terms
and conditions as the November 3, 2008 offering.
Interest expense on the notes payable to related party was $nil for the three
month period ended March 31, 2009 as compared to $74,288 for the three month
period ended March 31, 2008. In November 2008, the Company settled all
previously issued promissory notes through a partial repayment of principal and
the balance of principal and interest was converted into a subscription of
$3,000,000 of Debentures under the November 3, 2008 offering.
LIQUIDITY AND CAPITAL RESOURCES
ESW's principal sources of operating capital have been the proceeds from its
various financing transactions; In the first quarter of 2009, the Company used
$1,316,735 of cash to sustain operating activities as our sales were low. As of
March 31, 2009 and 2008, the Company had cash and cash equivalents of $ 751,461
and $1,256,062 respectively.
Net Cash used in operating activities for the three month period ended March 31,
2009 amounted to $1,316,735. This amount was attributable to the net loss of
$1,628,284, plus non cash expenses such as depreciation, amortization, interest
on long term debt and others of $513,405, and a decrease in net operating assets
and liabilities of $201,856. 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 an increase in net
operating assets and liabilities of $256,704.
Net Cash used in investing activities was $69,270 for the three month period
ended March 31, 2009 as compared to $299,124 for the three month period ended
March 31, 2008. The capital expenditures during the first quarter of 2009 were
primarily dedicated to production tooling required for ESW's new product lines.
Net cash used by financing activities totalled $59,588 for the three month
period ended March 31, 2009 as compared to $2,895 used by financing activities
for the three month period ended March 31, 2008. In the current period no new
debt or share issuances from the exercise of option or warrants took place and
$56,664 was repaid under ESW`s bank loan and $2,924 under capital lease
obligation.
In 2007, ESW's subsidiary, ESW Canada entered into a $2.5 Million revolving
credit facility with Royal Bank of Canada ("RBC"), to finance orders on hand.
This credit line will provide ESW with the working capital to complete larger
contracts. Effective September 2, 2008, ESW completed its negotiations with
Royal Bank of Canada and entered into an amendment to the secured commercial
loan agreement. The amendment to the Agreement extends the term of the Agreement
from June 30, 2008 through June 30, 2009. In addition to extending the term of
the Agreement, certain financial covenants have also been amended. The new
arrangement in the agreement provides for a revolving facility available by way
of a series of term loans of up to $750,000 to finance future production orders.
The Credit Facility is guaranteed by the Company and its subsidiary ESW Canada
through the pledge of their assets to secure RBC. The Credit Facility bears
interest at a base rate of one and a half percentage (1.5%) points above the
Canadian prime rate. As at March 31, 2009, $20,504 is outstanding and due to RBC
under the Credit Facility. As of December 31, 2008, $ 77,168 was outstanding and
due to RBC under the Credit Facility.
On November 3, 2008, ESW issued $6.0 million of convertible debentures (the
"Debentures") to six accredited investors under Rule 506 of Regulation D. The
Debentures are for a term of three years and are convertible into shares of the
Company's common stock at the option of the holder at any time six (6) months
after the date of issuance of the Debenture by dividing the principal amount of
the Debentures to be converted by $0.25. ESW used $2.2 Million of the cash to
pay down a previously issued promissory note as well as settling all the other
notes previously issued by the Company. In addition to the $6.0 million, an
additional $3.0 Million of convertible Debt has been issued. Currently ESW has a
principal amount of $9.0 million of Convertible debt at March 31, 2009
($8,948,560 net of deferred costs of $51,440) all at the same terms and
conditions. (See Debt structure for further details.)
-6-
Based on ESW's current operating plan, management believes that at March 31,
2009 cash balances, anticipated cash flows from operating activities, and, the
appropriate borrowings under ESW's 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.
The industry that ESW operates in is capital intensive and there is a timing
issue bringing product to market which is considered normal for this industry.
ESW continues invest in research and development to prove up its technologies
and bring them to the point where its customers have a high confidence level
allowing them to place larger orders. The length of time a customer needs to
build confidence in ESW's technologies cannot be predetermined and as a result,
ESW has sustained operating losses as a result of not generating sufficient
sales to generate a profit from operations. There is no assurance that the
Company will be successful in achieving sufficient cash flow from its current
operations. Although this indicates a working capital deficiency and a potential
concern about the Company's ability to continue to operate as going concern,
ESW's management believes that the revenues will increase based on ESW`s product
verifications. Certain products, are currently in the verification/certification
stages and ESW believes that these products, will be verified by CARB and EPA
during 2009. ESW also has a good history of receiving capital infusions when
needed.
