UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended - December 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 Crescent
Concord Ontario Canada L4K 5R2
(Address of principal executive offices, including postal code.)
(905) 695-4142
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $0.001 PAR VALUE
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant 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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the Registrant was required
to submit and post such files). Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
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]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
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The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $43,094,569 as of March 29,
2010 based upon the closing sale price reported for such date. Shares of Common
Stock held by each officer and director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates of the registrant.
There were 123,588,099 shares of the registrant's Common Stock outstanding as of
March 29, 2010.
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INDEX PAGE NO.
PART I
ITEM 1 Business 4
ITEM 1A Risk Factors 18
ITEM 1B Unresolved Staff Comments 25
ITEM 2 Properties 25
ITEM 3 Legal Proceedings 25
ITEM 4 Removed and reserved 25
PART II
ITEM 5 Market for Registrants Common Equity and Related
Stockholder Matters and Issuer Purchases of Equity
Securities 26
ITEM 6 Selected Financial Data 27
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
ITEM 7A Quantitative And Qualitative Disclosures About
Market Risk 53
ITEM 8 Financial Statements and Supplemental Data F-1 thru F-31
ITEM 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 54
ITEM 9A Controls and Procedures 54
ITEM 9B Other Information 56
PART III
ITEM 10 Directors, Executive Officers and Corporate Governance 58
ITEM 11 Executive Compensation 64
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management And Related Stockholder Matters 69
ITEM 13 Certain Relationships and Related Transactions and
Director Independence 75
ITEM 14 Principal Accountant Fees and Services 79
PART IV
ITEM 15 Exhibits and Financial Statement Schedule 80
Signatures 81
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PART I
This Form 10-K contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release any modifications or revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events. In
connection with the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, the Company cautions investors that actual financial and
operating results may differ materially from those projected in forward-looking
statements made by, or on behalf of, the Company. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause the actual results, performance, or achievements of the Company
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements.
The words "anticipate," "believe," "estimate," "expect," "intend," "will,"
"should," "may," "plan," and similar expressions, as they relate to
Environmental Solutions Worldwide Inc., ("ESW" or the "Company") or ESW's
management, are intended to identify forward-looking statements. Such statements
reflect ESW's current views of the Company with respect to future events and are
subject to certain risks, uncertainties, and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected, intended, or planned. ESW assumes no
obligations and does not intend to update these forward-looking statements.
Readers are also urged to carefully review and consider the various disclosures
made by ESW which attempts to advise interested parties of the factors that
affect ESW's business, including without limitation the disclosures made under
the caption "Management's Discussion and Analysis" and under the caption "Risk
Factors" included herein.
ITEM 1. BUSINESS
GENERAL
Environmental Solutions Worldwide Inc. ("ESW" or the "Company") is a publicly
traded Florida corporation formed in 1987 in the State of Florida as BBC Stock
Market, Inc. ("BBC") as a development stage enterprise. BBC subsequently changed
its name to Environmental Solutions Worldwide, Inc.
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ESW is engaged through its wholly owned subsidiaries in the design, development,
manufacturing and sales of environmental technologies and emission testing
service. ESW is currently focused on the international medium duty and heavy
duty diesel engine market for on-road and off-road vehicles as well as the
utility engine, mining, marine, locomotive and military industries. ESW also
offers engine and after treatment emissions verification testing and
certification services.
ESW's common stock is currently quoted on the OTC Bulletin Board(R) (OTCBB)
which is a regulated quotation service that displays real-time quotes, last-sale
prices, and volume information in over-the-counter (OTC) equity securities under
the symbol (ESWW.OB). ESW's common stock is also quoted on the Frankfurt Stock
Exchange (FWB), under the symbol (EOW).
The "ESW Group" trade name is being used in part to identify the Company's
potential participation in business opportunities outside its traditional focus
of engine emissions controls.
ESW operates through three wholly owned subsidiaries:
o ESW America Inc. (a Delaware corporation) is ESW's technical, research
and development division. ESW America houses ESW's engine emissions
testing laboratory and certification services known under the trade
name "Air Testing Services(TM) ("ATS") recognized by the Environmental
Protection Agency (EPA), California Air Resources Board (CARB) and the
Mine Safety and Health Administration (MSHA) as capable of performing
engine emissions verification test protocols. ESW America's
capabilities include certification and verification of internal
combustion and compression engines ranging from 5 to 600 horse power
as well as vehicle chassis testing capabilities up to 1000 horse
power. ESW America also houses ESW's catalyst coating and development
laboratory. ESW America is a fully compliant ISO 9001:2008 certified
manufacturing and laboratory testing facility.
o ESW Canada Inc. (an Ontario corporation) serves as a high volume
production and substrate manufacturing facility, as well as houses ESW
Group's sales division, managing all sales and marketing globally for
ESW's catalytic product lines as well as development and testing
services. ESW Canada also houses a manufacturing line for all of ESW's
products and is a fully compliant ISO 9001:2008 certified
manufacturing facility.
o ESW Technologies Inc. (a Delaware corporation) holds ESW's
intellectual property, and/or rights to the same.
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ESW is a developer of diesel emissions technology solutions, advancing emissions
reduction technology by commercializing leading edge proprietary catalytic
emission conversion, control and support products and technologies. ESW's key
technologies and products are detailed below and are believed to be responsive
to more stringent global emissions regulations being implemented. Among the key
products are ESW's Therma Cat(TM), Xtrm Cat(TM) and Clean Cat(TM) diesel
emissions control technologies. ESW also manufactures a line of military
technologies including the Stlth Cat(TM) and Scat-IR-Shield(TM) exhaust
shielding technology currently employed on US Marine Light Armored Vehicles in
Iraq.
Global retrofit opportunities continue to expand as both, countries and locales
worldwide attempt to address clean air issues. ESW is intensifying efforts to
position its technologies as key, market-proven enablers to reduce diesel
emissions from a wide variety of applications and has developed a solid
distribution network throughout North America and Asia to aid in the Company's
evolution from a research and development mindset to that of commercialization
of its intellectual property.
INDUSTRY TRENDS
Emissions regulations for mobile diesel engines in the major markets of North
America, Europe and Asia have continued to tighten and are now 40% to 90% lower
than previous regulations. Regulations in effect in 2010 in the United States of
America and 2009 in Europe and in Asia are expected to reduce the emissions
level for new mobile diesel engines from 85% to 99% of the levels mandated in
the mid-1980s. While much of the regulatory pressure and resulting action from
engine manufacturers has focused on reducing emissions from new engines, there
is increasing focus and concern over pollution from existing diesel engines,
many of which have 20- to 30-year life cycles. The EPA has estimated that in the
U.S. alone there are approximately 11 million diesel powered vehicles which need
to be retrofitted over the next ten years. ESW's future performance and growth
is directly related to this trend within the global market. In recent years
there has been an increasing emphasis on climate change the world over. The
global response and efforts by governments around the world is to implement
legislation and enforce upon re-sellers and fleet operators of diesel engines to
reduce emissions from these engines into the environment.
In U.S., the EPA, CARB and MSHA continue to place great emphasis on compliance
with emission reduction standards. The identification of diesel particulate
matter "PM" as a toxic air contaminant in 1998 led the CARB to adopt the Risk
Reduction Plan to Reduce Particulate Matter Emissions from Diesel-fueled Engines
and Vehicles (Plan) in September 2000.
The cost of meeting emission regulations, retrofit and replacement projects in
the U.S. is estimated to be approximately $7.0 billion dollars as published in
the National Clean Diesel Campaign Fact Sheet (Source EPA's National Clean
Diesel Campaign Fact Sheet). CARB estimates retrofits and engine replacements
for approximately 420,000 trucks and buses registered in California as well as
those transiting California roadways from other states and countries. As of
today, sixteen U.S. states have committed to voluntarily adopt California's
stricter regulations to control greenhouse gas emissions.
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Over the last five years, the EPA has brought forward a number of very
successful innovative programs all designed to reduce emissions from diesel
fleets. In conjunction with state and local governments, public interest groups
and industry partners, the EPA has established a goal of reducing emissions from
the over 11 million diesel engines in the existing fleets by 2014. The EPA
offers numerous programs in order to provide technical and financial assistance
to stakeholders interested in reducing their fleets' emissions effectively and
efficiently. The American Recovery and Reinvestment Act of 2009 (Recovery Act)
provided $156 million in new funding for National Clean Diesel Funding
Assistance Program to support the implementation of verified and certified
diesel emission reduction technologies in 2009. The EPA's Regional offices
administered competitions to deploy EPA or CARB verified and certified
technologies to significantly reduce diesel emissions from existing fleets. This
funding will fund projects through to September 2010.
The EPA and CARB programs are accelerating the activities toward creation of
active markets for diesel emissions reduction technologies and products in the
U.S. These markets include retrofit applications in on- and off-road segments,
as well as for stationary power generation and marine and rail applications.
Thus, the market for diesel emissions reduction technologies and products is
still emerging. We expect growing demand for diesel emissions reduction
technologies and products for the diesel engine market, owners of existing
fleets of diesel-powered vehicles, and expanding requirements from the off-road,
marine and railroad sectors. It is an essential requirement of the U.S. retrofit
market that emissions control products and systems are verified under the EPA
and/or CARB protocols to qualify for credits within the EPA and/or CARB
programs. Funding for these emissions control products and systems is generally
limited to those products and technologies that have already been verified. As
of the date of this report, ESW has CARB verifications and an EPA Emerging
Technology listing which provides an advantage in attracting customers with
access to governmental funding for retrofit programs.
BUSINESS STRATEGY
ESW's long term goal is to deliver financial performance to its shareholders by
being an industry leader in environmental technologies. With this goal in mind,
our results-oriented team is committed to achieving excellence in our product
lines and service and is taking the necessary steps to maximize its potential by
continuing to accelerate its growth. ESW intends to continue to execute on the
following key strategies in order to leverage its strengths, as well as to
position itself for long-term growth and success:
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o Continue to develop and enhance the North American distribution network
while developing the Asian and European markets in order to have products
continually introduced to new markets. ESW will introduce innovative
marketing and communications tools for use by distributors in effectively
profiling ESW's product line.
o Continue investing in new product and process technologies to strengthen
and differentiate its product portfolio and capitalize on the strategic and
competitive advantage of ESW America in verifying and/or certifying
products with the EPA and CARB. ESW also intends to continue its efforts to
develop innovative products to serve its customers better and improve its
product mix and profit margins such as developing product that meet
California Occupational Health and Safety requirements for visibility.
o Focusing on its core business, ESW intends to continue to strengthen its
growth strategy by seeking complimentary partnerships and investments that
provide a competitive advantage and growth opportunities for its core
businesses.
o Maximize production capabilities, ESW continually implements initiatives
designed to improve product quality while reducing manufacturing costs. ESW
periodically evaluates opportunities to maximize facility and asset
utilization.
o Focus on strategic partnerships and alliances that do not require
significant upfront cash investments to pursue new business opportunities
in other environmental products and sectors.
PRINCIPAL PRODUCTS AND THEIR MARKETS:
ESW's woven stainless steel wire mesh catalytic converter substrate forms the
basis of ESW's product lines building on the success of the Stlth Cat(TM) and
Particulate Reactor(TM). This product can be produced in almost any size and
shape. The wire mesh substrate creates a turbulent environment, which increases
catalytic activity, and when manufactured for diesel applications, is designed
to serve as a partial filter of PM, an important factor in diesel emission
control. ESW's manufacturing process and chemical wash coat formula is
proprietary.
XTRM CAT(TM) is an innovative proprietary diesel oxidation catalyst designed for
Electro Motive Diesel (EMD) turbocharged and roots blown engines and is based on
ESW's combat proven Stealth Cat(TM) filter system employed on US Marine Light
Armored Vehicles. The outstanding durability and flexible characteristics enable
the Xtrm Cat(TM) to perform within the extreme operating conditions of
locomotive and marine two stroke diesel engine applications. In October 2008 the
XTRM Cat(TM) was listed as an emerging technology on the EPA's Emerging
Technology List and in August 2009 was selected for two emerging technology
grants for deploying seventeen (17) Xtrm Cat(TM) marine variant units on seven
(7) vessels operating on the Mississippi River and Puget Sound. ESW has also
successfully installed Xtrm Cat(TM) rail variants on several locomotives. ESW's
emerging technology listing was extended to October 2010 and is currently in the
process of being verified / certified with the US EPA or CARB. These kits
provide significant reductions of PM, hydro carbons (HC), and carbon monoxide
(CO), which may allow EMD engines to be rebuilt to the new EPA rebuild standards
of today and the standards of the future.
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THERMA CAT(TM) Active Diesel Particulate Filter is an advanced level III?
technology that is designed to provide the end user the flexibility and
pre-retrofit usability that existed prior to installing a retrofit device. The
problem with previous retrofit technologies is that they either limited the
vehicles' use or required driver interaction and limited the vehicles'
availability during regular or multi-shift operations. These solutions added
additional costs in manpower and vehicle management that added to the retrofit
devices initial purchase price. The Therma Cat(TM) was designed to address these
issues with the introduction of an exothermic based (flameless technology) that
utilizes the vehicles existing fuel supply to supplement and raise the exhaust
heat so that the Diesel Particulate Filter can regenerate and continue normal
operations. The fuel penalty is typically less than 1% in normal vehicle
operations. The system operates in the background, transparent to the vehicle
operator and does not impact the vehicles normal operations. ESW took
comprehensive steps to ensure the safe operation of the Therma Cat(TM) that
included meeting Federal Motor Vehicle Safety Standards 301S for fuel system
integrity for School Bus's that included crash testing the school bus to ensure
the integrity of the fuel system with the Therma Cat(TM) installed. ESW also
completed a 1,000 vibration test that simulated a typical 100,000 mile life
cycle on rural roads. In 2009 ESW's Therma Cat(TM) Active Level III? catalyst
system received CARB verification for a variety of on and off-road engine
applications.
CLEAN CAT(TM) HP Diesel Oxidation Catalyst (DOC) has proven to be effective in
achieving moderate reductions in PM emissions, while simultaneously reducing CO
and HC. The DOCs are designed to be installed in-line into the existing exhaust
systems between the muffler and the turbocharger. The DOC has broad engine
coverage on four-stroke diesel engines for on-road and off-road applications
with engine horsepower range between 150-600 hp. The Clean Cat(TM) Hp is
designed for Low Sulfur Diesel (LSD - < 500 parts per million sulfur) and Ultra
Low Sulfur Diesel (ULSD - < 15 parts per million sulfur) fuel, however, is
available in variants that are tolerable of higher sulfur content for developing
nations and markets in South America and Asia.
CLEAN CAT(TM) XP is a partial flow through filter proven to be effective in
achieving significant reductions in particulate matter emissions, while
simultaneously reducing CO and HC. The DOCs are designed to be installed as a
muffler replacement after the turbocharger. The DOC has broad engine coverage on
four-stroke diesel engines for on-road applications with engine horsepower
ranges of 150-600 hp and meet EPA Level II emissions requirements The Clean
Cat(TM) XP is designed to be maintenance free and does not require ash cleaning
and is designed to be taken apart in event of engine malfunction.
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PERMISSIBLE CAT(TM) is a current product that helps the mining community meet
the new emission targets regulated by MSHA and is currently being used by
Bucyrus Inc as part of an engine pack to meet the new MSHA underground coal
mining requirements. It is also designed to reduce HC, CO and unpleasant odors
while not having an outer skin temperature greater than 300(degree)F.
M CAT(TM) is a market specific catalyst, specially developed for use in the
Mining industry and has demonstrated stand alone PM reduction above 40%. It is
also designed to reduce hydrocarbons, carbon monoxide and unpleasant odors.
TERRA CAT(TM) is a combination of high temperature fiberglass filter and M
Cat(TM) diesel oxidation catalyst (DOC). It is an MSHA approved technology
designed for all size off-road combustion and compression engines, yielding 85%
or greater PM reduction efficiency. It is also designed to reduce HC, CO and
unpleasant odors.
TEMPMAX(TM) is an engine exhaust tube designed to be installed as a direct
replacement to the existing OEM factory unit. Current passive emissions control
technology is dependent on the engines exhaust temperature to function properly.
TempMax(TM) delivers the engines exhaust heat energy with very little
temperature loss directly to the after-treatment device, sustaining long term
catalyst performance in its application.
STLTH CAT(TM) unit construction incorporates the Company's proprietary catalyzed
wire mesh substrate integrated into an advanced sound abatement system. The
units were specifically engineered to decrease military vehicles and equipments
overall tactical signature by reducing the diesel engines black smoke (soot),
eye and throat irritating noxious diesel engine emissions, temperature and
sound. The Stlth Cat(TM) is currently employed on US Military vehicles employed
in tactical combat situations in Iraq.
SCAT-IR-SHIELD(TM) is an innovative technology, operates in combination with the
Company's proprietary STLTH CAT(TM). The complete system is engineered to reduce
the overall heat/infrared, sound and exhaust signature of tactical military
vehicles and equipment.
AIR TESTING SERVICES (ATS) is ESW America's Emissions Testing Facility ATS is
recognized as capable of performing engine emissions verification test protocols
by EPA, CARB and MSHA, while providing vehicle and engine manufacturers with a
wide range engine and chassis dynamometer-based durability testing. ATS has
capabilities for providing testing protocols with a broad range of fuels,
including: diesel, gasoline, and alternative fuels. ATS Engine Dynamometer-based
Durability Testing protocols can also help develop custom accelerated aging test
schedules for emissions control technologies, or support customer-designed tests
for component stress. A full range of services is offered including emissions
testing, compilation and submission of applications, final issuance of the
certifications, production line, and audit testing. ATS offers customers
complete testing and validation services including complete project management
and verification management.
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ESW's objective is the worldwide deployment of technologies to reduce the
overall emissions from diesel applications and to continue developing emissions
reduction technology. Central to successful emissions reduction is deployment of
systems that have undergone certification, verification and registration by
regulatory bodies around the world. The industry is substantially driven by
Federal and State/Provincial regulations and an analysis of future legislative
requirements led ESW to focus on the development of two substantial products,
The Therma Cat(TM) Level III Active Diesel Particulate Filter for on- and
off-road medium and heavy duty diesel engines and the Xtrm Cat(TM) Diesel
Oxidation Catalyst for marine and rail applications. ESW achieved this product
development through verifications from CARB with product development and testing
conducted at ESW's "Air Testing Services" division.
ESW's target markets include the following six areas regulated in North America
by EPA, CARB, and other State and Local standards:
1. On-road vehicle sector generally comprised of on-road trucks and
school buses employed with private and municipal fleets.
2. Off-road engine/ vehicle sector defined as construction equipment,
tractors, power generators, irrigation pumps, stationary power and
others.
3. Marine sector comprising of solutions for workboat applications such
as tows, ferries, dredges, tugs, and yachts, to generator sets on blue
water vessels.
4. Rail sector comprising of solutions for line haul and switching, as
well as passenger rail locomotive and head end power systems
5. Mining Industry, including all equipment and vehicles operating in and
around a mine.
6. Military Sector, including catalyst products and support technologies.
DISTRIBUTION METHODS OF PRODUCTS
ESW has developed and employs a strategy whereby it sells products in three
principal methods:
1. Through a comprehensive network of independent distributors that have
established organizations that have an extensive existing client base
and are actively servicing the retrofit requirements of existing and
new clients.
2. Through strategic partnerships with organizations that have
complementary products that enhance and extend the efficacy of ESW
products.
3. Direct to market utilizing ESW's own sales personnel, local trade
magazines and trade shows to complement distribution of its products
globally into key markets.
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ESW is currently working with key independent distributors in North American and
Asian Markets at the government and local levels to develop retrofit catalyst
applications and is aggressively moving to expand its European and Asian
presence. ESW's sales and marketing staff works closely with design and
engineering personnel to prepare the materials used for bidding on new business
and to provide a consistent interface between ESW and its key customers.
COMPETITION
Currently there is intense competition among several companies that provide
retrofit solutions for diesel powered engines. The number of competitors varies
depending on the sector the diesel engine is operating. ESW competes primarily
on the basis of technology, performance, price, quality, reliability,
distribution, customer service, and support. ESW faces direct competition from
companies that market similar products with stronger financial, technological,
manufacturing and personnel resources. Other companies offer products that
potential customers may consider to be acceptable alternatives to ESW's products
and services.
ESW's direct competitors in the North American On-Road, Off-Road, and Mining
markets are Engine Control Systems, Donaldson, DCL, Huss and Cleaire.
ESW's Marine and Rail products compete in the engine rebuild sector with low oil
consumption kits provided by manufacturers such as EMD and other DOC technology
providers such as Miratech.
ESW America faces competition from well established emissions testing facilities
such as South West Research Institute and TRC and several smaller facilities
such as Olson-Eco Logic and California Environmental Engineering.
ESW believes it can address the competitive landscape with the following:
o Unique Substrate Technology - ESW's proprietary wire mesh substrate is
very flexible in design, size, performance and overall product
configuration. The high mechanical and thermally durable wire mesh
technology is suitable for Diesel Oxidation Catalyst applications. The
technology is -cost effective and can be applied to almost any
application. Traditional ceramic or metal based flow-through type
technologies are typically less efficient, larger in size, and are
only available in pre-configured sizes and designs.
o Leading edge products that are designed to have operational and
technical advantages over the competition and are priced aggressively
in the market. The Therma Cat(TM) described above is an example of a
product that offers technical and operational advantages over all
current competitors.
o Solutions Provider - ESW does not only offer an emission control
component, it also provides a variety of engineering solutions and
services as required by the regulatory authorities for demonstrating
new technologies. (Product development and project management
services) This includes designing our systems to meet federal and
state visibility retrofit requirements that have been recently
introduced in California. This competitive edge allows ESW to
participate in emerging markets such as emission control retrofit
solutions for locomotive and marine applications. It also enables ESW
to respond to immediate and time-sensitive business opportunities such
as the Improvised Electronic Devices / Mine blast energy absorption
project with the U.S. Military.
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o Vertically Integrated Manufacturing - Having all services combined
under one roof is an advantage and is very unique in the emission
control industry. ESW can respond immediately to customers in need for
quick turnaround engineering solutions and fast product lead-times.
The close cooperation between sales, research and development,
implementation and manufacturing have helped in the past, and will
help in the future to capitalize on "last minute" business
opportunities where the customer is in need for control solutions
enabling them to be in compliance with the latest emission standards.
o ESW America's Air Testing Services facility is engaged in the very
competitive market of pay for service emissions testing. Competition
is this arena is primarily driven by price and reputation. ESW America
has participated in successful EPA engine verifications as well as
CARB product verification testing that has raised the profile and
reputation of the organization over the past several months and
resulted in ESW America being chosen by a major original equipment
manufacturer (OEM) engine manufacturer to provide air testing services
when its own facilities are unable to meet demand. ESW America's
advantages over larger rivals is its ability to react quickly to
customer needs and provide a high level of service in a timely and
professional manner. ESW America is continually upgrading its testing
facilities and equipment in response to changing regulatory mandates
and vehicle technology and provides the capabilities for advanced
research, engineering and testing of various aftermarket products and
new technologies.
RAW MATERIALS
The primary raw materials used to manufacture ESW products includes, but is not
limited to stainless steel, stainless steel wire, stainless steel tubing,
precious metals such as platinum and palladium, particulate filters and other
components. ESW does not carry inventories of raw materials or finished products
in excess of those reasonably required to meet production and shipping
schedules.
Overall, raw steel, steel mesh and precious metals accounted for the most
significant component of ESW's raw materials costs in 2009. ESW does spot buys
of steel products from suppliers to meet customer demand. Platinum prices
remained low during the early part of 2009 and increased during the later part
of the year. ESW continues to implement a strategy in an effort to mitigate the
effect of fluctuating prices of raw materials on its result of operations. This
strategy includes, delaying price increases from raw material suppliers; selling
steel off cuts and scrap at the highest possible price; increase cost reduction
programs throughout the business; and negotiate price relief from customers. In
addition, ESW continues to purse volume discounts from significant suppliers of
raw material. ESW does not currently hedge any raw materials; however this
approach could be considered as demand for ESW products increases. ESW's results
of operations could be adversely affected if steel and precious metal prices
fluctuate unless it is successful in passing along these price undulations to
customers or otherwise offset these as operating costs.
-13-
Other raw materials or components purchased by ESW include particulate filters,
tools, fasteners, other steel and components for the Level III product, as well
as a variety of custom alloy materials and chemicals, all of which are available
from numerous sources.
CUSTOMERS
ESW recorded sales from 26 customers in Fiscal 2009 as compared to 21 in Fiscal
2008. One of these customers accounted for 45 % and two other customers
accounted for 20 % and 9% of ESW's revenue in Fiscal 2009. In Fiscal 2008, one
customer accounted for 32% and two other customers accounted for 29% and 15% of
ESW's revenue. ESW anticipates continuing its program of establishing long-term
relationships with existing customers. The loss of, or major reduction in
business from, one or more of the major customers could have a material adverse
effect on ESW's liquidity, financial position, or results of operations.
PATENT AND TRADEMARKS
ESW is developing technologies or furthering the development of acquired
technologies through internal research and development efforts by its engineers
and product specialists. Where practical, ESW is seeking to obtain the exclusive
rights to use technology through patents or licenses for proprietary
technologies or processes.
Through its wholly owned subsidiary, ESW holds both Canadian and U.S. patents
and pending applications covering the catalytic converter technology. The
protections provided by patents and those sought by pending patents are
important to ESW's business, although management believes that no individual
right is material to ESW's business at the present time. There can be no
assurance that these patents, combined with pending patent applications or
existing or future trade secret protections that ESW seeks will survive legal
challenge, or provide meaningful levels of protection.
The Canadian patent only affords protection against the manufacture, use or sale
of the patented technology within Canada. The U.S. patent application for ESW's
method of producing a catalytic element was filed on October 1, 2004 and a
patent has been issued as of December 02, 2008. There can be no assurances that
any patents ESW may have or has applied for or any agreements ESW has in place
or enters into will protect the technology and or prevent competitors from
employing the use of ESW's design and production information. Moreover, there is
no guarantee that ESW's proprietary rights will provide any significant
competitive advantages.
Additionally, ESW possesses certain registered, pending and common law
trademarks. ESW considers the goodwill associated with the trademarks to be an
important part of developing product identity.
PRODUCT CERTIFICATION
ESW's customers have acquired, where necessary, engine certifications and
catalyst verifications using ESW products from such authorities as the EPA,
Mexico Department of Ecology, CARB, MSHA and ETV Canada for gasoline and diesel
products. ESW was the first catalytic substrate manufacturer and catalyst
coating company in North America to verify a metallic wire mesh substrate based
catalytic converter system as a gasoline retrofit replacement devices.
-14-
ESW was the first catalytic substrate manufacturer and catalyst coating company
in the world to verify a metallic wire mesh substrate based catalytic converter
system as a passive stand alone Level II diesel retrofit replacement device.
This verification status was removed by CARB effective January 01, 2009 with the
EPA's newly regulated NO2 limits.
