SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended - March 31, 2010.
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)
COMMON STOCK, $0.001 PAR VALUE
(Title of class)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Company was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Indicate by check mark whether the registrant 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 [ ] (Not yet applicable to issuer)
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | | Accelerated Filer | | Non-Accelerated Filer | |
Smaller reporting company [x]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).YES [ ] NO [X]
There were 123,588,099 shares of the registrant's Common Stock outstanding as of
May 14, 2010.
FORM 10-Q
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
TABLE OF CONTENTS
PAGE #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets as of March 31, 2010 F2
(unaudited) and December 31, 2009
Consolidated Condensed Statements of Operations and Comprehensive F3
Gain/(Loss) for the Three Month Periods Ended March 31, 2010
and 2009 (unaudited)
Consolidated Condensed Statements of Changes in Stockholders' Equity F4
(Deficit) and comprehensive income for the Three Months Ended
March 31, 2010 (unaudited)
Consolidated Condensed Statements of Cash Flows
for the Three Months Ended March 31, 2010 and 2009 (unaudited) F5
Notes to Consolidated Condensed Financial Statements (unaudited) F6-F22
Item 2. Management's Discussion And Analysis Of Financial Condition And 3
Results Of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 15
Item 4. Controls And Procedures 16
PART II. OTHER INFORMATION
Item 1A. Risk Factors 17
Item 2. Unregistered Sale of Equity Securities And Use Of Proceeds 17
Item 5. Other Information. 18
Item 6. Exhibits. 18
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2010 2009
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents (Note 4) $ 949,021 $ 632,604
Accounts receivable, net of allowance 1,586,078 1,118,929
for doubtful accounts of $10,186 (2009 - $6,637) (Note 2)
Inventory (Note 5) 2,348,538 1,508,414
Prepaid expenses and sundry assets 300,397 213,484
------------ ------------
Total current assets 5,184,034 3,473,431
Property, plant and equipment under construction (Note 6) 163,102 138,800
Property, plant and equipment, net of accumulated
depreciation of $ 5,016,740 2,520,629 2,687,105
(2009 - $4,663,281) (Note 6)
Patents and trademarks, net of accumulated
amortization of $1,955,132 175,953 229,347
(2009 - $1,901,501) (Note 2)
------------ ------------
$ 8,043,718 $ 6,528,683
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,726,205 $ 1,126,680
Accrued liabilities 436,459 1,311,518
Advance Share Subscription (Note 10) 2,909,872 --
Notes payable to related party (Note 7) -- 500,000
Bank loan (Note 8) -- 713,037
Customer deposits 14,627 9,857
Redeemable Class A special shares (Note 9) 453,900 453,900
Current portion of capital lease obligation (Note 15) 5,760 8,857
------------ ------------
Total current liabilities 5,546,823 4,123,849
------------ ------------
Long-Term Liabilities
Convertible debentures net of deferred costs -- 10,334,513
of $0 (2009 - $36,506)
and debt discount of $0 (2009 - $228,981) (Note 10)
Capital lease obligation (Note 15) 10,886 10,861
------------ ------------
Total long-term liabilities 10,886 10,345,374
------------ ------------
Total liabilities 5,557,709 14,469,223
------------ ------------
Commitments and Contingencies (Note 15)
Stockholders' Equity / (deficit) (Note 12)(Note 13)
Common stock, $0.001 par value, 125,000,000
shares authorized; 123,588,099 shares
issued and outstanding (2009 - 73,823,851) 123,586 73,822
Additional paid-in capital 41,354,114 26,083,635
Accumulated other comprehensive income 529,248 425,383
Accumulated deficit (39,520,939) (34,523,380)
------------ ------------
Total stockholders' equity / (deficit) 2,486,009 (7,940,540)
------------ ------------
$ 8,043,718 $ 6,528,683
============ ============
The accompanying notes are an integral part of these
consolidated condensed financial statements
F2
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE GAIN / (LOSS)
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(UNAUDITED)
2010 2009
------------ ------------
Revenue
Net sales $ 2,248,596 $ 370,118
Cost of sales 1,510,490 206,018
------------ ------------
Gross profit 738,106 164,100
------------ ------------
Operating expenses
Marketing, office and general costs 995,802 812,085
Research and development costs 125,314 384,707
Officers' compensation and directors fees 198,357 155,048
Consulting and professional fees 105,975 590
Foreign exchange loss / (gain) 56,223 (27,734)
Depreciation and amortization 262,845 260,676
------------ ------------
1,744,516 1,585,372
------------ ------------
Loss from operations (1,006,410) (1,421,272)
Interest on long-term debt (183,858) (202,499)
Amortization of deferred costs (117,131) (4,979)
Long-term debt accretion (768,981) --
Inducement premium (2,909,872) --
Interest on notes payable to related party (11,342) --
Interest income 35 466
------------ ------------
Net loss (4,997,559) (1,628,284)
------------ ------------
Other comprehensive gain/(loss):
Foreign currency translation of Canadian subsidiaries 103,865 (50,569)
------------ ------------
Net comprehensive loss $ (4,893,694) $ (1,678,853)
============ ============
Net loss per share (basic and diluted) $ (0.06) $ (0.02)
============ ============
Weighted average number of shares outstanding (basic and diluted) 77,694,404 72,973,851
============ ============
The accompanying notes are an integral part of these
consolidated condensed financial statements
F3
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2010
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL INCOME DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
January 1, 2010 73,823,851 $ 73,822 $ 26,083,635 $ 425,383 $(34,523,380) $ (7,940,540)
Net loss -- -- -- -- (4,997,559) (4,997,559)
Common stock issued from
conversion of debentures 49,764,248 49,764 14,730,479 -- -- 14,780,243
Fair value of convertible debentures -- -- 540,000 -- -- 540,000
Foreign currency translation of
Canadian subsidiaries -- -- -- 103,865 -- 103,865
------------ ------------ ------------ ------------ ------------ ------------
March 31, 2010 123,588,099 $ 123,586 $ 41,354,114 $ 529,248 $(39,520,939) $ 2,486,009
------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these
consolidated condensed financial statements
F4
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(UNAUDITED)
2010 2009
------------ ------------
Net Loss $ (4,997,559) $ (1,628,284)
------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property, plant and equipment 281,492 252,742
Amortization of patents and trademarks 53,414 53,185
Provision for uncollectible accounts 3,242 --
Interest on long-term debt 183,858 202,499
Amortization of deferred costs 36,506 4,979
Long-term debt accretion 768,981 --
Inducement premium on conversion of Debentures
(Note 10) 2,909,872 --
------------ ------------
4,237,365 513,405
------------ ------------
Increase (decrease) in cash flows from operating
activities resulting from changes in:
Accounts receivable (464,671) (66,399)
Inventory (910,526) (52,932)
Prepaid expenses and sundry assets (15,322) 43,919
Accounts payable and accrued liabilities 615,258 (126,444)
Customer deposits 4,770 --
------------ ------------
(770,491) (201,856)
------------ ------------
Net cash used in operating activities (1,530,685) (1,316,735)
------------ ------------
Investing activities:
Proceeds from sale of property, plant and equipment -- --
Acquisition of property, plant and equipment (81,096) (51,540)
Property, plant and equipment under construction (19,902) (16,623)
Increase in patents and trademarks -- (1,107)
------------ ------------
Net cash used in investing activities (100,998) (69,270)
------------ ------------
Financing activities:
Convertible debentures placement 3,000,000 --
Repayment of bank loan (720,510) (56,664)
Repayment of notes payable to related party (500,000) --
Repayment of capital lease obligation (3,668) (2,924)
------------ ------------
Net cash provided by / (used in) financing activities 1,775,822 (59,588)
------------ ------------
Net increase / (decrease) in cash and equivalents 144,139 (1,445,593)
Foreign exchange gain / (loss) on foreign operations 172,277 (50,569)
Cash and cash equivalents, beginning of period 632,604 2,247,623
------------ ------------
Cash and cash equivalents, end of period $ 949,021 $ 751,461
============ ============
Supplemental disclosures:
Interest received $ 35 $ 466
Cash interest paid $ 11,844 $ 875
Other non-cash conversion debenture principal and interest
(Note 10) $ 14,780,243 $ --
============ ============
The accompanying notes are an integral part of these
consolidated condensed financial statements
F5
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
Environmental Solutions Worldwide Inc. (the "Company" or "ESW") through its
wholly-owned subsidiaries is engaged in the design, development, manufacturing
and sales of environmental technologies and testing services with its primary
focus on the international on-road and off-road diesel market. ESW currently
manufactures and markets a line of catalytic emission control and enabling
technologies for a number of applications.