During the first quarter of 2009 and the fiscal year 2008 ESW did not produce
sufficient cash from operations to support its expenditures; the November 3,
2008 the $6.0 million offering of convertible debentures along with continued
borrowing on ESW's credit facility afforded ESW the opportunity to support its
operations and to execute its business plan. ESW's principal use of liquidity
will be to finance any further capital expenditures needed, to provide working
capital availability and to pay previously issued debt. ESW does not anticipate
having any major capital expenditures in 2009 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, ESW
would evaluate the need and make provisions as necessary. ESW does not expect
that total capital expenditures for 2009 will amount to more than $300,000.
Should ESW not be profitable, it will need to finance its operations through
other capital financings. ESW continues to seek, equity financing and/or debt
financing in the form of private placements at favourable terms, or the exercise
of currently outstanding derivatives that would provide additional capital.
However, such additional financing may not be available to ESW, if and when
needed, on acceptable terms or at all. ESW intends to retain any future earnings
to retire debt, finance the expansion of its business, necessary capital
expenditures, and for general corporate purposes.
ESW's operating profitability requires increased sales coupled with lower
overall cost to manufacture its products and to improve both sales and
administrative productivity through process and system enhancements. This will
be largely dependent on the success of ESW's initiatives to streamline its
infrastructure and drive its operational efficiencies across the Company. ESW's
failure to successfully implement these initiatives, or the failure of such
initiatives to result in improved profit margins, could have a material adverse
effect ESW's liquidity, financial position, and results of operations.
ESW believes the success of its newly developed products will continue to
motivate others to develop similar designs, many of the same functional and
physical characteristics as ESW's product. ESW has patents covering the
technology embodied in its products, and intend to enforce those patents as
appropriate. If ESW is not successful in enforcing its patents, competition from
such products could adversely affect ESW's market share and prices for its
products. Although overall pricing has been stable recently, the average price
of ESW's products may decline in the future. There is no assurance that current
or future products will be able to successfully compete with products developed
by others.
ESW expects an increase in consulting and audit fees related to the impact of
our Sarbanes-Oxley internal control certification efforts, with which we are
required to be in compliance by December 31, 2009.
ESW has 700,000 Class A special shares recorded at $453,900 (based on the
historical exchange rate at the time of issuance.), authorized, issued, and
outstanding. The Class A special shares are issued by ESW's wholly-owned
subsidiary BBL Technologies, Inc. ("BBL") without par value, and are redeemable
on demand by the Holder of the shares which is a private Ontario Corporation at
$700,000 Canadian (which translates to $554,983 at March 31, 2009. As the Class
A special shares are issued by ESW's wholly-owned subsidiary BBL, the maximum
value upon which ESW is liable is the net book value of BBL. At March 31, 2009
BBL had an accumulated deficit and therefore would be unable to redeem the Class
A special shares at their ascribed value.
-7-
DEBT STRUCTURE
On November 3, 2008, the Company completed a transaction whereby it issued $6.0
million of 9% convertible debentures to six accredited investors. The Debentures
are for a term of three years and are convertible into shares of the Company's
common stock at the option of the holder at any time six (6) months after the
date of issuance of the Debenture by dividing the principal amount of the
Debenture to be converted by $0.25. The Debentures earn interest at a rate of 9%
per annum payable in cash or in shares of the Company's common stock at the
option of the holder. If the Holder elects to receive interest in shares of
common stock, the number of shares of common stock to be issued for interest
shall be determined by dividing accrued interest by $0.25. Subject to the
holder's right to convert, the Company has the right to redeem the Debentures at
a price equal to one hundred and ten percent (110%) multiplied by the then
outstanding principal amount plus unpaid interest to the date of redemption.
Upon maturity, the debenture and interest is payable in cash or common stock at
the option of the Holder. The Debentures contain customary price adjustment
protections.
