WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file reports, proxy statements and other information with the SEC. Information filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at Headquarters Office, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of this information by mail from the Public Reference Section of the SEC, Headquarters Office, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. Further information on the operation of the SEC’s public reference room in Washington, D.C. can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy statements and other information about issuers, such as us, who file electronically with the SEC. The address of that website is http://www.sec.gov.
We filed a registration statement on Form S-1 to register with the SEC the securities offered by this prospectus. This prospectus is a part of that registration statement. As allowed by the rules of the SEC, this prospectus does not contain all of the information you can find in our registration statement or the exhibits to the registration statement.
Our common stock is traded on the OTCQB under the symbol “ESWW”.
Our website is located at www.eswgroup.com. The information on our website, however, is not, and should not be deemed to be, a part of this prospectus.
Disclosure of Commission Position
on Indemnification for Securities Act Liabilities
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In addition, indemnification may be limited by state securities laws.
77
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Environmental Solutions Worldwide, Inc.
We have audited the accompanying consolidated balance sheets of Environmental Solutions Worldwide, Inc. (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s experience of negative cash flows from operations and its dependency upon future financing raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ MSCM LLP
Toronto, Canada
March 19, 2013
701 Evans Avenue, 8th Floor,Toronto, Ontario,M9C 1A3, Canada
T (416) 626-6000, F (416) 626-8650, MSCM.CA
F1
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31,
|
|
DECEMBER 31,
|
|
|
|
|
2012
|
|
2011
|
ASSETS
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents (Note 4)
|
$
|
253,998
|
$
|
1,103,649
|
|
Accounts receivable, net of allowance
|
|
|
|
|
|
|
for doubtful accounts of $221,212 (2011 - $1,398) (Note 2)
|
|
1,322,320
|
|
1,204,734
|
|
Inventory, net of reserve of $252,473 (2011 - $223,007) (Note 5)
|
|
1,962,278
|
|
2,431,027
|
|
Prepaid expenses and sundry assets
|
|
133,438
|
|
295,211
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
3,672,034
|
|
5,034,621
|
|
|
|
|
|
|
|
Property, plant and equipment under construction (Note 6)
|
|
350,431
|
|
198,416
|
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated
|
|
|
|
|
|
depreciation of $2,735,691 (2011 - $6,867,760) (Note 6)
|
|
1,382,653
|
|
1,271,989
|
|
|
|
|
|
|
|
|
|
|
$
|
5,405,118
|
$
|
6,505,026
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
Accounts payable
|
$
|
1,457,091
|
$
|
1,384,972
|
|
Accrued liabilities
|
|
487,852
|
|
592,760
|
|
Redeemable Class A special shares (Note 7)
|
|
-
|
|
453,900
|
|
Customer deposits
|
|
73,078
|
|
-
|
|
Current portion of loan payable (Note 8)
|
|
68,926
|
|
-
|
|
Current portion of capital lease obligation
|
|
-
|
|
1,241
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
2,086,947
|
|
2,432,873
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
Loan payable (Note 8)
|
|
404,207
|
|
-
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
2,491,154
|
|
2,432,873
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity (Notes 10 and 11)
|
|
|
|
|
|
Common stock, $0.001 par value, 250,000,000 (2011 - 250,000,000)
|
|
|
|
|
|
|
shares authorized; 224,098,447 (2011 - 219,450,447)
|
|
|
|
|
|
|
shares issued and outstanding
|
|
224,098
|
|
219,450
|
|
Additional paid-in capital
|
|
56,856,061
|
|
56,606,629
|
|
Accumulated other comprehensive income
|
|
344,183
|
|
344,183
|
|
Accumulated deficit
|
|
(54,510,378)
|
|
(53,098,109)
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
2,913,964
|
|
4,072,153
|
|
|
|
|
|
|
|
|
|
|
$
|
5,405,118
|
$
|
6,505,026
|
Going concern ( Note 1)
|
|
|
|
|
Subsequent events (Note 18)
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
F2
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
|
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
FOR THE YEARS ENDED DECEMBER 31,
|
|
|
|
2012
|
|
2011
|
Revenue
|
$
|
10,526,323
|
$
|
11,885,665
|
|
|
|
|
|
|
Cost of revenue (Note 2)
|
|
6,940,610
|
|
9,712,850
|
|
|
|
|
|
|
Gross profit
|
|
3,585,713
|
|
2,172,815
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
Marketing, office and general expenses
|
|
3,317,720
|
|
3,891,814
|
|
Restructuring charges
|
|
-
|
|
1,385,685
|
|
Research and development costs (Note 2)
|
|
759,847
|
|
692,977
|
|
Officers' compensation and directors' fees (Note 13)
|
|
797,863
|
|
700,140
|
|
Consulting and professional fees
|
|
268,952
|
|
336,523
|
|
Foreign exchange loss
|
|
72,517
|
|
248,306
|
|
Depreciation and amortization (Note 6)
|
|
203,811
|
|
366,266
|
|
Loss on impairment of property, plant and equipment, net (Note 6)
|
|
31,172
|
|
163,668
|
|
|
|
|
|
|
|
|
|
5,451,882
|
|
7,785,379
|
|
|
|
|
|
|
Loss from operations
|
|
(1,866,169)
|
|
(5,612,564)
|
|
|
|
|
|
|
Gain on deconsolidation of subsidiary (Note 7)
|
|
453,900
|
|
-
|
Change in fair value of exchange feature liability (Notes 12 and 13)
|
|
-
|
|
(578,739)
|
Interest on notes payable to related parties (Notes 12 and 13)
|
|
-
|
|
(126,850)
|
Interest accretion expense (Note 12)
|
|
-
|
|
(3,506,074)
|
Financing charge on embedded derivative liability (Note 12)
|
|
-
|
|
(485,101)
|
Gain on convertible derivative (Note 12)
|
|
-
|
|
1,336,445
|
Bank fees related to credit facility covenant waivers
|
|
-
|
|
(154,205)
|
|
|
|
|
|
|
Net loss
|
|
(1,412,269)
|
|
(9,127,088)
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
Foreign currency translation of Canadian subsidiaries
|
|
-
|
|
(102,366)
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
$
|
(1,412,269)
|
$
|
(9,229,454)
|
|
|
|
|
|
|
Net loss per share (basic and diluted) (Note16)
|
$
|
(0.01)
|
$
|
(0.05)
|
|
|
|
|
|
|
Weighted average number of shares outstanding (basic and diluted) (Note16)
|
|
219,666,098
|
|
170,818,147
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
F3
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
Total
|
|
Common Stock
|
|
Additional
|
|
Comprehensive
|
|
Accumulated
|
|
Stockholders'
|
|
Shares
|
|
Amount