The unaudited consolidated condensed 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 March 31, 2010, the Company has an accumulated deficit of
$39,520,939 and cash and cash equivalents of $949,021. Based on cash and cash
equivalents on hand at March 31, 2010, 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, 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 unaudited consolidated condensed 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 condensed
financial statements.
These statements have not been audited and should be read in conjunction with
the consolidated financial statements and the notes thereto included in ESW's
Annual Report on Forms 10-K, as filed with the United States Securities and
Exchange Commission for the year ended December 31, 2009. The methods and
policies set forth in the year-end audited consolidated financial statements are
followed in these interim consolidated condensed financial statements.
All adjustments considered necessary for fair presentation and of a normal
recurring nature have been included in these interim consolidated condensed
financial statements. Revenues and operating results for the three month period
ended March 31, 2010 are not necessarily indicative of the results to be
expected for the full year.
F6
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated condensed financial statements include the accounts of the
Company and its wholly-owned subsidiaries, ESW America Inc., ESW Technologies
Inc., ESW Canada Inc. and BBL Technologies Inc. All inter-company transactions
and balances have been eliminated on consolidation. Amounts in the consolidated
condensed financial statements are expressed in U.S. dollars.
ESTIMATES
The preparation of consolidated condensed 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, valuation of
share based compensation, inventory, redeemable Class A special shares, advance
share subscription and accounts receivable.
CONCENTRATION OF CREDIT RISK
The Company's cash balances are maintained in various banks in Canada and the
United States. Deposits held in banks in the United States are insured up to
$250,000 per depositor for each bank by the Federal Deposit Insurance
Corporation. Deposits held in banks in Canada are insured up to $100,000
Canadian per depositor for each bank by The Canada Deposit Insurance Corporation
a federal Crown 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 27.9%, 20.4%, and 17.62%, respectively of the Company's revenue during the
three month period ended March 31, 2010 and 24.8%, 15.6%, and 1.9%, respectively
of its accounts receivable as at March 31, 2010. Three of its customers
accounted for 45%, 20%, and 9%, respectively of the Company's revenue in fiscal
2009 and 27%, 11%, and 25%, respectively of its accounts receivable as at
December 31, 2009.
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 $10,186 was appropriate as at March 31, 2010
and that a reserve of $6,637 was appropriate as at December 31, 2009.
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.
F7
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 period ended March 31,
2010 was $53,418, amortization expense for the year ended December 31, 2009 was
$212,792.
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. 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.
F8
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 1.3% 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 is used to offset
these expenditures. For the three month period ended March 31, 2010 and 2009 the
Company expensed $226,840 and $384,707 respectively towards research and
development costs. For the three month period ended March 31, 2010 and 2009,
grant money amounted to $101,526 and $0 respectively.
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 March 31, 2010, $91,336 (March 31, 2009 - $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 (March 31, 2010 - less than 1.3% of total
revenue, 2009 less than 3% of total revenue) from providing air testing and
environmental certification services. For the period ended March 31, 2010 and
December 31, 2009, all revenues were generated from the United States. As at
March 31, 2010, $1,528,510 (2009 - $1,662,243) 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 April 2010, the FASB issued ASU No. 2010-013 - Compensation Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades a consensus of the FASB Emerging Issues Task Force. ASU
2010-13 addresses the classification of an employee share-based award with an
exercise price denominated in the currency of a market in which the underlying
equity security trades. The amendments are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company will comply with the additional disclosures required by this
guidance upon its adoption in January 2011.
F9
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 2010-06 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 adoption of the guidance did not have a material effect on the
Company's consolidated financial position, results of operations, cash flows or
related disclosures.
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 adoption of the guidance did not have a material effect on the
Company's consolidated financial position, results of operations, cash flows or
related disclosures.
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 adoption of the guidance did not have a material effect on the Company's
consolidated financial position, results of operations, cash flows or related
disclosures.
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.
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 March 31, 2009 and 2008 all of the Company's cash and cash
equivalents consisted of cash.
NOTE 5 - INVENTORY
Inventory is summarized as follows:
MARCH 31, DECEMBER 31,
INVENTORY 2010 2009
---------------------------------------------
Raw materials $ 967,698 $ 844,649
Work-In-Process 1,294,005 640,286
Finished goods 86,835 23,479
---------------------------------------------
TOTAL $2,348,538 $1,508,414
=============================================
F10
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
MARCH 31, DECEMBER 31,
CLASSIFICATION 2010 2009
-----------------------------------------------------------
Plant, machinery and equipment $ 5,651,977 $ 5,539,017
Office equipment 377,530 325,626
Furniture and fixtures 458,364 451,281
Vehicles 18,157 17,951
Leasehold improvements 1,031,341 1,016,511
--------------------------
$ 7,537,369 $ 7,350,386
Less: accumulated depreciation (5,016,740) (4,663,281)
--------------------------
$ 2,520,629 $ 2,687,105
--------------------------
MARCH 31, MARCH 31,
Depreciation Expense 2010 2009
----------------------------------------------------------------------
Depreciation expense included in Cost of Sales $ 41,511 $ 10,215
Depreciation expense included in operating expenses $ 209,427 $ 207,491
Depreciation expense included in research
and development costs $ 34,101 $ 35,036
-----------------------
Total Depreciation expense $ 285,039 $ 252,742
-----------------------
At March 31, 2010 and December 31, 2009 the Company had $163,102 and $138,800,
respectively, of customized equipment under construction.