CARB has established three primary technology levels for diesel catalyst
verifications.
LEVEL I: PM reduction greater than 25%
LEVEL II: PM reduction greater than 50%
LEVEL III: PM reduction greater than 85%
Effective January 1, 2009, the EPA has established a nitrogen dioxide (NO2)
limit for diesel retrofit technologies verified under the EPA's National Clean
Diesel Campaign (NCDC) Retrofit Technology Verification Program. The EPA
implemented a NO2 increase limit that is harmonized with the requirements for
retrofit technologies by CARB. This requirement limits the increase in NO2
emissions associated with retrofit technologies to levels no greater than 20%
above baseline engine levels.
ESW has completed an extensive research and development program to upgrade its
existing Level II diesel retrofit replacement device to meet these new
regulations. ESW has also completed the development for Level I technologies.
The generation II of these products which meets or exceeds the 2009 regulated
NO2 limits are expected to be in the verification process in 2010 through EPA or
CARB.
In 2009 ESW's Therma Cat(TM) Active Level III Plus catalyst system was verified
by CARB for a variety of on- and off-road engine applications (PM reduction
greater than 85%). For further details on the Level III verification, engines,
engine families and horse power ranges, please refer to the CARB website
http://www.arb.ca.gov, currently verified Level III, ESW Canada listing. The
Therma Cat(TM) filter system is a combined technology comprised of a chemically
coated wire mesh substrate and Diesel Particulate Filter (DPF) combined with an
electronically controlled external fuel injection component. The Therma Cat(TM)
regeneration process is an electronically controlled exothermic reaction and
occurs automatically during normal vehicle operation, transparent to the
operator.
In October 2008 ESW's Xtrm Cat(TM) product designed for Marine, 2-stroke, Tier 0
and Tier 1, turbocharged EMD 645 and 710 models was listed as an emerging
technology on the EPA's Emerging Technology List. In October 2009 the Emerging
Technology listing was extended for an additional year. The Xtrm Cat(TM) is an
innovative proprietary substrate/catalyst configuration based in part on ESW's
Stealth Cat(TM) catalytic reduction system employed on US Marine Light Armoured
Vehicles (LAV). The outstanding durability and flexible characteristics enable
the Xtrm Cat(TM) to perform within the extreme operating conditions of
locomotive and marine two stroke diesel engine applications. For further details
on the Xtrm Cat(TM) emerging technology listing please refer to the US EPA
website http://www.epa.gov/diesel/prgemerg.htm Emerging Technology List, ESW
Canada listing. ESW intends to verify the Xtrm Cat(TM) product with the EPA in
2010.
-15-
ESW's products are generally sold according to appropriate government
application regulations; however, ESW does not necessarily need government
approval to sell its products into unregulated markets.
WARRANTY MATTERS
ESW may face an inherent business risk of exposure to product liability and
warranty claims in the event that its products fail to perform as expected. ESW
cannot assure that it will not experience any material warranty or product
liability losses in the future or that it will not incur significant costs to
defend such claims. In addition, if any of the products are or are alleged to be
defective; ESW may be required to participate in a recall involving such
products. Each of ESW's customers has its own policy regarding product recalls
and other product liability actions relating to its suppliers. CARB verified
products require ESW to provide specific warranties and warranty reporting on
products depending upon engine applications. A successful claim brought against
ESW or a requirement to participate in a product recall may have a material
adverse effect on ESW's business.
ESW's Therma Cat(TM) Active Level III Plus on-road catalyst system which has
been verified as a Level III technology is required to meet CARB limited
warranty standard of 5 years or 100,000 miles or 5 years or 150,000 miles or 2
years unlimited miles depending on engine application.
ESW's Therma Cat(TM) Active Level III Plus off-road catalyst system which has
been verified as a Level III technology is required to meet CARB limited
warranty standard of 5 years or 4,200 hours.
To date ESW has not had any product warranty recalls.
MANUFACTURING
ESW has made capital investments in manufacturing capability to support its
products. ESW's substrate manufacturing plant located in Concord Ontario Canada
enables ESW to control the complete manufacturing process required for
production of catalyzed substrates and catalytic converter systems. Catalyzed
substrates are the integral part of all catalytic converter systems sold
worldwide. This facility has the capability to design, develop and manufacture
complete catalytic converter systems based on specific customer requirements.
ESW has made significant capital investment in its Tech Center based in
Montgomeryville Pennsylvania. This facility manufactures and provides the
catalytic and chemical wash coat solutions for the Concord Ontario plant. As
well, all of ESW's emission testing laboratories and testing capabilities are
located there. The 40,200 sq ft facility houses a state of the art 18,000 sq ft
expansion of ATS, an emissions testing lab, recognized as capable of performing
engine emissions verification test protocols by the EPA, CARB and MSHA. ATS
incorporates eight dedicated engine and vehicle dynamometer test cells.
-16-
ATS's capabilities include:
o Engine dynamometer capacity from 5hp to 600hp, including both transient and
steady state testing.
o Chassis dynamometer testing, including light duty (up to 10,000lbs) and
medium/heavy duty (up to 50,000lbs).
o Full flow Constant Volume Sampling emission measurement system capability
across all test cells.
o All emission systems have dual Nitrogen Oxide Chemiluminescence detector and
non-methane hydrocarbon measurement capability.
o Engine dynamometer test cells comply with 40 Code of Federal Regulations (CFR)
Part 60, 86, 89, 90, 92, 1042, 1048 and CARB testing protocols.
o Test Cells are currently in transition to 40 CFR Part 1065.
Regular upgrading of ESW's manufacturing and testing capabilities is required to
meet the challenges of a fast changing and growing business environment,
increase the flexibility, efficiency and improving operating quality, while
minimizing the overall effective costs, to produce products.
ESW utilizes ISO 9001:2008 protocols and structured communication meetings at
all levels of manufacturing to provide training and instruction as well as to
assure a cohesive, focused effort toward common goals. ESW encourages employee
involvement in all aspects of its business and views such involvement as a key
element in its future success. ESW also pursues involvement from its suppliers
and customers, which it believes is necessary to assure a consistent high
quality and on time delivery of raw materials, components and finished products.
RESEARCH AND DEVELOPMENT
In 2009, research and development costs amounted to $930,548 (2008 -
$1,323,754). ESW aggressively pursues testing and research and development for
new products to serve potential customers and meet new regulations that are
regularly being imposed on the industry. Through a combination of proprietary
methods for improving ESW's catalyzed substrates there are prospects for the
development of innovative applications outside of ESW's present verified product
line. ESW continues to spend further resources on new research and development
projects.
ENVIRONMENTAL MATTERS
ESW is presently engaged in a business that does not generate significant
hazardous waste. ESW's facilities may have tanks for storage of diesel fuel and
other petroleum products that are subject to laws regulating such storage tanks.
Federal, state, and local provisions relating to the protection of the
environment have not had, and are not expected to have, a material adverse
effect on ESW's liquidity, financial position, and results of operations.
However, like all manufacturers, if a release of hazardous substances occurs,
ESW may be held liable for the contamination, and the amount of such liability
could be material. While ESW devotes resources designed to maintaining
compliance with these requirements, there can be no assurance that ESW operates
at all times in complete compliance with all such requirements.
EMPLOYEES
ESW and its subsidiaries presently employ 75 full-time employees. ESW does not
have any collective bargaining agreements and considers its relationship with
its employees to be good.
-17-
ITEM 1A. RISK FACTORS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes statements of our expectations, intentions, plans and
beliefs that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and are intended to come within the safe harbour protection
provided by those sections. These statements, which involve risks and
uncertainties, relate to matters such as sales growth, price demand for our
products and services as well as competition, and our ability to obtain
additional financing should same be necessary to sustain our operations. We have
used words such as "may," "will," "should," "expects," "intends," "plans,"
"anticipates," "believes," "thinks," "estimates," "seeks," "predicts," "could,"
"projects," "potential" and other similar terms and phrases, including
references to assumptions, in this report to identify forward-looking
statements. These forward-looking statements are made based on expectations and
beliefs concerning future events affecting us and are subject to uncertainties,
risks and factors relating tour operations and business environments, all of
which are difficult to predict and many of which are beyond our control, that
could cause our actual results to differ materially from those matters expressed
or implied by these forward-looking statements. These risks and other factors
include those listed in this Item 1A. "Risk Factors" and elsewhere in this
report.
When considering these forward-looking statements, you should keep in mind the
cautionary statements in this report and the documents incorporated by
reference. New risks and uncertainties arise from time to time, and we cannot
predict those events or how they may affect us. There may also be other factors
that we cannot anticipate or that are not described in this report that could
cause results to differ materially from our expectations. Forward-looking
statements speak only as of the date they are made and we assume no obligation
to update them after the date of this report as a result of new information,
future events or subsequent developments, except as required by the federal
securities law.
IF CASH FLOWS FROM OPERATIONS ARE NOT SUFFICIENT AND IF ESW IS UNABLE TO OBTAIN
ADDITIONAL FUNDING THEN, ESW MAY HAVE TO SIGNIFICANTLY CURTAIL THE SCOPE OF ITS
OPERATIONS AND ALTER ITS BUSINESS MODEL.
ESW's sales and revenues continue to be unpredictable. In the event that
profitable operations are not achieved, ESW's present financial resources and
history of its ability for raising cash when needed, should allow it to continue
operations through at least the next twelve months. Should ESW receive a large
order (defined by management as one in which monthly production and deliveries
would exceed $2 million), ESW will need to either negotiate extremely favourable
payment terms providing for at least some advance payment or ESW will need to
obtain either debt or equity financing to allow it to purchase sufficient raw
materials and meet its working capital needs. ESW has a work in progress credit
facility that provides working capital related to export orders up to Canadian
$750,000, however ESW needs to be profitable and meet certain financial
covenants to use the facility, as per the terms of the facility, the facility
expires on 30 April 2010, ESW is working towards upgrading or renewing the
facility with the bank. If additional financing is required and not available
when required or is not available on acceptable terms, ESW may be unable to
continue its operations at current levels or satisfy the requirements necessary
to fill a large order. ESW continues to impose actions designed to minimize its
operating losses. ESW would consider strategic opportunities, including
investments in ESW, or other acceptable transactions, to sustain its operations.
There can be no assurances that additional capital will be available to ESW on
acceptable terms, or at all.
-18-
ESW HAS INCURRED LOSSES IN THE PAST AND EXPECTS TO INCUR LOSSES IN THE FUTURE
SHOULD ITS BUSINESS PLAN NOT BE EFFECTIVE.
ESW has incurred losses in each year since its inception. ESW's net loss for the
fiscal year ended December 31, 2009 was $5,936,952 and accumulated deficit as of
December 31, 2009 was $34,523,380. As ESW's sales and revenue continue to be
unpredictable, and should ESW's current business plan not be effective, ESW
expects to experience additional periods with operating losses.
ESW IS REQUIRED TO AMEND ITS ARTICLES OF INCORPORATION TO HAVE ADDITIONAL
AUTHORISED SHARES FOR ISSUANCE.
ESW's authorised share capital consists of 125,000,000 share of common stock. As
of March 29, 2010, there were 123,588,099 shares of common stock outstanding.
The Company will be required to seek shareholder approval to amend its articles
of incorporation to increase its authorised share capital for future issuances
of common stock. The inability for the Company to obtain shareholder approval to
increase its authorised share capital may have an adverse effect on the Company
and its ability in the future to raise capital, issue stock options or other
forms of stock based compensation.
THE PRICE OF ESW'S SHARES MAY BE ADVERSELY AFFECTED BY THE PUBLIC SALE OF A
SIGNIFICANT NUMBER OF THE SHARES ELIGIBLE FOR FUTURE SALE.
Sales of a large amount of ESW's common stock in the public market could
materially adversely affect the market price of ESW's common stock. Such sales
may also inhibit ESW's ability to obtain future equity or equity-related
financing on acceptable terms. The issuance of additional shares could have a
significant adverse effect on the trading price of ESW's common stock.
RISKS RELATED TO THE MARKET FOR ESW'S COMMON STOCK
THE PRICE OF ESW'S COMMON STOCK HAS BEEN HIGHLY VOLATILE.
ESW's common stock has traded as low as $0.09 per share and as high as $0.86 per
share in the twelve (12) months ended December 31, 2009. Some of the factors
leading to the volatility include:
o price and volume fluctuation in the stock market at large and market
conditions which are not necessarily related to ESW operating performance;
o fluctuation in ESW's operating results;
o concerns about ESW's ability to finance continuing operations;
o financing arrangements which may require the issuance of a significant number
of shares in relation to the number shares of ESW's common stock currently
outstanding;
o announcements of agreements, technological innovations, certification /
verifications or new products which ESW or its competitors make;
o costs and availability of precious metals used in the production of ESW's
products; and
o Fluctuations in market demand and supply of ESW products.
-19-
ESW'S COMMON STOCK IS CURRENTLY TRADED ON THE OVER-THE-COUNTER-BULLETIN-BOARD
AND THE FRANKFURT EXCHANGE AND AN INVESTOR'S ABILITY TO TRADE ESW'S COMMON STOCK
MAY BE LIMITED BY TRADING VOLUME.
The trading volume in ESW's common stock has been relatively limited. A
consistently active trading market for ESW's common stock may not continue on
the Over-The-Counter-Bulletin-Board or the Frankfurt Stock Exchange. The average
daily trading volume of ESW common stock on the Over-The-Counter-Bulletin-Board
for the year ended December 31, 2009 was approximately 62,856 shares. While
ESW's common stock started trading on the Frankfurt Exchange on March 16, 2007,
ESW has a limited trading history and there can be no assurances that there will
be increased liquidity in ESW stock.
ESW's Board of Directors may explore alternative listings of its Common Stock if
deemed beneficial to ESW's shareholders. If ESW were to seek an alternative
listing of its Common Stock, it may incur significant capital expenditures
beyond those anticipated for general business operations. Disciplined capital
expenditure decisions, focused on investments made for maintaining high quality
service, cost structure improvement, and cash flow generation are essential.
THE COMPANY MAY ISSUE MORE SHARES IN CONNECTION WITH A MERGER OR ACQUISITION,
WHICH WOULD RESULT IN SUBSTANTIAL DILUTION.
ESW's Certificate of Incorporation authorizes the issuance of a maximum of
125,000,000 shares of common stock. Any merger or acquisition effected by ESW
may result in the issuance of additional securities without stockholder approval
and may result in substantial dilution in the percentage of ESW's common stock
held by ESW's then existing stockholders. Moreover, the common stock issued in
any such merger or acquisition transaction may be valued on an arbitrary or
non-arm's-length basis by ESW management, resulting in an additional reduction
in the percentage of common stock held by ESW's then existing stockholders.
ESW's Board of Directors has the power to issue any or all of such authorized
but unissued shares without stockholder approval. To the extent that additional
shares of common stock are issued in connection with a business combination or
otherwise, dilution to the interests of ESW's stockholders will occur and the
rights of the holders of common stock might be materially adversely affected.
SEVERAL OF ESW'S SHAREHOLDERS OWN A SIGNIFICANT AMOUNT OF ESW'S OUTSTANDING
SHARES AND COLLECTIVELY MAY BE ABLE TO DECIDE CERTAIN CORPORATE ACTION.
Two individuals and five trusts, are ESW's shareholders and collectively own
63,523,631 shares which is equivalent to 51.4% of ESW's currently issued and
outstanding common stock as of March 29, 2010 on an undiluted basis. As such,
all or some of these shareholders may be able to control aspects of ESW's
business operations including the election of board members the acquisition or
disposition of assets and the future issuance of shares. For additional
information about beneficial ownership please refer to ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
-20-
RISKS RELATED TO ESW'S BUSINESS
ESW'S RESULTS MAY FLUCTUATE DUE TO CERTAIN REGULATORY, MARKETING AND COMPETITIVE
FACTORS OVER WHICH ESW HAS LITTLE OR NO CONTROL.
The factors listed below some of which ESW cannot control may cause the
Company's revenues and result of operations to fluctuate significantly:
o Actions taken by regulatory bodies relating to the verification and
certification of ESW products.
o The extent to which ESW products obtain market acceptance.
o The timing and size of customer purchases.
o Customer concerns about the stability of ESW's business which could cause them
to seek alternatives to ESW products.
ESW IS CURRENTLY DEPENDENT ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF
ITS REVENUES.
ESW recorded sales from 26 customers in Fiscal 2009 as compared to 21 in Fiscal
2008. Three of its customers accounted for 45%, 20%, and 9%, respectively of the
Company's revenue in the fiscal year 2009. Three of its customers accounted for
32%, 29%, and 15%, respectively of the Company's revenue in fiscal 2008. ESW
anticipates continuing the program of establishing long-term relationships with
existing and new customers. The loss of, or major reduction in business from,
one or more of ESW's major customers could have a material adverse effect on
ESW's liquidity, financial position, or results of operations.
ESW DOES NOT HAVE A LONG HISTORY OF SELLING AND MARKETING ITS PRODUCTS.
At the current time, ESW has limited marketing capabilities as compared to many
of ESW's competitors. ESW does not have a large sales, promotion and marketing
budget. ESW is constrained by the lack of working capital and its ability to
raise the necessary cash flow from business operations to re-invest in its
marketing programs. As a result of ESW's limited marketing capabilities, it is
forced to rely upon customer referrals, trade publications and a small sales
force. ESW's competitors have direct advertising and sales promotion programs
for their products as well as sales and marketing personnel that may have a
competitive advantage over ESW in contacting prospective customers. ESW's
position in the industry is considered minor in comparison to that of its
competitors. ESW continues to develop and explore new marketing methods and
techniques such as, trade show representation and programs directed toward
foreign customers. ESW's ability to compete at the present time is limited.
ESW's success depends upon the ability to market, penetrate and expand markets
and form alliances with third party international distributors.
There can be no assurances that:
o ESW's selling efforts will be effective;
o ESW will obtain an expanded degree of market acceptance;
o ESW will be able to successfully form additional relationships with
international distributors to market its products.
-21-
ESW DEPENDS UPON THE MARKETABILITY OF ITS CORE PRODUCTS.
Catalytic converters are ESW's primary products. ESW may have to cease
operations if its primary products fail to achieve market acceptance and/or
generate significant revenues. Additionally, the marketability of ESW's products
is dependent upon obtaining and maintaining verification and certifications as
well as the effectiveness of the product in relation to various environmental
regulations as well as competitor's products in the various jurisdictions ESW
markets and sells its products.
ESW MAY NOT BE ABLE TO OBTAIN DIRECT OR INDIRECT REGULATORY CERTIFICATION OR
VERIFICATION APPROVALS WITH RESPECT TO CERTAIN PRODUCTS.
The industry that ESW operates in is regulated. In the United States of America
these regulations are enforced by U.S. Environmental Protection Agency and
California Air Resources Board. ESW plans to further develop and market
catalytic converter products and support technologies that meet new regulations
enforced by these agencies (see ITEM 1. BUSINESS, PRODUCT CERTIFICATION for
regulations). If ESW is unable to demonstrate the feasibility of these products
or obtain in a timely manner the verification and or certifications for its
products from such regulatory agencies as the EPA or CARB, ESW may have to
abandon the products or alter its business plan. Such modifications to ESW's
business plan will have an adverse effect on revenue and its ability to achieve
profitability. 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. 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.
ESW FACES CONSTANT CHANGES IN GOVERNMENTAL STANDARDS BY WHICH ITS PRODUCTS ARE
EVALUATED.
ESW believes that due to the constant focus on the environment and clean air
standards throughout the world, ESW will be required in the future to adhere to
new and more stringent regulations both domestically and abroad. Governmental
agencies constantly seek to improve standards required for verification and or
certification of products intended to promote clean air. In the event ESW's
products fail to meet these ever changing standards, some or all of its products
may become obsolete or de-listed from government verification.
ESW DOES NOT HAVE A LONG HISTORY OF MANUFACTURING ITS PRODUCTS AND DOES NOT HAVE
A LONG HISTORY OF MANUFACTURING ITS PRODUCTS IN COMMERCIAL QUANTITIES.
-22-
ESW may encounter difficulties in ramping up production of current and any
future products due to:
o lack of working capital necessary to gain market acceptance;
o quality control and assurance;
o raw material supplies;
o shortages of qualified personnel;
o equipment capable of producing large quantities; and
o insufficient manufacturing space.
Any of the foregoing would affect ESW's ability to meet increases in demand
should its products gain market acceptance and reduce growth in its sales
revenues.
ESW FACES INTENSE COMPETITION AND RAPID TECHNOLOGICAL ADVANCES FROM COMPETITORS.
Competition among companies that provide solutions for pollutant emissions from
diesel, leaded and unleaded engines is intense. Several companies market
products that compete directly with ESW products. Other companies offer products
that potential customers may consider to be acceptable alternatives to ESW
products and services. ESW faces direct competition from companies with far
greater financial, technological, manufacturing and personnel resources,
including Corning, NGK and Emitec. Corning and NGK are the two major
manufacturers of ceramic cores, which are integral components in current
catalytic converter production, and Emitec is the major manufacturer of metal
cores. ESW also faces direct competition with companies like BASF/Engelhard and
Johnson Matthey, who purchase their substrates from others, and do further
processing with their own formulas and fabrication for direct sale to the market
place. Newly developed products could be more effective and cost efficient than
ESW's current products or those ESW may develop in the future. Many of ESW's
current and potential future competitors have substantially more engineering,
sales and marketing capabilities, substantially greater financial, technological
and personnel resources, and broader product lines than ESW. ESW also faces
indirect competition in the form of alternative fuel consumption vehicles such
as those using methanol, hydrogen, ethanol and electricity.
ESW CLAIMS CERTAIN PROPRIETARY RIGHTS IN CONNECTION WITH THE DESIGN AND
MANUFACTURE OF ITS PRODUCTS.
The protections provided by patents and those sought by pending patents are
important to ESW's business, although ESW believes that no individual right is
material to its business at the present time. There can be no assurance that
these patents, combined with pending patent applications or existing or future
trade secret protections that ESW seeks will survive legal challenge, or provide
meaningful levels of protection. Additionally, there can be no assurances when
these patents or pending patents may be assigned to ESW directly. The Canadian
patent only affords protection against the manufacture, use or sale of the
patented technology within Canada. The U.S. patent application for ESW's method
of producing a catalytic element was filed on October 1, 2004 and a patent has
been issued as of December 2, 2008. ESW does not presently have any worldwide
patent protection or any immediate plans to file for protection in any foreign
countries other than Canada. There can be no assurances that any patents ESW may
have or have applied for or any agreements ESW has in place or will enter into
will protect ESW's technology and or prevent competitors from employing the use
of ESW's design and production information.
-23-
ATTRACTION AND RETENTION OF KEY PERSONNEL.
ESW's future success depends in significant part, on the continued services of
key technical, sales and senior management personnel. The loss of any of ESW's
executive officers or other key employees could have materially adverse effects
on ESW's business, results of operations and financial condition. ESW's success
depends upon its continued ability to attract and attain highly qualified
technical, sales and managerial personnel. There can be no assurances that ESW
can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.
ESW IS DEPENDANT UPON KEY SUPPLIERS FOR CERTAIN MATERIALS WHICH ARE ONE OF THE
NECESSARY COMPONENTS OF ITS PRODUCTS.
The production process of ESW's products includes certain raw materials
including:
o stainless steel;
o steel tubing;
o precious metals and
o components.
An extended interruption of the supply of precious metals and components
necessary for the production of ESW's products could have an adverse effect on
ESW. Further, a substantial price increase or decrease of the raw materials that
are components of ESW's products could also have an adverse effect on ESW's
business. ESW currently relies on third party vendors to provide certain
components of its products. ESW currently does not have any fixed commitments
from suppliers to provide supplies.
ESW DOES NOT HAVE A SIGNIFICANT LEVEL OF PRODUCT RECALL INSURANCE DUE TO ITS
HIGH COST.
ESW develops, markets and sells catalytic converter products and support
technologies. Any failure of ESW's product may result in a recall or a claim
against ESW. Due to the high cost of product recall insurance, ESW does not
maintain significant amounts of insurance to protect against claims associated
with use of its product. Any claim against ESW, whether or not successful, may
result in expenditure of substantial funds and litigation. Further, any claims
may require management's time and use of ESW resources and may have a materially
adverse impact.
JOINT VENTURES AND/OR RELATIONSHIPS ENTERED INTO OR SOUGHT BY ESW FOR
DEVELOPMENT AND SALE OF ITS PRODUCTS.
ESW's success partially depends on the relationships that it develops with
various Original Equipment Manufacturers, dealers, and distributers for the
further development and deployment of its technology in the field. ESW does not
manage these entities nor is it necessary that ESW will be able to create
relationships with these entities. The absence of such relationships could
adversely impact ESW's business plans.
-24-
ITEM 1B. UNRESOLVED STAFF COMMENTS.
ESW has received no written comments regarding its periodic or current reports
from the staff of the Securities and Exchange Commission that were issued 180
days or more preceding the end of our 2009 fiscal year and that remained
unresolved.
ITEM 2. PROPERTIES
ESW does not own real property. Through its subsidiary, ESW Canada Inc. ESW
leases its executive, sales and marketing offices as well as its production
center which totals approximately 50,000 square feet located at 335 Connie
Crescent, Concord, Ontario Canada under an offer to lease that expires September
30, 2010, property, lease evaluation and negotiations are in progress.
Additionally, ESW's wholly owned subsidiary ESW America Inc. leases
approximately 40,200 square feet at 200 Progress Drive, Montgomery Township,
Pennsylvania. The leasehold space houses ESW's research and development
facilities. The lease expires February 28, 2013.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. REMOVED AND RESERVED
-25-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUERS PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's Common Stock is quoted under the symbol "ESWW.OB" on the Over The
Counter ("OTC") Bulletin Board operated by the National Association of
Securities Dealers, Inc.
On March 16, 2007 the Company's Common Stock became listed on the Frankfurt
Stock exchange (FWB), under the trading symbol "EOW".
The following table sets forth the high and low bid prices, on the OTC Bulletin
Board, for the Common Stock for the quarters indicated, as reported by Bloomberg
Reporting Service. Such market quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission and may not necessarily represent actual
transactions:
FISCAL 2009 HIGH LOW
--------------------------------------
1st Quarter $ 0.40 $ 0.09
2nd Quarter 0.86 0.23
3rd Quarter 0.78 0.51
4th Quarter 0.52 0.35
FISCAL 2008 HIGH LOW
--------------------------------------
1st Quarter $ 0.58 $ 0.31
2nd Quarter 0.42 0.20
3rd Quarter 0.30 0.11
4th Quarter 0.23 0.06
HOLDERS
As of March 29, 2010 there were approximately 267 stockholders of record of the
Company's Common Stock. The Company estimates there are approximately 4,000
additional stockholders with stock held in street name. On March 29, 2010, there
were 123,588,099 shares of common stock outstanding.
DIVIDENDS
The Company has not declared or issued any dividends in the past and intends to
retain future earnings if any, for general business purposes and to retire debt.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth as at December 31, 2009 securities authorized for
issuance under equity compensation plans.