|
|
Paid-In Capital
|
|
Income
|
|
Deficit
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2011
|
129,463,767
|
$
|
129,463
|
$
|
43,567,531
|
$
|
446,549
|
$
|
(43,971,021)
|
$
|
172,522
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
(9,127,088)
|
|
(9,127,088)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation (Notes 10 and 11)
|
816,668
|
|
817
|
|
179,944
|
|
-
|
|
-
|
|
180,761
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation of Canadian subsidiaries
|
-
|
|
-
|
|
-
|
|
(102,366)
|
|
-
|
|
(102,366)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for prior transactions
|
22,500,000
|
|
22,500
|
|
5,344,830
|
|
-
|
|
-
|
|
5,367,330
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription of common stock
|
66,670,012
|
|
66,670
|
|
7,933,734
|
|
-
|
|
-
|
|
8,000,404
|
|
|
|
|
|
|
|
|
|
|
|
|
Right offering costs
|
-
|
|
-
|
|
(419,410)
|
|
-
|
|
-
|
|
(419,410)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
219,450,447
|
|
219,450
|
|
56,606,629
|
|
344,183
|
|
(53,098,109)
|
|
4,072,153
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
(1,412,269)
|
|
(1,412,269)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation (Notes 10 and 11)
|
4,648,030
|
|
4,648
|
|
249,432
|
|
-
|
|
-
|
|
254,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
224,098,477
|
$
|
224,098
|
$
|
56,856,061
|
$
|
344,183
|
$
|
(54,510,378)
|
$
|
2,913,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
F4
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
FOR THE YEARS ENDED DECEMBER 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
Net loss
|
$
|
(1,412,269)
|
$
|
(9,127,088)
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Interest accretion expense
|
|
-
|
|
3,506,074
|
|
Change in fair value of exchange feature liability
|
|
-
|
|
578,739
|
|
Financing charge on embedded derivative liability
|
|
-
|
|
485,101
|
|
Loss on disposal of inventory
|
|
-
|
|
404,500
|
|
Reserve on inventory obsolescence
|
|
252,473
|
|
223,007
|
|
Depreciation of property, plant and equipment
|
|
586,196
|
|
718,884
|
|
Loss on impairment of property, plant and equipment
|
|
44,838
|
|
295,238
|
|
Interest on notes payable to related party
|
|
-
|
|
126,850
|
|
Stock-based compensation
|
|
254,080
|
|
179,944
|
|
Amortization of patents and trademarks
|
|
-
|
|
16,145
|
|
Provision for doubtful accounts
|
|
218,952
|
|
-
|
|
Gain on disposal of property and equipment
|
|
(13,666)
|
|
(131,570)
|
|
Gain on convertible derivative
|
|
-
|
|
(1,336,445)
|
|
Gain on deconsolidation of subsidiary
|
|
(453,900)
|
|
-
|
|
|
|
|
|
|
|
|
|
888,973
|
|
5,066,467
|
Increase (decrease) in cash flows from operating activities resulting from changes in:
|
|
|
|
|
|
Accounts receivable
|
|
(336,538)
|
|
1,168,397
|
|
Inventory
|
|
216,276
|
|
1,362,672
|
|
Prepaid expenses and sundry assets
|
|
161,773
|
|
(53,998)
|
|
Accounts payable and accrued liabilities
|
|
(256,408)
|
|
(1,030,904)
|
|
Customer deposits
|
|
73,078
|
|
(29,322)
|
|
|
|
|
|
|
|
|
|
(141,819)
|
|
1,416,845
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
(665,115)
|
|
(2,643,776)
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
13,666
|
|
131,570
|
|
Acquisition of property, plant and equipment
|
|
(625,731)
|
|
(233,337)
|
|
Addition to property, plant and equipment under construction
|
|
(44,363)
|
|
(150,618)
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(656,428)
|
|
(252,385)
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
Proceeds from notes payable to related parties
|
|
-
|
|
4,000,000
|
|
Proceeds from loan payable
|
|
500,000
|
|
-
|
|
Repayment of loan payable
|
|
(26,867)
|
|
-
|
|
Rights offering cost
|
|
-
|
|
(419,410)
|
|
Issuance of common stock
|
|
-
|
|
3,857,997
|
|
Repayment of bank loan
|
|
-
|
|
(3,434,075)
|
|
Repayment of capital lease obligation
|
|
(1,241)
|
|
(3,800)
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
471,892
|
|
4,000,712
|
|
|
|
|
|
|
Net change in cash and equivalents
|
|
(849,651)
|
|
1,104,551
|
|
|
|
|
|
|
Foreign exchange gain on foreign operations
|
|
-
|
|
(14,230)
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
1,103,649
|
|
13,328
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
$
|
253,998
|
$
|
1,103,649
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
Cash interest paid
|
$
|
6,421
|
$
|
-
|
|
Property, plant and equipment included in accounts payable
|
$
|
223,619
|
$
|
-
|
|
Other non-cash conversion of loans and related interest
|
$
|
-
|
$
|
4,126,850
|
|
Reclassification of convertible derivative and exchange
|
|
|
|
|
|
liabilities to equity
|
$
|
-
|
$
|
4,861,256
|
|
Conversion of accrued expenses to equity
|
$
|
-
|
$
|
16,374
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
F5
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 1 - NATURE OF BUSINESS AND GOING CONCERN
Environmental Solutions Worldwide, Inc. (the "Company" or "ESW") through its wholly-owned subsidiaries is engaged in the design, development, manufacturing and sales of emissions control technologies. ESW also provides emissions testing and environmental certification services with its primary focus on the North American on-road and off-road diesel engine, chassis and after-treatment market. ESW currently manufactures and markets a line of catalytic emission control and enabling technologies for a number of applications focused on the retrofit market.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which contemplates continuation of the Company as a going concern.
The Company has sustained recurring operating losses. As of December 31, 2012, the Company had an accumulated deficit of $54,510,378 and cash and cash equivalents of $253,998. During the fiscal year 2011 there were significant changes made to ESW’s business. These changes in operations, the relocation of the Company’s operations, and the prevailing economic conditions all create uncertainty in the operating results and, accordingly, there is no assurance that the Company will be successful in generating sufficient cash flow from operations or achieving profitability in the near future. As a result, there is substantial doubt regarding the Company's ability to continue as a going concern. The Company may require additional financing to fund its continuing operations. Financing may not be available at acceptable terms or may not be available at all. The Company's ability to continue as a going concern is dependent on obtaining additional financing and achieving and maintaining a profitable level of operations.