The office equipment above includes $19,784 in assets under capital lease with a
corresponding accumulated depreciation of $16,615 for the three month period
ended March 31, 2010. As at year ended December 31, 2009 office equipment
included $19,121 in assets under capital lease with a corresponding accumulated
depreciation of $15,493.
The Plant, machinery and equipment above includes $37,552 in assets under
capital lease with a corresponding accumulated depreciation of $20,854 for the
three month period ended March 31, 2010. As at year ended December 31, 2009,
plant, machinery and equipment included $36,294 in assets under capital lease
with a corresponding accumulated depreciation of $18,592.
NOTE 7 - NOTES PAYABLE TO RELATED PARTY
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% as per the terms of
the note upon the Company completing a financing for the gross sum of $2 million
dollars or more or in the event the Company did not complete a Financing by
March 31, 2010, this Note would have been payable upon Demand of the Holder.
Effective March 31, 2010 the Company repaid $500,000 principal and $11,342 in
interest from the proceeds of the March 19, 2010 convertible debentures
issuance. (See NOTE 10 - CONVERTIBLE DEBENTURES for details.)
F11
As at March 31, 2010, principal and corresponding accrued interest outstanding
on notes payable to related party was $0. As at December 31, 2009, principal and
interest outstanding on notes payable to related party was $500,000.
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, the agreement was amended to extend the term of the
Agreement through to June 30, 2009 and effective August 21, 2009, the term of
the secured commercial loan agreement with RBC was extended through to April 30,
2010. 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.
The Credit Facility was guaranteed by the Company and its subsidiary ESW Canada
through the pledge of their assets to RBC. The facility had been guaranteed to
the bank under Export Development Canada ("EDC") pre-shipment financing program.
Borrowings under the revolving credit agreement bore interest at 1.5% above the
bank's prime rate of interest.
Repayments of any loans were required no later than one year from the date of
the advancement of that loan. Obligations under the revolving credit agreement
were 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.
Effective March 31, 2010, all borrowings under the RBC facility were repaid and
the facility with RBC was closed. As at December 31, 2009, $713,037 was owed
under the facility.
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 Canadian. Borrowings under the
facility are limited to a percentage of accounts receivable plus a percentage of
inventories (capped at $1 million Canadian 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 CIBC under Export
Development Canada's Export Guarantee Program. Borrowings under the credit
facility bear interest at 2.25% above CIBC'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. As at March 31, 2010 the
Company is in compliance with all covenants under the facility. At March 31,
2010, $0 is outstanding under the 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 $689,112 USD at March 31,
2010). As the redeemable Class A special shares were issued by the Company's
wholly-owned subsidiary BBL, the maximum value upon which the Company is liable
is the net book value of BBL. As at March 31, 2010 BBL has an accumulated
deficit of $1,188,418 USD ($1,840,808 Canadian dollars as at March 31, 2010)
(December 31, 2009 - $ 1,187,506 USD which equates to $1,839,864 Canadian) and
therefore, the holder would be unable to redeem the redeemable Class A special
shares at their ascribed value.
F12
NOTE 10 - CONVERTIBLE DEBENTURES
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. 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 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 was committed to pay a premium as an inducement to convert all
debentures. The premium is payable to all converting debenture holders and was
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 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,
the premium has been recorded as an advance share purchase agreement at fair
market value $2,909,872 as at March 31, 2010, the agreement is without interest,
subordinated to the banks position and payable in a fixed number of common
shares (4,375,665 shares) of the Company upon increase in the authorised share
capital of the Company.
TOTAL TOTAL
2008 DEBENTURE 2009 DEBENTURE 2010 DEBENTURE MARCH 31, 2010 DECEMBER 31, 2009
-------------- -------------- -------------- --------------- ---------------
Face value of convertible debenture $ 9,000,000 $ 1,600,000 $ 3,000,000 $ 13,600,000 $ 10,600,000
Less: Beneficial conversion feature -- (256,000) (540,000) (796,000) (256,000)
Deferred costs (59,738) -- (80,625) (140,363) (59,738)
--------------- -------------- --------------- --------------- ---------------
Book value upon issuance $ 8,940,262 $ 1,344,000 $ 2,379,375 $ 12,663,637 $ 10,284,262
Accretion of the debt discount -- 256,000 540,000 796,000 27,019
Amortization of deferred costs 59,738 -- 80,625 140,363 23,232
--------------- -------------- ---------------- --------------- ---------------
CARRYING VALUE $ 9,000,000 $ 1,600,000 $ 3,000,000 $ 13,600,000 $ 10,334,513
---------------
CONVERSION (MARCH 25/2010) (9,000,000) (1,600,000) (3,000,000) (13,600,000)
--------------- -------------- ---------------- ---------------
CARRYING VALUE (MARCH 31/2010) $ 0 $ 0 $ 0 $ 0
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 were for a term of three (3) years and were
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 earned 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 elected to receive interest in shares of common stock, the number of
shares of common stock to be issued for interest would be determined by dividing
accrued interest by $0.50. The Debentures had a mandatory conversion feature
that required the holders to convert in the event a majority of the Company's
pre-existing outstanding 9% convertible debentures converted. Subject to the
holder's right to convert and the mandatory conversion feature, the Company had
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
was payable in cash or common stock at the option of the Holder. The Company
also had provided the holders of the Debentures registration rights. The
Debentures contained customary price adjustment protections.
F13
At the time the 2010 Debentures were issued, the Company recorded a debt
discount for a beneficial conversion feature in the amount of $540,000. The debt
discount being the aggregate intrinsic value calculated as the difference
between the market price of the Company's share of stock on March 19, 2009 and
the conversion price of the 2010 Debentures. The debt discount was being
accreted over the three (3) year life of the debentures using the effective
yield method. The effective yield on the debentures was 16.36%.
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 were for a term of three (3) years and were
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 earned 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 elected to receive interest in shares of common stock, the number of
shares of common stock to be issued for interest would be determined by dividing
accrued interest by $0.50. Subject to the holder's right to convert, the Company
had 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 was payable in cash or common stock at the option of the Holder. The
2009 Debentures contained 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 being 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 was being
accreted over the three (3) year life of the debentures using the effective
yield method. The effective yield on the debentures was 15.52%.