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EQUITY COMPENSATION PLAN INFORMATION
(A) (B) (C)
- -----------------------------------------------------------------------------------------------------------------------------
Number of securities remaining
NUMBER OF SECURITIES TO BE Weighted-average available for future issuance under
ISSUED UPON EXERCISE OF exercise price of equity compensation plans (excluding
PLAN CATEGORY OUTSTANDING OPTIONS outstanding options securities in column A)
- -----------------------------------------------------------------------------------------------------------------------------
2002 Stock Option Plan
(Shareholder Approved.
Authorized - 5,000,000 shares) 2,700,000 $ 0.74 1,055,000
- -----------------------------------------------------------------------------------------------------------------------------
2000 Stock Option Plan
(Shareholder Approved.
Authorized - 10,000,000 shares) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
As reflected in the aggregate numbers above, no options were awarded under the
Company's 2002 stock plan in fiscal 2009 and 2008.
On February 7, 2008 the Board of Directors granted the aggregate award of
400,000 stock options to five employees, two executive officers and one
director. The options have vested immediately with an exercise price of $0.71
and $1.00 per share (above fair-market value at the date of grant) with exercise
periods ranging from three and five years from the date of award.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operation" and ESW's consolidated financial statements and the related notes
appearing elsewhere in this Form 10-K.
The consolidated statements of income data for the years ended December 31, 2008
and 2009, and the consolidated balance sheet data at December 31, 2008 and 2009,
are derived from ESW's audited consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K. The consolidated statements of
income data for the years ended December 31, 2005, 2006 and 2007, and the
consolidated balance sheet data at December 31, 2005, 2006 and 2007, are derived
from ESW's audited consolidated financial statements that are not included in
this Annual Report on Form 10-K. The historical results are not necessarily
indicative of the results to be expected in any future period.
-27-
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
2005 2006 2007 2008 2009
- ----------------------------------------------------------------------------------------------------------------------------
Revenue
Net Sales $ 3,072,236 $ 3,195,176 $ 9,310,504 $ 885,206 $3,075,398
Cost of sales 1,935,711 1,660,433 3,678,088 834,837 1,812,100
- -------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 1,136,525 1,534,743 5,632,416 50,369 1,263,298
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Marketing, office and general costs 2,721,210 3,588,455 3,768,710 3,683,165 3,329,570
Research and development costs 541,811 417,768 757,900 1,323,754 930,548
Officers' compensation and directors fees 404,541 591,250 1,240,070 611,293 672,444
Consulting and professional fees 257,966 210,992 138,021 171,746 215,984
Foreign exchange loss / (gain) (3,460) (7,619) 357,850 (186,743) 10,035
Depreciation and amortization 350,376 858,044 1,141,173 1,125,038 1,123,560
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 4,272,444 5,658,890 7,403,724 6,728,253 6,282,141
- -------------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (3,135,919) (4,124,147) (1,771,308) (6,677,884) (5,018,843)
Interest income and other (211,308) (298,899) (392,313) (413,368) (918,109)
- -------------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (3,347,227) $ (4,423,046) $ (2,163,621) $ (7,091,252) $ (5,936,952)
===============================================================================================================================
Loss per share $ (0.06) $ (0.08) $ (0.03) $ (0.10) $ (0.08)
===============================================================================================================================
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31,
2005 2006 2007 2008 2009
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 3,083,373 $ 1,393,294 $ 2,891,088 $ 2,247,623 $ 632,604
Total assets (Excluding cash and cash equivalents)$ 6,602,270 $ 7,796,222 $ 6,214,823 $ 5,078,019 $ 5,896,079
Total liabilities $ 7,102,033 $ 10,217,609 $ 4,412,036 $ 10,184,087 $ 14,469,223
Total stockholders' equity/(deficit) $ 2,583,610 $ (1,028,093) $ 4,693,875 $ (2,858,445) $ (7,940,540)
-28-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with ESW's Consolidated
Financial Statements and Notes thereto included elsewhere in this Report.
This Form 10-K 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. Risks
and uncertainties inherent in forward-looking statements (are set forth in the
Risk Factor disclosure contained elsewhere in this report) include, but are not
limited to:
o ESW's ability to obtain financing needed to fund its ongoing operations.
o The Company's operating results may fluctuate due to regulatory, marketing and
competitive factors over which it has little or no control.
o The Company does not maintain a significant level of product liability
insurance.
o ESW does not have a long history in manufacturing its products and does not
have a long history in manufacturing products in commercial quantities.
o The Company is dependent on a few major customers for a significant portion of
its revenue.
o The Company faces intense competition and rapid technological advances by
competitors.
o Joint ventures and/or relationships entered into or sought by the Company for
development and sale of its products.
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o Further verification and certification of ESW's products by various
governmental agencies including but not limited to the Environmental Protection
Agency (EPA), California Air Resources Board (CARB), ETV Canada and the Mine
Safety and Health Administration.
o Costs and availability of raw materials, including precious metals necessary
for the production of the Company's products.
o Developments with respect to intellectual property, patents or proprietary
rights.
o Changes in environmental policy or regulations in the United States or abroad.
o Fluctuations in market demand for and supply of the Company's products.
o Litigation against the Company that may direct resources away from business
development
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 and emission
technologies. ESW is currently focused on the international medium duty and
heavy duty diesel engine market for on-road and off-road vehicles as well as the
utility engine, mining, marine, locomotive and military industries. ESW also
offers engine and after treatment emissions verification testing and
certification services.
ESW's long term goal is to deliver financial performance to its shareholders by
being an industry leader in environmental technologies.
ESW's primary business objective is to capitalize on the growing global
requirement of reducing emissions, by offering catalyst technology solutions to
the market. ESW has and continues to seek to develop relationships with OEM's of
engines and OEM suppliers 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.
-30-
Factors that are critical to ESW's success include winning new business,
obtaining additional regulatory verifications for emission control products,
managing ESW's manufacturing capabilities to correspond with business needs,
maintaining competitive wages and benefits, maximizing efficiencies in the
manufacturing processes, and reducing overall costs. In addition, ESW's ability
to adapt to key industry trends, such as increasing technologically
sophisticated products, changing aftermarket distribution partners, and
increasing environmental standards, also plays a critical role in its success.
Other factors that are critical to ESW's success include adjusting to
environmental and economic challenges such as, increases in the cost of raw
materials and ESW's ability to successfully reduce the impact of any such cost
increases through material substitutions, cost reduction initiatives and other
methods.
During 2009, ESW has made significant progress in its efforts to comply with new
regulations which came into force in January of 2009. (See ITEM 1. BUSINESS -
PRODUCT CERTIFICATION). ESW's Therma Cat(TM) Active Level III Plus catalyst
system has been verified by CARB for a variety of on- and off-road engine
applications (PM reduction greater than 85%). For further details on the Level
III verification, engines, engine families and horse power ranges, please refer
to the CARB website http://www.arb.ca.gov, currently verified Level III, ESW
Canada listing. The Therma Cat(TM) filter system is a combined technology
comprised of a chemically coated wire mesh substrate and Diesel Particulate
Filter (DPF) combined with an electronically controlled external fuel injection
component. The Therma Cat(TM) regeneration process is an electronically
controlled exothermic reaction and occurs automatically during normal vehicle
operation, transparent to the operator.
The EPA's Voluntary Diesel Retrofit Program signed a Memorandum of Agreement
with the State of California Air Resources Board for the coordination and
reciprocity in diesel retrofit device verification. The EPA recognizes and
accepts those retrofit hardware strategies or device-based systems that have
been verified by CARB. This reciprocity agreement allows ESW's Therma Cat (TM)
technology to be used in the remaining 49 states and it allows ESW to
participate in EPA funded programs worldwide.
-31-
In 2009 ESW's was focused primarily on (a) verification of the Level III
products (b) setting up a distribution network to target key markets segments
such as school bus retrofits and government regulated retrofit programs and (c)
ensuring ESW's production capabilities are adequate to deliver product to the
target markets (d) further development of the Xtrm Cat (TM) product for the rail
and marine markets.
ESW has made significant investments in research and development and obtaining
regulatory approvals for its technology. The delay in achieving verification for
ESW's Level III product has delayed the programs for certification/verification
of other technologies that ESW has developed. The products that ESW intends put
forward for verification / certification in the fiscal year 2010 cover the
following primary technology levels established by CARB:
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%
LEVEL II +
o Diesel Oxidation Catalyst with Crank Case Ventilation - PM reduction greater
than 50% LEVEL III +
o Expansion of On Road Active Diesel Particulate Filter verification to include
Exhaust Gas Recirculation engines - PM reduction greater than 85%
In addition ESW also intends to verify / certify the Xtrm Cat(TM) product
designed for Marine, 2-stroke, Tier 0 and Tier 1, turbocharged EMD 645 and 710
models with the EPA or CARB. The Xtrm Cat(TM) is listed as an emerging
technology on the EPA's Emerging Technology List until October 2010.
ESW believes that with the additional certifications/verification of the above
range of products, ESW 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. 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.
-32-
The cost of developing a complete range of products to meet regulations is
substantial. ESW believes that it possesses an advantage in seeking to comply
with regulations through its use of its Testing and Research facility in
Montgomeryville, PA to support its own certification and verification efforts,
which ESW believes has lead to the commercialization of ESW's Therma Cat (TM)
and Xtrm Cat (TM) in 2009. ESW has also managed to offset some of these
development costs through the application of research grants and tax refunds.
During the year 2009 ESW has further developed its active independent dealer and
support distribution network that has positioned ESW's products as the
technology of choice for several key markets. Dealers are fully trained for
rapid distribution and deployment of ESW products. ESW also has an active field
sales support team, customer service, installation and training team to allow
for the anticipated rapid growth and distribution of ESW product in 2010.
ESW's production, sales, technical and design staff at ESW Canada Inc. have
undertaken to ensure that products are able to meet the diverse applications
found in on- and off-road vehicles while maximising product commonality to
reduce manufacturing and support costs. ESW's manufacturing and design facility,
ESW Canada Inc. has been capitalised to streamline production of its new product
line to maximise efficiency. The offer to lease for ESW Canada's offices and
manufacturing facility expires in September 2010; property, lease evaluation and
negotiations are in progress.
ESW has also made significant capital investment in its Tech Center based in
Montgomeryville, Pennsylvania. This facility provides the catalytic and chemical
wash coat solutions for the Concord Ontario plant. All of ESW's emission testing
laboratories and testing capabilities are located there. The 40,200 sq ft
facility houses a state of the art 18,000 sq ft expansion of "Air Testing
Services", recognized as capable of performing engine emissions verification
test protocols by the EPA, CARB and MSHA. In October 2009, ESW America, Inc.
entered into a lease renewal agreement with Nappen & Associates; there were no
modifications to the original economic terms of the lease, the lease term will
now expire February 28, 2013.
ESW believes that the ATS group will be available to better service ESW's
clientele for engine testing as well as EPA/CARB emissions testing and
certification programs. ATS currently provides testing support for ESW`s
internal research and development ("R&D") programs. The focus at this facility
in the near term is to support the necessary steps and provide testing for ESW`s
research activities, in order to have new products verified in the shortest time
frame possible.
-33-
Both ESW facilities are in full compliance with ISO 9001:2008. ESW currently
holds a full registration certificate effective until March 2013 for ESW America
Inc., and January 2013 for ESW Canada Inc.
The field of emission control is very complex and requires a variety of
different technologies to be employed. ESW has recognized this fact, and has
partnered with several strategic alliances assuring immediate access to leading
edge technologies that address the needs of ESW's potential global customer
base. The technology can be either in form of customized precious metal
solutions, critical system components or the complete transfer of the entire
technology. This approach enables ESW to adapt quickly to an ever-changing
marketplace.
In effecting its business plan ESW achieved important goals in fiscal 2009.
o On April 07, 2009 ESW announced that the company has been awarded a $731,000
Grant for 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. 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 2-stroke diesel engines
in 2007 during 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.
o On May 4, 2009 ESW announced that the Company's wholly owned subsidiary ESW
Canada Inc. received notification from the California Air Resources Board
(CARB), that the Therma Cat(TM) Active Level III Plus catalyst system has been
verified effective April 28, 2009 for a wide variety of 1996 to 2009 diesel
powered off-road mobile applications, as set forth in CARB Executive Order
DE-09-010.
-34-
o On June 1, 2009 ESW announced that the Company's wholly owned subsidiary ESW
Canada Inc. received notification from the California Highway Patrol (CHP) that
the Company's Therma Cat(TM) Active Level III Plus catalyst system has passed
the first inspection for usage on school buses carrying children on California
roads
o On June 10, 2009 ESW announced that the Company's wholly owned subsidiary ESW
Canada Inc. has received sales orders amounting to $266,000 for five Xtrm
Cat(TM) Locomotive Diesel Oxidation Catalysts from Advanced Global Engineering
in Atlantic Beach, Florida and West Coast Express (TransLink) in Vancouver,
British Columbia, Canada.
o On August 10, 2009 ESW announced that the Company's wholly owned subsidiary
ESW Canada Inc. received notification from the CARB that the Company's Therma
Cat(TM) Active Level III Plus catalyst system has been verified effective August
5th, 2009 for a wide variety of 1993 through 2006 model year on-road vehicle
applications powered by 5 to 10 litre diesel engines.
o On September 29, 2009, ESW's announced that the Company's Therma Cat(TM)
Active Level III Plus diesel engine emission reduction technology has been
extended to include up to 350 horsepower (hp), 15.2 liter off-road diesel
engines. The Therma Cat(TM) System now covers off-road diesel engines model
years 1996 to 2009 between 175 to 350 hp and 5 to 15.2 Liter displacement,
excluding those that are equipped with exhaust gas recirculation systems. The
CARB Executive Order permits the Therma Cat(TM) to be applied to over 1100
engine families encompassing in excess of 3000 individual engines.
o In October of 2009 The Xtrm Cat (TM) `Emerging Technology' listing extension
was granted by the EPA till October 2010 after a comprehensive investigation of
the progress ESW had achieved with the Xtrm Cat(TM) towards the final
verification/certification over the past year on Electro-Motive Diesel 2 Stroke
marine/locomotive engines. ESW is currently working closely with various
stakeholders; both marine and locomotive based to generate the final necessary
field data required for completing the stated goal for this technology.
During 2009 the Company had been pursuing various financing initiatives. August
21, 2009, the Company's wholly owned subsidiary ESW Canada, Inc. entered into an
amendment with Royal Bank of Canada extending the term of the 2007 Secured Loan
Agreement through to April 30, 2010. The revolving facility available under the
Agreement provides for up to $750,000 to finance future production orders. On
August 28, 2009, ESW completed an offering whereby it raised $1.6 million for
general working capital purposes through the issuance of convertible debentures
at terms deemed fair and reasonable by management. Effective December 29, 2009
ESW issued a $500,000 nine (9%) percent unsecured promissory note to a director
and shareholder of the Company. The note will be payable upon the Company
completing a financing for a gross sum of $2 million or more or will become a
demand note on March 31, 2010. As ESW has a substantial amount of indebtedness,
its ability to generate cash, both to fund operations and service its debt, is
also a significant area of focus for the Company. See "Liquidity and Capital
Resources" below for further discussion of cash flows.
-35-
COMPARISON OF YEAR ENDED DECEMBER 31, 2009 TO YEAR ENDED DECEMBER 31, 2008
RESULTS OF OPERATIONS
Revenues for the year ended December 31, 2009 increased by $2,190,192, or 247.4
percent, to $3,075,398 from $885,206 for the year ended December 31, 2008. The
increase in revenue is mainly related to sales of ESW's newly verified Level III
products that meets new regulations, and facing an increase in customer
acceptance further complemented by sales of the Xtrm Cat(TM) product. In 2008
and the first two quarters of 2009, the Company focused its efforts on mainly
developing the next generation of diesel catalyst products to meet new
regulations effective January 2009.
Cost of sales as a percentage of revenues for the year ended December 31, 2009
was 58.9 percent compared to 94.3 percent for year ended December 31, 2008. The
gross profit for the year ended December 31, 2009 was 41.1 percent as compared
to a gross margin of 5.7 percent for the year ended December 31, 2008. The
improvements in the gross margin are mainly due to the efforts by ESW to
streamline its product installation capabilities, helped by higher volume
orders, additionally in 2008 management wrote down $207,889 of inventory due to
discontinued product lines. The inventory write down resulted in a significant
increase in the cost of sales. The orders produced during the year ended
December 31, 2008 were mainly sample or prototype orders that had low volumes
leading to increased setup costs. Finally all orders for the Company's Level III
product in 2008 were installed by the Company's installation team.
Marketing, office and general expenses for the year ended December 31, 2009
decreased by $353,595, or 9.6 percent, to $3,329,570 from $3,683,165 for the
year ended December 31, 2008. The decrease is primarily due to decreases in the
following areas: A decrease in Facility costs of $78,580 as a result of higher
sales volumes and higher overhead costs attributed to cost of sales.
Administration salaries and wages were lower by $551,334 as support for ESW's
research and development programs declined, a consulting agreement in the prior
year (2008) was terminated, in addition ESW implemented cost saving measures by
centralizing administration functions. Plant related expenses were lower by
$22,279 as a result of higher sales volumes and lower support requirements for
ESW's research and development programs. Investor relations expense was lower by
$36,409 attributed to lower expenses on meetings and presentations. These
decreases were offset by an increase in sales and marketing salaries and wages
and selling expenses by $324,782 due to an increased focus on business
development and product marketing efforts, the Company has also set up a
customer service and support department. General and administration costs
increased marginally by $10,224 as the Company incurred recruitment expenses for
high skill air testing technicians and engineers.
-36-
Research and development ("R&D") expenses for the year ended December 31, 2009
decreased by $393,206 , or 29.7 percent to $930,548 from $1,323,754 for the year
ended December 31, 2008. As planned, ESW continues to aggressively pursue the
verification of its Level I, Level II, locomotive and marine products, the
decrease in the cost of research and development is marginally due to the
product development cycle being completed, ESW has received verification for its
Therma Cat(TM) Active Level III Plus Diesel Particulate Filter on- and off-road
products and also an expansion on the engine family size for the Therma
Cat(TM)Active Level III Plus Diesel Particulate Filter off-road product.
Officer's compensation and director's fees for the year ended December 31, 2009
increased by $61,151, or 10.0 percent, to $672,444 from $611,293 for the year
ended December 31, 2008. As a percentage of revenue, officer's compensation and
director's fees decreased to 21.9 percent for the year ended December 31, 2009,
compared to 69.1 percent for the year ended December 31, 2008. The increase in
fees is mainly due to change in status of a director who was previously an
inside director in the prior year to a outside director as of January 2009, a
wage increase for an officer of the company effected January 2009 and the effect
of exchange rate differences on Canadian Dollar contracts for officers of the
company.
Consulting and professional fees for the year ended December 31, 2009 increased
by $44,238, or 25.8 percent, to $215,984 from $171,746 for the year ended
December 31, 2008. The increase is mainly attributed to audit fees, tax
consulting fees and fees related to compliance activities for requirements of
Section 404 of the Sarbanes-Oxley Act of 2002.
Foreign exchange loss for the year ended December 31, 2009 amounted to $10,035.
For the year ended December 31, 2008 foreign exchange gain amounted to $186,743.
This is a result of the fluctuation in the exchange rate of the Canadian Dollar
relative to the United States Dollar.
Depreciation and amortization expense for the year ended December 31, 2009
decreased by $1,478 or 0.1 percent to $1,123,560 from $1,125,038 for the year
ended December 31, 2008. Interest expense on long-term debt was $870,632 for the
year ended December 31, 2009 as compared to $129,072 for the year ended December
31, 2008. Amortization of deferred costs amounted to $19,912 and Long Term Debt
Accretion amounted to $27,019 for the year ended December 31, 2009 as compared
to $ 0 for the year ended December 31, 2008. On August 28, 2009, the Company
completed a transaction whereby it issued $1.6 million of 9% convertible
debentures (the " 2009 Debentures") to six accredited investors. 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. See "NOTE
10 - CONVERTIBLE DEBENTURES" for complete details. At the time the 2008
Debentures were issued, the company recorded a deferred cost asset of $59,738
for legal fees paid in relation to the issuance of the November 2008 Convertible
Debentures. The deferred costs will be amortized over the term of the November
2008 Convertible Debenture. At the time the 2009 Debentures were issued, the
Company recorded a debt discount for a beneficial conversion feature in the
amount of $256,000. The debt discount is the aggregate intrinsic value
calculated as the difference between the market price of the Company's share of
stock on August 28, 2009 and the conversion price of the 2009 Debentures. The
debt discount is being accreted over the three (3) year life of the debentures
using the effective yield method. The effective yield on the debentures is
15.52%.
-37-
Interest expense on notes payable to a related party was $ 0 for the year ended
December 31, 2009 as compared to $304,146 for the year ended December 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. Additionally, on December 28, 2009 the Company issued
a $500,000 unsecured subordinated demand promissory note "the note" to a member
of the Company's Board of Directors. The note bears interest at a rate of 9% per
annum and is payable on demand after March 31, 2010 or upon the company raising
additional finance of $2 million. The Company may prepay the note without
penalty at any time.
LIQUIDITY AND CAPITAL RESOURCES
ESW's principal sources of operating capital have been the proceeds from its
various financing transactions. In 2009, the Company used $4,353,576 of cash to
sustain operating activities as compared to $4,855,230 in 2008. As of December
31, 2009 and 2008, the Company had cash and cash equivalents of $632,604 and
$2,247,623 respectively.
Net Cash used in operating activities for the year ended December 31, 2009
amounted to $4,353,576. This amount was attributable to the net loss of
$5,936,952, plus non cash expenses such as depreciation, amortization,
amortization of the fair value of the debenture beneficial conversion feature
and others of $2,199,407, and an increase in net operating assets and
liabilities of $616,031. Net Cash used in operating activities for the year
ended December 31, 2008 amounted to $4,855,230. This amount was attributable to
the loss of $7,091,252, plus non cash expenses such as depreciation,
amortization, amortization of the fair value of the debenture warrant and others
of $1,939,350, and a decrease in net operating assets and liabilities of
$296,672.
Net Cash used in investing activities was $171,176 for the year ended December
31, 2009 as compared to $445,676 for the year ended December 31, 2008. The
capital expenditures during 2009 were primarily dedicated to production tooling
required for ESW's new product lines.
Net cash provided by financing activities totalled $3,086,915 for the year ended
December 31, 2009, as compared to $4,856,233 provided by financing activities
for the year ended December 31, 2008. In the current year $425,000 was provided
through the exercise of options, $573,916 was obtained under ESW`s bank loan
($846,140 net of repayment of $272,224), $1,600,000 through the issuance of
convertible debentures, $500,000 was received through a subordinated promissory
note issued to a shareholder and director. And $12,001 repaid under capital
lease obligation.
-38-
In 2008 a total of $4,856,233 was received through:
o $1,253,000 was received through the issuance of notes payable from the $1.5
Million Credit Facility Agreement entered into with a director and shareholder
of the Company.
o $324,046 was borrowed against ESW`s bank loan, repayments on bank loan
amounted to $246,878.
o On November 3, 2008 the Company completed a transaction whereby it issued $6.0
million of 9% convertible debentures to six accredited investors. The $ 6
Million of proceeds from the financing were used in part to repay $2,402,689 of
notes payable and related interest on the notes to related parties.
o The Company repaid $150,000 in principal and $4,475 interest due to a
shareholder of the Company who by separate agreement with the Company agreed to
provide funding to the Company under the $1.5 Million Credit Facility.
o On November 7, 2008 the February 9, 2007 Consolidated Note with a principal
amount of $2,308,148, the March 7, 2007 Consolidated Subordinated Note with a
principal amount of $1,002,589 and the balance of the unpaid notes issued under
the Credit Facility Agreement of June 2, 2008 with the principal amount of
$1,103,000 were extinguished through a repayment of $2,200,000 the principal
portion only of the $2,308,148 Consolidated Note and $48,214 as taxes
withholding and the balance of principal and interest has been converted into a
new convertible debenture agreement of $3,000,000.
o Legal fees paid for Convertible Debentures amounted to $59,738. o During the
year 2008, $11,508 was repaid under ESW's capital lease obligation.
In 2007, ESW's subsidiary, ESW Canada entered into a $2.5 Million revolving
credit facility ("the Agreement") with Royal Bank of Canada ("RBC"), to finance
orders on hand. Effective September 2, 2008, ESW Canada completed its
negotiations with RBC and entered into an amendment to the secured commercial
loan agreement. The amended agreement extended 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 were also amended. The amended
arrangement provided for a revolving facility available by way of a series of
term loans of up to $750,000 to finance future production orders. Effective
August 21, 2009, the term of the secured commercial loan agreement with RBC was
extended through to April 30, 2010. The Credit Facility is guaranteed by the
Company and its subsidiary ESW Canada through the pledge of their assets to RBC.
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 any loans are required no later than one year from the date of the
advancement of that 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.
-39-
As at December 31, 2009, $713,037 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 August 28, 2009, the Company completed a transaction whereby it issued $1.6
million of 9% convertible debentures (the " 2009 Debentures") to six accredited
investors. Of the $1.6 million received by the Company, $500,000 was received
from a director of the Company through the exchange of a $300,000 unsecured 9%
subordinated demand short term loan previously provided to the Company on August
11, 2009 and an additional $200,000 investment made by the director in the
offering. The 2009 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 by dividing the principal amount of the 2009 Debenture to be converted by
$0.50. The 2009 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 $0.50. Subject to the holder's right to convert, the Company
has the right to redeem the 2009 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
2009 Debentures contain customary price adjustment protections.
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.
ESW has a principal amount of $10,334,513 of Convertible debt at December 31,
2009 net of deferred costs of $36,506 and debt discount of $228,981. At December
31, 2008 ESW had a principal amount of $8,943,581 Convertible debt net of
deferred costs of $56,419 (See Debt structure for further details.)
Based on ESW's current operating plan, management believes that at December 31,
2009 cash balances, anticipated cash flows from operating activities, and, the
appropriate borrowings from other 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.
-40-
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 to 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.
During 2009 and 2008 ESW did not produce sufficient cash from operations to
support its expenditures; the August 28, 2009 $1.6 million offering of
convertible debentures; the November 3, 2008 $6.0 million offering of
convertible debentures along with continued borrowing on ESW's credit facility,
short term loan from a shareholder and director of the Company and the exercise
of outstanding options afforded ESW the opportunity to support its operations
and to execute its business plan. ESW's principal use of liquidity will be to
provide working capital availability and to finance any further capital
expenditures or tooling needed for production. ESW does not anticipate having
any major capital expenditures in 2010 related to the general operation of its
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 2010 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 options that would provide additional capital. ESW also
has a good history of receiving capital infusions when needed. 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 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 costs 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 on ESW's liquidity, financial position, and results of operations.
-41-
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 intends 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 the
company is required to be in compliance by June 15, 2010.