On February 17, 2011 and May 3, 2011, the Company raised a total of $4 million through the issuance of unsecured subordinated promissory notes (the “Notes”) to certain shareholders, including deemed affiliates of certain members of the Board of Directors (the “Board”) of the Company. Proceeds from the Notes funded working capital related to its 2011 sales, capital investments and other general corporate purposes.
Effective May 10, 2011, the Company entered into an Investment Agreement with certain of its current shareholders and subordinated lenders under unsecured promissory notes (the “Bridge Lenders") for an aggregate amount of $4 million. As per the Investment Agreement, the Bridge Lenders agreed to provide a backstop commitment (the "Backstop Commitment") to a rights offering targeted by the Company to raise up to $8 million (the “Qualified Offering"). Under the Backstop Commitment, the Bridge Lenders agreed to purchase any shares offered in the Qualified Offering that were not purchased by the Company's shareholders of record, after giving effect to any oversubscriptions.
Effective June 30, 2011, the Company completed the Qualified Offering. The Company's shareholders subscribed to 38,955,629 shares including oversubscriptions. Under the Qualified Offering, shareholders subscribed to $4.7 million, which was subscribed for via cash ($1.9 million), and the exchange of principal and accrued interest on the Notes and the Bridge Loan Notes (approximately $2.8 million). Under the Backstop Commitment, the Bridge Lenders purchased 27,714,385 shares of common stock at a price of $0.12 per share for approximately $3.3 million, of which $2.0 million was paid in cash and $1.3 million was paid for through the exchange of the balance of principal and accrued interest due on the Notes. As a result of these transactions, the Company satisfied its obligations with the Bridge Lenders and effectively cancelled the Notes effective June 30, 2011.
Effective July 18, 2011, ESW’s wholly-owned subsidiary ESW Canada Inc. (“ESWC”) paid its senior lender the amount of $1.5 million (Canadian dollars) from the proceeds of the Qualified Offering to liquidate the outstanding balance on the bank loan. The senior lender has discharged all liens, encumbrances and securities against the Company and its subsidiaries and cancelled the June 30, 2010 demand revolving credit facility agreement.
Effective May 1, 2012, the Company’s wholly owned subsidiary ESW America Inc. (“ESWA”) received a $280,787 low interest loan from the Machinery and Equipment Loan Fund (“MELF”), which is administered by the Pennsylvania Department of Community and Economic Development. Effective November 13, 2012, ESWA
received the second draw down of $219,213 low interest loan from MELF. Proceeds from the loan were used to purchase and upgrade equipment at the air testing facility.
These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, ESWA, ESW Technologies Inc. ("ESWT"), ESWC and Technology Fabricators Inc. (“TFI”). All inter-company transactions and balances have been eliminated on consolidation. Amounts in the consolidated financial statements are expressed in U.S. dollars.
F6
Effective February 3, 2012, BBL Technologies Inc. (“BBL”), a non-operating subsidiary, filed for bankruptcy in the Province of Ontario, Canada. At the time of filing, BBL had no assets but had issued and outstanding redeemable Class A special shares. The Company did not provide any guarantee in relation to these redeemable Class A special shares. As a result of BBL’s filing for bankruptcy, the Company lost its control over BBL and has deconsolidated BBL from the consolidated financial statements on the filing date. The Company recorded a $453,900 gain in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2012, upon deconsolidation of BBL.
ESTIMATES
The preparation of consolidated financial statements in conformity with U.S. 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 inventory valuation, impairment of property plant and equipment, share-based compensation, valuation of the stock options and warrants, accrued liabilities and accounts receivable exposures.
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 an allowance for doubtful accounts of $221,212 and $1,398 was appropriate as of December 31, 2012 and 2011, respectively.
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, finished goods and parts.
PROPERTY, PLANT AND EQUIPMENT UNDER CONSTRUCTION
The Company capitalizes customized equipment built to be used in the future day to day operations at cost. 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.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the Accounting Standards Codification (“ASC”) Topic 360, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the assets' carrying amounts may not be recoverable. In performing the review for recoverability, if future undiscounted cash flows (excluding interest charges) from the use and ultimate disposition of the assets are less than their carrying values, an impairment loss, represented by the difference between its fair value and carrying value, is recognized. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. Management reviewed certain assets for impairment in the first quarter of 2012 (see Note 6 for details).
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC Topic 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
Included in the ASC Topic 820 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 ASC Topic 820 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, accrued liabilities and loan payable approximate fair value because of their short-term nature or current market rate for the loan payable with a fixed rate. Per ASC Topic 820 framework these are considered Level 2 inputs where inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
F7
Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposure through its normal operating and financing activities.
REVENUE RECOGNITION
The Company derives revenue primarily from the sale of its catalytic products. In accordance with Staff Accounting Bulletin No. 104, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the amount is fixed or determinable and collection is reasonably assured.
The Company also derives revenue (less than 7.3% and 4.9% of total revenue during the years ended December 31, 2012 and 2011, respectively) from providing emissions testing and environmental certification services. Revenue is recognized upon delivery of testing services when persuasive evidence of an arrangement exists and collection of the related receivable is reasonably assured.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the year. Common stock equivalents are excluded from the computation of diluted loss per share when their effect is anti-dilutive.
INCOME TAXES
Income taxes are computed in accordance with the provisions of ASC Topic 740, which requires, among other things, a liability approach to calculating deferred income taxes. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company is required to make certain estimates and judgments about the application of tax law, the expected resolution of uncertain tax positions and other matters. In the event that uncertain tax positions are resolved for amounts different than the Company's estimates, or the related statutes of limitations expire without the assessment of additional income taxes, the Company will be required to adjust the amounts of the related assets and liabilities in the period in which such events occur.
Such adjustments may have a material impact on ESW's income tax provision and results of operations.
SHIPPING AND HANDLING COSTS
The Company’s shipping and handling costs of $104,961 and $138,815 are included in cost of revenue for the years ended December 31, 2012 and 2011, respectively. Additionally, the Company has recorded recoveries of these costs amounting to $86,101 and $77,963, which are included in revenue for the years ended December 31, 2012 and 2011, respectively.