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 were for a term of three (3) years and were
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 earned 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
elected to receive interest in shares of common stock, the number of shares of
common stock to be issued for interest would be determined by dividing accrued
interest by $0.25. Subject to the holder's right to convert, the Company had 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 was payable
in cash or common stock at the option of the Holder. The Debentures contained
customary price adjustment protections. The effective yield on the 2008
debentures was 9%.
F14
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 the Debt holder
subscribed to an aggregate of $2,566,077 of Debentures under the offering.
As at March 31, 2010 Convertible Debentures, corresponding accrued interest
amounted to $0. As at March 31, 2010, the debt discount of $768,981 and deferred
cost of $ 117,131 were fully amortized and expensed due to the conversion of the
debentures effective March 25, 2010. 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.
LEGAL FEES RELATED TO 2008 AND 2010 CONVERTIBLE DEBENTURES
The Company had 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 were being amortized over the term of the November 2008
Convertible Debenture. The Company had also recorded a deferred cost asset of
$80,625 for legal fees paid in relation to the issuance of the March 2010
Convertible Debentures. The deferred costs were being amortized over the term of
the November 2010 Convertible Debenture.
As at March 31, 2010, the deferred cost assets were fully amortized due to the
conversion of the debentures effective March 25, 2010 the deferred cost assets
and related amortization expense was $0 and $117,131 respectively. As at
December 31, 2009, the deferred cost asset and related amortization expense was
$36,506 and $23,232 respectively. For the year ended December 31, 2009, legal
fees have been presented net against the related convertible debentures.
NOTE 11- INCOME TAXES
As at March 31, 2010, there are tax loss carry forwards for Federal income tax
purposes of approximately $25,405,758 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 $8,892,015 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
2010 1,743,556
---- -----------
Total $25,405,758
-----------
F15
Additionally, as at March 31, 2010, the Company's two wholly-owned Canadian
subsidiaries had non-capital tax loss carry forwards of approximately $7,460,214
to be used, in future periods, to offset taxable income. The loss carry forwards
expire in various years through 2030 The deferred tax asset of approximately
$2,461,870 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
---- ----------
2003 $ 5,343
2004 5,942
2005 2
2006 561,306
2007 7,060
2008 3,671,089
2009 2,977,360
2010 232,112
---- ----------
Total $7,460,214
----------
For the three month period ended March 31,
2010 2009
---------------------------
Statutory tax rate:
U.S. 35.0% 35.0%
Foreign 33.0% 33.5%
Income (loss) before income taxes:
U.S. $(4,653,428) $(1,054,332)
Foreign ( 344,131) ( 573,952)
---------------------------
$(4,997,559) $(1,628,284)
---------------------------
Expected income tax recovery $(1,742,263) $( 561,290)
Differences in income tax resulting from:
Depreciation (Foreign operations) 17,876 6,409
Inducement premium on conversion of Debentures 1,018,455 --
Accrued interest on loans 64,350 70,875
Long-term debt accretion 269,143 --
---------------------------
(372,439) (484,006)
Benefit of losses not recognized $ 372,439 $ 484,006
---------------------------
Income tax provision (recovery) per financial statements $ -- $ --
---------------------------
F16
Deferred income tax assets and liabilities consist of the following difference:
As at March 31,
2010 2009
-----------------------------
Assets
Capital Assets - Tax Basis (Foreign operations only) $ 1,370,877 $ 1,333,810
Capital Assets - Book Value (Foreign operations only) ( 994,066) (1,099,849)
-----------------------------
Net Capital Assets $ 376,811 $ 233,964
Tax loss carry forwards 32,865,972 25,699,740
-----------------------------
Net temporary differences $ 33,242,783 $ 25,933,701
Statutory tax rate:
U.S. 35.0% 35.0%
Foreign 25.0% 33.5%
Temporary differences $ 10,851,271 $ 9,009,708
Valuation allowance $(10,851,271) $ (9,009,708)
-----------------------------
Carrying Value $ -- $ --
=============================
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 interim consolidated
statement of operations. Accrued interest and penalties will be included within
the related tax liability line in the interim consolidated balance sheet.
The following describes the Company's open tax years that remain subject to
examination by tax authorities, by major tax jurisdiction, as of March 31, 2010:
United States - Federal 2006 - present
United States - State 2006 - present
Canada - Federal 2007 - present
Canada - Provincial 2007 - 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
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. 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 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.
F17
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 was committed to pay a premium as an inducement to convert all
debentures. The premium is payable to all converting debenture holders and was
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 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,
the premium has been recorded as an advance share purchase agreement at fair
market value of $2,909,872 as at March 31, 2010, the agreement is without
interest, subordinated to the banks position and payable in a fixed number of
common shares (4,375,665 shares) of the Company upon increase in the authorised
share capital of the Company.
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.
NOTE 13 - STOCK OPTIONS AND WARRANT GRANTS
During the three month period ended March 31, 2010 and fiscal year 2009 no stock
options or warrants were granted.
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, 2009 6,120,000 $ 0.65
Granted -- --
Expired (1,600,000) ($ 0.50)
Exercised (850,000) ($ 0.50)
---------- ------
OUTSTANDING, JANUARY 1, 2010 3,670,000 $ 0.76
Granted -- --
Expired (175,000) ($ 0.71)
---------- ------
OUTSTANDING, MARCH 31, 2010 3,495,000 $ 0.76
========== ======
At March 31, 2010, the outstanding options have a weighted average remaining
life of 20 months. And all outstanding options have vested.
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.
F18
At March 31, 2010, the Company had outstanding options as follows:
NUMBER OF EXERCISE
OPTIONS PRICE EXPIRATION DATE
----------------------------------------------------
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
----------------------------------------------------
3,495,000
====================================================
At March 31, 2010, the Company signed agreements with certain option holders to
stand back on exercise of their options, until authorised shares are available:
NUMBER OF EXERCISE
OPTIONS PRICE EXPIRATION DATE
----------------------------------------------------
520,000 $1.00 December-31-10
50,000 $0.71 February-06-11
250,000 $0.27 August-06-13
1,300,000 $0.71 February-16-12
----------------------------------------------------
2,120,000
====================================================
Warrants issued in connection with various private placements of equity
securities, are treated as a cost of capital and no income statement recognition
is required. A summary of warrant transactions is as follows:
WEIGHTED AVERAGE
DETAILS WARRANT SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------
Outstanding, January 1, 2008 3,272,500 $ 1.28
Granted -- --
Exercised -- --
Expired (3,272,500) $(1.28)
- --------------------------------------------------------------------------------
Outstanding, March 31, 2010 and December 31, 2009 -- --
================================================================================
NOTE 14 - RELATED PARTY TRANSACTIONS
During the three month period ended March 31, 2010 transactions with related
parties included $6,134,024 related to conversion of convertible debentures
including interest of $634,024 thereon into common stock; $1,292,894 related to
inducement on early conversion of convertible debentures; and the repayment of
$511,342 principal and interest on promissory note in addition to salaries and
reimbursement of business expenses. During the three month period ended March
31, 2009, the Company paid shareholders and their affiliates $0 in addition to
salaries and reimbursement of business expenses. All transactions are recorded
at the exchange amounts.