ESW has 700,000 Class A special shares, authorized, issued and outstanding,
recorded at $453,900 (based on the historical exchange rate at the time of
issuance). 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 $660,032 USD at December 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 December
31, 2009 BBL had an accumulated deficit of $1,187,506 and therefore would be
unable to redeem the Class A special shares at their ascribed value.
DEBT STRUCTURE
On December 29, 2009 the Company issued a $500,000 unsecured subordinated
promissory note to a member of the Company's Board of Directors with interest
accruing at the annual rate of 9%. Upon the Company completing a financing for
the gross sum of $2 million dollars or more or in the event the Company does not
complete a financing by March 31, 2010, this note will be payable upon demand of
the holder.
On August 28, 2009, the Company completed a transaction whereby it issued $1.6
million of 9% convertible debentures (the " 2009 Debentures") to six accredited
investors. Of the $1.6 million received by the Company, $500,000 was received
from a director of the Company through the exchange of a $300,000 unsecured 9%
subordinated demand short term loan previously provided to the Company on August
11, 2009 and an additional $200,000 investment made by the director in the
offering. The 2009 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 by dividing the principal amount of the 2009 Debenture to be converted by
$0.50. The 2009 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 $0.50. Subject to the holder's right to convert, the Company
has the right to redeem the 2009 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
2009 Debentures contain customary price adjustment protections. (See Note 10:
Convertible Debt for further details)
-42-
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. (See Note 10: Convertible Debentures for further details)
From the proceeds of the November 2008 offering, 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 agreed to have the remaining
amount of $433,923, due under the note, to be applied to a subscription to the
November 3, 2008 debenture offering. Concurrently, the Company 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 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
subscribed to an aggregate of $2,566,077 of Debentures under the offering.
ESW has a principal amount of $10,334,513 of convertible debt at December 31,
2009 net of deferred costs of $36,506 and debt discount of $228,981. At December
31, 2008 ESW had a principal amount of $8,943,581 convertible debt net of
deferred costs of $56,419.
-43-
In 2007, ESW's subsidiary, ESW Canada entered into a $2.5 Million revolving
credit facility with RBC, to finance orders on hand. Effective September 2,
2008, ESW completed its negotiations with RBC and entered into an amendment to
the secured commercial loan agreement. The amended agreement extended 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 were also
amended. The amended arrangement provided for a revolving facility available by
way of a series of term loans of up to $750,000 to finance future production
orders. Effective August 21, 2009, the term of the secured commercial loan
agreement with RBC was extended through to April 30, 2010. The Credit Facility
is guaranteed by the Company and its subsidiary ESW Canada through the pledge of
their assets to RBC. The facility has been guaranteed to the bank under the
EDC's 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 any loans are required no later than one year from the date of the
advancement of that loan. Obligations under the revolving credit agreement are
collateralized by a first-priority lien on the assets of the Company and its
subsidiary ESW Canada, Inc. including, accounts receivable, inventory, equipment
and other tangible and intangible property, including the capital stock of all
direct subsidiaries.
As at December 31, 2009, $713,037 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.
The amount of availability of the loan 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 $1.1
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.
-44-
ESW's ability to service its 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 that have received verification from the appropriate regulatory
authorities will obtain customer and market acceptance, 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.
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. Under the terms of the lease agreement the Company has the option to
extend the lease for an additional period of five years.
Effective October 16, 2009, the Company's wholly owned subsidiary ESW America,
Inc. entered into a lease renewal agreement with Nappen & Associates for the
leasehold property at Pennsylvania which houses the Company's research and
development facilities. There were no modifications to the original economic
terms of the lease under the lease renewal agreement. Under the terms of the
lease renewal, the lease term will now expire February 28, 2013.
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 has been extended to September 30, 2010.
-45-
The following breakdown is the total, of the minimum annual lease payments, for
both leases.
YEAR $
2010 $405,767
2011 $180,990
2012 $180,990
2013 $ 30,165
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.
CAPITAL LEASE OBLIGATION
The Company is committed to the following lease payments in connection with the
acquisition of equipment under capital leases:
YEAR $
---- ------
2010 15,899
2011 3,475
2012 1,448
-------
TOTAL $20,821
=======
Less imputed interest ( 1,103)
-------
Total obligation under capital lease $19,718
Less current portion ( 8,857)
-------
TOTAL LONG-TERM PORTION $10,861
=======
The Company has incurred $6,354 of interest expense on capital leases for the
year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
ESW's discussion and analysis of the financial condition and results of
operations is based upon its consolidated financial statements, which have been
prepared in accordance with Generally Accepted Accounting Principles, in the
United States ("US GAAP").
A critical accounting policy is defined as one that is both material to the
presentation of ESW's financial statements and requires management to make
difficult, subjective or complex judgments that could have a material effect on
ESW's financial condition and results of operations. Specifically, critical
accounting estimates generally require management to make assumptions about
matters that are highly uncertain at the time of the estimate; and if different
estimates or judgments were used, the use of these estimates or judgments would
have a material effect on ESW's financial condition or results of operations.
-46-
The estimates and judgments ESW makes that affect the reported amount of assets,
liabilities, revenues and expenses are based on historical experience and on
various other factors, which ESW believes to be reasonable in the circumstances
under which they are made. Actual results may differ from these estimates under
different assumptions or conditions. ESW considers accounting policies related
to revenue recognition, the valuation of inventories, research and development
and accounting for the value of long-lived assets and intangible assets to be
critical accounting policies.
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, redeemable class A special shares, convertible debentures and
accounts receivable exposures..
CONCENTRATIONS OF CREDIT RISK
The Company's cash balances are maintained in various banks in Canada and the
United States. Deposits held in banks in the United States are insured up to
$100,000 ($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 45%, 20%, and 9%, respectively of the Company's revenue in the fiscal year
2009 and 27%, 11%, and 25%, respectively of its accounts receivable as at
December 31, 2009. Three of its customers accounted for 32%, 29%, and 15%,
respectively of the Company's revenue in fiscal 2008 and 32%, 31%, and 0%,
respectively of its accounts receivable as at December 31, 2008.
-47-
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 $6,637 was appropriate as at December 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," which was primarily
codified into Topic 350-20, Goodwill, 350-30, Intangibles other than goodwill in
the Accounting Standards Codification ("ASC") 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 and as of December 31, 2009 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 year ended December
31, 2009 and 2008 were $212,792 and $213,080 respectively.
-48-
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", which was primarily codified into Topic 605 Revenue
Recognition SEC Staff Accounting Bulletin Topic 13 in the ASC, 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 3% of total revenue) from providing
air testing and environmental certification services. Revenues from these
services are recognized upon performance.
RESEARCH AND DEVELOPMENT
The Company is engaged in research and development work. Research and
development costs, 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 year ended December 31, 2009 and 2008 the
Company expensed $930,548 and $1,323,754 respectively towards research and
development costs. In 2009 and 2008, grant money amounted to $168,753 and
$221,990 respectively.
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements have been translated into United States
dollars in accordance with Accounting Standards Codification Topic 830 - Foreign
Currency Matters. All monetary items have been translated using the exchange
rates in effect at the balance sheet date. All non -monetary items have been
translated using the historical exchange rates at the time of transactions.
Income statement amounts have been translated using the average exchange rate
for the year. The unrealized portion of a foreign exchange gain or loss is
included in Accumulated other comprehensive income.
PRODUCT WARRANTIES
The Company provides for estimated warranty costs at the time of sale and
accrues for specific items at the time their existence is known and the amounts
are determinable. The Company estimates warranty costs using standard
quantitative measures based on industry warranty claim experience and evaluation
of specific customer warranty issues.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2010, the FASB issued ASU No. 2010-06, -Improving Disclosures about
Fair Value Measurements (ASU 2010-06) (codified within ASC 820 -Fair Value
Measurements and Disclosures). ASU 2010-06 improves disclosures originally
required under SFAS No. 157. ASU 2010-16 is effective for interim and annual
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within those
years. The Company will comply with the additional disclosures required by this
guidance upon its adoption in January 2010.
-49-
In December 2009, the FASB issued ASU 2009-16, - Transfers and Servicing (Topic
860) - Accounting for Transfers of Financial Assets. ASU 2009-16 amends the
accounting for transfers of financials assets and will require more information
about transfers of financial assets, including securitizations, and where
entities have continuing exposure to the risks related to transferred financial
assets. ASU 2009-16 is effective at the start of a reporting entity's first
fiscal year beginning after November 15, 2009, with early adoption not
permitted. The Company will comply with the additional disclosures required by
this guidance upon its adoption in January 2010.
In October 2009, the FASB issued ASU 2009-15, - Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.
ASU 2009-15 amends the accounting and reporting guidance for debt (and certain
preferred stock) with specific conversion features or other options. ASU 2009-15
is effective for fiscal years beginning on or after December 15, 2009. The
Company is currently assessing the impact of ASU 2009-13 on its consolidated
financial position, results of operations and cash flows.
In October 2009, the FASB issued ASU No. 2009-13, - Multiple Deliverable Revenue
Arrangements - a consensus of the FASB Emerging Issues Task Force (ASU 2009-13)
(codified within ASC Topic 605). ASU 2009-13 addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined unit. ASU 2009-13
is effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010, with early
adoption permitted. The Company is currently assessing the impact of ASU 2009-13
on its consolidated financial position, results of operations and cash flows.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, -
Measuring Liabilities at Fair Value (ASU 2009-05) (codified within ASC 820 -
Fair Value Measurements and Disclosures). ASU 2009-05 amends the fair value and
measurement topic to provide guidance on the fair value measurement of
liabilities. ASU 2009-05 is effective for interim and annual periods beginning
after August 26, 2009. The Company adopted this guidance effective October 1,
2009.
In June 2009, the FASB issued SFAS No. 168, - The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162 (SFAS 168) (codified within ASC 105
- -Generally Accepted Accounting Principles). SFAS 168 stipulates that the FASB
Accounting Standards Codification is the source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is
effective for interim and annual periods ending after September 15, 2009. In
conjunction with the issuance of SFAS 168, the SEC issued interpretive guidance
Final Rule 80 (FR-80) regarding FASB`s Accounting Standards Codification. Under
FR-80, the SEC clarified that the ASC is not the authoritative source for SEC
guidance and that the ASC does not supersede any SEC rules or regulations.
Further, any references within the SEC rules and staff guidance to specific
standards under U.S. GAAP should be understood to mean the corresponding
reference in the ASC. FR-80 is also effective for interim and annual periods
ending after September 15, 2009. The adoption had no impact on the Company's
financial position, cash flows or results of operations.
-50-
In June 2009, the FASB issued SFAS No. 166, - Accounting for Transfers of
Financial Assets (SFAS 166) (codified within ASC 860 -Transfers and Servicing).
SFAS 166 amends the derecognition guidance in SFAS No. 140, - Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(SFAS No. 140). SFAS 166 is effective for fiscal years beginning after November
15, 2009. The Company will comply with the additional disclosures required by
this guidance upon its adoption in January 2010.
In May 2009, the FASB issued SFAS No. 165, - Subsequent Events (SFAS 165)
(codified within ASC 855 - Subsequent Events). SFAS 165 establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before the financial statements are issued or are
available to be issued. Specifically, SFAS 165 sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. SFAS 165 is
effective prospectively for interim and annual periods ending after June 15,
2009. The Company adopted this guidance on June 30, 2009.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, - Interim Disclosures
about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1) (codified
within ASC 825 - Financial Instruments). FSP FAS 107-1 and APB 28-1 require fair
value disclosures in both interim as well as annual financial statements in
order to provide more timely information about the effects of current market
conditions on financial instruments. FSP FAS 107-1 and APB 28-1 are effective
for interim and annual periods ending after June 15, 2009. The Company adopted
this guidance on June 30, 2009.
In April 2009, the FASB issued FSP FAS 157-4 - Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That are Not Orderly (codified within ASC
820). FSP FAS 157-4 provides additional guidance for estimating fair value when
the volume and level of activity for the asset or liability have significantly
decreased. It also includes guidance on identifying circumstances that indicate
a transaction is not orderly. FSP FAS 157-4 becomes effective for interim and
annual reporting periods after June 15, 2009 and shall be applied prospectively.
The adoption of this guidance did not have a significant effect on the Company's
consolidated financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, - Recognition and
Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2)
(codified within ASC 320 - Investments - Debt and Equity Securities). FSP FAS
115-2 and FAS 124-2 change the method for determining whether an
other-than-temporary impairment exists for debt securities and the amount of the
impairment to be recorded in earnings. FSP FAS 115-2 and FAS 124-2 are effective
for interim and annual periods ending after June 15, 2009. The adoption of this
guidance did not have a significant effect on the Company's consolidated
financial statements.
-51-
In June 2008, , the FASB issued EITF 07-05Determining Whether an Instrument (or
Embedded Feature) is Indexed to a Company's Own Stock, (codified within ASC 815
- - Derivatives and Hedging - Contracts in Entity's Own Equity), the FASB ratified
the consensus reached on determining whether an instrument (or embedded feature)
is indexed to an entity's own stock. This consensus 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 the standard accounting
for derivative instruments and hedging activities. This consensus is effective
for financial statements issued for fiscal years beginning after December 15,
2008. It was effective for the Company on January 1, 2009. The adoption of this
consensus did not have a significant effect on the company's consolidated
financial statements.
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) (codified within ASC 815 - Derivatives and Hedging). SFAS 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity`s financial position, financial
performance, and cash flows. SFAS 161 is effective for fiscal years beginning
after November 15, 2008. The Company adopted this guidance on January 1, 2009.
The Company currently does not have any derivative financial instruments subject
to accounting or disclosure under this standard; therefore, the adoption of this
standard did not have a significant effect on the Company's consolidated
statement of financial position, results of operations or cash flows.
-52-
ITEM 7A. 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
predominantly 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
gain of $173,857 in 2009 as compared to a loss of $198,792 in 2008 reported as
comprehensive loss in the Consolidated Statements of Changes in Stockholders'
Equity (Deficit), ESW recognized a translation gain of $10,035 in 2009 as
compared to a loss of $186,743 in 2008 reported as Foreign exchange (gain) /
loss in the Consolidated Statements Of Operations And Comprehensive Gain /
(Loss) primarily as a result of exchange rate differences between the U.S.
dollar and 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 December 31, 2009, ESW had no outstanding forward exchange
contracts.
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 December 31, 2009 and 2008, ESW had no 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.
The average interest rate the Company is paying is 3.9%. 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. 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. At December 31, 2009 ESW has a principal amount of
$10,334,513 of Convertible debt net of deferred costs of $36,506 and debt
discount of $228,981.As at December 31, 2008, the new Convertible Debenture
amounted to $8,943,581 net of deferred costs of $56,419.
-53-
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
MSCM LLP
701 EVANS AVENUE, SUITE 800
TORONTO, ONTARIO M9C 1A3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Environmental Solutions Worldwide, Inc.
We have audited the accompanying consolidated balance sheet of Environmental
Solutions Worldwide, Inc. (the "Company") as of December 31, 2009, and the
related consolidated statements of operations and comprehensive income, changes
in stockholders' deficit and comprehensive income and cash flows for the year
then ended. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit, in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2009, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
MSCM LLP
Toronto, Canada
April 6, 2010
F-1
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
Deloitte & Touche LLP
1 Concorde Gate
Suite 200
Toronto, ON M3C 4G4
Canada
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Board of Directors and Stockholders of
Environmental Solutions Worldwide, Inc.
Toronto, Ontario, Canada
We have audited the accompanying consolidated balance sheet of Environmental
Solutions Worldwide, Inc. and subsidiaries (the "Company") as of December 31,
2008, and the related consolidated statements of operations and comprehensive
loss, changes in stockholders' equity (deficit), and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting.
Our audit included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Environmental Solutions Worldwide,
Inc. and subsidiaries as of December 31, 2008, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
April 8, 2009
F-2
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2009 2008
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents (Note 4) $ 632,604 $ 2,247,623
Accounts receivable, net of allowance 1,118,929 103,728
for doubtful accounts of $6,637 (2008 - $1,901) (Note 2)
Inventory (Note 5) 1,508,414 723,812
Prepaid expenses and sundry assets 213,484 313,936
------------ ------------
Total current assets 3,473,431 3,389,099
Property, plant and equipment under construction (Note 6) 138,800 171,445
Property, plant and equipment, net of accumulated
depreciation of $ 4,663,281 2,687,105 3,324,364
(2008 - $3,530,182) (Note 6)
Patents and trademarks, net of accumulated
amortization of $1,901,501 229,347 440,734
(2008 - $1,688,157) (Note 2)
------------ ------------
$ 6,528,683 $ 7,325,642
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,126,680 $ 407,737
Accrued liabilities (Note 2) 1,311,518 258,155
Notes payable to related party (Note 7) 500,000 --
Bank loan (Note 8) 713,037 77,168
Customer deposits 9,857 12,540
Redeemable class A special shares (Note 9) 453,900 453,900
Current portion of capital lease obligation (Note 15) 8,857 12,001
------------ ------------
Total current liabilities 4,123,849 1,221,501
------------ ------------
Long Term Liabilities
Convertible debentures net of deferred costs 10,334,513 8,943,581
of $36,506 (2008 - $56,419)
and debt discount of $228,981 (2008 - $ nil) (Note 10)
Capital lease obligation (Note 15) 10,861 19,005
------------ ------------
Total long term liabilities 10,345,374 8,962,586
------------ ------------
Total liabilities 14,469,223 10,184,087
------------ ------------
Commitments and Contingencies (Note 15)
Stockholders' Deficit (Note 12)(Note 13)
Common stock, $0.001 par value, 125,000,000
shares authorized; 73,823,851 shares
(2008 - 72,973,851) issued and outstanding 73,822 72,972
Additional paid-in capital 26,083,635 25,403,485
Accumulated other comprehensive income 425,383 251,526
Accumulated deficit (34,523,380) (28,586,428)
------------ ------------
Total stockholders' deficit (7,940,540) (2,858,445)
------------ ------------
$ 6,528,683 $ 7,325,642
============ ============
The accompanying notes are an integral part of these financial statements
F-3
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE GAIN / (LOSS)
FOR THE YEARS ENDED DECEMBER 31,
2009 2008
------------ ------------
Revenue
Net sales $ 3,075,398 $ 885,206
Cost of sales 1,812,100 834,837
------------ ------------
Gross profit 1,263,298 50,369
------------ ------------
Operating expenses
Marketing, office and general costs 3,329,570 3,683,165
Research and development costs 930,548 1,323,754
Officers' compensation and directors fees 672,444 611,293
Consulting and professional fees 215,984 171,746
Foreign exchange (gain) / loss 10,035 (186,743)
Depreciation and amortization 1,123,560 1,125,038
------------ ------------
6,282,141 6,728,253
------------ ------------
Loss from operations (5,018,843) (6,677,884)
Interest on long term debt (870,632) (129,072)
Amortization of deferred costs (19,912) --
Long term debt accretion (27,019) --
Interest on notes payable to related party -- (304,146)
Loss on disposal of property, plant and equipment (1,404) --
Interest income 858 19,850
------------ ------------
Net loss (5,936,952) (7,091,252)
------------ ------------
Other comprehensive gain/(loss):
Foreign currency translation of Canadian subsidiaries 173,857 (198,792)
------------ ------------
Net comprehensive loss $ (5,763,095) $ (7,290,044)
============ ============
Net loss per share (Basic and diluted) $ (0.08) $ (0.10)
============ ============
Weighted average number of shares outstanding (Basic and diluted) 73,416,317 72,973,851
============ ============
The accompanying notes are an integral part of these financial statements
F-4
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME THE YEARS ENDED DECEMBER 31, 2009 AND 2008
ACCUMULATED
COMPREHENSIVE
COMMON STOCK ADDITIONAL OTHER ACCUMULATED
SHARES AMOUNT PAID-IN 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 -- -- -- -- (5,936,952) (5,936,952)
Common stock issued on exercise of options 850,000 850 424,150 -- -- 425,000
Intrinsic value of beneficial conversion feature of
convertible debentures -- -- 256,000 -- -- 256,000
Foreign currency translation of Canadian subsidiaries -- -- -- 173,857 -- 173,857
---------- ------- ------------ --------- ------------ -----------
December 31, 2009 73,823,851 $73,822 $ 26,083,635 $ 425,383 $(34,523,380) $(7,940,540)
---------- ------- ------------ --------- ------------ -----------
The accompanying notes are an integral part of these financial statements
F-5
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2009 2008
----------- -----------
Net Loss $(5,936,952) $(7,091,252)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property, plant and equipment 1,061,439 1,069,617
Amortization of patents and trademarks 212,792 213,080
Provision for uncollectible accounts 6,209 1,901
Interest on long term debt 870,632 125,753
Interest on notes to related party -- 304,146
Amortization of deferred costs 19,912 3,318
Long term debt accretion 27,019 --
Loss on disposal of property, plant and equipment 1,404 --
Stock based compensation -- 13,646
Write down of Inventory -- 207,889
----------- -----------
2,199,407 1,939,350
----------- -----------
Increase (decrease) in cash flows from operating
activities resulting from changes in:
Accounts receivable (954,177) 166,074
Inventory (591,108) 99,142
Prepaid expenses and sundry assets 151,036 (175,223)
Accounts payable and accrued liabilities 780,901 194,139
Customer deposits (2,683) 12,540
----------- -----------
(616,031) 296,672
----------- -----------
Net cash used in operating activities (4,353,576) (4,855,230)
----------- -----------
Investing activities:
Proceeds from sale of property, plant and equipment 951 --
Acquisition of property, plant and equipment (225,134) (288,235)
Property, plant and equipment under construction 54,115 (152,823)
Increase in patents and trademarks (1,108) (4,618)
----------- -----------
Net cash used in investing activities (171,176) (445,676)
----------- -----------
Financing activities:
Convertible debentures 1,300,000 6,000,000
Deferred costs - legal fees paid for convertible debentures -- (59,738)
Bank loan 846,140 324,046
Repayment of bank loan (272,224) (246,878)
Notes payable from related party 800,000 1,253,000
Repayment of notes payable to related party -- (2,350,000)
Repayment of interest on notes payable to related party -- (52,689)
Issuance of common stock 425,000 --
Repayment of capital lease obligation (12,001) (11,508)
----------- -----------
Net cash provided by financing activities 3,086,915 4,856,233
----------- -----------
Net decrease in cash and equivalents (1,437,837) (444,673)
Foreign exchange gain (loss) on foreign operations (177,182) (198,792)
Cash and cash equivalents, beginning of year 2,247,623 2,891,088
----------- -----------
Cash and cash equivalents, end of period $ 632,604 $ 2,247,623
=========== ===========
Supplemental disclosures:
Interest received 858 19,850
Cash paid as interest -- 52,689
Cash paid (recieved) as income taxes $ (10,838) $ 10,838
=========== ===========
The accompanying notes are an integral part of these financial statements
F-6
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 audited 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 has sustained recurring operating losses and negative cash flows
from operations. As of December 31, 2009, the Company has an accumulated deficit
of $34,523,380 and cash and cash equivalents of $632,604. Based on cash and cash
equivalents on hand at December 31, 2009, anticipated spending levels,
anticipated revenues from the Company's newly verified Level III on-road and
off-road products and sources of funding available to the Company (See Note 18
Subsequent event), the Company estimates that it has sufficient cash resources
to meet its anticipated net cash needs through the next twelve months.
The Company may be required to raise additional funds through equity or debt
financing. The Company cannot assure that the funding, if needed, will be
available on terms attractive to it, or at all. Furthermore, any additional
financings may be dilutive to shareholders or if available, may involve
restrictive covenants. The Company's failure to raise capital as and when needed
or at favourable terms could have a negative impact on its financial condition
and its ability to pursue business strategies. If adequate funds are not
available, the Company plans to delay or reduce the scope of its operations and
product development plans. In addition, the Company may be required to reduce
personnel-related costs and other discretionary expenditures that are within the
Company's control.
These consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern for a reasonable period of
time. All adjustments considered necessary for fair presentation and of a normal
recurring nature have been included in these consolidated financial statements.
F-7
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, redeemable class A special shares, convertible debentures and
accounts receivable exposures.
CONCENTRATIONS OF CREDIT RISK
The Company's cash balances are maintained in various banks in Canada and the
United States. Deposits held in banks in the United States are insured up to
$250,000 per depositor through December 31, 2009 (2008 - $100,000) for each bank
by the Federal Deposit Insurance Corporation. Actual 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 45%, 20%, and 9%, respectively of the Company's revenue in the fiscal year
2009 and 27%, 11%, and 25%, respectively of its accounts receivable as at
December 31, 2009. Three of its customers accounted for 32%, 29%, and 15%,
respectively of the Company's revenue in fiscal 2008 and 32%, 31%, and 0%,
respectively of its accounts receivable as at December 31, 2008.
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 $6,637 was appropriate as at December 31, 2009
and that a reserve of $1,901 was appropriate as at December 31, 2008.
F-8
INVENTORY
Inventory is stated at the lower of cost or market determined using the first-in
first-out method. 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," which was primarily
codified into Topic 350-20, Goodwill, and 350-30, Intangibles other than
goodwill in the Accounting Standards Codification ("ASC") requires intangible
assets with a finite life be tested for impairment whenever events or
circumstances indicate that the 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 and
as of December 31, 2009 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 year ended December
31, 2009 and 2008 was $212,792 and $213,080 respectively.
DEFERRED COSTS
Deferred costs consist of legal fees paid in connection with the issuance of the
convertible debenture notes during the year 2008. The amount is being amortised
in a straight line basis over a three year period from the date of issuance of
the November 2008 convertible debenture notes. The amortization for the current
year is $19,912 (2008 - $3,318). (See Note: 10). The deferred costs asset for
the year ended December 31, 2009, amounted to $36,506 (2008 - $56,419) and has
been netted against Convertible Debentures under Long Term Liabilities.
F-9
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS 157 defines fair value which was codified into Topic 820-10 Fair Value
Measurements and Disclosures under the ASC, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. FAS
157 was issued in September 2006 and the Company's adoption of FAS 157 effective
January 1, 2008 for financial assets and liabilities did not have an impact on
its consolidated financial position, results of operations or cash flows.
Included in the FAS 157 framework is a three level valuation inputs hierarchy
with Level 1 being inputs and transactions that can be effectively fully
observed by market participants spanning to Level 3 where estimates are
unobservable by market participants outside of the Company and must be estimated
using assumptions developed by the Company. The Company discloses the lowest
level input significant to each category of asset or liability valued within the
scope of FAS 157 and the valuation method as exchange, income or use. The
Company uses inputs which are as observable as possible and the methods most
applicable to the specific situation of each company or valued item.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, notes payable to related party, bank loan,
redeemable Class A special shares and capital lease obligation approximate fair
value because of the short-term nature of these items. The carrying amount of
the convertible debentures approximates their fair value as at December 31, 2009
and 2008. Interest rate risk is the risk that the value of a financial
instrument might be adversely affected by a change in the interest rates. In
seeking to minimize the risks from interest rate fluctuations, the Company
manages exposure through its normal operating and financing activities.
REVENUE RECOGNITION
The Company derives revenue primarily from the sale of its catalytic products.
In accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition
in Financial Statements", which was primarily codified into Topic 605 Revenue
Recognition SEC Staff Accounting Bulletin Topic 13 in the ASC, 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.
F-10
The Company also derives revenue (less than 3% of total revenue) from providing
air testing and environmental certification services. Revenues from these
services are recognized upon performance.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the year. Common stock
equivalents are excluded from the computation of diluted loss per share when
their effect is anti-dilutive.
Therefore diluted loss per share has not been calculated for 2009 and 2008. (See
Note 16)
INCOME TAXES
Income taxes are computed in accordance with the provisions of Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes"
("SFAS 109") Codified as Codification Topic 740-10 Income Taxes, which requires,
among other things, a liability approach to calculating deferred income taxes.
SFAS 109 requires a company to recognize deferred tax liabilities and assets for
the expected future tax consequences of events that have been recognized in a
company's financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax basis of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. The Company has adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109"
("FIN 48") as of January 01, 2007. The implementation of the provisions of FIN
48 requires the Company to make certain estimates and judgments about the
application of tax law, the expected resolution of uncertain tax positions and
other matters. In the event that uncertain tax positions are resolved for
amounts different than the Company's estimates, or the related statutes of
limitations expire without the assessment of additional income taxes, the
Company will be required to adjust the amounts of the related assets and
liabilities in the period in which such events occur.
Such adjustments may have a material impact on ESW's income tax provision and
results of operations. NOTE 11- INCOME TAXES of the consolidated financial
statements describes FIN 48 and the effects on results of operations and
financial position arising from its adoption.
F-11
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows SFAS No. 144, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Codified as Codification
Topic 360 Property, Plant and Equipment, 10 Overall, 35 Subsequent measurement
under ASC This statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the assets'
carrying amounts may not be recoverable. In performing the review for
recoverability, if future undiscounted cash flows (excluding interest charges)
from the use and ultimate disposition of the assets are less than their carrying
values, an impairment loss represented by the difference between its fair value
and carrying value, is recognized. Management reviewed the related assets for
impairment in the fourth quarter and found no impairment.
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 is be used to offset
these expenditures. For the year ended December 31, 2009 and 2008 the Company
expensed $930,548 and $1,323,754 respectively towards research and development
costs. In 2009 and 2008, grant money amounted to $168,753 and $221,990
respectively.
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements have been translated into United States
dollars in accordance with Accounting Standards Codification Topic 830 - Foreign
Currency Matters. All monetary items have been translated using the exchange
rates in effect at the balance sheet date. All non -monetary items have been
translated using the historical exchange rates at the time of transactions.
Income statement amounts have been translated using the average exchange rate
for the year. Translation adjustments that arise from translating the financial
statements of the Company's foreign subsidiaries from local currency to U.S.
dollars are recorded in other comprehensive income (loss) component of
stockholders equity.
COMPREHENSIVE INCOME
Accounting Standards Codification Topic 830-30 Translation of Financial
Statements establishes standards for reporting and display of comprehensive
income and its components. For the years ended December 31, 2009 and 2008
accumulated other comprehensive income is reported as a component of
stockholders' equity. Other comprehensive income (loss) includes only foreign
currency translation adjustments.
F-12
PRODUCT WARRANTIES
The Company provides for estimated warranty costs at the time of sale and
accrues for specific items at the time their existence is known and the amounts
are determinable. The Company estimates warranty costs using standard
quantitative measures based on industry warranty claim experience and evaluation
of specific customer warranty issues. The Company currently records warranty
costs as 2% of revenue, as of December 31, 2009, $ 40,290 (2008 - $ 0) was
accrued against warranty provision and included in accrued liabilities and cost
of sales.
SEGMENTED REPORTING
Accounting Standards Codification Topic 280-10-50 - Segmented Reporting -
Overall - Disclosure changed the way public companies report information about
segments of their business in their quarterly reports issued to shareholders. It
also requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenues
and its major customers.
The Company also derives revenue (2009 - less than 3% of total revenue, 2008
less than 4% of total revenue) from providing air testing and environmental
certification services. For the year ended December 31, 2009 and 2008, all
revenues were generated from the United States. As at December 31, 2009,
$1,662,243 (2008 - $2,160,815) of property, plant and equipment is located at
the Air testing facility in Pennsylvania all remaining long lived assets are
located in Concord, Ontario.
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2010, the FASB issued ASU No. 2010-06, -Improving Disclosures about
Fair Value Measurements (ASU 2010-06) (codified within ASC 820 -Fair Value
Measurements and Disclosures). ASU 2010-06 improves disclosures originally
required under SFAS No. 157. ASU 2010-16 is effective for interim and annual
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within those
years. The Company will comply with the additional disclosures required by this
guidance upon its adoption in January 2010.
In December 2009, the FASB issued ASU 2009-16, - Transfers and Servicing (Topic
860) - Accounting for Transfers of Financial Assets. ASU 2009-16 amends the
accounting for transfers of financials assets and will require more information
about transfers of financial assets, including securitizations, and where
entities have continuing exposure to the risks related to transferred financial
assets. ASU 2009-16 is effective at the start of a reporting entity's first
fiscal year beginning after November 15, 2009, with early adoption not
permitted. The Company will comply with the additional disclosures required by
this guidance upon its adoption in January 2010.
F-13
In October 2009, the FASB issued ASU 2009-15, - Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.
ASU 2009-15 amends the accounting and reporting guidance for debt (and certain
preferred stock) with specific conversion features or other options. ASU 2009-15
is effective for fiscal years beginning on or after December 15, 2009. The
Company is currently assessing the impact of ASU 2009-13 on its consolidated
financial position, results of operations and cash flows.
In October 2009, the FASB issued ASU No. 2009-13, - Multiple Deliverable Revenue
Arrangements - a consensus of the FASB Emerging Issues Task Force (ASU 2009-13)
(codified within ASC Topic 605). ASU 2009-13 addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined unit. ASU 2009-13
is effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010, with early
adoption permitted. The Company is currently assessing the impact of ASU 2009-13
on its consolidated financial position, results of operations and cash flows.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, -
Measuring Liabilities at Fair Value (ASU 2009-05) (codified within ASC 820 -
Fair Value Measurements and Disclosures). ASU 2009-05 amends the fair value and
measurement topic to provide guidance on the fair value measurement of
liabilities. ASU 2009-05 is effective for interim and annual periods beginning
after August 26, 2009. The Company adopted this guidance effective October 1,
2009.
In June 2009, the FASB issued SFAS No. 168, - The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162 (SFAS 168) (codified within ASC 105
- -Generally Accepted Accounting Principles). SFAS 168 stipulates that the FASB
Accounting Standards Codification is the source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is
effective for interim and annual periods ending after September 15, 2009. In
conjunction with the issuance of SFAS 168, the SEC issued interpretive guidance
Final Rule 80 (FR-80) regarding FASB`s Accounting Standards Codification. Under
FR-80, the SEC clarified that the ASC is not the authoritative source for SEC
guidance and that the ASC does not supersede any SEC rules or regulations.
Further, any references within the SEC rules and staff guidance to specific
standards under U.S. GAAP should be understood to mean the corresponding
reference in the ASC. FR-80 is also effective for interim and annual periods
ending after September 15, 2009. The adoption had no impact on the Company's
financial position, cash flows or results of operations.
In June 2009, the FASB issued SFAS No. 166, - Accounting for Transfers of
Financial Assets (SFAS 166) (codified within ASC 860 - Transfers and Servicing).
SFAS 166 amends the derecognition guidance in SFAS No. 140, - Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(SFAS No. 140). SFAS 166 is effective for fiscal years beginning after November
15, 2009. The Company will comply with the additional disclosures required by
this guidance upon its adoption in January 2010.
F-14
In May 2009, the FASB issued SFAS No. 165, - Subsequent Events (SFAS 165)
(codified within ASC 855 - Subsequent Events). SFAS 165 establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before the financial statements are issued or are
available to be issued. Specifically, SFAS 165 sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. SFAS 165 is
effective prospectively for interim and annual periods ending after June 15,
2009. The Company adopted this guidance on June 30, 2009.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, - Interim Disclosures
about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1) (codified
within ASC 825 - Financial Instruments). FSP FAS 107-1 and APB 28-1 require fair
value disclosures in both interim as well as annual financial statements in
order to provide more timely information about the effects of current market
conditions on financial instruments. FSP FAS 107-1 and APB 28-1 are effective
for interim and annual periods ending after June 15, 2009. The Company adopted
this guidance on June 30, 2009.
In April 2009, the FASB issued FSP FAS 157-4 - Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That are Not Orderly (codified within ASC
820). FSP FAS 157-4 provides additional guidance for estimating fair value when
the volume and level of activity for the asset or liability have significantly
decreased. It also includes guidance on identifying circumstances that indicate
a transaction is not orderly. FSP FAS 157-4 becomes effective for interim and
annual reporting periods after June 15, 2009 and shall be applied prospectively.
The adoption of this guidance did not have a significant effect on the Company's
consolidated financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, - Recognition and
Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2)
(codified within ASC 320 - Investments - Debt and Equity Securities). FSP FAS
115-2 and FAS 124-2 change the method for determining whether an
other-than-temporary impairment exists for debt securities and the amount of the
impairment to be recorded in earnings. FSP FAS 115-2 and FAS 124-2 are effective
for interim and annual periods ending after June 15, 2009. The adoption of this
guidance did not have a significant effect on the Company's consolidated
financial statements.
F-15
In June 2008, , the FASB issued EITF 07-05Determining Whether an Instrument (or
Embedded Feature) is Indexed to a Company's Own Stock, (codified within ASC 815
- - Derivatives and Hedging - Contracts in Entity's Own Equity), the FASB ratified
the consensus reached on determining whether an instrument (or embedded feature)
is indexed to an entity's own stock. This consensus 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 the standard accounting
for derivative instruments and hedging activities. This consensus is effective
for financial statements issued for fiscal years beginning after December 15,
2008. It was effective for the Company on January 1, 2009. The adoption of this
consensus did not have a significant effect on the company's consolidated
financial statements.
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) (codified within ASC 815 - Derivatives and Hedging). SFAS 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity`s financial position, financial
performance, and cash flows. SFAS 161 is effective for fiscal years beginning
after November 15, 2008. The Company adopted this guidance on January 1, 2009.
The Company currently does not have any derivative financial instruments subject
to accounting or disclosure under this standard; therefore, the adoption of this
standard did not have a significant effect on the Company's consolidated
statement of financial position, results of operations or cash flows.
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. At December 31, 2009 and 2008 all of the Company's cash and cash
equivalents consisted of cash.
NOTE 5 - INVENTORY
Inventory is consists of:
DECEMBER 31,
INVENTORY 2009 2008
---------------------------------------------
Raw materials $ 844,649 $ 503,129
Work-In-Process 640,286 201,173
Finished goods 23,479 19,510
---------------------------------------------
TOTAL $1,508,414 $ 723,812
=============================================
F-16
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
CLASSIFICATION 2009 2008
-----------------------------------------------------------
Plant, machinery and equipment $ 5,539,017 $ 5,126,108
Office equipment 325,626 294,250
Furniture and fixtures 451,281 424,426
Vehicles 17,951 12,014
Leasehold improvements 1,016,511 997,748
--------------------------
$ 7,350,386 $ 6,854,546
Less: accumulated depreciation (4,663,281) (3,530,182)
--------------------------
$ 2,687,105 $ 3,324,364
--------------------------
DECEMBER 31,
Depreciation Expense 2009 2008
-----------------------------------------------------------------------
Depreciation expense included in Cost of Sales $ 56,436 $ 14,979
Depreciation expense included in operating expenses $ 910,713 $ 911,958
Depreciation expense included in research
and development costs $ 139,109 $ 142,680
-----------------------
Total Depreciation expense $1,106,258 $1,069,617
-----------------------
At December 31, 2009 and 2008, the Company had $138,800 and $171,445,
respectively, of customized equipment under construction.
The office equipment above includes $19,121 in assets under capital lease with a
corresponding accumulated depreciation of $15,493 for the year ended December
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 $36,294 in assets under
capital lease with a corresponding accumulated depreciation of $18,592 for the
year ended December 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.
F-17
NOTE 7 - NOTES PAYABLE TO RELATED PARTY
On January 5, 2007 the Company extended the maturity date of the unsecured
subordinated promissory note originally issued on June 26, 2006 in the principal
amount of $1.2 million; and the August 29, 2006 unsecured subordinated
promissory note in the principal amount of $1.0 million, through to January 31,
2007. On February 9, 2007, the Company's two unsecured subordinated promissory
notes in the principal amount of $1.2 million and $1.0 million and accrued
interest were consolidated into one unsecured subordinated demand note (the
"Consolidated Note") with principal amount of $2,308,148.
In accordance with the terms of the Consolidated Note in the principal amount of
$2,308,148, the same was due and payable to Holder upon demand. The Consolidated
Note bears interest at a rate of 9% per annum if principal and interest are paid
by the Company in cash, or if principal and interest are paid in shares of
restricted common stock of the Company, the Consolidated Note will bear interest
at a rate of 12% per annum. The Company may repay the Consolidated Note without
penalty at any time. The Consolidated Note was issued to a company controlled by
a trust of which a director and shareholder of our Company is the beneficiary.
The holder of the Consolidated Note has the option to receive payment of
principal and all accrued interest in the form of restricted shares of the
Company's common stock, par value ($0.001) with cost free registration rights.
On February 15, 2007 the Company issued a $500,000 unsecured subordinated demand
promissory note to a member of the Company's Board of Directors. On March 7,
2007 the Company issued a second $500,000 unsecured subordinated demand
promissory note to a member of the Company's Board of Directors and consolidated
this sum with the principal and accrued interest of the $500,000 unsecured
demand promissory note previously issued on February 15, 2007 (the "Consolidated
Subordinated Note"). The Consolidated Subordinated Note is in the principal
amount of $1,002,589. The Consolidated Subordinated Note bears interest at a
rate of 9% per annum and is payable upon demand. The Company may repay the
Consolidated Subordinated Note without penalty at any time. The Consolidated
Subordinated Note was issued to a director and shareholder of the Company.
F-18
Effective June 2, 2008 the Company entered into a Credit Facility Agreement with
a director and shareholder of the Company. Pursuant to the Agreement, the
Company can request draw downs under the Facility of up to $1,500,000 in the
aggregate with funds to be used for general working capital purposes. All
requests to draw down under the Facility are subject to the debt holders consent
and approval. An approved draw down by the Company under the Facility will be
represented by a 9% unsecured subordinated demand promissory note (the "Note")
issued by the Company to the debtor or his designee. The Company may repay the
Note at anytime without penalty. At the option of the Note holder, in lieu of
cash, principal and interest earned on the Note can be repaid in restricted
common stock of the Company. Should the Note holder elect to receive stock of
the Company, interest on principal will be calculated at a rate of 12% per
annum. The number of shares of common stock to be issued in satisfaction of
interest and principal shall be determined by dividing the principal and accrued
interest by the greater of 105% of the twenty (20) day average closing price of
the Company's common stock immediately preceding the date the Note holder elects
to have the Note satisfied with common stock, or the Closing Price on that date.
Under no circumstance can the conversion price be below the fair market price of
the Company's common stock on the date the Note holder elects to have the Note
satisfied with common stock. The Company may request draw downs under the Credit
Facility Agreement through December 31, 2008.
Subsequently, from June 2008 to October 2008 a total of nine unsecured
subordinated promissory notes were issued totalling to $1,253,000 in principal.
These nine unsecured subordinated promissory notes are part of a series of draw
downs against the aforementioned Credit Facility Agreement. Of the nine
unsecured subordinated promissory notes the Company repaid one unsecured
subordinated promissory note in the amount of $150,000 in principal and $ 4,475
interest, this unsecured subordinated promissory note was due to a shareholder
of the Company who by separate agreement with the above debt holder and the
Company agreed to provide funding to the Company under the Credit Facility.
In November 2008 the Company recorded $275,922 in the Consolidated Statements Of
Changes In Stockholders' Equity (Deficit) towards a loss on extinguishment of
debt as a payment to a director and shareholder of the Company to surrender the
right to convert the existing notes payable into common stock of the Company.
Also, on November 7, 2008, the "February 9, 2007" Consolidated Note with
principal amount of $2,308,148, the "March 7, 2007" Consolidated Subordinated
Note with principal amount of $1,002,589 and all notes issued under the Credit
Facility Agreement, dated June 2, 2008, in the principal amount of 1,103,000
have been extinguished through a repayment of $2,200,000 the principal portion
only of the $2,308,148 Consolidated Note and $48,214 as taxes withholding and
the balance of principal and interest has been converted into a convertible
debenture (see Note 10 CONVERTIBLE DEBENTURES).
F-19
On December 29, 2009, the Company issued a $500,000 unsecured subordinated
promissory note to a shareholder and a member of the Company's Board of
Directors with interest accruing at the annual rate of 9% upon the Company
completing a financing for the gross sum of $2 million dollars or more or in the
event the Company does not complete a Financing by March 31, 2010, this Note
will be payable upon Demand of the Holder.
As at December 31, 2009, principal and interest on notes payable to related
party was $500,000 & $0 respectively. As at December 31, 2008, principal and
interest on notes payable to related party was $0.
NOTE 8 - BANK LOAN
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.
Effective September 2, 2008, ESW Canada completed its negotiations with RBC and
entered into an amendment to the secured commercial loan agreement. The amended
agreement extended the term of the Agreement from June30, 2008 through June 30,
2009. In addition to extending the term of the Agreement, certain financial
covenants were also amended. The amended arrangement provided for a revolving
facility available by way of a series of term loans of up to $750,000 to finance
future production orders. Effective August 21, 2009, the term of the secured
commercial loan agreement with RBC was extended through to April 30, 2010. The
Credit Facility is guaranteed by the Company and its subsidiary ESW Canada
through a general security agreement over all assets to RBC. 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 any loans are
required no later than one year from the date of the advancement of that 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.
At December 31, 2009 and 2008, $713,037 and $ 77,168 respectively was owed under
the credit facility.
NOTE 9 - REDEEMABLE CLASS A SPECIAL SHARES
700,000 Class A special $453,900 (based on the historical
shares Authorized, exchange rate at the time of
issued, and 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 $660,032 USD at December 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 December 31, 2009 BBL has an accumulated
deficit of $ 1,187,506 USD ($1,839,864 Canadian dollars as at December 31, 2009)
(2008 - $ 1,183,183 USD which equates to $1,834,989 Canadian) and therefore, the
holder would be unable to redeem the redeemable Class A special shares at their
ascribed value.
F-20
NOTE 10 - CONVERTIBLE DEBENTURES
2008 DEBENTURE 2009 DEBENTURE TOTAL 2009 TOTAL 2008
-------------- -------------- ---------- ----------
Face value of convertible debenture $ 9,000,000 $ 1,600,000 $ 10,600,000 $ 9,000,000
Less: Beneficial conversion feature - (256,000) (256,000) -
Deferred costs (59,738) - (59,738) (59,738)
---------------- ---------------- ---------------- ----------------
Book value upon issuance $ 8,940,262 $ 1,344,000 $ 10,284,262 $ 8,940,262
Accretion of the debt discount - 27,019 27,019 -
Amortization of deferred costs 23,232 - 23,232 3,319
---------------- ---------------- ---------------- ----------------
CARRYING VALUE $ 8,963,494 $ 1,371,019 $ 10,334,513 $ 8,943,581
---------------- ---------------- ---------------- ----------------
On August 28, 2009, the Company completed a transaction whereby it issued $1.6
million of 9% convertible debentures (the " 2009 Debentures") to six accredited
investors. Of the $1.6 million received by the Company, $500,000 was received
from a director of the Company through the exchange of a $300,000 unsecured 9%
subordinated demand short term loan previously provided to the Company on August
11, 2009 and an additional $200,000 investment made by the director in the
offering. The 2009 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 by dividing the principal amount of the 2009 Debenture to be converted by
$0.50. The 2009 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 $0.50. Subject to the holder's right to convert, the Company
has the right to redeem the 2009 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
2009 Debentures contain customary price adjustment protections.
At the time the 2009 Debentures were issued, the Company recorded a debt
discount for a beneficial conversion feature in the amount of $256,000. The debt
discount is the aggregate intrinsic value calculated as the difference between
the market price of the Company's share of stock on August 28, 2009 and the
conversion price of the 2009 Debentures. The debt discount is being accreted
over the three (3) year life of the debentures using the effective yield method.
The effective yield on the debentures is 15.52%.
F-21
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. The effective yield on the 2008 debentures is 9%.
From the proceeds of the November 2008 debentures, 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 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 December 31, 2009, total Convertible Debentures amounted to $10,334,513
net of deferred costs of $36,506 and debt discount of $228,981, with
corresponding accrued interest of $996,385. 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.
F-22
LEGAL FEES RELATED TO 2008 CONVERTIBLE DEBENTURES
The Company has recorded a deferred cost asset of $59,738 for legal fees paid in
relation to the issuance of the November 2008 Convertible Debentures. The
deferred costs will be amortized over the term of the November 2008 Convertible
Debenture. As at December 31, 2009, the deferred cost asset and related
amortization was $36,506 and $23,232 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 convertible
debentures.
NOTE 11- INCOME TAXES
As at December 31, 2009, there are tax loss carry forwards for Federal income
tax purposes of approximately $23,662,202 available to offset future taxable
income in the United States. The tax loss carry forwards expire in various years
through 2027 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 $8,281,771 has been
established until realizations of the tax benefit from the loss carry forwards
meet the "more likely than not" criteria.
LOSS CARRY
YEAR FORWARD
---- -------
1999 $ 407,067
2000 $ 2,109,716
2001 $ 2,368,368
2002 $ 917,626
2003 $ 637,458
2004 $ 1,621,175
2005 $ 2,276,330
2006 $ 3,336,964
2007 $ 3,378,355
2008 $ 3,348,694
2009 $ 3,260,449
---- -----------
Total $23,662,202
Additionally, as at December 31, 2009, the Company's two wholly owned Canadian
subsidiaries had non-capital tax loss carry forwards of approximately $7,090,156
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
$2,339,458 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.
LOSS CARRY
FORWARD FOREIGN
YEAR OPERATIONS
---- ----------
2002 $ 104,137
2003 $ 5,164
2004 $ 5,743
2005 $ 2
2006 $ 542,507
2007 $ 6,824
2008 $3,548,137
2009 $2,877,642
---- ----------
Total $7,090,156
F-23
For the year ended December 31,
2009 2008
---------------------------
Statutory tax rate:
U.S. 35.0% 35.0%
Foreign 33.0% 33.5%
Income (loss) before income taxes:
U.S. $(3,260,449) $(3,367,446)
Foreign (2,676,503) (3,723,806)
---------------------------
$(5,936,952) $(7,091,252)
---------------------------
Expected income tax recovery $(2,024,403) $(2,426,081)
Differences in income tax resulting from:
Depreciation (Foreign operations) $ 31,936 $ (1,595)
Stock Based Compensation $ -- $ 4,776
Accrued interest on loans $ 304,721 $ 44,014
---------------------------
$(1,687,746) $(2,378,887)
Benefit of losses not recognized $ 1,687,746 $ 2,378,887
---------------------------
Income tax provision (recovery) per financial statements $ -- $ --
---------------------------
Deferred income tax assets and liabilities consist of the following difference:
As at December 31,
2009 2008
-----------------------------
Assets
Capital Assets - Tax Basis (Foreign operations only) $ 1,332,331 $ 1,426,857
Capital Assets - Book Value (Foreign operations only) (1,020,598) (1,204,388)
-----------------------------
Net Capital Assets $ 311,732 $ 222,469
Tax loss carry forwards 30,751,468 24,474,065
-----------------------------
Net temporary differences (foreign operations only) $ 31,063,200 $ 24,696,534
Statutory tax rate:
U.S. 35.0% 35.0%
Foreign 33.0% 33.5%
Temporary differences (foreign operations only) $ 10,250,856 $ 8,579,442
Valuation allowance $(10,250,856) $ (8,579,442)
-----------------------------
Carrying Value $ -- $ --
=============================
F-24
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" which was primarily codified into
Topic 740-10-30, Income Tax in the Accounting Standards Codification 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 no 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 December 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 12 - ISSUANCE OF COMMON STOCK
On June 24, 2009 the Company received $425,000 from the exercise of options at
$0.50 per share and issued 850,000 shares of restricted common stock. For the
year ended December 31, 2008 no common shares were issued.
NOTE 13 - STOCK OPTIONS AND WARRANT GRANTS
A total of $ 0 and $13,646 for stock based compensation has been recorded for
the year ended December 31, 2009 and 2008, respectively.
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.
F-25
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, 2008 6,120,000 $ 0.65
Granted -- --
Expired (1,600,000) ($ 0.50)
Exercised (850,000) ($ 0.50)
---------- ------
OUTSTANDING, DECEMBER 31, 2009 3,670,000 $ 0.76
========== ======
At December 31, 2009, the outstanding options have a weighted average remaining
life of 22 months. And all outstanding options have vested.
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.
F-26
At December 31, 2009, the Company had outstanding options as follows:
NUMBER OF EXERCISE
OPTIONS PRICE EXPIRATION DATE
----------------------------------------------------
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
----------------------------------------------------
3,670,000
====================================================
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, December 31, 2009 and 2008 -- --
=====================================================================
NOTE 14 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2009 and 2008, the Company paid shareholders
and their affiliates $238,750 and $2,663,422, respectively for various services,
principal and interest on promissory notes and fees rendered in addition to
salaries and reimbursement of business expenses. All transactions are recorded
at the exchange amounts. Any one transaction or combination attributed to one
individual or entity exceeding $120,000 on an annual basis has been disclosed as
follows:
NOTES PAYABLE TO RELATED PARTY
The information required by this item is included under the caption "NOTE 7 -
NOTES PAYABLE TO RELATED PARTY".
CONSULTING AGREEMENT
In 2008, a director and shareholder of the company provided consulting services
to the company under a consulting agreement. The agreement provided for a
monthly retainer of $12,500 per month. In December 2008 the agreement was
terminated. For the year ended December 31, 2008, $137,500 was paid as per the
agreement for consulting services. $43,750 of expenses payable to the consultant
over the period of four (4) months subsequent to the separation was recorded in
accounts payable at the end of 2008 and paid out in 2009.
F-27
CONVERTIBLE DEBENTURE ISSUED TO RELATED PARTY
On August 28, 2009, the Company completed a transaction whereby it issued $1.6
million of 9% convertible debentures to six accredited investors. A director who
is also a shareholder of the Company participated in the August convertible
debenture offering with a principal investment of $500,000.
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. The Leon Black
1997 Family Trust participated in the November convertible debenture offering
with a principal investment of $2,000,000.
Further information required for the convertible debentures is included under
the caption "NOTE 10 - CONVERTIBLE DEBENTURES".
As at December 31, 2009, the principal amount of Convertible Debenture net of
accretion due to related party amounted to $5,428,443 with a corresponding
accrued interest of $540,128, and debt discount of $71,557. At December 31,
2008, Convertible Debenture due to related party amounted to $5,000,000 with a
corresponding accrued interest of $68,548.