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 years ended December 31, 2012 and 2011, the Company expensed $759,847 and $692,977 net of grant revenues, respectively, towards research and development costs. For the years ended December 31, 2012 and 2011, gross research and development expense, excluding any offsetting grant revenues, amounted to $759,847 and $971,689, respectively, and grant money amounted to $0 and $278,712, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company and its foreign subsidiaries is the U.S. dollar. All of the Company’s revenue and materials purchased from suppliers are denominated in or linked to the U.S. dollar. Transactions denominated in currencies other than a functional currency are converted to the functional currency on the transaction date, and any resulting assets or liabilities are further translated at each reporting date and at settlement. Gains and losses recognized upon such translations are included within foreign exchange gain (loss) in the consolidated statements of operations and comprehensive loss.
Effective October 1, 2011, ESW changed the functional currency for its Canadian operations from the Canadian dollar to the U.S. dollar. The change in functional currency was applied on a prospective basis. The U.S dollar translated amounts of nonmonetary assets and liabilities at October 1, 2011 became the historical accounting basis for those assets and liabilities at October 1, 2011. Until the point of transition a cumulative translation adjustment of $102,366 was recognized in other comprehensive income, as a result of the change, losses of $186,812 were recognized through net income and were included in foreign exchange loss on the consolidated statements of operations and comprehensive loss. Since the accumulated other comprehensive income related only to foreign currency translation adjustments the full amount of accumulated other comprehensive income of $344,183 was reclassified into accumulated deficit. Upon the dissolution, sale, or wind-up of the Canadian subsidiary, this amount will be recognized in the consolidated statement of operations and comprehensive loss.
F8
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 estimates warranty costs as 2% of revenue. As of December 31, 2012 and 2011, $143,564 and $192,674, respectively, was accrued as warranty provision and included in accrued liabilities. For the years ended December 31, 2012 and 2011, the total warranty, service, service travel and installation costs included in cost of revenue were $265,936 and $272,966, respectively.
SEGMENT REPORTING
ESW operates in two reportable segments. ASC 280-10, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for the way that public business enterprises report information about operating segments in the Company’s consolidated financial statements. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. ESW’s operating segments include manufacturing operations and air testing services (see Note 15). ESW’s chief operating decision maker is the Company’s Executive Chairman.
RESTRUCTURING CHARGES
In 2011, ESW underwent a significant restructuring of its operations. ESW recognizes restructuring expenses as they are incurred. ESW also evaluated the inventory and property, plant and equipment associated with restructuring actions for impairment. Asset impairment and accelerated depreciation expenses primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value of the closed facilities to the Company’s estimated fair value. In addition, the remaining useful lives of other property, plant and equipment associated with the related operations were re-evaluated based on the respective plan, resulting in the impairment of certain assets. In accordance with ASC 420-10-25-11 costs to terminate an operating lease arise when a lessee will either: (a) terminate an operating lease; or (b) if it is unable to terminate the lease, discontinue its use of the asset and continue to make lease payments over the remaining term of the lease without benefit. When the lease will be terminated, the lessee should recognize a liability for the cost of terminating the lease at the time the lease is terminated. If the lease will not be terminated and the lessee will continue to incur costs under the lease without future benefit, the lessee should recognize a liability on the cease-use date (the date the lessee discontinues its use of the asset). In accordance with paragraphs 420-10-30-7 through 30-9, a liability for the remaining lease rentals, reduced by actual (or estimated) sublease rentals, would be recognized and measured at its fair value at the cease-use date. In accordance with paragraphs 420-10-35-1 through 35-4, the liability would be adjusted for changes, if any, resulting from revisions to estimated cash flows after the cease-use date, measured using the credit-adjusted risk-free rate that was used to measure the liability initially.
As disclosed in Note 14, the Company entered into an agreement with its former landlord for the full release of any future obligations under the lease agreement.
COMPARATIVE FIGURES
Certain 2011 figures have been reclassified to conform to the current financial statement presentation.
Effective October 1, 2011, ESW changed the functional currency for its Canadian operations from the Canadian dollar to the U.S. dollar. The change in functional currency was applied on a prospective basis. The U.S. dollar translated amounts of nonmonetary assets and liabilities at October 1, 2011 became the historical accounting basis for those assets and liabilities at October 1, 2011. On the same date, the cumulative translation adjustment of $344,183 was reclassified into accumulated deficit. As of December 31, 2012, the Company considered that the cumulative translation adjustment of $344,183 should be presented separately within the equity section and,
accordingly, reclassified the 2011 balance to conform to the current year’s presentation. Upon the dissolution, sale, or wind-up of the Canadian subsidiary, this amount will be recognized in the consolidated statement of operations and comprehensive loss.
NOTE 3 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-5 - "Comprehensive Income - Presentation of Comprehensive Income". This statement removed the presentation of comprehensive income in the statement of changes in stockholders’ equity. The only two allowable presentations are below the components of net income in a statement of comprehensive income or in a separate statement of comprehensive income that begins with total net income. The guidance was effective for interim or annual reporting periods beginning after December 15, 2011. The adoption of this ASU had no effect on the Company’s consolidated financial statements.
F9
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments purchased with an original maturity of 90 days or less at the date of purchase. At December 31, 2012 and 2011, all of the Company's cash and cash equivalents consisted of cash.
NOTE 5 – INVENTORY
Inventory consists of:
|
|
December 31,
|
|
December 31,
|
Inventory
|
|
2012
|
|
2011
|
Raw materials
|
$
|
914,310
|
$
|
846,113
|
Work-in-process
|
|
1,234,375
|
|
1,705,346
|
Finished goods
|
|
28,660
|
|
102,575
|
Parts
|
|
37,406
|
|
-
|
|
|
2,214,751
|
|
2,654,034
|
Less: reserve for inventory obsolescence
|
|
(252,473)
|
|
(223,007)
|
Total
|
$
|
1,962,278
|
$
|
2,431,027
|
The Company recorded a reserve for inventory write-downs amounting to $252,473 and $223,007 for the years ended December 31, 2012 and 2011, respectively, related to certain inventory that was impaired as a result of the restructuring and product changes. The Company disposed of certain inventory to recover cash, resulting in a loss on disposal of $0 and $415,041 for the years ended December 31, 2012 and 2011, respectively.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
December 31,
|
|
December 31,
|
Classification
|
|
2012
|
|
2011
|
Plant, machinery and equipment
|
$
|
3,164,175
|
$
|
6,294,458
|
Office equipment
|
|
75,572
|
|
357,717
|
Furniture and fixtures
|
|
2,893
|
|
449,147
|
Vehicles
|
|
-
|
|
25,604
|
Leasehold improvements
|
|
875,704
|
|
1,012,823
|
|
|
4,118,344
|
|
8,139,749
|
|
|
|
|
|
Less: accumulated depreciation
|
|
(2,735,691)
|
|
(6,867,760)
|
|
$
|
1,382,653
|
$
|
1,271,989
|
|
|
For the years ended
|
|
|
December 31,
|
|
December 31,
|
Depreciation Expense
|
|
2012
|
|
2011
|
Depreciation expense included in cost of revenue
|
$
|
332,664
|
$
|
271,563
|
Depreciation expense included in operating expenses
|
|
203,811
|
|
350,121
|
Depreciation expense included in research and development costs
|
|
49,721
|
|
97,200
|
Total depreciation expense
|
$
|
586,196
|
$
|
718,884
|
At December 31, 2012 and 2011, the Company had $350,431 and $198,416, respectively, of customized equipment under construction.