From the proceeds, the Company elected to repay $2.2 million, the principal
portion only, of a previously issued Consolidated Note to a company controlled
by a trust to which a director and shareholder of the Company is the
beneficiary. The debt holder has agreed to have the remaining amount of
$433,923, due under the note, to be applied to a subscription to a Debenture
under the November 3, 2008 offering. Concurrently, the Company has agreed to
repay a Consolidated Subordinate Note that it had previously issued to debt
holder who is a director and shareholder of the Company in the principal amount
of $1.02 million. The debt holder has agreed to have the full amount of
principal and accumulated interest, in the amount of $1,158,024 due under the
note, applied to a subscription of a Debenture under the offering. Additionally
the Company's $1.5 million credit facility also provided by the same debt
holder, on which the Company had drawn down the sum of $1,103,000 as of November
3, 2008, was also satisfied by way of issuance of Debentures under the November
3, 2008 offering. With the agreement to settle all the notes previously issued
by the Debt holder is subscribing to an aggregate of $2,566,077 of Debentures
under the offering.
As at March 31, 2009, Convertible Debenture amounted to $8,948,560 net of
deferred costs of $51,440, with corresponding accrued interest of $328,252. As
at December 31, 2008, the new Convertible Debenture amounted to $8,943,851 net
of deferred costs of $56,419, with corresponding accrued interest of $125,753.
In 2007, ESW'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 ESW with the working capital to complete larger
contracts. Effective September 2, 2008, we completed our negotiations with Royal
Bank of Canada and entered into an amendment to the secured commercial loan
agreement originally entered into March 19, 2007. The amendment to the Agreement
extends the term of the Agreement from June 30, 2008 through June 30, 2009. In
addition to extending the term of the Agreement, certain financial covenants
have also been amended. The new arrangement in the agreement provides for a
revolving facility available by way of a series of term loans of up to $750,000
to finance future production orders. The Credit Facility is guaranteed by the
Company and its subsidiary ESW Canada through the pledge of their assets to
secure RBC. The Credit Facility bears interest at a base rate of one and a half
percentage (1.5%) points above the Canadian prime rate. For the three month
period ended March 31, 2009, $20,504 was owed under the aforementioned facility.
As at December 31, 2008, $77,168 was owed under the facility.
The amount of availability at any time is dependent upon various factors,
including, the amount of open export orders on hand, and the amount of eligible
receivables. The terms relating to the credit agreement specifically note that
at the time of any borrowing under the credit agreement, the Company's
subsidiary ESW Canada Inc. maintain a tangible net worth of at least $1.5
million. The credit agreement contains, among other things, covenants,
representations and warranties and events of default customary for a facility of
this type for both the Company and its subsidiary ESW Canada Inc. Such covenants
include certain restrictions on the incurrence of additional indebtedness,
liens, acquisitions and other investments, mergers, consolidations, liquidations
and dissolutions, sales of assets, dividends and other repurchases in respect of
capital stock, voluntary prepayments of certain other indebtedness, capital
expenditures and transactions with affiliates, subject to certain exceptions.
Under certain conditions amounts outstanding under the credit agreements may be
accelerated. Such events include failure to pay any principal, interest or other
amounts when due, failure to comply with covenants, breach of representations or
warranties in any material respect, non-payment or acceleration of other
material debt, entry of material judgments not covered by insurance, or a change
of control of the Company.
ESW's ability to service our indebtedness in cash will depend on its future
performance, which will be affected by prevailing economic conditions,
financial, business, regulatory and other factors. Certain of these factors are
beyond ESW's control. ESW believes that, based upon its current business plan,
it will be able to meet its debt service obligations when due. Significant
assumptions underlie this belief, including, among other things, that ESW will
be successful in implementing its business strategy, that some of ESW's new
products receive verification from the appropriate regulatory authorities, and
that there will be no material adverse developments in ESW's business, liquidity
or capital requirements. If ESW cannot generate sufficient cash flow from
operations to service its indebtedness and to meet other obligations and
commitments, ESW might be required to refinance its debt or to dispose off
assets to obtain funds for such purpose. There is no assurance that refinancing
or asset dispositions or raising funds from sales of equity or otherwise could
be effected on a timely basis or on satisfactory terms, ESW's ability to pay
principal and interest on its debt would be impaired. In such circumstance, ESW
would have to issue shares of its common stock as repayment of this debt, which
would be of a dilutive nature to ESW's present shareholders.
-8-
CONTRACTUAL OBLIGATIONS
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 five (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.
YEAR $
2009 $323,042
2010 $139,949
CAPITAL LEASE OBLIGATION
The Company is committed to the following lease payments in connection with the
acquisition of capital assets under capital leases:
YEAR $
2009 15,081
2010 11,870
2011 2,594
2012 1,081
-------
TOTAL $30,626
Less imputed interest (2,544)
-------
Total obligation under capital lease $28,082
Less current portion (8,692)
-------
TOTAL LONG-TERM PORTION $19,390
=======
The Company has incurred $2,058 interest expense on capital leases for the year.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This statement does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information; SFAS No.