NOTE 15 - 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 October 16, 2009, the Company's wholly owned subsidiary ESW
America, Inc. entered into a lease renewal agreement with Nappen & Associates
for the leasehold property at Pennsylvania which houses the Company's research
and development facilities. There were no modifications to the original economic
terms of the lease under the lease renewal agreement. Under the terms of the
lease renewal, the lease term will now expire February 28, 2013.
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 has been extended to September 30, 2010.
The following breakdown is the total, of the minimum annual lease payments, for
both leases.
YEAR $
--------------------------
2010 $405,767
2011 $180,990
2012 $180,990
2013 $ 30,165
F-28
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.
CAPITAL LEASE OBLIGATION
The Company is committed to the following lease payments in connection with the
acquisition of equipment under capital leases:
YEAR $
---------------------
2010 15,899
2011 3,475
2012 1,448
-------
TOTAL $20,821
=======
Less imputed interest ( 1,103)
-------
Total obligation under capital lease $19,718
Less current portion ( 8,857)
-------
TOTAL LONG-TERM PORTION $10,861
=======
The Company incurred $6,354 of interest expense on capital leases for the year.
NOTE 16 - LOSS PER SHARE
Potential common shares of 3,670,000 related to ESW's outstanding stock options
and potential common shares of 42,583,901 related to the 2008 and 2009
convertible debenture were excluded from the computation of diluted loss per
share for the period ended December 31, 2009. As at December 31, 2008, 6,120,000
anti-dilutive stock options and potential common shares of 36,503,014 related to
the 2008 convertible debenture have been excluded from the computation of
diluted earnings per share as the effect of inclusion of these shares would have
been anti-dilutive.
F-29
The reconciliation of the number of shares used to calculate the diluted loss
per share is calculated as follows:
For the Year ended
Ended December 31,
2009 2008
------------ ------------
NUMERATOR
Net (loss) for the period $ (5,936,952) $ (7,091,252)
Interest on debentures $ 870,632 $ 129,072
Amortization of deferred costs $ 19,912 $ --
Amortization of debenture fair value $ 27,019 $ --
Interest on notes to related party $ -- $ 304,146
------------ ------------
$ (5,019,389) $ (6,658,034)
DENOMINATOR
Weighted average number of shares outstanding 73,416,317 72,973,851
Dilutive effect of :
Stock options -- --
Warrants -- --
Convertible Debt conversion -- --
Notes Payable to related party conversion -- --
------------ ------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING -- --
------------ ------------
NOTE 17 - COMPARATIVE FIGURES
Certain 2008 figures have been reclassified to conform to the financial
statement presentation adopted in 2009. The presentation includes Other
Comprehensive Income in the Consolidated Statement of Operations and
Consolidated Statement Of Changes In Stockholders (Deficit).
NOTE 18 - SUBSEQUENT EVENTS
Effective January 25, 2010, the Company's Board of Directors unanimously elected
Elbert O. Hand to serve as a member of the Board of Directors and appointed Mr.
Hand to serve as Chairman of the Board.
Effective February 16, 2010, 175,000 stock options expired as outlined in Note
13: Options and warrants.
Effective March 19, 2010, the Company issued $3,000,000 of its 9% convertible
debentures (the "Debentures") to five (5) accredited investors under Rule 506 of
Regulation D. 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 by dividing the principal amount of the Debenture to be converted by
$0.50. 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 $0.50. The Debentures have a mandatory conversion feature
that will require the holders to convert in the event a majority of the
Company's pre-existing outstanding 9% convertible debentures convert. Subject to
the holder's right to convert and the mandatory conversion feature, 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 Company also
has provided the holders of the Debentures registration rights. The Debentures
contain customary price adjustment protections.
F-30
Effective March 25, 2010, the November 2008 and the August 2009 debenture
holders agreed to convert all outstanding convertible debentures as per the
terms of the respective debenture agreements (SEE NOTE 10 FOR DETAILS). The
early conversion of the debentures was a condition precedent to the Company's
wholly owned subsidiary ESW Canada entering into a new credit facility with
Canadian Imperial Bank of Commerce ("CIBC"). A total of $10,600,000 in principal
and $1,176,445 of accrued interest was converted into 43,756,653 shares of
restricted common stock. The conversion of the November 2008 and the August 2009
debentures also triggered the mandatory conversion feature on the March 19, 2010
debentures. A total of $3,000,000 in principal and $3,797 in accrued interest
was converted into 6,007,595 shares of restricted common stock. With these
transactions effective March 25, 2010 the Company has $0 of convertible
debentures and accrued interest on convertible debenture. As part of the
agreement to convert all existing convertible debentures the Company has
proposed a premium on the conversion transaction payable to all converting
debenture holders subject to a positive Fairness opinion, approval by a Fairness
Committee consisting of independent Directors of the Company's Board of
Directors and an increase in the share capital of the Company. The proposed
premium consists of 4,375,665 shares of Common Stock. As the Company does not
have sufficient authorised shares as of the date of conversion of the debentures
to fulfill the premium, upon approval, the proposed premium will be recorded as
an advance share purchase agreement at fair market value, the agreement will be
without interest, subordinated to the banks position and payable in a fixed
number of common shares of the Company.
Effective March 31, 2010 the Company repaid the December 29, 2009, 9% unsecured
subordinated promissory note issued to a shareholder and a member of the
Company's Board of Directors. The Company repaid $500,000 principal and $11,342
in interest from the proceeds of the March 19, 2010 convertible debentures (See
Note 7: NOTES PAYABLE TO RELATED PARTY).
Effective March 31, 2010 ESW's subsidiary, ESW Canada entered into a demand
revolving credit facility agreement with a Canadian chartered bank, Canadian
Imperial Bank of Commerce ("CIBC"), to meet working capital requirements. The
facility has a credit limit of $4 million. Borrowings under the facility are
limited to a percentage of accounts receivable plus a percentage of inventories
(capped at $ 1 million or 50% of the accounts receivable portion) less any prior
ranking claims. The credit facility is guaranteed by the Company and its
subsidiaries ESW Canada Inc, ESW America Inc, BBL Technologies Inc and ESW
Technologies Inc through a general security agreement over all assets to CIBC.
The facility has been guaranteed to the bank under Export Development Canada's
Export Guarantee Program. Borrowings under the credit facility bear interest at
2.25% above the bank's prime rate of interest. Obligations under the revolving
credit agreement are collateralized by a first-priority lien on the assets of
the Company and its subsidiaries, including, accounts receivable, inventory,
equipment and other tangible and intangible property, including the capital
stock of all direct subsidiaries.
On April 05, 2010 the Board of Directors granted an aggregate award of 900,000
stock options to one executive officer and director and one director. The
options vest over a period of three years with exercise prices of $0.65 (fair
market value of the Company's common stock as of the date of grant) with expiry
five years from the date of award.
F-31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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.
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 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of ESW's management, including
ESW's Chief Executive Officer and Chief Accounting Officer, ESW evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December
31, 2009 (the "Evaluation Date"). Based upon that evaluation, the Chief
Executive Officer and Chief Accounting Officer concluded that, as of the
Evaluation Date, ESW's disclosure controls and procedures were effective to
provide reasonable assurance to ensure that information required to be disclosed
in ESW's Exchange Act reports is recorded, processed, summarized, and reported
within the time periods specified by the Securities and Exchange Commission's
rules and forms and that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Accounting Officer,
as appropriate to allow timely decisions regarding required disclosures.
CHANGES IN INTERNAL CONTROLS
There was no significant change in the Company's internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the
last fiscal year that has materially affected, or is reasonably likely to
materially affect the Company's internal control over financial reporting.
-54-
INTERNAL CONTROL OVER FINANCIAL REPORTING.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
ESW's management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined in Exchange
Act Rule 13a-15(f). Internal control over financial reporting is a process
designed by, or under the supervision of, ESW's Chief Executive and Chief
Accounting Officers and effected ESW's Board of Directors, management and other
personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles, and includes those
policies and procedures that: (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that ESW's
receipts and expenditures are being made only in accordance with the
authorizations of its management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on ESW's
consolidated financial statements.
Because of inherent limitations, 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. Also projections of any evaluation
of effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with policies or procedures may deteriorate.
Under the supervision of and with the participation of management, including
ESW's Chief Executive Officer and Chief Accounting Officer, ESW assessed the
effectiveness of its internal control over financial reporting as of December
31, 2009. In making this assessment, management used the framework in INTERNAL
CONTROL-INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this assessment, ESW's management concluded
that ESW's internal control over financial reporting was effective as of
December 31, 2009.
This annual report does not include an attestation of ESW's registered public
accounting firm regarding internal controls over financial reporting as
management's report was not subject to attestation by ESW's registered public
accounting firm pursuant to Securities and Exchange Commission Rule for small
business issuers.
-55-
ITEM 9B OTHER INFORMATION
Effective January 25, 2010, the Company's Board of Directors unanimously elected
Elbert O. Hand to serve as a member of the Board of Directors and appointed Mr.
Hand to serve as Chairman of the Board.
Effective February 16, 2010, 175,000 stock options expired as outlined in Note
13: Options and warrants.
Effective March 19, 2010, the Company issued $3,000,000 of its 9% convertible
debentures (the "Debentures") to five (5) accredited investors under Rule 506 of
Regulation D. 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 by dividing the principal amount of the Debenture to be converted by
$0.50. 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 $0.50. The Debentures have a mandatory conversion feature
that will require the holders to convert in the event a majority of the
Company's pre-existing outstanding 9% convertible debentures convert. Subject to
the holder's right to convert and the mandatory conversion feature, 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 Company also
has provided the holders of the Debentures registration rights. The Debentures
contain customary price adjustment protections.
Effective March 25, 2010, the November 2008 and the August 2009 debenture
holders agreed to convert all outstanding convertible debentures as per the
terms of the respective debenture agreements (SEE NOTE 10 FOR DETAILS). The
early conversion of the debentures was a condition precedent to the Company's
wholly owned subsidiary ESW Canada entering into a new credit facility with
Canadian Imperial Bank of Commerce ("CIBC"). A total of $10,600,000 in principal
and $1,176,445 of accrued interest was converted into 43,756,653 shares of
restricted common stock. The conversion of the November 2008 and the August 2009
debentures also triggered the mandatory conversion feature on the March 19, 2010
debentures. A total of $3,000,000 in principal and $3,797 in accrued interest
was converted into 6,007,595 shares of restricted common stock. With these
transactions effective March 25, 2010 the Company has $0 of convertible
debentures and accrued interest on convertible debenture. As part of the
agreement to convert all existing convertible debentures the Company has
proposed a premium on the conversion transaction payable to all converting
debenture holders subject to a positive Fairness opinion, approval by a Fairness
Committee consisting of independent Directors of the Company's Board of
Directors and an increase in the share capital of the Company. The proposed
premium consists of 4,375,665 shares of Common Stock. As the Company does not
have sufficient authorised shares as of the date of conversion of the debentures
to fulfill the premium, upon approval, the proposed premium will be recorded as
an advance share purchase agreement at fair market value, the agreement will be
without interest, subordinated to the banks position and payable in a fixed
number of common shares of the Company.
-56-
Effective March 31, 2010 the Company repaid the December 29, 2009, 9% unsecured
subordinated promissory note issued to a shareholder and a member of the
Company's Board of Directors. The Company repaid $500,000 principal and $11,342
in interest from the proceeds of the March 19, 2010 convertible debentures (See
Note 7: NOTES PAYABLE TO RELATED PARTY).
Effective March 31, 2010 ESW's subsidiary, ESW Canada entered into a demand
revolving credit facility agreement with a Canadian chartered bank, Canadian
Imperial Bank of Commerce ("CIBC"), to meet working capital requirements. The
facility has a credit limit of $4 million. Borrowings under the facility are
limited to a percentage of accounts receivable plus a percentage of inventories
(capped at $ 1 million or 50% of the accounts receivable portion) less any prior
ranking claims. The credit facility is guaranteed by the Company and its
subsidiaries ESW Canada Inc, ESW America Inc, BBL Technologies Inc and ESW
Technologies Inc through a general security agreement over all assets to CIBC.
The facility has been guaranteed to the bank under Export Development Canada's
Export Guarantee Program. Borrowings under the credit facility bear interest at
2.25% above the bank's prime rate of interest. Obligations under the revolving
credit agreement are collateralized by a first-priority lien on the assets of
the Company and its subsidiaries, including, accounts receivable, inventory,
equipment and other tangible and intangible property, including the capital
stock of all direct subsidiaries.
On April 05, 2010 the Board of Directors granted an aggregate award of 900,000
stock options to one executive officer and director and one director. The
options vest over a period of three years with exercise prices of $0.65 (fair
market value of the Company's common stock as of the date of grant) with expiry
five years from the date of award.
-57-
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS
Certain information concerning the directors and executive officers of the
Company is set forth in the following table and in the paragraphs following.
Information regarding each such directors and executive officer's ownership of
voting securities of the Company appears as "Securities Ownership of Certain
Beneficial Owners and Management" below.
NAME POSITION DATE ELECTED/
APPOINTED
-------------------------------------------------------------------------------
Elbert O. Hand Chairman January 2010
David J. Johnson Director, President and Chief September 2000
Executive Officer
Nitin Amersey Director January 2003
Michael F. Albanese Director February 2006
John D. Dunlap III Director February 2007
Bengt G. Odner Director September 2000
Joey Schwartz Director June 2005
Stefan Boekamp Vice President Of Operations February 2008
Praveen Nair Chief Accounting Officer February 2008
Set forth below is information relating to the business experience of each of
the directors and executive officers of the Company.
ELBERT O. HAND. Age 69, has extensive experience in corporate management. Mr.
Hand became President of Hartmarx Corporation in 1985 and Chairman and Chief
Executive Officer from 1992 through 2004 and thereafter retired as Chairman and
remained as a director though 2009. Mr. Hand has also served on the Main Board
of Austin Reed PLC, London from 1993 to 2002 and currently serves on the Board
of Arthur J. Gallagher Inc. and has been a director from 2002 through the
present. Mr. Hand also serves on the advisory board of Terlato Wines
International and is a board member of the Savannah Music Festival, Savannah
Georgia and Chicago's Music of the Baroque Chorus and Orchestra of which he was
Chairman from 1995 to 2004. Mr. Hand attended The Kellog School of Management's
Executive Development Program at Northwestern University and received a
bachelor's degree from Hamilton College, Clinton, New York State. Effective
January 25, 2010, ESW's Board of Directors unanimous elected Elbert O. Hand to
serve as a member of the Board of Directors and appointed Mr. Hand Interim
Chairman until the next annual meeting of shareholders.
-58-
DAVID J. JOHNSON, age 48, has 27 years experience in the automotive industry in
various aspects of advanced engineering, systems development, manufacturing of
components, and as an entrepreneur. Mr. Johnson has served as the Company's
Chief Operating Officer from August 2000 through November 2001 and was elected
as a to the Board of Directors in September 2000. In addition to serving as a
Director of the Company, Mr. Johnson has served as Senior Vice President of
Sales and Marketing from November 2001 until May 2004 and served as acting Chief
Financial Officer from December 2004 through May 2005. Mr. Johnson was appointed
as the Interim Chief Executive Officer and President in May 1, 2004 and was
subsequently appointed President, Chief Executive Officer in June of 2005. Mr.
Johnson attended Tollgate Tech. Secondary, Mohawk College, Devry Institute of
Technologies and is an active member of the Society of Automotive Engineers
(SAE).
NITIN M. AMERSEY, age 58, has over thirty-six years of experience in
international trade, marketing and corporate management. Mr. Amersey was elected
as a director of Environmental Solutions Worldwide and has served as a member of
the board since January 2003. Mr. Amersey was appointed interim Chairman of the
Board in May 2004 and subsequently was appointed Chairman of the Board in
December 2004 and served as Chairman on ESW's board through to January 2010. In
addition to his service as a board member of Environmental Solutions Worldwide,
Mr. Amersey has been Chairman of Scothalls Limited, a private trading firm since
1978. Mr. Amersey has also served as President of Circletex Corp., a financial
consulting management firm since 2001 and has served as chairman of Midas Touch
Global Media Corp from 2005 to the present. He is also Chairman of Hudson
Engineering Industries Pvt. Ltd. and of Trueskill Technologies Pvt. Ltd.,
private companies domiciled in India. He is a director and CFO of the Trim
Holding Group, and the Chairman of ABC Acquisition Corp 1501, both public
corporations. From 2003 to 2006 Mr. Amersey was Chairman of RMD Entertainment
Group and also served during the same period as chairman of Wide E-Convergence
Technology America Corp. Mr. Amersey is also the owner of Langford Business
Services LLC. Mr. Amersey has a Masters of Business Administration Degree from
the University of Rochester, Rochester, N.Y. and a Bachelor of Science in
Business from Miami University, Oxford, Ohio. He graduated from Miami University
as a member of Phi Beta Kappa and Phi Kappa Phi. He is the sole member manager
of Amersey Investments LLC. Mr. Amersey also holds a Certificate of Director
Education from the NACD Corporate Director's Institute.
MICHAEL F. ALBANESE, age 56, has over 33 year's financial experience including
roles as Chief Financial Officer and Chief Operating Officer. Currently he is
the president of Cost Reduction Solutions, a CPA consulting firm providing
services to both private and public companies as well as to the banking
industry. Mr. Albanese received a Bachelor's degree in Accounting and is a
licensed CPA practicing in New Jersey. He is a member of the AICPA and NJSCPA,
The Garden State Credit Association and is a registered accountant with the
SEC's Public Company Accounting Oversight Board (PCAOB).
-59-
JOHN DUNLAP, III, 51, served as Chairman of the Board of Directors of the
California Air Resources Board from 1994 to 1999. In this post, Mr. Dunlap
promoted advanced technological solutions to achieve air quality and public
health protection gains. During his tenure as Chairman, Mr. Dunlap oversaw the
development and implementation of the most far-reaching air quality regulations
in the world aimed at fuels, engines and over 200 consumer products. Prior to
Mr. Dunlap's tenure at CARB, he served as the Chief Deputy Director of the
California Department of Toxic's Substances Control where his responsibilities
included, crafting the state's technology advancement program, serving as the
lead administration official in securing congressional and U.S. Department of
Defence/Executive Branch support and funding for military base closure
environmental clean-up and in creating a network of ombudsman staff to assist
the regulated businesses in demystifying the regulatory process. In addition,
Mr. Dunlap spent more than a decade at the South Coast Air Quality Management
District in a host of regulatory, public affairs and advisory positions where he
distinguished himself as the principle liaison with the business and regulatory
community. Mr. Dunlap is currently the owner of a California-based advocacy and
consulting firm called the Dunlap Group. He has served on the Board of
Director's of Environmental Solutions Worldwide Inc. since 2007. Mr. Dunlap has
a BA degree in Political Science and Business from the University of Redlands
(California) and a Master's degree in Public Policy from Claremont Graduate
University (California).
BENGT G. ODNER, age 57, has served as a director since September 2000. He served
as the Company's Chairman from September 2000 through October 2002. Mr. Odner
has also served as our Chief Executive Officer from August 1999 through
September 2000 and as interim Chief Executive Officer from February 2002 to July
2002. Mr. Odner was a director of Crystal Fund Ltd., a Bermuda mutual fund, and
was a director of Crystal Fund Managers, Ltd. from 1996 until January 2003. From
1990 through 1995, Mr. Odner was the Chairman of Altus Nord AB, a property
holding company specializing in Scandinavian properties and a wholly owned
subsidiary of Credit Lyonais Bank Paris. Mr. Odner holds a masters degree in
Business Administration from Babson College.
JOEY SCHWARTZ, age 49, has over 26 years experience in financial management,
business strategy development and marketing. During various periods from
February 2001 to September 2004, Mr. Schwartz served in various consulting
positions involving organizational development, corporate compliance, legal
affairs and finance for ESW and its wholly owned subsidiary ESW Canada Inc. In
May 2005 he was appointed as Chief Financial Officer (CFO) and served as CFO
through February 2008. He served as a consultant to the Company on special
projects and provided advice on compliance, due diligence, regulatory and
business matters from February 2008 through to December 2008. Prior to his
association with the Company, Mr. Schwartz consulted for several companies in
different industries including Identicam Systems Canada Ltd., which was acquired
under the GE Infrastructure security group of companies. He was President of
Empereau Manufacturing, for over 18 years, a manufacturing company supplying
products to the commercial specification and construction industry as well as
government procurement. He is currently president of JMC Emerald Corp. a
consulting company. Mr. Schwartz graduated on the dean's honour roll from York
University where he received a Bachelor of Arts Degree in Economics and
Mathematics.
-60-
STEFAN BOEKAMP, age 61, joined the Company in July 2005 as the Plant Manager of
the Company's wholly owned subsidiary, ESW Canada Inc. In February 2008 he was
appointed as the Company's Vice President of Operations. Prior to joining the
Company, Mr. Boekamp ran several machine building companies in Europe engaged in
tooling and specialized equipment design and building between 1971 and 1983.
From 1983 to 1992 he served as a General Manager and Vice President of
Operations for Magna International. He was the President and Chief Executive
Officer of Evermore Automation, an industrial magnet and automated equipment
manufacturer between 1992 and 2005. Mr. Boekamp has a Masters Degree in Tool and
Die Making, equivalent to a Professional Engineer Degree and a Masters in
Business Administration from Handwerskammer Ostwetfalen-Lippe Zu Bielefeld,
Bielefeld, Germany.
PRAVEEN NAIR, age 35, was appointed Chief Accounting Officer in February 2008.
He joined the Company in May 2005 and served in the position of Assistant to the
Chief Financial Officer supporting the Company's Chief Financial Officer in
day-to-day operations. In May 2006 he was promoted to Controller for the
Company's wholly owned subsidiaries, ESW America Inc. and ESW Canada Inc. Prior
to joining the Company, Mr. Nair was with e-Serve International Ltd, a Citigroup
company from December 2000 through January 2005 where he served as a Deputy
Manager in the Business Development and Migrations Unit and subsequently as
Manager and Senior Manager. He was responsible for feasibility studies and
regionalizing operations from countries in Europe, North America and Africa into
processing centers in Mumbai and Chennai in India. Mr. Nair has a Bachelors
Degree in Commerce with specialization in Accounting and a Masters Degree in
Finance from Faculty of Management Studies, College of Materials Management,
Jabalpur, India.
CORPORATE GOVERNANCE
GENERAL
ESW's management and Board of Directors believe that good corporate governance
is important to ensure that the Company is managed for the long-term benefit of
its stockholders. This section describes key corporate governance practices that
have been adopted.
BOARD OF DIRECTORS MEETINGS AND ATTENDANCE
The Board of Directors has responsibility for establishing broad corporate
policies and reviewing overall performance of the Company rather than day-to-day
operations. The primary responsibility of ESW's Board of Directors is to oversee
the management of the Company and, in doing so, serve the best interests of the
Company and its stockholders. The Board of Directors selects, evaluates and
provides for the succession of executive officers and, subject to stockholder
approval, the election of directors. The Board also reviews and approves
corporate objectives and strategies, and evaluates significant policies and
proposed major commitments of corporate resources as well as participates in
decisions that have a potential major economic impact on our Company. Management
keeps the directors informed of Company activity through regular communication,
including written reports and presentations at Board of Directors and committee
meetings.
-61-
We have no formal policy regarding director attendance at the annual meeting of
stockholders. The Board of Directors held ten (10) meetings in 2009, all of
which were telephonic. All board members were in attended at least seventy five
percent (80%) of the board meetings.
AUDIT COMMITTEE COMPOSITION
The Company has a separately designated standing audit committee comprised of
Michael F. Albanese (Chairman) and Nitin M. Amersey. Michael F. Albanese,
qualifies as a "financial expert" as defined by SEC rules. The Company's Board
has also determined that Michael F. Albanese meets the SEC definition of an
"independent" director. The Audit Committee met 6 times during 2009.
COMPENSATION COMMITTEE COMPOSITION
The Compensation Committee is currently comprised of Nitin Amersey, who serves
as Chairman, Bengt George Odner and Michael Albanese. In accordance with its
charter, the Compensation Committee is responsible for establishing and
reviewing the overall compensation philosophy of the Company, establishing and
reviewing the Company's general compensation policies applicable to the chief
executive officer and other officers, evaluating the performance of the chief
executive officer and other officers and approving their annual compensation,
reviewing and recommending the compensation of directors, reviewing and
recommending employment, consulting, retirement and severance arrangements
involving officers, and directors of the Corporation and reviewing and
recommending proposed and existing incentive-compensation plans and equity-based
compensation plans for the Corporation's directors, officers, employees and
consultants. The Compensation Committee met 2 times during 2009.
COMPENSATION POLICY:
The objective of the Compensation Committee with respect to compensation for
executive officers is to ensure that compensation packages are designed and
implemented to align compensation with both short-term and long-term key
corporate objectives and employee performance and to ensure that the Corporation
is able to attract, motivate and retain skilled and experienced executives in an
effort to enhance Environmental Solutions' success and shareholder value.
The compensation policies are designed to align the interests of management with
Environmental Solutions' shareholders. In order to do so, the committee takes
into consideration the experience, responsibility and performance of each
individual over the longer term and considers a range of short-and long-term
cash, and non-cash compensation elements. The Company believes that this serves
the goals of compensating Environmental Solutions' executive officers
competitively on a current basis, tying a significant portion of the executives'
compensation to company performance, and allowing the executive officers and key
employees to gain an ownership stake in Environmental Solutions commensurate
with their relative levels of seniority and responsibility. Each year, a review
of the executive compensation program, compensation philosophy, committee
mission and performance is completed. In addition, each year the committee
reviews the nature and amounts of all elements of the executive officers'
compensation, both separately and in the aggregate, to ensure that the total
amount of compensation is competitive with respect to Environmental Solutions'
peer companies, and that there is an appropriate balance for compensation that
is tied to the short- and long-term performance of the Company.
-62-
NOMINATION COMMITTEE:
The Company does not at present have a formal nominating committee. The full
Board of Directors as a group performs the role. The Board does not assign
specific weights to particular criteria and no particular criterion is a
prerequisite for each prospective nominee. ESW believes that the backgrounds and
qualifications of our directors, considered as a group, should provide a
significant breadth of experience, knowledge and abilities that will allow its
Board to fulfill its responsibilities.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Under the securities laws of the United States, the Company's directors,
executive officers, and any persons holding more than ten percent of the
Company's common stock are required to report their initial ownership of the
Company's common stock and any subsequent changes in their ownership to the
Securities and Exchange Commission. Specific due dates have been established by
the Commission, and the Company is required to disclose any failure to file by
those dates. Based upon (1) the copies of Section 16 (a) reports that the
Company received from such persons for their 2009 fiscal year transactions, the
Company believes there has been compliance with all Section 16 (a) filing
requirements applicable to such officers, directors and ten-percent beneficial
owners for such fiscal year.