NOTES PAYABLE TO RELATED PARTY
The information required by this item is included under the caption "NOTE 7 -
NOTES PAYABLE TO RELATED PARTY".
F19
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
was included as a related party, all other entities participating in the
November convertible debenture offering disclaim beneficial ownership (see
beneficial ownership table PART III - ITEM 12 of the Company's 10K report filed
with the Securities Exchange Commission for the year ended December 31, 2009).
The Leon Black 1997 Family Trust participated in the November convertible
debenture offering with a principal investment of $2,000,000.
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.
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. 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 CIBC. A total of $5,500,000
in principal and $634,024 of accrued interest due to related parties was
converted into 23,489,494 shares of restricted common stock.
As part of the agreement to convert all existing convertible debentures, the
Company was committed to pay a premium as an inducement to convert all
debentures. The premium is payable to all converting debenture holders and was
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 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,
the premium has been recorded as an advance share purchase agreement at fair
market value $2,909,872 as at March 31, 2010, the agreement is without interest,
subordinated to the banks position and payable in a fixed number of common
shares of the Company upon increase in the authorised share capital of the
Company. Of the total amount $1,292,894 (fair market value of 2,065,697 shares
of common stock) was attributed to related parties.
As at March 31, 2010, principal and interest on Convertible Debenture due to
related parties was $0. 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.
F20
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 $290,787
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 $11,334
2011 4,296
2012 1,790
-------
TOTAL $17,420
=======
Less imputed interest (774)
-------
Total obligation under capital lease $16,646
Less current portion ( 5,760)
-------
TOTAL LONG-TERM PORTION $10,886
=======
F21
The Company incurred $515 of interest expense on capital leases for the year.
NOTE 16 - LOSS PER SHARE
Potential common shares of 3,495,000 related to ESW's outstanding stock options
were excluded from the computation of diluted loss per share for the period
ended March 31, 2010. As at March 31, 2009, 6,120,000 anti-dilutive stock
options and potential common shares of 42,583,901 related to the 2008 and 2009
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.
The reconciliation of the number of shares used to calculate the diluted loss
per share is calculated as follows:
For the three month period ended
Ended March 31,
2010 2009
------------ ------------
NUMERATOR
Net (loss) for the period $ (4,997,559) $ (1,628,284)
Interest on long term debt 183,858 202,499
Amortization of deferred costs 117,131 4,979
Long term debt accretion 768,981 --
Interest on notes to related party 11,342 --
Interest income (35) (466)
------------ ------------
$ (3,916,282) $ (1,421,272)
DENOMINATOR
Weighted average number of shares outstanding 77,694,404 72,973,851
Dilutive effect of :
Stock options -- --
Warrants -- --
Convertible Debt conversion -- --
------------ ------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 77,694,404 72,973,851
------------ ------------
NOTE 17 - COMPARATIVE FIGURES
Certain 2009 figures have been reclassified to conform to the financial
statement presentation adopted in 2010.
NOTE 18 - SUBSEQUENT EVENT
On April 15, 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.
Effective May 13, 2010, the Company's Board of Directors approved the
recommendation of the Compensation Committee whereby the base salary for Mr.
David J. Johnson, the Company's Chief Executive Officer and President was
increased to $360,000 per annum. The increase in Mr. Johnson's salary is
retroactive to January 1, 2010.
F22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with ESW's consolidated
condensed financial statements and Notes thereto included elsewhere in this
Report.
This Form 10-Q contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of ESW's business.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. ESW undertakes no obligation
to publicly release any modifications or revisions to these forward-looking
statements to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events. In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, ESW
caution investors that actual financial and operating results may differ
materially from those projected in forward-looking statements made by, or on
behalf of, ESW. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause the actual results, performance,
or achievements to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements. This
report should be read in conjunction with ESW's Annual Report on Forms 10-K, for
the year ended December 31, 2009 as filed with the Securities and Exchange
Commission.
GENERAL OVERVIEW
Environmental Solutions Worldwide Inc. ("ESW" or the "Company") is a publicly
traded company engaged through its wholly owned subsidiaries ESW Canada Inc.,
ESW America Inc. and ESW Technologies Inc. (the "ESW Group of Companies") in the
design, development, manufacturing and sales of environmental 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 Original
Equipment Maufacturers ("OEM") 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.
In 2010 ESW is primarily focused on:(a) achieving further verification of the
Level III product (b) increasing the strength of its independent distribution
network, to target key markets segments such as school bus retrofits and
government regulated retrofit programs (c) scaling ESW's production
capabilities to deliver product to the target markets and meet demand and (d)
certification or verification Xtrm Cat (TM) product for the rail and marine
markets.
The Company is experiencing an increase in demand for its currently verified
Therma Cat (TM) product. To March 31, 2010 since verification, 251 Therma Cat
(TM) units have been sold and are in operation across the United States. The
Company is also receiving larger volumes on orders for the Therma Cat (TM)
product which facilitates greater economy of scale in purchasing raw materials
and in production.
3
ESW has made significant investments in research and development and obtaining
regulatory approvals for its technology. The products that ESW intends put
forward for verification / certification in the fiscal year 2010 cover the
following primary technology levels established by California Air Resources
Board (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.
In effecting its business plan ESW achieved important goals:
o On April 7, 2009 ESW was awarded a $731,000 Grant for EPA Verification of its
XTRM Cat (TM) Marine / Locomotive Catalyst.
o On May 4, 2009 ESW 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.
o On June 1, 2009 ESW 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 August 10, 2009 ESW received notification from the CARB that the Company's
Therma Cat (TM) Active Level III Plus catalyst system has been verified
effective August 5, 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 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 litre off-road diesel
engines. 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.
The Company had been pursuing various financing initiatives. Effective March 19,
2010, the Company issued $3,000,000 of its 9% convertible debentures (the
"Debentures") to five (5) accredited investors. The Debentures were for a term
of three (3) years and were 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 had a mandatory conversion
feature that required the holders to convert in the event a majority of the
Company's pre-existing outstanding 9% convertible debentures converted.
4
Effective March 25, 2010, the November 2008 and the August 2009 debenture
holders agreed to convert all outstanding convertible debentures. 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.