During the year ended December 31, 2012, the Company recognized an impairment loss for furniture, fixtures and office equipment located at its Canadian facility. The recovery from the sale of furniture, fixtures and office equipment was nominal and, accordingly, the Company has valued these assets as $0 and recorded an impairment loss equal to the full amount of their carrying value.
Certain property and equipment are used as a collateral for borrowings under the MELF facility (Note 8).
F10
The details of impairment loss recognized are summarized in the following table:
|
|
For the years ended
|
|
|
December 31,
|
|
December 31,
|
Asset grouping
|
|
2012
|
|
2011
|
Plant and machinery
|
$
|
-
|
$
|
180,993
|
Leasehold improvements
|
|
-
|
|
93,328
|
Furniture and fixtures (Abandonment)
|
|
1,842
|
|
-
|
Office equipment (Held for sale)
|
|
2,182
|
|
36,983
|
Computer hardware (Held for sale)
|
|
18,905
|
|
-
|
Computer software (Held for sale)
|
|
21,909
|
|
-
|
Total impairment loss recognized
|
|
44,838
|
|
311,304
|
|
|
|
|
|
Effect of exchange rate fluctuations
|
|
-
|
|
(16,066)
|
Gain on disposal of plant and machinery
|
|
(13,666)
|
|
(131,570)
|
Net impairment loss recognized
|
$
|
31,172
|
$
|
163,668
|
NOTE 7 - REDEEMABLE CLASS A SPECIAL SHARES
At December 31, 2011, the redeemable Class A special shares that were issued by the Company's wholly-owned subsidiary, BBL, without par value, were redeemable on demand by the holder of the shares, which is a private Ontario Corporation, at $700,000 Canadian (historically translated to $453,900 at December 31, 2011). On February 3, 2012, BBL filed for bankruptcy and the redeemable Class A special shares were subsequently cancelled.
NOTE 8 - LOAN PAYABLE
On April 25, 2012, the Company’s wholly-owned subsidiary ESWA entered into the MELF Facility with the Commonwealth of Pennsylvania for up to $500,000 for the purchase of equipment and related purchases. Two (2) draw-downs were permitted under the MELF Facility by ESWA. The first draw-down of $280,787 was made under the MELF Facility in connection with equipment purchased by ESWA on April 25, 2012 (the “Closing Date”). ESWA made one (1) additional draw-down of $219,213 on November 13, 2012 per the terms of the MELF Facility so that the aggregate amount borrowed under the MELF Facility amounts to $500,000. Terms of the MELF Facility include initial interest at three (3%) percent per annum with monthly payments and full repayment of the MELF Facility on or before the first day of the eighty fifth (85) calendar month following the Closing Date. As part of the loan agreement, within three years from the Closing Date ESWA is required to create, or retain, at its current location a certain number of jobs that is specified in the loan application. A breach by ESWA in the creation or maintenance of these jobs shall be considered an event of default under the MELF Facility. In the event ESWA defaults on any payments, the MELF Facility may be accelerated with full payment due along with certain additional modifications including the increase in interest to twelve and one half (12 1/2%) percent. The loan is secured by certain property and equipment and corporate guarantee of the Company.
As of December 31, 2012 and 2011, the loan payable amounted to $473,133 and $0, respectively. For the year ended December 31, 2012 and 2011, the Company paid interest amounting to $6,421 and $0 on the loan and also repaid principal in the amount of $26,867 and $0, respectively.
Loan maturities based on outstanding principal are as follows:
Year Ending December 31,
|
|
Amount
|
2013
|
$
|
68,926
|
2014
|
|
71,022
|
2015
|
|
73,182
|
2016
|
|
75,408
|
Thereafter
|
|
184,595
|
Total
|
$
|
473,133
|
F11
NOTE 9 - INCOME TAXES
As of December 31, 2012, there are tax loss carry forwards for Federal income tax purposes of approximately $40,939,073 available to offset future taxable income in the United States. The tax loss carry forwards expire in various years through 2032. 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 $14,328,675 has been established until realizations of the tax benefit from the loss carry forwards meet the "more likely than not" criteria.
Originating
|
|
Loss
|
Year
|
|
Carryforward
|
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
|
|
2,927,096
|
2010
|
|
2,269,987
|
2011
|
|
2,393,112
|
2012
|
|
12,947,125
|
Total
|
$
|
40,939,073
|
Additionally, as of December31, 2012, the Company's two wholly-owned Canadian subsidiaries had non-capital tax loss carry forwards of approximately $4,133,242 available to be used, in future periods, to offset taxable income. The loss carry forwards expire in 2031. The deferred tax asset of approximately $1,033,310 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.
The reconciliation of the difference between the income tax provision using the statutory tax rates and the effective tax rate is as follows:
|
|
For the years ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2012
|
|
2011
|
Statutory tax rates:
|
|
|
|
|
U.S.
|
|
35.00%
|
|
35.00%
|
Canada
|
|
26.25%
|
|
26.50%
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
U.S.
|
$
|
(13,201,205)
|
$
|
(5,799,781)
|
Canada
|
|
11,788,936
|
|
(3,327,307)
|
|
$
|
(1,412,269)
|
$
|
(9,127,088)
|
Expected tax recovery at statutory tax rates
|
$
|
(1,525,826)
|
$
|
(2,945,043)
|
Differences in income taxes resulting from:
|
|
|
|
|
Depreciation and impairment (foreign operations)
|
|
(110,279)
|
|
138,779
|
Change in fair value of exchange feature liability
|
|
-
|
|
202,559
|
Financing charge on embedded derivative liability
|
|
-
|
|
169,785
|
Stock-based compensation
|
|
88,928
|
|
62,980
|
Gain on convertible derivative
|
|
-
|
|
(467,756)
|
Long-term debt interest expense accretion
|
|
-
|
|
1,227,126
|
|
|
(1,547,177)
|
|
(1,611,570)
|
Benefit of losses not recognized
|
|
1,547,177
|
|
1,611,570
|
Income tax provision per consolidated financial statements
|
$
|
-
|
$
|
-
|
F12
Components of deferred income tax assets are as follows:
|
|
December 31,
|
|
December 31,
|
|
|
2012
|
|
2011
|
Property, plant and equipment
|
$
|
-
|
$
|
488,494
|
Tax loss carryforwards
|
|
15,361,985
|
|
13,255,075
|
|
|
15,361,985
|
|
13,743,569
|
Valuation allowance
|
|
(15,361,985)
|
|
(13,743,569)
|
Carrying value
|
$
|
-
|
$
|
-
|
Valuation allowances reflect the deferred tax benefits that management is uncertain about regarding the Company's ability to utilize in the future.