CODE OF ETHICS
ESW's Board of Directors has adopted a Code of Business Conduct and Ethics which
provides a framework for directors, officers and employees on the conduct and
ethical decision-making integral to their work. The Audit Committee is
responsible for monitoring compliance with this code of ethics and any waivers
or amendments thereto can only be made by the Board or a Board committee. The
Code of Ethics is available on www.sec.gov as an exhibit with the Company's Form
10KSB filed with the Securities and Exchange Commission on April 3, 2006. The
Company can provide a copy of such Code of Ethics, upon receipt of a written
request to the attention of the CAO's Office, at ESW Inc., 335 Connie Crescent,
Concord, Ontario, Canada, L4K 5R2. The written request should include the
Company name, contact person and full mailing address and/or email address of
the requestor.
-63-
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for each of the last two (2)
fiscal years earned by the Chief Executive Officer and each of the most highly
compensated executive officers (the "Named Executives").
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------------------
NON-EQUITY NON-QUALIFIED
NAME OPTION INCENTIVE DEFERRED
/ PRINCIPAL STOCK AWARDS PLAN COMPENSATION ALL OTHER
POSITION YEAR SALARY BONUS AWARDS (5) COMPENSATION EARNINGS COMPENSATION TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
David J. Johnson (1) 2009 $240,000 -- -- -- -- -- $34,998 $274,998
Director,
Chief Executive Officer 2008 $240,000 -- -- -- -- -- $37,558 $277,558
And President
- -------------------------------------------------------------------------------------------------------------------------------
Joey Schwartz (2) 2009 -- -- -- -- -- -- -- $ 0
Director and
Chief Financial Officer 2008 $147,500 -- -- $4,992 -- -- $55,558 $208,050
- -------------------------------------------------------------------------------------------------------------------------------
Stefan Boekamp (3) 2009 $100,709 -- -- -- -- -- $10,421 $111,130
Vice President Of
Operations 2008 $95,335 -- -- $2,391 -- -- $16,140 $113,866
- -------------------------------------------------------------------------------------------------------------------------------
Praveen Nair (4) 2009 $105,088 -- -- -- -- -- $8,282 $113,370
Chief Accounting Officer
2008 $62,175 -- -- $2,391 -- -- $8,262 $72,828
- -------------------------------------------------------------------------------------------------------------------------------
1. Mr. David J. Johnson is paid at the annual rate of $240,000. In 2009 Mr.
Johnson received the following compensation $240,000 as salary and fees, $18,000
pay in lieu of vacation, a car allowance of $12,000 per annum and standard
medical and dental benefits provided by the Company totalling $4,998. In 2008
Mr. Johnson received the following compensation $240,000 as salary and fees,
$20,000 pay in lieu of vacation, a car allowance of $12,000 per annum and
standard medical and dental benefits provided by the Company totalling $5,558.
2. In 2009 Mr. Joey Schwartz was not an executive officer of the Company and did
not receive any remuneration. Mr. Joey Schwartz currently serves as a Director
for the Company. Mr. Schwartz served as the Chief Financial Officer for the
Company from May 2005 through to February 2008. Effective February 4, 2008
through to December 2008, Mr. Schwartz served as a consultant per an agreement
with the Company. In 2008, Mr. Schwartz received the following compensation,
$147,500 as salary and consulting fees, and standard medical and dental benefits
provided by the Company totalling $5,558. In February 2008, Mr. Schwartz
received options for 100,000 shares of Common Stock with a per share exercise
price of $1.00(exercise price greater than the fair market value on the date of
grant) the compensation expense for this stock option grant was $4,992. In
December 2008 as per the terms of the separation clauses under the consulting
agreement with Mr. Schwartz, the Company recognised a $50,000 expenses. This
separation payment is due in eight equal bi-monthly instalments from December
2008 through to April 2009.
-64-
3. Mr. Stefan Boekamp is paid at the annual rate of $115,000 Canadian Dollars
(which translates to United State Dollar $100,709 for the year ended December
31, 2009). In 2009 Mr. Boekamp received the following compensation $100,709 as
salary, $5,423 pay in lieu of vacation, and standard medical and dental benefits
provided by the Company totalling $4,998. In 2008 Mr. Boekamp received the
following compensation $95,335 as salary, $10,582 pay in lieu of vacation, and
standard medical and dental benefits provided by the Company totalling $5,558.
In February 2008, Mr. Boekamp received options for 50,000 shares of Common Stock
with a per share exercise price of $0.71(exercise price greater than the fair
market value on the date of grant) the compensation expense for this stock
option grant was $2,391.
4. Mr. Praveen Nair is paid at the annual rate of $120,000 Canadian Dollars
(which translates to United State Dollar $105,088 for the year ended December
31, 2009). In 2009 Mr. Nair received the following compensation $105,088 as
salary, $3,284 pay in lieu of vacation, and standard medical and dental benefits
provided by the Company totalling $4,998. In 2008 Mr. Nair received the
following compensation $62,175 as salary, $2,704 pay in lieu of vacation, and
standard medical and dental benefits provided by the Company totalling $5,558.
In February 2008, Mr. Nair received options for 50,000 shares of Common Stock
with a per share exercise price of $0.71(exercise price greater than the fair
market value on the date of grant) the compensation expense for this stock
option grant was $2,391.
5. Represents the cost of the compensation expense recorded by the Company for
option grants in 2009 and 2008.
EMPLOYMENT AGREEMENTS
In February 2007, the Company entered into an employment agreement with Mr.
Johnson as President and Chief Executive Officer. The agreement provides, among
other things, for an annual salary of $240,000, as well as an award of 600,000
options exercisable for a term of five (5) years at an exercise price of $0.71
per share (fair market value of the Company's stock as of the date of grant).
The agreement also provides that, other than in connection with Mr. Johnson's
employment being terminated other than for death, disability, conviction of a
felony or non-performance of duties, he will be paid the balance of his
contract. The employment agreement provides for participation in benefit plans
ESW offers to its employees, and a car allowance of $1,000 per month.
In 2009 Mr. Schwartz was not an executive officer of the company. In 2008 Mr.
Schwartz acting as the Company's Chief Financial Officer received total
compensation of $120,000 on an annual basis plus benefit plans ESW offers to its
employees. Effective February 4, 2008, the Company and Mr. Schwartz entered into
a consulting agreement whereby Mr. Schwartz would serve as a consultant to the
Company and would no longer serve as the Company's Chief Financial Officer.
Under the consulting agreement, Mr. Schwartz received a $12,500 monthly fee and
served as a consultant to the Company on special projects and provided advice on
compliance, due diligence, regulatory and business matters. Effective December
2008 the consulting agreement with Mr. Schwartz was terminated.
-65-
Effective February 4, 2008, the Company entered into an employment agreement
with Mr. Stefan Boekamp as Vice President of Operations. The agreement provides,
among other things, for an annual salary of $115,000 Canadian, as well as an
award of 50,000 options exercisable for a term of five (3) years at an exercise
price of $0.71 per share (the exercise price being greater than the fair market
value of the Company's stock as of the date of grant). The employment agreement
also provides for participation in benefit plans ESW offers to its employees.
The agreement also contains a non-disclosure and non-compete clause. The
non-compete portion of the agreement is in effect for a period of three (3)
months after Mr. Boekamp's departure from the Company.
Effective February 4, 2008, the Company entered into an employment agreement
with Mr. Praveen Nair as Chief Accounting Officer. The agreement provides, among
other things, for an annual salary of $75,000 Canadian, as well as an award of
50,000 options exercisable for a term of five (3) years at an exercise price of
$0.71 per share (the exercise price being greater than the fair market value of
the Company's stock as of the date of grant). The employment agreement also
provides for participation in benefit plans ESW offers to its employees. The
agreement also contains a non-disclosure and non-compete clause. The non-compete
portion of the agreement is in effect for a period of three (3) months after Mr.
Nair's departure from the Company. Effective January 1, 2009, the agreement has
been amended and Mr. Nair's annual salary has been increased to $120,000
Canadian Dollars from $75,000 Canadian Dollars.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table shows certain information regarding the outstanding equity
awards held by the Named Executives at the end of 2009.
No stock options were granted in 2009. In February 2008 the Board of Directors
granted:
An award of 100,000 stock options to Mr. Schwartz. The options have immediate
vesting with an exercise price of $1.00 per share (share price greater than
fair-market value at the date of grant) with an exercise period of five years
from the date of award. b) An award of 50,000 stock options to Mr. Boekamp and
50,000 stock options to Mr. Nair. The options have immediate vesting with an
exercise price of $0.71 per share (share price greater than fair-market value at
the date of grant) with an exercise period of three years from the date of
award.
-66-
NUMBER OF SECURITIES OPTION OPTION
UNDERLYING EXERCISE EXPIRY
NAME UNEXERCISED OPTIONS(#) PRICE DATE
- --------------------------------------------------------------------------------
200,000 $1.00 12/30/2010
David J. Johnson 700,000 $0.71 02/16/2012
150,000 $0.27 08/06/2013
- --------------------------------------------------------------------------------
50,000 $0.71 02/16/2010
Stefan Boekamp 50,000 $1.00 12/30/2010
50,000 $0.71 02/06/2011
- --------------------------------------------------------------------------------
50,000 $0.71 02/16/2010
Praveen Nair 20,000 $1.00 12/30/2010
50,000 $0.71 02/06/2011
- --------------------------------------------------------------------------------
THE 2002 STOCK OPTION PLAN
On June 23, 2005, the Company, with shareholder approval, amended its 2002 Stock
Option Plan (the "Plan"), to increase the underlying shares of common stock
available under the plan to 5,000,000 shares. The 2002 Stock Option Plan is the
successor plan to the 2000 Nonqualified Stock Option Plan. All stock options
outstanding under the 2000 Nonqualified Stock Option Plan remain in effect
according to their terms and conditions (including vesting requirements). Under
the Company's 2002 Stock Option Plan, the compensation committee may grant
equity incentive awards to directors, officers, employees and service providers
of the Company, in the form of incentive stock options, non-qualified stock
options, and other performance-related or non-restricted stock awards. The
selection of participants in the 2002 Plan, the determination of the award
vehicles to be utilized and the number of stock options or shares subject to an
award are determined by the Company compensation committee, in its sole
discretion, within the approved allocation of shares. The committee shall
determine any service requirements and/or performance requirements pertaining to
any stock awards under the 2002 Plan. The Plan permits the Company to provide
its employees with incentive compensation opportunities which are motivational
and which afford the most favourable tax and accounting treatments to the
Company. The exercise price of any option granted under the 2002 Plan shall not
be less than the fair market value of the common stock of the Company on the
date of grant.
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COMPENSATION OF NON-MANAGEMENT DIRECTORS
FEES EARNED OPTIONS
NAME OF OUTSIDE OR PAID IN AWARDS (1)
DIRECTOR YEAR CASH $ TOTAL
--------------------------------------------------------------------------
Elbert O. Hand (2) 2009 $ -- $ -- $ --
2008 $ -- $ -- $ --
--------------------------------------------------------------------------
Nitin M. Amersey 2009 $49,500 $ -- $ 49,500
2008 $54,000 $ -- $ 54,000
--------------------------------------------------------------------------
Michael F. Albanese 2009 $38,500 $ -- $ 38,500
2008 $42,000 $ -- $ 42,000
--------------------------------------------------------------------------
John D. Dunlap III 2009 $27,500 $ -- $ 27,500
2008 $30,000 $ -- $ 30,000
--------------------------------------------------------------------------
Bengt G. Odner 2009 $27,500 $ -- $ 27,500
2008 $30,000 $ -- $ 30,000
--------------------------------------------------------------------------
Joey Schwartz 2009 $ 27,500 $ -- $ 27,500
2008 $ 1,250 $ -- $ 1,250
--------------------------------------------------------------------------
During the fiscal year 2009 and 2008, outside directors were compensated at the
rate of $2,500 a month. The Chairman of the Board of Directors received an
additional $2,000 per month and the Chair of the audit committee received an
additional $1,000 per month.
-68-
(1) Represents the cost of the compensation expense recorded by the Company in
accordance with FAS123R (ASC 718-10-10). In 2009 and 2008 no stock option awards
were issued to Outside Directors.
(2) Effective January 25, 2010, ESW's Board of Directors unanimous elected
Elbert O. Hand to serve as a member of the Board of Directors and appointed Mr.
Hand Interim Chairman until the next annual meeting of shareholders. Mr. Hand
did not receive any compensation from the Company in 2009 and 2008.
The following table shows certain information regarding the outstanding equity
awards held by the outside Directors at the end of 2009.
No stock awards or stock options were granted to the outside Directors in 2009
and 2008.
OPTION
NUMBER OF EXERCISE OPTION
OPTIONS (#) PRICE EXPIRATION
NAME OUTSTANDING ($) DATE
-------------------------------------------------------------------
50,000 $ 0.27 08/06/2013
Nitin M. Amersey 150,000 $ 1.00 12/30/2010
300,000 $ 0.71 02/16/2012
-------------------------------------------------------------------
Michael F. Albanese 450,000 $ 0.71 02/16/2012
-------------------------------------------------------------------
John D. Dunlap III 300,000 $ 0.71 02/16/2012
-------------------------------------------------------------------
50,000 $ 0.27 08/06/2013
Bengt G. Odner 150,000 $ 1.00 12/30/2010
300,000 $ 0.71 02/16/2012
-------------------------------------------------------------------
200,000 $ 1.00 12/30/2010
Joey Schwartz (1) 100,000 $ 0.71 02/16/2012
100,000 $ 1.00 02/08/2013
-------------------------------------------------------------------
(1) Mr. Joey Schwartz's status changed to an Outside Director in December 2008.
As an Outside Director, Mr. Schwartz has not received any stock option awards.
The option awards show in the table above reflect Mr. Schwartz's prior awards
which are still effective until their expiration date.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The following table sets forth, to the best knowledge of the Company, as of
March 31, 2010, certain information with respect to (1) beneficial owners of
more than five percent (5%) of the outstanding common stock of the Company, (2)
beneficial ownership of shares of the Company's common stock by each director
and named executive, (3) beneficial ownership of shares of common stock of the
Company by all directors and officers as a group.
-69-
Unless otherwise noted, all shares are beneficially owned and the sole voting
and investment power is held by the persons/entities indicated.
Calculations are based upon the aggregate of all shares of common stock issued
and outstanding as of March 29, 2010 in addition to shares issuable upon
exercise of options currently exercisable or becoming exercisable within 60 days
and which are held by the individuals named on the table.
As a result of the debenture financing disclosed in Note 10: Convertible
Debentures and the Note 18: - Subsequent Events and subsequent conversion of the
debentures disclosed in Note 18: - Subsequent Events, the combined ownership
position held by Leon D. Black , The Black Family 1997 Trust, The Leon D. Black
Trust UAD 11/30/92 FBO Alexander Black, TheLeon D. Black Trust UAD 11/30/92 FBO
Benjamin Black, The Leon D. Black Trust UAD 11/30/92 FBO Joshua Black and The
Leon D. Black Trust UAD 11/30/92 FBO Victoria Black has decreased from a
potential ownership of 44.39% in 2008 to an actual ownership of 32.11% on a
fully diluted basis, however these entities disclaim beneficial ownership (see
beneficial ownership table below) . Also the potential ownership position held
by Mr. Bengt G. Odner, a director and shareholder of the Company has decreased
from to 25.29% in 2008 to 19.61% in 2009 (actual ownership 19.29% - 2009) on a
fully diluted basis. The reason for ownership interest decrease on a fully
diluted basis is due to the company's recent finance offerings as described in
Note 18: Subsequent Events.
NAME AND ADDRESS OF TOTAL BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP (1) CLASS
- -------------------------------------------------------------------------------
Bert Hand, Chairman
c/o 335 Connie Crescent 500,000 (2) 0.40%
Concord, ON L4K 5R2
- -------------------------------------------------------------------------------
Nitin M. Amersey, Director
c/o 335 Connie Crescent 500,000 (3) 0.40%
Concord, ON L4K 5R2
- -------------------------------------------------------------------------------
David J. Johnson
Chief Executive Officer,
President and Director 1,650,000 (4) 1.32%
c/o 335 Connie Crescent
Concord, ON L4K 5R2
- -------------------------------------------------------------------------------
Bengt G. Odner, Director
c/o 335 Connie Crescent 24,337,120 (5) 19.61%
Concord, ON L4K 5R2
- -------------------------------------------------------------------------------
Joey Schwartz, Director
c/o 335 Connie Crescent 410,000 (6) 0.33%
Concord, ON L4K 5R2
- -------------------------------------------------------------------------------
Michael F. Albanese, Director
c/o 335 Connie Crescent 450,000 (7) 0.36%
Concord, ON L4K 5R2
-70-
- -------------------------------------------------------------------------------
John D. Dunlap, III, Director
c/o 335 Connie Crescent 300,000 (8) 0.24%
Concord, ON L4K 5R2
- -------------------------------------------------------------------------------
Stefan Boekamp,
Vice President of Operations
c/o 335 Connie Crescent 100,000 (9) 0.08%
Concord, ON L4K 5R2
- -------------------------------------------------------------------------------
Praveen Nair, Chief Accounting Officer
c/o 335 Connie Crescent 70,900 (10) 0.06%
Concord, ON L4K 5R2
- -------------------------------------------------------------------------------
Black Family 1997 Trust
c/o 9 West 57TH Street, Suite 4300 14,834,698 (11) 12.00%
New York NY 10019
- -------------------------------------------------------------------------------
Leon D. Black
c/o 9 West 57TH Street, Suite 4300 5,879,253 (12) 4.76%
New York NY 10019
- -------------------------------------------------------------------------------
Leon D. Black Trust UAD
11/30/92 FBO Alexander Black 4,743,140 (13) 3.84%
c/o 9 West 57TH Street, Suite 4300
New York NY 10019
- -------------------------------------------------------------------------------
Leon D. Black Trust UAD
11/30/92 FBO Benjamin Black 4,743,140 (14) 3.84%
c/o 9 West 57TH Street, Suite 4300
New York NY 10019
- -------------------------------------------------------------------------------
Leon D. Black Trust UAD
11/30/92 FBO Joshua Black 4,743,140 (15) 3.84%
c/o 9 West 57TH Street, Suite 4300
New York NY 10019
- -------------------------------------------------------------------------------
Leon D. Black Trust UAD
11/30/92 FBO Victoria Black 4,743,140 (16) 3.84%
c/o 9 West 57TH Street, Suite 4300
New York NY 10019
- -------------------------------------------------------------------------------
All current directors and executive
officers as a group (Nine persons) 28,318,020 22.15%
- -------------------------------------------------------------------------------
(1) On the basis of 123,588,099 shares of common stock outstanding, plus, in the
case of any person deemed to own shares of common stock as a result of owning
options or rights to purchase common stock exercisable within 60 days of March
29, 2010.
(2) Includes 200,000 shares of Common Stock. Includes options to purchase
300,000 shares of common stock at $0.63 per share, expiring March 25, 2014. Mr.
Hand has agreed to stand back on exercise of the 300,000 options until the
Company has sufficient authorised shares available for issuance.
-71-
(3) Includes options to purchase 50,000 shares of common stock at $0.27 per
share expiring August 6, 2013, options to purchase 150,000 shares of common
stock at $1.00 per share expiring December 30, 2010, and options to purchase
300,000 shares of common stock at $0.71 per share expiring February 16, 2012.
Mr. Amersey has agreed to stand back on exercise of the 500,000 options until
the Company has sufficient authorised shares available for issuance.
(4) Includes options to purchase 150,000 shares of common stock at $0.27 per
share expiring August 6, 2013, includes options to purchase 200,000 shares of
common stock at $1.00 per share expiring December 30, 2010 options to purchase
700,000 shares of common stock at $0.71 per share expiring February 16, 2012 and
options to purchase 600,000 shares of common stock at $0.63 per share expiring
March 25, 2014. Mr. Johnson has agreed to stand back on exercise of the
1,650,000 options until the Company has sufficient authorised shares available
for issuance.
(5) Mr. Bengt George Odner is a director of Environmental Solutions Worldwide,
Inc. as well as AB Odnia and the beneficiary of a trust that controls Ledelle
Holdings Limited and Sedam Limited. Includes indirect ownership of 7,609,943
shares of Common Stock owned by Sedam Limited, a corporation organized under the
laws of Cyprus which is controlled by a trust of which Mr. Bengt Odner is the
sole beneficiary, and 1,000,000 shares of Common Stock owned by Ledelle Holding
Limited which is controlled by a trust to which Mr. Odner is also a beneficiary.
Also includes 16,507,177 shares of Common Stock Beneficially Owned by Mr. Odner
represented by 14,507,177 shares acquired upon conversion of convertible
debentures and 1,000,000 shares of Common Stock previously owned. Also includes
500,000 shares underlying director stock options that may be exercised as
follows: 50,000 shares at $0.27 per share, 150,000 shares at $1.00 per share and
300,000 shares at $0.71 per share. Mr. Odner has agreed to stand back on
exercise of the 500,000 options until the Company has sufficient authorised
shares available for issuance.
(6) Includes 10,000 shares of Common Stock and includes options to purchase
200,000 shares of common stock at $1.00 per share expiring December 30, 2010,
options to purchase 100,000 shares of common stock at $0.71 per share expiring
February 16, 2012, and options to purchase 100,000 shares of common stock at
$1.00 per share expiring February 8, 2013.
(7) Includes 450,000 options to purchase 450,000 shares of common stock at $0.71
per share expiring February 16, 2012.
(8) Includes 300,000 options to purchase 300,000 shares of common stock at $0.71
per share expiring February 16, 2012.
(9) Includes options to purchase 50,000 shares of common stock at $1.00 per
share expiring December 30, 2010, and options to purchase 50,000 shares of
common stock at $0.71 per share expiring February 3, 2011.
(10) Includes 900 shares of Common Stock and includes options to purchase 20,000
shares of common stock at $1.00 per share expiring December 30, 2010, and
options to purchase 50,000 shares of common stock at $0.71 per share expiring
February 3, 2011. Mr. Nair has agreed to stand back on exercise of the 70,000
options until the Company has sufficient authorised shares available for
issuance.
-72-
(11) Includes 14,834,698 shares of Common Stock Beneficially Owned by the Black
Family 1997 Trust (the "1997 Trust") represented by 5,852,381 shares of Common
Stock directly beneficially owned by the 1997 Trust and 8,982,317 shares of
Common Stock acquired upon conversion of convertible debentures directly
beneficially owned by the 1997 Trust. Does not include: 5,879,253 shares of
Common Stock directly beneficially owned, by Leon D. Black, 4,743,140 shares of
Common Stock directly beneficially owned, in each case by each of (A) the Leon
D. Black Trust UAD 11/30/92 FBO Alexander Black, (B) the Leon D. Black Trust UAD
11/30/92 FBO Benjamin Black, (C) the Leon D. Black Trust UAD 11/30/92 FBO Joshua
Black, and (D) the Leon D. Black Trust UAD 11/30/92 FBO Victoria Black, and (E)
1,088,095 shares of Common Stock directly beneficially owned by John J. Hannan.
The 1997 Trust expressly disclaims beneficial ownership of each of the
referenced securities in the preceding sentence.
(12) Includes 5,879,253 shares of Common Stock Beneficially Owned by Leon D.
Black represented by 1,388,095 shares of Common Stock directly beneficially
owned by Leon D. Black and 4,491,158 shares of Common Stock acquired upon
conversion of convertible debentures directly beneficially owned by Leon D.
Black. Also includes 5,852,381 shares of Common Stock directly beneficially
owned by the Black Family 1997 Trust and 8,982,317 shares of Common Stock
acquired upon conversion of convertible debentures directly beneficially owned
by the 1997 Trust. Although Mr. Black may be deemed to be the indirect
beneficial owner of the securities referenced in the preceding sentence, Mr.
Black disclaims beneficial ownership. Does not include: 4,743,140 shares of
Common Stock directly beneficially owned, by each of (A) the Leon D. Black Trust
UAD 11/30/92 FBO Alexander Black, (B) the Leon D. Black Trust UAD 11/30/92 FBO
Benjamin Black, (C) the Leon D. Black Trust UAD 11/30/92 FBO Joshua Black, and
(D) the Leon D. Black Trust UAD 11/30/92 FBO Victoria Black, and (E) 1,088,095
shares of Common Stock directly beneficially owned by John J. Hannan. Mr. Black
expressly disclaims beneficial ownership of each of the referenced securities in
the preceding sentence.
(13) Includes 851,470 shares of Common Stock directly beneficially owned by the
Leon D. Black Trust UAD 11/30/92 FBO Alexander Black (the "Alexander Trust") and
3,891,670 shares of Common Stock acquired upon conversion of convertible
debentures directly beneficially owned by the Alexander Trust. Does not include:
1,388,095 shares of Common Stock directly beneficially owned, and 4,491,158
shares of Common Stock acquired upon conversion of convertible debentures
directly beneficially owned by Leon D. Black, 851,470 shares of Common Stock
directly beneficially owned, and 3,891,670 shares of Common Stock acquired upon
conversion of convertible debentures directly beneficially owned, in each case
by each of (A) the Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black, (B) the
Leon D. Black Trust UAD 11/30/92 FBO Joshua Black, and (C) the Leon D. Black
Trust UAD 11/30/92 FBO Victoria Black, (D) 5,852,381 shares of Common Stock
directly beneficially owned, and 8,982,317 shares of Common Stock acquired upon
conversion of convertible debentures directly beneficially owned, by the Black
Family 1997 Trust, and (E) 1,088,095 shares of Common Stock directly
beneficially owned by John J. Hannan. The Alexander Trust expressly disclaims
beneficial ownership of each of the referenced securities in the preceding
sentence.
-73-
(14) Includes 851,470 shares of Common Stock directly beneficially owned by the
Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black (the "Benjamin Trust") and
3,891,670 shares of Common Stock acquired upon conversion of convertible
debentures directly beneficially owned by the Benjamin Trust. Does not include:
1,388,095 shares of Common Stock directly beneficially owned, and 4,491,158
shares of Common Stock acquired upon conversion of convertible debentures
directly beneficially owned, by Leon D. Black, 851,470 shares of Common Stock
directly beneficially owned, and 3,891,670 shares of Common Stock acquired upon
conversion of convertible debentures directly beneficially owned, in each case
by each of (A) the Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, (B) the
Leon D. Black Trust UAD 11/30/92 FBO Joshua Black, and (C) the Leon D. Black
Trust UAD 11/30/92 FBO Victoria Black, (D) 5,852,381 shares of Common Stock
directly beneficially owned, and 8,982,317 shares of Common Stock acquired upon
conversion of convertible debentures directly beneficially owned, by the Black
Family 1997 Trust, and (E) 1,088,095 shares of Common Stock directly
beneficially owned by John J. Hannan. The Benjamin Trust expressly disclaims
beneficial ownership of each of the referenced securities in the preceding
sentence.