Effective March 31, 2010 ESW's subsidiary, ESW Canada entered into a demand
revolving credit facility agreement with a Canadian chartered bank, CIBC, to
meet working capital requirements. The facility has a credit limit of $4 million
Canadian. 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.
ESW's manufacturing production facility located in Concord Ontario Canada is
adequately capitalised to support delivery of its verified products and the rail
and marine products. Minor capital additions and production tooling changes to
meet customer demands are an ongoing expense. ESW's Tech Center based in
Montgomeryville Pennsylvania houses all of ESW's emission testing laboratories
and testing capabilities. The facilities include several testing systems,
including engine and vehicle chassis test cells. These cells are used for
certification and verification for engines ranging from 0.5 to in excess of 600
horse power. This facility also manufactures and provides the catalytic and
chemical wash coat solutions for the Concord Ontario Canada plant.
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.
COMPARISON OF THREE MONTH PERIOD ENDED MARCH 31, 2010 TO THREE MONTH PERIOD
ENDED MARCH 31, 2009
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations (MD&A) should be read in conjunction with the MD&A
included in ESW's Annual Report on Forms 10-K, for the year ended December 31,
2009.
Revenues for the three month period ended March 31, 2010 increased by $1,878,478
or 507.5 percent, to $2,248,596 from $370,118 for the three month period ended
March 31, 2009. The increase in revenue is mainly related to sales of ESW's
verified Therma Cat (TM) Level III products that meet new regulations, further
complemented by sales of the Xtrm Cat (TM) product. In 2009, the Company focused
its efforts on mainly achieving verifications for its Therma Cat (TM) Level III
product.
5
Cost of sales as a percentage of revenues for the three month period ended March
31, 2010 was 67 percent compared to 56 percent for the three month period ended
March 31, 2009. The gross profit for the three month period ended March 31, 2010
was 33 percent as compared to a gross margin of 44 percent for the three month
period ended March 31, 2009. The cost of sales increase as a percentage of
revenue in the current period is due to increased labour costs involved in
ramping up of operations to meet customer orders, in addition the sales in the
prior period were related to prototype and show case orders that allowed higher
margins. Cost of sales was higher in the current period due to the increase in
customer orders for the Therma Cat (TM) Level III product.
Marketing, office and general expenses for the three month period ended March
31, 2010 increased by $183,717 or 22.6 percent, to $995,802 from $812,085 for
the three month period ended March 31, 2009. The increase is primarily due to
increases in the following areas: An increase in sales and marketing salaries
and wages and selling expenses by $84,371 due to an increased focus on business
development and product marketing efforts, the Company has also set up a
customer service and support department. Administration salaries and wages were
higher by $19,416. Plant related expenses were higher by $54,830 as a result of
increased activity levels, consumables and maintenance costs. Investor relations
expense increased by $31,356 attributed to expenses related to a obtaining a
fairness review and opinion on convertible debentures. The increases were offset
by decreases in the following areas. A decrease in Facility costs of $1,337 as a
result of higher sales volumes and higher overhead costs attributed to cost of
sales. General and administration cost decreased by $4,919.
Research and development ("R&D") expenses for the three month period ended March
31, 2010 decreased by $259,393 , or 67.4 percent to $125,314 from $384,707 for
the three month period ended March 31, 2009. 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. Additionally during the three month period ended March
31, 2010 grant money amounted to $101,526 as compared to $0 for the three month
period ended March 31, 2009.
Officer's compensation and director's fees for the three month period ended
March 31, 2010 increased by $43,309 or 27.9 percent, to $198,357 from $155,048
for the three month period ended March 31, 2009. The increase in fees is mainly
due to the addition of one outside director in 2010, a wage increase for an
officer of the company effective retroactive from January 2009 and the effect of
exchange rate differences on Canadian Dollar contracts for officers of the
Company.
Consulting and professional fees for the three month period ended March 31, 2010
increased by $105,385 to $105,975 from $590 for the three month period ended
March 31, 2009. The increase is mainly attributed to an increase in legal fees
related to the new demand revolving credit facility agreement with a Canadian
chartered bank, a marginal increase in audit fees and ongoing fees related to
SOX 404 consulting.
Foreign exchange loss for the three month period ended March 31, 2010 was
$56,223 as compared to a gain of $27,734 for the three month period ended March
31, 2009. This is a result of the fluctuation in the exchange rate of the
Canadian Dollar to the United States Dollar.
Depreciation and amortization expense for the three month period ended March 31,
2010 increased by $2,169, or 0.8 percent to $262,845 from $260,676 for the three
month period ended March 31, 2009.
6
Loss from operations for the three month period ended March 31, 2010 decreased
by $414,862, or 29.2 percent to $1,006,410 from $1,421,272 for the three month
period ended March 31, 2009. The decrease is mainly due to increased revenues in
the current period.
Interest expense on long-term debt was $183,858 for the three month period ended
March 31, 2010 as compared to $202,499 for the three month period ended March
31, 2009. Amortization of deferred costs amounted to $117,131 and Long Term Debt
Accretion amounted to $768,981 for the three month period ended March 31, 2010
as compared to $4,979 and $0 respectively for the three month period ended March
31, 2009. The conversion of all outstanding Convertible Debentures and related
accrued interest on March 25, 2010 into common stock of the Company accelerated
the amortization of deferred costs and Long Term Debt Accretion. As of March 31,
2010 the company has $0 of debt outstanding related to convertible debentures.
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. 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 CIBC. The conversion of the
November 2008 and the August 2009 debentures also triggered the mandatory
conversion feature on the March 19, 2010 debentures. As part of the agreement to
convert all existing convertible debentures the Company has paid a premium as an
inducement to convert all debentures. The premium is payable to all converting
debenture holders and was 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 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, the premium has been recorded as an advance share purchase
agreement at fair market value $2,909,872 as at March 31, 2010, the agreement is
without interest, subordinated to the banks position and payable in a fixed
number of common shares (4,375,665 shares) of the Company upon increase in the
authorised share capital of the Company.
Interest on notes payable to related party amounted to $11,342 for the three
month period ended March 31, 2010 as compared to $0 for the three month period
ended March 31, 2009. Effective March 31, 2010 the Company repaid $500,000
principal and $11,342 in interest from the proceeds of the March 19, 2010
convertible debentures.
LIQUIDITY AND CAPITAL RESOURCES
ESW's principal sources of operating capital have been the proceeds from its
various financing transactions; during the three month period ended March 31,
2010, the Company used $1,530,685 of cash to sustain operating activities
compared with $1,316,735 for the three month period ended March 31, 2009. As of
March 31, 2010 and December 31, 2009, the Company had cash and cash equivalents
of $949,021 and $632,604 respectively.