Based on the Company’s current tax loss position tax benefits to be recognized is more-likely-than-not to be sustained upon examination by taxing authorities. The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.
The Company will recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of operations and comprehensive loss. Accrued interest and penalties will be included within the related tax liability line in the consolidated balance sheets.
In many cases the Company's uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2012:
United States – Federal
|
2008 – present
|
United States – State
|
2008 – present
|
Canada – Federal
|
2009 – present
|
Canada – Provincial
|
2009 – present
|
NOTE 10 - STOCKHOLDERS' EQUITY
Effective November 6, 2011, the Board approved restricted stock grants to 7 board members under the 2010 stock incentive plan, as per the terms of the grant each of the 7 Board members will receive 150,000 shares vesting in equal parts on December 31, 2011, December 31, 2012 and December 31, 2013 subject to the execution of the requisite grant agreements. The Board also approved restricted stock grants to 2 Board members for serving as chair to various committees. As per the terms of the grant each of the 2 board members will receive 200,000 shares vesting immediately subject to the execution of the requisite grant agreements. Stock-based compensation expense will be recorded as of the vesting terms of the grants. Of the vested shares 700,000 restricted shares of common stock have been issued as of December 31, 2012.
Effective December 10, 2012, the Board approved a one-time grant of 8,229,392 shares of restricted common stock from treasury to a member of the Company’s Board for services rendered as Executive Chairman, 4,114,696 shares of which were issued upon the date of grant, and 4,114,696 shares of which were issued on February 28, 2013. The shares of common stock were issued from treasury not under the Company’s 2010 stock incentive plan.
Effective December 31, 2012, the Company issued 83,334 restricted shares of common stock to two board members in lieu of outstanding board fees under the 2010 stock incentive plan.
Effective December 31, 2012, the Company issued 450,000 restricted shares of common stock to seven board members in connection with restricted stock grants under the 2010 stock incentive plan.
On July 15, 2011, as a result of the closing of the rights offering effective June 30, 2011, the Company issued 89,170,012 shares of common stock.
Effective November 6, 2011, the Company issued 400,000 restricted shares of common stock to two board members in connection with restricted stock grants under the 2010 stock incentive plan.
Effective November 6, 2011, the Company issued 166,668 restricted shares of common stock to four board members in lieu of outstanding board fees under the 2010 stock incentive plan.
Effective December 31, 2011, the Company issued 250,000 restricted shares of common stock to five board members in connection with restricted stock grants under the 2010 stock incentive plan.
F13
Shares of restricted common stock issued above were valued at the quoted market price on the dates of grant. During the years ended December 31, 2012 and 2011, $171,244 and $67,037, respectively, has been recorded in the consolidated statements of operations and comprehensive loss for the fair value of each grant of restricted common shares.
NOTE 11 - STOCK OPTIONS AND WARRANT GRANTS
On April 15, 2010, the Board granted an aggregate award of 900,000 stock options to a former executive officer and former director and one director. The options vest over a period of three years with an exercise price of $0.65 (fair market value of the Company's common stock as of the date of grant) with expiry of five years from the date of award. Effective February 7, 2011, with the resignation of a director, the unvested portion of the stock options was cancelled as a result of the resignation. At December 31, 2012, the Company had $20,709 of unrecognized stock option expense related to the non-vested stock options.
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, 2011
|
3,600,000
|
$
|
0.68
|
Granted
|
475,000
|
$
|
0.12
|
Expired or cancelled
|
(500,000)
|
$
|
(0.73)
|
Outstanding, December 31, 2011
|
3,575,000
|
$
|
0.60
|
Expired or cancelled
|
(2,400,000)
|
$
|
(0.65)
|
Outstanding, December 31, 2012
|
1,175,000
|
$
|
0.50
|
At December 31, 2012 and 2011, the outstanding options had a weighted average remaining life of 23 months and 13 months, respectively.
No stock options were granted for the year ended December 31, 2012. The weighted average fair value of options granted during 2011 was $0.05 and was estimated using the Black-Scholes option pricing model, using the following assumptions:
|
2011
|
Expected volatility
|
114%
|
Risk-free interest rate
|
0.42%
|
Expected life
|
3.16 years
|
Dividend yield
|
0.00%
|
Forfeiture rate
|
0.00%
|
The Black-Scholes option-pricing 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.
During the years ended December 31, 2012 and 2011, $82,836 and $113,704, respectively, has been recorded in the consolidated statements of operations and comprehensive loss for stock option expense.
At December 31, 2012, the Company had outstanding options as follows:
Number of
|
Exercise
|
|
Options
|
Price
|
Expiration date
|
100,000
|
$1.00
|
February 8, 2013
|
250,000
|
$0.27
|
August 6, 2013
|
600,000
|
$0.65
|
April 15, 2015
|
225,000
|
$0.12
|
June 30, 2016
|
1,175,000
|
|
|
F14
Warrants issued in connection with various private placements of equity securities are treated as a capital transaction 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, 2011 and December 31, 2011
|
1,545,000
|
$
|
0.65
|
Granted
|
--
|
$
|
--
|
Exercised
|
--
|
$
|
--
|
Expired
|
(1,545,000)
|
$
|
0.65
|
Outstanding, December 31, 2012
|
--
|
$
|
--
|
No warrants were issued during the years ended December 31, 2012 and 2011.
NOTE 12 – EXPENSES RELATING TO ISSUANCE OF NOTES PAYABLE AND 2010 DEBENTURES
In connection with the issuance of unsecured subordinated notes payables and the Qualified Offering disclosed in Note 1, the Company recognized the following expenses for the year ended December 31, 2011:
·
Interest expense on notes payable to related parties of $126,850;
·
Interest accretion expense of $3,506,074 representing the full discount on the $4 million notes, as a portion of the proceeds from the issuance of notes were allocated to an embedded derivative liability in the amount of $3,506,074; and
·
The Company recognized a financing charge on embedded derivative liability of $485,101 and a gain on convertible derivative of $1,336,445, both of which also relate to the notes payable.