(15) Includes 851,470 shares of Common Stock directly beneficially owned by the
Leon D. Black Trust UAD 11/30/92 FBO Joshua Black (the "Joshua Trust") and
3,891,670 shares of Common Stock acquired upon conversion of convertible
debentures directly beneficially owned by the Joshua Trust. Does not include:
1,388,095 shares of Common Stock directly beneficially owned, and 4,491,158
shares of Common Stock acquired upon conversion of convertible debentures
directly beneficially owned, by Leon D. Black, 851,470 shares of Common Stock
directly beneficially owned, and 3,891,670 shares of Common Stock acquired upon
conversion of convertible debentures directly beneficially owned, in each case
by each of (A) the Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, (B) the
Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black, and (C) the Leon D. Black
Trust UAD 11/30/92 FBO Victoria Black, (D) 5,852,381 shares of Common Stock
directly beneficially owned, and 8,982,317 shares of Common Stock acquired upon
conversion of convertible debentures directly beneficially owned, by the Black
Family 1997 Trust, and (E) 1,088,095 shares of Common Stock directly
beneficially owned by John J. Hannan. The Joshua Trust expressly disclaims
beneficial ownership of each of the referenced securities in the preceding
sentence.
(16) Includes 851,470 shares of Common Stock directly beneficially owned by the
Leon D. Black Trust UAD 11/30/92 FBO Victoria Black (the "Victoria Trust") and
3,891,670 shares of Common Stock acquired upon conversion of convertible
debentures directly beneficially owed by the Victoria Trust. Does not include:
1,388,095 shares of Common Stock directly beneficially owned, and 4,491,158
shares of Common Stock acquired upon conversion of convertible debentures
directly beneficially owned, by Leon D. Black, 851,470 shares of Common Stock
directly beneficially owned, and 3,891,670 shares of Common Stock acquired upon
conversion of convertible debentures directly beneficially owned, in each case
by each of (A) the Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, (B) the
Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black, and (C) the Leon D. Black
Trust UAD 11/30/92 FBO Joshua Black, (D) 5,852,381 shares of Common Stock
directly beneficially owned, and 8,982,317 shares of Common Stock acquired upon
conversion of convertible debentures directly beneficially owned, by the Black
Family 1997 Trust, and (E) 1,088,095 shares of Common Stock directly
beneficially owned by John J. Hannan. The Victoria Trust expressly disclaims
beneficial ownership of each of the referenced securities in the preceding
sentence.
-74-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information about transactions involving related parties is assessed by the
directors on ESW's Board. Related parties include directors and executive
officers, as well as immediate family members of directors and officers, and
beneficial owners of more than five percent of the Company's common stock. If
the determination is made that a related party has a material interest in any
Company transaction, then the Company's directors would review, approve or
ratify it, and the transaction would be required to be disclosed in accordance
with the SEC rules. If the related party at issue is a director, then that
director would not participate in the review, approval or ratification process.
In general, ESW believes that some transactions with related parties are not
significant to investors because they take place under the Company's standard
policies and procedures, such as: the sale or purchase of products or services
in the ordinary course of business and on an arm's length basis; the employment
by the Company where the compensation and other terms of employment are
determined on a basis consistent with the Company's human resources policies.
RELATED TRANSACTIONS
NOTES PAYABLE TO RELATED PARTY
On January 5, 2007 the Company extended the maturity date of the unsecured
subordinated promissory originally issued on June 26, 2006 in the principal
amount of $1.2 million; and the August 29, 2006 unsecured subordinated
promissory note in the principal amount of $1.0 million, through to January 31,
2007. On February 9, 2007, the Company's two unsecured subordinated promissory
notes in the principal amount of $1.2 million and $1.0 million and accrued
interest were consolidated into one unsecured subordinated demand note with
principal amount of $2,308,148 (the "Consolidated Note"). The Consolidated Note
was payable to Ledelle Holdings Limited a company controlled by a trust of which
Mr. Bengt George Odner, a director and shareholder of the Company is a
beneficiary.
In accordance with the terms of the Consolidated Note in the principle amount of
$2,308,148, the same will be due and payable to Holder upon demand. The
Consolidated Note bears interest at a rate of 9% per annum if principal and
interest are paid by the Company in cash, or if principal and interest are paid
in shares of restricted common stock of the Company, the Consolidated Note will
bear interest at a rate of 12% per annum. The Company may repay the Consolidated
Note without penalty at any time. The holder of the Note has the option to
receive payment of principal and all accrued interest in the form of restricted
shares of the Company's common stock, par value ($0.001) with cost free
registration rights. Under this repayment option, interest will be calculated at
12% per annum.
-75-
On February 15, 2007 the Company issued a $500,000 unsecured subordinated demand
promissory note to Mr. Bengt George Odner, a member of the Company's Board of
Directors. On March 7, 2007 the Company issued a second $500,000 unsecured
subordinated demand promissory note to Mr. Odner and consolidated this sum with
the principal and accrued interest of the $500,000 unsecured demand promissory
note previously issued on February 15, 2007 (the "Consolidated Subordinate
Note"). The Consolidated Subordinate Note is in the principal amount of
$1,002,589. The Consolidated Subordinate Note bears interest at a rate of 9% per
annum and is payable upon demand. The Company may repay the Consolidated Note
without penalty at any time. The Note was issued to a director and shareholder
of the Company.
Effective June 2, 2008 the Company entered into a Credit Facility Agreement with
Mr. Bengt George Odner, a director and shareholder of the Company. Pursuant to
the Agreement, the Company can request draw down(s) under the Facility of up to
$1,500,000 in the aggregate with funds to be used for general working capital
purposes. All request(s) to draw down under the Facility are subject to the debt
holders consent and approval. An approved draw down by the Company under the
Facility will be represented by a 9% unsecured subordinated demand promissory
note issued by the Company to the debtor or his designee. The Company may repay
the Note at anytime without penalty. At the option of the Note holder, in lieu
of cash, principal and interest earned on the Note can be repaid in restricted
common stock of the Company. Should the Note holder elect to receive stock of
the Company, interest on principal will be calculated at a rate of 12% per
annum. The number of shares of Common Stock to be issued in satisfaction of
interest and principal shall be determined by dividing the principal and accrued
interest by the greater of 105% of the twenty (20) day average closing price of
the Company's Common Stock immediately preceding the date the Note holder elects
to have the Note satisfied with Common Stock, or the Closing Price on that date.
Under no circumstance can the conversion price be below the fair market price of
the Company's Common Stock on the date the Note holder elects to have the Note
satisfied with Common Stock. The Company may request draw down(s) under the
Facility through December 31, 2008.
Subsequently, from June 2008 to October 2008 a total of nine unsecured
subordinated promissory notes were issued totalling to $1,253,000 in principal.
These nine notes are part of a series of draw downs against a Credit Facility
Agreement. Of the nine notes the Company repaid one note in the amount of
$150,000 in principal and $ 4,475 interest, this note was due to Mr. Louis E.
Edmondson a shareholder of the Company who by separate agreement with the above
debt holder and the Company agreed to provide funding to the Company under the
credit facility.
-76-
In November 2008 the Company recorded $275,922 in the Consolidated Statements Of
Changes In Stockholders' Equity (Deficit) towards loss on extinguishment of debt
as a payment to Mr. Bengt George Odner a director and shareholder of the Company
to surrender the right to convert the existing notes payable into common stock
of the Company. Also, on November 7, 2008 the February 9, 2007 Consolidated Note
with principal amount of $2,308,148, the March 7, 2007 Consolidated Subordinate
Note with principal amount of $1,002,589 and all notes issued under the Credit
Facility Agreement of June 2, 2008 in the principal amount of 1,103,000 have
been extinguished through a repayment of $2,200,000 the principal portion only
of the $2,308,148 Consolidated Note and $48,214 as taxes withholding to Ledelle
Holdings Limited a company controlled by a trust of which Mr. Bengt George
Odner, a director and shareholder of the Company is a beneficiary. The balance
of principal and interest has been converted into a convertible debenture.
On December 29, 2009, the Company issued a $500,000 unsecured subordinated
promissory note to Mr. Bengt George Odner, a director and shareholder of the
Company with interest accruing at the annual rate of 9%. Upon the Company
completing a financing for the gross sum of $2 million dollars or more or in the
event the Company does not complete a Financing by March 31, 2010, this Note
will be payable upon Demand of the Holder.
As at December 31, 2009, principal and interest on notes payable to related
party was $500,000 & $0 respectively. As at December 31, 2008, principal and
interest on notes payable to related party was $0.
CONTRACTS AND AGREEMENTS
Mr. Amersey a Director of ESW is the owner of Langford Business Services LLC, a
company that is party to a sales representative agreement dated March 15, 2002,
with the Company's wholly owned subsidiary, ESW Canada, Inc. whereby Langford
and its subagent, Hudson Engineering Industries Pvt. Ltd. (Bombay), also owned
by Mr. Amersey and his family, serve as ESW Canada's exclusive representative in
India for the sale and after sale support of certain products of the Company in
India. To date, no sales transactions have taken place under the agreement
between ESW Canada and Langford.
-77-
In 2008, Mr. Joey Schwartz, a director and shareholder of the company provided
consulting services to the company under a consulting agreement. The agreement
provided 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 The Leon Black 1997 Family Trust is included as a
related party all other entities disclaim beneficial ownership (see beneficial
ownership table ITEM 12). The Leon Black 1997 Family Trust participated in the
November convertible debenture offering with a principal investment of
$2,000,000. (See Note 10 - CONVERTIBLE DEBENTURES). From the proceeds of the
$6.0 million convertible debentures, the Company elected to repay $2.2 million,
the principal portion only, of a previously issued Consolidated Note in the
principal amount of $2,308,148 to Ledelle Holdings Limited a company controlled
by a trust to which Mr. Bengt George Odner, 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 Mr. Bengt George Odner, a director and
shareholder of the Company, in the principal amount of $1,002,589. The Mr. Bengt
George Odner 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 November 3, 2008 offering. Additionally
the Company's $1.5 million credit facility also provided by Mr. Odner, from
which the Company had drawn down the sum of $1,103,000 as of November 3, 2008,
will also be satisfied by way of issuance of Debentures under the November 3,
2008 offering. With the agreement to settle all the notes previously issued, the
Debt holder Mr. Bengt George Odner is subscribing to an aggregate of $2,566,077
of Debentures under the offering.
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 anytime after six (6)
months of the date of issuance 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.
-78-
On August 28, 2009, the Company completed a transaction whereby it issued $1.6
million of 9% convertible debentures (the "2009 Debentures") to six accredited
investors. Of the $1.6 million received by the Company, $500,000 was received
from Mr. Bengt George Odner a director of the Company through the exchange of a
$300,000 unsecured 9% subordinated demand short term loan previously provided to
the Company on August 11, 2009 and an additional $200,000 investment made by Mr.
Odner in the offering. The 2009 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 by dividing the principal amount of the 2009 Debenture to be converted by
$0.50. The 2009 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 $0.50. Subject to the holder's right to convert, the Company
has the right to redeem the 2009 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
2009 Debentures contain customary price adjustment protections.
As at December 31, 2009, the principal amount of Convertible Debenture net of
accretion due to related party amounted to $5,428,443 with a corresponding
accrued interest of $540,128, and debt discount of $71,557. At December 31,
2008, Convertible Debenture due to related party amounted to $5,000,000 with a
corresponding accrued interest of $68,548. For further details see Note 10 -
CONVERTIBLE DEBENTURES.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES:
The Company paid its principal accountant MSCM LLP, $ 0 to date in audit fees
for the audit of the Company's annual financial statements for 2009.
The Company paid its principal accountant MSCM LLP $24,524 in audit fees for
review of the financial statements included in its Form 10-QSB for the three
quarterly reports in 2009.
The Company paid its former principal accountant Deloitte $94,286 to date in
audit fees for the audit of the Company's annual financial statements for 2008.
The Company paid its former principal accountant Deloitte $19,704 in audit fees
for review of the financial statements included in its Form 10-QSB for the three
quarterly reports in 2008.
TAX AND OTHER FEES:
The Company paid its principal accountant MSCM LLP $0 and $29,971 for tax and
compliance services for 2009.
The Company paid its former principal accountant Deloitte $0 for tax and
compliance services for 2008 respectively.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
The Company has filed the following documents as part of this Form 10-K:
1. CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm - Page F1
Financial Statements
Consolidated Balance Sheets - Page F3
Consolidated Statements of Income - Page F4
Consolidated Statements of Stockholders' Equity - Page F5
Consolidated Statements of Cash Flows - Page F6
Notes to Consolidated Financial Statements - Page F7-31
2. FINANCIAL STATEMENT SCHEDULE
All schedules have been omitted because they are not required, not applicable,
or the required information is otherwise included.
3. EXHIBITS.
Exhibits are incorporated by reference to the Index of Exhibits provided at the
end of this Report on Form 10-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on behalf
of the undersigned; thereunto duly authorized this 06 th day of April 2010 in
the city of Concord, Province of Ontario.
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
(Registrant)
BY: /S/ DAVID J. JOHNSON
------------------------
DAVID J. JOHNSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below, by the following persons on behalf of the Registrant and
in the capacities indicated.
SIGNATURES TITLE DATE
- --------------------------------------------------------------------------------
/S/ ELBERT O. HAND CHAIRMAN APRIL 06, 2010
- ----------------------------
ELBERT O. HAND
/S/ DAVID J. JOHNSON PRESIDENT, CHIEF APRIL 06, 2010
- ---------------------------- EXECUTIVE OFFICER,
DAVID J. JOHNSON AND DIRECTOR
/S/ NITIN M. AMERSEY DIRECTOR APRIL 06, 2010
- ----------------------------
NITIN M. AMERSEY
/S/ MICHAEL F. ALBANESE DIRECTOR APRIL 06, 2010
- ----------------------------
MICHAEL F. ALBANESE
/S/ JOHN DUNLAP III DIRECTOR APRIL 06, 2010
- ----------------------------
JOHN DUNLAP
/S/ BENGT G. ODNER DIRECTOR APRIL 06, 2010
- ----------------------------
BENGT G. ODNER
/S/ JOEY SCHWARTZ DIRECTOR APRIL 06, 2010
- ----------------------------
JOEY SCHWARTZ
/S/ PRAVEEN NAIR CHIEF ACCOUNTING APRIL 06, 2010
- ---------------------------- OFFICER
PRAVEEN NAIR
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INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
NUMBER
3.1 Articles of Incorporation of the Company. (1)
3.2 Bylaws of the Company. (1)
3.3 Articles of Incorporation of the Company, as amended as of
November 29, 2001. (Originally filed as exhibit 3.2) (5)
3.4 Articles of Incorporation of the Company as amended July 20,
2005 (Originally filed as exhibit 3.3) (13)
3.5 Bylaws of the Company as amended January 3, 2006 (15)
4.1 Form of Warrant Certificate issued April, 1999. (1)
4.2 Form of Warrant Certificate for 2002 Unit Private Placement
(7)
4.3 Form of three (3) year Warrant Certificate exercisable at
$0.90 per share issued on April and July 2005. (13)
4.4 Form of three (3) year Warrant Certificate exercisable at
$2.00 per share issued on April and July 2005. (13)
4.5 Form of three (3) year Warrant Certificate exercisable at
$3.00 per share issued on April and July 2005. (13)
4.6 Form of Specimen of Common Stock Certificate. (Originally
filed as exhibit 4.1)
10.1 Form of Agreement dated January 29, 1999 by and between the
shareholders BBL Technologies, Inc. and the Company. (1)
10.2 Form of Consulting Agreement dated March 31, 1999 by and
between May Davis Group and the Company. (1)
10.3 Form of Commission Agreement dated March 31, 1999 by and
between May Davis Group and the Company. (1)
10.4 Form of Option Agreement dated June 21, 1999, between David
Coates o/a Fifth Business and the Company. (1)
10.5 Form of Option Agreement dated June 21 1999 between Zoya
Financial Corp. and the Company. (1)
10.6 Form of Consulting Agreement with Bruno Liber dated January
29, 2000. (2)
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10.7 Form of Office Offer to Lease for Environmental Solutions
Worldwide Inc. dated October 6, 1999. (2)
10.8 Form of Financial relations agreement with Continental
Capital & Equity Corporation dated December 5, 2000. (4)
10.9 Form of Employment Agreement between John A. Donohoe, Jr.
and the Company dated as of September 10, 2003. (6)
10.10 Form of Employment Agreement between Robert R. Marino and
the Company dated as of September 10, 2003. (6)
10.11 Form of Employment Agreement between David J. Johnson and
the Company dated as of September 10, 2003. (6)
10.12 Form of Subscription Agreement for 2001 Common Stock
Placement. (7)
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EXHIBIT NUMBER DESCRIPTION
10.13 Form of Subscription Agreement for 2002 Unit Private
Placement and related representation letters. (7)
10.14 Form of unsecured subordinated promissory note issued by the
Company to AB Odinia, dated August 27, 2004. (Originally
filed as exhibit 10.1) (8)
10.15 Form of Securities Subscription Agreement between the
Company and Investor for the purchase of 4% Convertible
Debentures and three (3) year warrant exercisable at $1.00
per share dated September, 2004. (Originally filed as
exhibit 10.1) (9)
10.16 Form of 4% Three (3) Year Debenture issued by the Company
dated September, 2004. (Originally filed as exhibit 10.2)
(9)
10.17 Form of Three (3) Year Warrant to purchase the Company's
Common Stock at $1.00 a share dated September,
2004.(Originally filed as exhibit 10.3) (9)
10.18 Form of Registration Rights Agreement dated September, 2004.
(Originally filed as exhibit 10.4) (9)
10.19 Form of Lease agreement and amended lease agreement between
the Company's wholly owned subsidiary ESW America Inc. and
Nappen & Associates dated on November 16, 2004. (12)*
10.20 Form of Subscription Agreement dated April and July 2005 for
Common Stock at $0.85 and Warrants exercisable at $0.90,
$2.00 and $3.00 per share. (13)
10.21 Form of Registration rights Agreement dated April and July
2005. (13)
10.22 Form of $1.2 Million Unsecured Subordinated Promissory Note
dated June 30, 2006. (16)
10.23 Form of $1 Million Unsecured Subordinated Promissory Note
dated September 7, 2006. (17)
10.24 Form of Separation Agreement and Release of Claims by and
between the Company and Stan Kolaric dated October 12, 2006.
(20)
10.25 Form of $500,000 Unsecured Subordinated Promissory Note
dated November 17, 2006. (18)
10.26 Form of Contract for Investor Relations Service by and
between the Company and Delta 2005 AG dated December 12,
2006. (20)
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10.27 Form of Consolidated $2.3 Million Unsecured Subordinated
Demand Promissory Note dated February 9, 2007. (20)
10.28 Form of $500,000 Unsecured Subordinated Demand Promissory
Note by and between the Company and Mr. Bengt Odner, dated
February 15, 2007. (20)
10.29 Form of Employment Agreement between David J. Johnson and
the Company dated as of January 1, 2007. (20)
10.30 Form of Assignment by Inventor by and between the Company
and David Johnson dated February 16, 2007. (20)
10.31 Form of Consolidated 1.002 Million Note by and between the
Company and Mr. Bengt Odner dated March 13, 2007. (20)
10.32 Form of $2.5 Million Financing Loan Agreement by and between
ESW Canada Inc and Royal Bank of Canada dated March 5, 2007
(20)
10.33 Letter Agreement dated October 11, 2007 and effective
November 2, 2007 by and between the Company's wholly
owned subsidiary ESW Canada Inc and Royal Bank of
Canada amending the terms of the Credit Facility
Agreement dated as of
March 2, 2007. (21)
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EXHIBIT NUMBER DESCRIPTION
10.34 Form of Employment Agreement between Stefan Boekamp and the
Company dated as of February 4, 2008. (23)
10.35 Form of Employment Agreement between Praveen Nair and the
Company dated as of February 4, 2008. (23)
10.36 Form of Credit Facility Agreement between the Company and
Mr. Bengt Odner Dated June 2, 2008 (24)
10.37 Form of $500,000 Unsecured Subordinated Demand Promissory
Note by and between the Company and Mr. Bengt Odner, dated
June 2, 2008 (24)
10.38 Form of Securities Subscription Agreement between the
Company and Investor for the purchase of 9% three (3) year
Convertible Debentures (25)
10.39 Form of 9% Three (3) Year Debenture issued by the Company
dated November 3, 2008. (25)
10.40 Form of Registration Rights Agreement dated November 3,
2008. (25)
10.41 Form of Consulting Agreement between Joey Schwartz and the
Company dated as of February 4, 2008 (26)
10.42 Form of Securities Subscription Agreement between the
Company and Investor Ledelle Holdings Ltd. for the purchase
of 9% three (3) year Convertible Debentures dated November
7, 2008. (26)
10.43 Form of 9% Three (3) Year Debenture issued by the Company to
Investor Ledelle Holdings Ltd. dated November 7, 2008. (26)
10.44 Form of Registration Rights Agreement between the Company
and Investor Ledelle Holdings Ltd. for the purchase of 9%
three (3) year Convertible Debentures (25)
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10.45 Form of Securities Subscription Agreement between the
Company and Investor Mr. Bengt Odner. for the purchase of 9%
three (3) year Convertible Debentures dated November 7,
2008. (26)
10.46 Form of 9% Three (3) Year Debenture issued by the Company to
Investor Mr. Bengt George Odner dated November 7, 2008. (26)
10.47 Form of Registration Rights Agreement between the Company
and Investor Ledelle Holdings Ltd. for the purchase of 9%
three (3) year Convertible Debentures (25)
10.48 Form of Amendment to Employment Agreement between Praveen
Nair and the Company effective as of January 1, 2009.(26)
10.49 Form of 9% Unsecured Promissory Note (27)
10.50 Form of Letter Agreement Amendment to Secured Commercial
Loan Agreement by and between ESW Canada Inc and Royal Bank
of Canada dated as of August 24, 2009 (28)
10.51 Form of Securities Subscription Agreement for 9% Convertible
Debentures dated as of August 28, 2009 (29)
10.51 Form of 9% Three (3) year debentures (29)
10.53 Lease Renewal Agreement by and between the Company's wholly
owned subsidiary ESW America, Inc. and Nappen Associates
effective October 16, 2009
10.54 Form of 9% Unsecured Promissory Note effective December 29,
2009 (30)
10.55 Form of Securitas Subscription Agreement for 9% Convertible
Debentures dated as of March 19, 2010 (31)
10.56 Form of 9% three year Convertible Debenture dated as of
March 19, 2010 (31)
10.57 Form of Registration Rights Agreement dated as of March 19,
2010 (31)
10.58 Form of Loan Agreement by and between the Company's wholly
subsidiary ESW Canada, Inc and Canadian Imperial Bank of
Commerce effective March 31, 2010.
10.59 Form of Guarantee of Loan Guarantee of Loan Agreement by and
between Canadian Imperial Bank of Commerce and the Company,
and the Company's wholly owned subsidiaries ESW America, Inc
and ESW Technologies, Inc.
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10.60 Form of Patent and Trademark Security Agreement by and
between the Company's wholly owned subsidiary ESW
Technologies, Inc. and Canadian Imperial Bank of Commerce
14.1 Code of ethics adopted March 28, 2005 by the Company's Board
Of Directors. (12)
14.2 Code of ethics as amended March 28, 2006 by the Company's
Board Of Directors. (15)
16.1 Letter from James E. Scheifley & Associates, P. C. (1)
16.2 Letter from Daren, Martenfeld, Carr, Testa and Company LLP
dated February 2001. (3)
16.3 Letter of resignation from Goldstein and Morris Certified
Public Account P.C. dated October 20, 2004 (10)
16.4 Letter from Goldstein and Morris Certified Public Account
P.C. dated November 23, 2004 (11)
16.5 Letter from Deloitte & Touche LLP dated May 29, 2009 (32)
21.1 List of subsidiaries. (1)
31.1 Certification Pursuant To Section 302 of the Sarbanes-Oxley
Act Of 2002
31.2 Certification Pursuant To Section 302 of the Sarbanes-Oxley
Act Of 2002
32.1 Certification Pursuant To 18 U.S. C. Section 1350 as Adopted
Pursuant To Section 906 of The Sarbanes- Oxley Act Of 2002
32.2 Certification Pursuant To 18 U. S. C. Section 1350 as
Adopted Pursuant To Section 906 of The Sarbanes- Oxley Act
Of 2002
99.1 Form of Compensation Committee Charter dated February 14,
2007. (19)
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NOTES
(1) Incorporated herein by reference from the Registrant's Form 10 Registration
Statement (SEC File No. 000-30392) filed with the Securities and Exchange
Commission of November 18, 1999
(2) Incorporated herein by reference from the Registrant's 10-K filed with the
Securities and Exchange Commission on March 30, 2000.
(3) Incorporated herein by reference from the Registrant's Form 8-K/A filed with
the Securities and Exchange Commission on March 14, 2001.
(4) Incorporated herein by reference from the Registrant's 10-KSB filed with the
Securities and Exchange Commission on April 16, 2001.
(5) Incorporated herein by reference from the Registrants Form 10-KSB filed with
the Securities and Exchange Commission on April 01, 2002.
(6) Incorporated herein by reference from the Registrant's Form 10-QSB/A filed
with the Securities and Exchange Commission on November 26, 2003.
(7) Incorporated by reference from an exhibit filed with the Registrant's
Registration Statement on Form S-2 (File No. 333-112125) filed on January 22,
2004.
(8) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on September 2, 2004.
(9) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on September 17, 2004.
(10) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on October 22, 2004.
(11) Incorporated herein by reference from the Registrants Form 8-K/A filed with
the Securities and Exchange Commission on December 2, 2004.
(12) Incorporated by reference to the Registrant's Form 10-KSB filed with the
Securities and Exchange Commission on March 31, 2005.
(13) Incorporated herein by reference from the Registrants Form 10-QSB filed
with the Securities and Exchange Commission on August 15, 2005.
(14) Incorporated herein by reference from the Registrants Form S-8 Registration
Statement SEC File No. 333-127549) filed on August 15, 2005.
(15) Incorporated herein by reference from the Registrants Form 10-KSB filed
with the Securities and Exchange Commission on April 3, 2006.
-89-
(16) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on June 30, 2006.
(17) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on September 7, 2006.
(18) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on November 17, 2006.
(19) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on February 14, 2007.
(20) Incorporated herein by reference from the Registrants Form 10-KSB filed
with the Securities and Exchange Commission on March 30, 2007.
(21) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on November 8, 2007.
(22) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on February 1, 2008.
(23) Incorporated herein by reference from the Registrants Form 10-KSB/A filed
with the Securities and Exchange Commission on April 29, 2008.
(24) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on June 2, 2008.
(25) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on November 7, 2008.
(26) Incorporated herein by reference from the Registrants Form 10-K filed with
the Securities and Exchange Commission on April 9, 2009.
(27) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on January 05, 2010.
(28) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on August 26, 2009.
(29) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on September 2, 2009.
(30) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on January 5, 2010.
(31) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on March 23, 2010.
(32) Incorporated herein by reference from the Registrants Form 8-K filed with
the Securities and Exchange Commission on June 2, 2010.
* Confidential treatment requested for a portion of this exhibit
** PREVIOUSLY FILED WITH FORM SB-2.
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