Net cash used in operating activities for the three month period ended March 31,
2010 amounted to $1,530,685. This amount was attributable to the net loss of
$4,997,559, plus non cash expenses such as depreciation, amortization, interest
and accretion on long term debt, inducement premium on conversion of debentures
and others of $4,237,365, and a decrease in net operating assets and liabilities
of $770,491. Net cash used in operating activities for the three month period
ended March 31, 2009 amounted to $1,316,735. This amount was attributable to the
net loss of $1,628,284, plus non cash expenses such as depreciation,
amortization, interest on long term debt and others of $513,405, and a decrease
in net operating assets and liabilities of $201,856.
7
Net cash used in investing activities was $100,998 for the three month period
ended March 31, 2010 as compared to $69,270 for the three month period ended
March 31, 2009. The capital expenditures during the three month period ended
March 31, 2010 were primarily dedicated to production tooling.
Net cash provided by financing activities totalled $1,775,823 for the three
month period ended March 31, 2010 as compared to $59,588 used in financing
activities for the three month period ended March 31, 2009. In the current
period $3,000,000 was provided through issuance of convertible debentures,
$720,510 was repaid under ESW`s bank loan, $500,000 repayment of promissory note
to related party and $3,668 repaid under capital lease obligation.
Based on ESW's current operating plan, management believes that at March 31,
2010 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.
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 the first quarter of 2010 and in 2009 ESW did not produce sufficient cash
from operations to support its expenditures; the March 19, 2010, $3 million
offering of convertible debentures 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.
Effective March 25, 2010, all convertible debentures holders converted all
outstanding convertible debentures as per the terms of the respective debenture
agreements. 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 CIBC.
Effective March 31, 2010 ESW's subsidiary, ESW Canada entered into a demand
revolving credit facility agreement with a Canadian chartered bank, CIBC to meet
working capital requirements. The facility has a credit limit of $4 million
Canadian. Borrowings under the facility are limited to a percentage of accounts
receivable plus a percentage of inventories (capped at $ 1 million Canadian or
50% of the accounts receivable portion) less any prior ranking claims.
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 has
in the past received 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.
8
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.
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 $689,112 USD at March 31, 2010). As the
Class A special shares are issued by ESW's wholly-owned subsidiary BBL, the
maximum value upon which ESW is liable is the net book value of BBL. At March
31, 2010 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
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. 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 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 paid a premium as an inducement to convert all debentures. The
premium is payable to all converting debenture holders and was 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 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, the premium has been
recorded as an advance share purchase agreement at fair market value $2,909,872
as at March 31 2010, the agreement is without interest, subordinated to the
banks position and payable in a fixed number of common shares of the Company
upon increase in the authorised share capital of the Company.
9
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 were for a term of three (3) years and were
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 earned 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 elected to receive interest in shares of common stock, the number of
shares of common stock to be issued for interest would be determined by dividing
accrued interest by $0.50. The Debentures had a mandatory conversion feature
that required the holders to convert in the event a majority of the Company's
pre-existing outstanding 9% convertible debentures converted. Subject to the
holder's right to convert and the mandatory conversion feature, the Company had
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
was payable in cash or common stock at the option of the Holder. The Company
also had provided the holders of the Debentures registration rights. The
Debentures contained customary price adjustment protections.
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 were for a term of three (3) years and were
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 earned 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 elected to receive interest in shares of common stock, the number of
shares of common stock to be issued for interest would be determined by dividing
accrued interest by $0.50. Subject to the holder's right to convert, the Company
had 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 was payable in cash or common stock at the option of the Holder. The
2009 Debentures contained customary price adjustment protections.
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 were for a term of three (3) years and were
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 earned 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
elected to receive interest in shares of common stock, the number of shares of
common stock to be issued for interest would be determined by dividing accrued
interest by $0.25. Subject to the holder's right to convert, the Company had 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 was payable
in cash or common stock at the option of the Holder. The Debentures contained
customary price adjustment protections. The effective yield on the 2008
debentures was 9%.
10
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 the Debt holder
subscribed to an aggregate of $2,566,077 of Debentures under the offering.
As at March 31, 2010 Convertible Debentures, corresponding accrued interest
amounted to $0. As at December 31, 2009, 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.
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 did not
complete a financing by March 31, 2010, this note would have been payable upon
demand of the holder.
From the proceeds of the March 2010 offering, the Company repaid $500,000
principal and $11,342 interest of the December 29, 2009 unsecured subordinated
promissory note. As at March 31, 2010 promissory note due to related party and
corresponding accrued interest amounted to $0. At December 31, 2009 promissory
note due to related party and corresponding accrued interest amounted to
$500,000.
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, the agreement was amended to extend the term of the Agreement through to
June 30, 2009 and effective August 21, 2009, the term of the secured commercial
loan agreement with RBC was extended through to April 30, 2010. 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. The Credit
Facility was guaranteed by the Company and its subsidiary ESW Canada through the
pledge of their assets to RBC. The facility had 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. Effective March 31, 2010, all borrowings under
the RBC facility were repaid from the proceeds of the March 19, 2010 convertible
debenture financing and the facility with RBC was closed. As at March 31, 2009,
$0 was owed under the aforementioned facility. As at December 31, 2009, $713,037
was outstanding and due to RBC under the Credit Facility
Effective March 31, 2010 ESW's subsidiary, ESW Canada entered into a demand
revolving credit facility agreement with a Canadian chartered bank, CIBC, to
meet working capital requirements. The facility has a credit limit of $4 million
Canadian. Borrowings under the facility are limited to a percentage of accounts
receivable plus a percentage of inventories (capped at $ 1 million Canadian 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.
11
The terms relating to the credit agreement specifically note that the Company's
maintain a tangible net worth of at least $4.0 million. The credit agreement
contains, among other things, covenants, representations and warranties and
events of default customary for a facility of this type for the Company and its
subsidiaries. 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
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.
Effective March 31, 2010, there were no amounts borrowed under the facility.
ESW's ability to service its indebtedness, other obligations and commitments 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 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, In such circumstance, ESW
would have to issue shares of its common stock as repayment of these
obligations, 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. 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. Lease evaluation and negotiations
are in progress.
The following breakdown is the total, of the minimum annual lease payments, for
both leases.
12
YEAR
--------------------------
2010 $290,787
2011 $180,990
2012 $180,990
2013 $ 30,165
CAPITAL LEASE OBLIGATION
The Company is committed to the following lease payments in connection with the
acquisition of equipment under capital leases:
YEAR
----------------------
2010 $11,334
2011 4,296
2012 1,790
-------
TOTAL $17,420
=======
Less imputed interest (774)
-------
Total obligation under capital lease $16,646
Less current portion (5,760)
-------
TOTAL LONG-TERM PORTION $10,886
=======
The Company incurred $515 of interest expense on capital leases for the year.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2010, the FASB issued ASU No. 2010-013 - Compensation--Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades--a consensus of the FASB Emerging Issues Task Force. ASU
2010-13 addresses the classification of an employee share-based award with an
exercise price denominated in the currency of a market in which the underlying
equity security trades. The amendments are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company will comply with the additional disclosures required by this
guidance upon its adoption in January 2011.