The Company recognized a loss in fair value of exchange feature liability of $578,739. The exchange feature liability was related to certain convertible debentures issued in 2010 with anti-dilution provisions. Concurrent with the closing of the Qualified Offering, the anti-dilution agreements were also closed.
NOTE 13 - RELATED PARTY TRANSACTIONS
In addition to fees and salaries as well as reimbursement of business expenses, transactions with related parties include:
·
On April 19, 2011, the Company's Board ratified a Services Agreement (the "Orchard Agreement") between the Company and Orchard Capital Corporation ("Orchard") which was approved by the Company's Compensation Committee and was effective January 30, 2011. Under the Orchard Agreement, Orchard agreed to provide services that may be mutually agreed to by and between Orchard and the Company including those duties customarily performed by the Chairman of the Board and executive of the Company as well as providing advice and consultation on general corporate matters and other projects as may be assigned by the Company's Board as needed. Orchard is controlled by Richard Ressler. Certain affiliated entities of Orchard as well as Richard Ressler own shares of the Company. During the years ended December 31, 2012 and 2011, management fees charged to operations amounted to $300,000 and $275,000, respectively.
·
Mr. Nitin Amersey, a director of the Company, is listed as a control person with the Securities and Exchange Commission of Bay City Transfer Agency Registrar Inc., the Company's transfer agent, and of Freeland Venture Resources Inc., which provides Edgar filing services to the Company. During the years ended December 31, 2012 and 2011, the Company incurred fees to these entities controlled by Mr. Amersey amounting to $11,296 and $18,054, respectively.
·
During the years ended December 31, 2012 and 2011, interest expense on notes payable to related party amounted to $0 and $126,850, respectively. These notes payable and certain agreements in connection with the subsequent conversion of these notes to equity are discussed in Note 1.
·
During the years ended December 31, 2012 and 2011, the Company recognized a loss in fair value of exchange feature liability of $0 and $578,739, respectively, in the consolidated statements of operations and comprehensive loss. This exchange feature was related to the $1 million convertible debentures issued on March 19, 2010 and held by Orchard. The exchange feature liability was classified as a derivative liability and was transferred to equity when the related convertible debentures were converted into equity on June 30, 2011.
·
Mr. Peter Bloch, a former director of the Company, provided consulting services to the Company and was paid in the amount of $88,796 for these services for the year ended December 31, 2011. Mr. Bloch did not provide similar consulting services for the year ended December 31, 2012.
F15
NOTE 14 - COMMITMENTS AND CONTINGENCIES
LEASES
Effective November 24, 2004, the Company's wholly-owned subsidiary, ESWA, 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 and also houses ESW’s manufacturing operations. The lease commenced on January 15, 2005. Effective October 16, 2009, the Company's wholly-owned subsidiary ESWA entered into a lease renewal agreement with Nappen & Associates for the leasehold property in Pennsylvania. Under the terms of the lease renewal, the lease term was extended to February 28, 2013. Effective September 24, 2012, ESWA entered into a second lease amendment agreement, whereby ESWA extended the term of the lease agreement by an additional 5 years. Under the terms of the second lease renewal, the lease will expire on February 28, 2018.
Effective December 20, 2004, the Company's wholly-owned subsidiary, ESWC, entered into a lease agreement for approximately 50,000 square feet of leasehold space in Concord, Ontario, Canada. The leasehold space previously housed the Company's executive offices and the manufacturing operations. The renewed lease period commenced on October 1, 2010 and ended on September 30, 2015. Effective May 1, 2012, the landlord terminated the lease agreement for the facility. The facility had been vacated prior to the lease termination. Thereafter effective May 22, 2012, ESWC and its former landlord entered into an agreement for the full release of any future obligations under the lease agreement subject to payment of a mutually agreed consideration payable through September 2012. The agreement provides for a full and complete release of ESWC by the landlord for the consideration and terms under the lease agreement. ESWC has fulfilled its terms of the release.
The following is a summary of the minimum annual lease payments for the Pennsylvania lease:
Year Ending December 31,
|
|
Total
|
2013
|
$
|
180,990
|
2014
|
|
180,990
|
2015
|
|
180,990
|
2016
|
|
180,990
|
2017
|
|
180,990
|
2018
|
|
30,165
|
Total
|
$
|
935,115
|
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 the Company’s business, collections claims, 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.
The Company is pursuing a lawsuit in New York for collection of unpaid invoices related to goods delivered to a former dealer.
NOTE 15 – OPERATING SEGMENTS
The Company has two principal operating segments, ESW America emissions testing services and catalyst manufacturing. These operating segments were determined based on the nature of the products and services offered. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and
in assessing performance. The Company’s Executive Chairman has been identified as the chief operating decision-maker, and directs the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.