157 is effective for fiscal years beginning after November 15, 2007, and all
interim periods within those fiscal years. In February, 2008, the FASB released
FASB Staff Position (FSP FAS 157-2 - Effective Date of FASB Statement No. 157)
which delays the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), to
fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. The implementation of SFAS No. 157 for financial assets and
liabilities, effective January 1, 2008, did not have an impact on the Company's
financial position and results of operations. The Company has also evaluated the
impact of SFAS No. 157 on non-financial assets and liabilities, and the adoption
of this statement does not have a significant effect on the Company's financial
statements.
-9-
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115". SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. This statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. The Company has evaluated the impact of SFAS No. 159 on
its financial statements, and has chosen not to adopt SFAS No.159.
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. The Company is required to adopt SFAS 161 on January 1,
2009. The Company currently does not have any derivative financial instruments
subject to accounting or disclosure under SFAS 133; therefore, the Company does
not expect the adoption of SFAS 161 to have a significant effect on the
Company's consolidated statement of financial position, results of operations or
cash flows.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles". The new standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles
(GAAP) for nongovernmental entities. SFAS 162 became effective November 15,
2008. Adoption of SFAS 162 is not expected to have a significant impact on
ESW's results of operations or financial position.
In May 2008, the FASB issued Staff Position ("FSP") APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlements)." This FSP requires a portion of this type
of convertible debt to be recorded as equity and to record interest expense on
the debt portion at a rate that would have been charged on nonconvertible debt
with the same terms. This FSP takes effect in the first quarter of fiscal years
beginning after December 15, 2008 and will be applied retrospectively for all
periods presented. It is effective for the Company starting January 1, 2009. The
Company has evaluated the impact of FSP APB 14-1 on its financial statements,
and the adoption of this statement does not have a significant effect on the
Company's financial statements.
-10-
In June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities."
Securities participating in dividends with common stock according to a formula
are participating securities. This FSP determined that unvested shares of
restricted stock and stock units with nonforfeitable rights to dividends are
participating securities. Participating securities require the "two-class"
method to be used to calculate basic earnings per share. This method lowers
basic earnings per common share. This FSP takes effect in the first quarter of
fiscal years beginning after December 15, 2008 and will be applied
retrospectively for all periods presented. It will be effective for the Company
on January 1, 2009. The Company does not expect FSP EITF 03-6-1 to have a
significant effect on its consolidated financial statements.
In June 2008, the FASB ratified the consensus reached on EITF Issue No. 07-05,
"Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity's Own Stock" ("EITF No. 07-05"). EITF No. 07-05 clarifies the
determination of whether an instrument (or an embedded feature) is indexed to an
entity's own stock, which would qualify as a scope exception under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. EITF No. 07-05 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. It will be effective for the Company on January 1, 2009.
Early adoption for an existing instrument is not permitted. The Company does not
expect EITF No. 07-05 to have a significant effect on its consolidated financial
statements.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are summarized in Note 2 to the Consolidated
Financial Statements included in our 2008 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.
-11-
FOREIGN CURRENCY TRANSACTIONS
The results of operations and the financial position of ESW's operations in
Canada is principally measured in Canadian currency and translated into U.S.
dollars. The future effects of foreign currency fluctuations between U.S.
dollars and Canadian dollars will be somewhat mitigated by the fact that certain
expenses will be generally incurred in the same currency in which revenues will
be generated. The future reported income of ESW's Canadian subsidiary would be
higher or lower depending on a weakening or strengthening of the U.S. dollar
against the Canadian currency. During the first quarter of 2009, the Company
experienced a net gain on foreign exchange due the strengthening of the U.S.
Dollar against the Canadian dollar.
A portion of ESW's 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, ESW's consolidated stockholders' investment will
fluctuate depending upon the weakening or strengthening of the Canadian currency
against the U.S. dollar.
Adjustments resulting from ESW's foreign Subsidiaries' financial statements are
included as a component of other comprehensive income within stockholders equity
because the functional currency of subsidiaries is non-USD.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ESW is exposed to financial market risks, including changes in currency exchange
rates and interest rates. The Company also has foreign currency exposures at its
foreign operations related to buying and selling currencies other than the local
currencies. The risk under these interest rate and foreign currency exchange
agreement is not considered to be significant.