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 2010-06 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 adoption of the guidance did not have a material effect on the
Company's consolidated financial position, results of operations, cash flows or
related disclosures.
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 adoption of the guidance did not have a material effect on the
Company's consolidated financial position, results of operations, cash flows or
related disclosures.
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 adoption of the guidance did not have a material effect on the Company's
consolidated financial position, results of operations, cash flows or related
disclosures.
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.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
ESW's significant accounting policies are summarized in Note 2 to the
Consolidated Condensed Financial Statements included its quarterly reports and
its 2009 Annual Report to Shareholders. In preparing the consolidated condensed
financial statements, we make estimates and assumptions that affect the expected
amounts of assets and liabilities and disclosure of contingent assets and
liabilities. We apply our accounting policies on a consistent basis. As
circumstances change, they are considered in our estimates and judgments, and
future changes in circumstances could result in changes in amounts at which
assets and liabilities are recorded.
FOREIGN CURRENCY TRANSACTIONS
The results of operations and the financial position of ESW's operations in
Canada is principally measured in Canadian currency and translated into U.S.
dollars. The future effects of foreign currency fluctuations between U.S.
dollars and Canadian dollars will be somewhat mitigated by the fact that certain
expenses will be generally incurred in the same currency in which revenues will
be generated. The future reported income of ESW's Canadian subsidiary would be
higher or lower depending on a weakening or strengthening of the U.S. dollar
against the Canadian currency. During the first quarter of 2010, the Company
experienced a net gain on foreign exchange due the weakening of the U.S. Dollar
against the Canadian dollar.
A portion of ESW's assets are based in its foreign operation and are translated
into U.S. dollars at foreign currency exchange rates in effect as of the end of
each period, Accordingly, ESW's consolidated investment will fluctuate depending
upon the weakening or strengthening of the Canadian currency against the U.S.
dollar.
Adjustments resulting from ESW's foreign Subsidiaries' financial statements are
included as a component of other comprehensive income within stockholders equity
/ (deficit) because the functional currency of subsidiaries is non-USD.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ESW is exposed to financial market risks, including changes in currency exchange
rates and interest rates. The Company also has foreign currency exposures at its
foreign operations related to buying and selling currencies other than the local
currencies. The risk under these interest rate and foreign currency exchange
agreement is not considered to be significant.
FOREIGN EXCHANGE RISK
ESW's foreign subsidiaries conduct their businesses in local currency
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 $103,865 for the three month period ended March 31, 2010 as compared to
a loss of $50,569 for the three month period ended March 31, 2009 reported as
comprehensive loss in the Consolidated Condensed Statements of Changes in
Stockholders' Equity (Deficit), ESW recognized a translation loss of $56,223 for
the three month period ended March 31, 2010 as compared to a gain of $27,734 for
the three month period ended March 31, 2009 reported as Foreign exchange (gain)
/ loss in the Consolidated Condensed 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 March, 2010, 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 March 31, 2010 and 2009, 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. At
March 31, 2010 and 2009, $0 and $20,504 respectively was owed under the
facility, the impact of interest rate fluctuations is not considered
significant.
ESW currently has no variable-rate, long-term debt that exposes ESW to interest
rate risk.
15
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURE
EVALUATION OF THE COMPANY'S DISCLOSURE AND INTERNAL CONTROLS
The Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" as of the end of the period covered by this
report. This evaluation was done with the participation of management, under the
supervision of the Chief Executive Officer ("CEO") and Chief Accounting Officer
("CAO").
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a cost
effective control system, misstatements due to error or fraud may occur and not
be detected. The Company conducts periodic evaluations of its internal controls
to enhance, where necessary, its procedures and controls.
CONCLUSIONS
Based on our evaluation, the CEO and CAO concluded that the registrant's
disclosures, controls and procedures are effective to ensure that information
required to be disclosed in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Security Exchange Commission rules and forms.
(b) CHANGES IN INTERNAL CONTROLS
Not applicable.
16
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS.
In evaluating an investment in our common stock, investors should consider
carefully, among other things, the risk factors previously disclosed in Part I,
Item 1 of our Annual Report to the Securities and Exchange Commission for the
year ended December 31, 2009, as well as the information contained in this
Quarterly Report and our other reports and registration statements filed with
the Securities and Exchange Commission. There has been no material changes in
the risk factors as previously disclosed under "Risk Factors" in Part I, Item 1
of our Annual Report to the Securities and Exchange Commission for the year
ended December 31, 2009.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
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 proceeds from the financing were used to repay debt and for
general business purposes. The Debentures were for a term of three (3) years and
were 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 earned 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 elected to receive interest in shares of common stock, the number of
shares of common stock to be issued for interest would be determined by dividing
accrued interest by $0.50. The Debentures had a mandatory conversion feature
that required the holders to convert in the event a majority of the Company's
pre-existing outstanding 9% convertible debentures converted. Subject to the
holder's right to convert and the mandatory conversion feature, the Company had
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
was payable in cash or common stock at the option of the Holder. The Company
also had provided the holders of the Debentures registration rights. The
Debentures contained 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. 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 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.
17
As part of the agreement to convert all existing convertible debentures the
Company has paid a premium as an inducement to convert all debentures. The
premium is payable to all converting debenture holders and was 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 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, the premium has been
recorded as an advance share purchase agreement at fair market value $2,909,872
as at March 31 2010, the agreement is without interest, subordinated to the
banks position and payable in a fixed number of common shares of the Company
upon increase in the authorised share capital of the Company.
ITEM 5. OTHER INFORMATION
On April 5, 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.
Effective May 13, 2010, the Company's Board of Directors approved the
recommendation of the Compensation Committee whereby the base salary for Mr.
David J. Johnson, the Company's Chief Executive Officer and President was
increased to $360,000 per annum. The increase in Mr. Johnson's salary is
retroactive to January 1, 2010.
ITEM 6. EXHIBITS
EXHIBITS:
31.1 Certification of Chief Executive Officer and President pursuant to the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Accounting Officer, pursuant to the Sarbanes-Oxley
Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: May 14, 2010
Concord, Ontario Canada
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
BY: /S/ DAVID J. JOHNSON
--------------------
DAVID J. JOHNSON
CHIEF EXECUTIVE OFFICER AND PRESIDENT
/S/ PRAVEEN NAIR
---------------------
PRAVEEN NAIR
CHIEF ACCOUNTING OFFICER
19