FOREIGN EXCHANGE RISK
ESW's foreign subsidiaries conduct their businesses in local currency pre
dominantly the Canadian Dollar. ESW's exposure to foreign currency transaction
gains and losses is the result of certain net receivables due from its foreign
subsidiaries. ESW's exposure to foreign currency translation gains and losses
also arises from the translation of the assets and liabilities of its
subsidiaries to U.S. dollars during consolidation. ESW recognized a translation
loss of $50,569 for the three month period ended March 31, 2009 reported in the
Consolidated Statements of Changes in Stockholders' Equity (Deficit) primarily
as a result of generally strengthening U.S. dollar against the Canadian Dollar.
ESW's strategy for management of currency risk relies primarily upon conducting
its operations in the countries' respective currency and ESW may, from time to
time, engage in hedging intended to reduce its exposure to currency
fluctuations. At March 31, 2009, ESW had no outstanding forward exchange
contracts.
-12-
INTEREST RATE RISK
ESW invests in highly liquid investments purchased with an original or remaining
maturity of three months or less at the date of purchase. These investments are
fixed rate investments. Investments in fixed rate interest earning products
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates. However due to
the limited amount of investment in such securities and their terms restricted
to three months or less, ESW does not expect the impact on these investments to
be material. At March 31, 2009, ESW had nil investments.
The interest payable on one of ESW`s subsidiaries bank loan is based on variable
interest rates and therefore affected by changes in market interest rates. The
Canadian prime business interest rates have decreased over the last two years.
Falling interest rates have positively impacted interest expense. Due to the
short term nature of these loans the impact of changing interest rates is not
considered significant.
ESW currently has no variable-rate, long-term debt that exposes ESW to interest
rate risk. As of March 31, 2009, ESW has principal $9 million of convertible
debentures with a fixed interest rate of 9%. Generally, the fair market value of
ESW`s fixed interest rate convertible debentures will increase as interest rates
fall and decrease as interest rates rise. As at March 31, 2009, Convertible
Debenture amounted to $8,948,560 net of deferred costs of $51,440.
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.
-13-
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.
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, 2008, 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 has 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, 2008.
ITEM 5. OTHER INFORMATION
On April 7, 2009 the Company filed a Current Report on Form 8-K reporting that
the Company has been awarded a $731,000 Grant for Environmental Protection
Agency (EPA) Verification of its XTRM Cat(TM) Marine / Locomotive Catalyst.
On May 04, 2009 the Company filed a Current Report on Form 8-K has received
notification from the California Air Resources Board (CARB) that the Company's
ThermaCat(TM) Active Level III catalyst has been approved for off-road
applications.
Effective May 15, 2009, the Registrant (the "Company") dismissed the firm of
Deloitte & Touche LLP ("Deloitte") who was previously engaged as the Company's
principal auditor.
Deloitte's audit report on the Company's consolidated financial statements for
the fiscal year ended December 31, 2008 and December 31, 2007, did not contain
any adverse opinion or disclaimer of opinion, and was not qualified or modified
as to audit scope or accounting principles, except that the aforementioned
report for the year ended December 31, 2008 included was modified for an
uncertainty relating to the Company's ability to continue as a going concern.
The decision to dismiss Deloitte has been approved by the Company's Audit
Committee and Board of Directors.
-14-
During the two fiscal years ended December 31, 2008 and 2007, there were no
disagreements with Deloitte on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement.
During the two fiscal years ended December 31, 2008 and 2007, there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K of the
Securities and Exchange Commission (the "Commission").
The Company has provided Deloitte a copy of the disclosures contained herein
prior to the filing of this current report and have requested that Deloitte
issue a letter addressed to the SEC containing any new information,
clarification of the Company's expression of its views, or the respects in which
it does not agree with the statements made by the Company herein.
Effective May 15, 2009 the Company upon approval of its Audit Committee and
Board of Directors elected to retain the firm of MSCM LLP ("MSCM") as its
principal independent accountants. During the Company's two most recent fiscal
years and through May 15, 2009, the Company has not consulted with MSCM
regarding either (i) the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on the Company's financial statements, and neither a written
report nor oral advise was provided that was an important factor considered by
the Company in reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was either the subject of a
disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K
and the related instructions to Item 304 of Regulation S-K.
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 Accounting 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.
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 20, 2009
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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