F16
The Company evaluates performance based on several factors, of which the primary financial measure is net income. The accounting policies of the business segments are the same as those described in Note 2. No intersegment sales were made for the years ended December 31, 2012 and 2011. The following tables show the operations and certain assets of the Company’s reportable segments:
For the year ended December 31, 2012
|
|
|
Catalyst
|
|
Emissions testing
|
|
Unallocated
|
|
Total
|
Revenue
|
$
|
9,778,763
|
$
|
747,560
|
$
|
-
|
$
|
10,526,323
|
Net income (loss)
|
$
|
309,303
|
$
|
(716,348)
|
$
|
(1,005,224)
|
$
|
(1,412,269)
|
Property, plant and equipment additions
|
$
|
31,604
|
$
|
703,565
|
$
|
-
|
$
|
735,169
|
Property, plant and equipment under construction
additions
|
$
|
150,616
|
$
|
1,399
|
$
|
-
|
$
|
152,015
|
Interest expense
|
$
|
-
|
$
|
6,421
|
$
|
-
|
$
|
6,421
|
Depreciation and amortization
|
$
|
112,614
|
$
|
473,582
|
$
|
-
|
$
|
586,196
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
Catalyst
|
|
Emissions testing
|
|
Unallocated
|
|
Total
|
Total assets
|
$
|
3,614,649
|
$
|
1,776,344
|
$
|
14,125
|
$
|
5,405,118
|
Property, plant and equipment under construction
|
$
|
1,399
|
$
|
349,032
|
$
|
-
|
$
|
350,431
|
Property, plant and equipment
|
$
|
205,135
|
$
|
1,177,518
|
$
|
-
|
$
|
1,382,653
|
Accounts receivable
|
$
|
1,203,355
|
$
|
118,965
|
$
|
-
|
$
|
1,322,320
|
Inventories
|
$
|
1,952,276
|
$
|
10,002
|
$
|
-
|
$
|
1,962,278
|
For the year ended December 31, 2011
|
|
|
Catalyst
|
|
Emissions testing
|
|
Unallocated
|
|
Total
|
Revenue
|
$
|
11,304,074
|
$
|
581,591
|
$
|
-
|
$
|
11,885,665
|
Net loss
|
$
|
(3,404,278)
|
$
|
(1,441,766)
|
$
|
(4,281,044)
|
$
|
(9,127,088)
|
Property, plant and equipment additions
|
$
|
25,406
|
$
|
207,931
|
$
|
-
|
$
|
233,337
|
|
Property, plant and equipment under construction
additions
|
$
|
-
|
$
|
150,618
|
$
|
-
|
$
|
150,618
|
|
Interest expense
|
$
|
-
|
$
|
-
|
$
|
3,506,074
|
$
|
3,506,074
|
|
Depreciation and amortization
|
$
|
272,191
|
$
|
446,693
|
$
|
16,145
|
$
|
735,029
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
Catalyst
|
|
Emissions testing
|
|
Unallocated
|
|
Total
|
Total assets
|
$
|
4,383,370
|
$
|
1,498,469
|
$
|
623,187
|
$
|
6,
505
,026
|
Property, plant and equipment under construction
|
$
|
-
|
$
|
198,416
|
$
|
-
|
$
|
198,416
|
Property, plant and equipment
|
$
|
328,489
|
$
|
943,500
|
$
|
-
|
$
|
1,271,989
|
Accounts receivable
|
$
|
1,028,720
|
$
|
176,014
|
$
|
-
|
$
|
1,
204
,734
|
Inventories
|
$
|
2,393,507
|
$
|
37,520
|
$
|
-
|
$
|
2,431,027
|
All of the Company’s revenue for the years ended December 31, 2012 and 2011 was derived from the United States. Net property, plant and equipment (including property, plant and equipment under construction) located outside of the United States are less than 10% at December 31, 2012 and 2011.
NOTE 16 - LOSS PER SHARE
Potential common shares of 1,175,000 related to ESW's outstanding stock options and 0 shares related to ESW's outstanding warrants were excluded from the computation of diluted loss per share for the year ended December 31, 2012 because the inclusion of these shares would be anti-dilutive.
Potential common shares of 3,575,000 related to ESW's outstanding stock options and 1,545,000 shares related to ESW's outstanding warrants were excluded from the computation of diluted loss per share for the year ended December 31, 2012 because the inclusion of these shares would be anti-dilutive.
NOTE 17 - RISK MANAGEMENT
CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE
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 customers' financial condition and generally does not require collateral from its customers. The Company also managed its credit risk by insuring certain of Company’s accounts receivable as at December 31, 2011. Three of the Company’s customers accounted for 27.8%, 15.8% and 7.7%, of revenue during the year ended December 31, 2012 and 13.7%, 12.1% and 11.2%, respectively, of its accounts receivable as of December 31, 2012. Three of the Company’s customers accounted for 41.2%, 15.7% and 10.6%, of revenue during the year ended December 31, 2011 and 37.4%, 25.1% and 14.0%, respectively, of its accounts receivable as of December 31, 2011.
For the year ended December 31, 2012, the Company purchased approximately 19.1% and 12.0% of its inventory from two vendors. For the year ended December 31, 2011, the Company purchased approximately 29.6% and 13.9% of its inventory from two vendors. The accounts payable to these two vendors aggregated approximately $483,717 and $511,271 as of December 31, 2012 and 2011, respectively.
NOTE 18 - SUBSEQUENT EVENTS
Effective February 28, 2013, the Company filed a Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934. 1. ESW’s Board has fixed the close of business on February 15, 2013 as the record date for the determination of shareholders entitled to submit written consents. The statement includes the following proposals submitted for consent by shareholders:
1) a proposal to amend the Articles of Incorporation of Company to effect a reverse stock split of the Company’s common stock, par value $0.001 per share, at an exchange ratio of 1-for-2,000 shares of the Company’s outstanding common stock. Such amendment would not change the par value per share and the number of authorized shares of common stock. Such amendment to be effective upon filing of Articles of Amendment to the Company’s Articles of Incorporation with the Secretary of State of the State of Florida; and
2) a proposal to approve and adopt the Company’s 2013 stock plan.
Effective February 28, 2013, the Company issued 4,114,696 restricted shares of common stock to one board member in connection with a stock grant approved by ESW’s Board effective December 10, 2012. The shares of common stock were issued from treasury and not under the Company’s 2010 stock incentive plan.
F17
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
|
CONSOLIDATED CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
SEPTEMBER 30,
|
|
DECEMBER 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash and cash equivalents (Note 5)
|
$ 2,782,759
|
|
$ 253,998
|
|
Accounts receivable, net of allowance
|
|
|
|
|
|
for doubtful accounts of $221,212 (2012 - $221,212) (Note 2)
|
1,424,981
|
|
1,322,320
|
|
Inventory, net of reserve of $252,473 (2012 - $252,473)(Note 6)
|
3,337,037
|
|
1,962,278
|
|
Prepaid expenses and sundry assets (Note 16)
|
473,767
|
|
133,438
|
|
|
Total current assets
|
8,018,544
|
|
3,672,034
|
|
|
|
|
|
|
Property, plant and equipment under construction (Note 7)
|
329,840
|
|
350,431
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated
|
|
|
|
|
depreciation of $3,194,911 (2012 - $2,735,691) (Note 7)
|
1,581,400
|
|
1,382,653
|
|
|
|
|
|
|
Patents and trademarks, net of accumulated
|
|
|
|
|
amortization of $2,100 (Note 2 and 3)
|
39,900
|
|
-
|
|
|
|
|
|
|
|
|
|
$ 9,969,684
|
|
$ 5,405,118
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts payable (Note 15)
|
$ 1,485,475
|
|
$ 1,457,091
|
|
Accrued liabilities (Note 15)
|
869,932
|
|
344,288
|
|
Warranty provision (Note 2)
|
1,717,019
|
|
143,564
|
|
Customer deposits
|
113,210
|
|
73,078
|
|
Current portion of loan payable (Note 9)
|
70,492
|
|
68,926
|
|
|
Total current liabilities
|
4,256,128
|
|
2,086,947
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
Promissory notes payable (Note 10)
|
2,054,461
|
|
-
|
|
Conversion option derivative liability (Note 11)
|
1,125,775
|
|
-
|
|
Loan payable (Note 9)
|
351,141
|
|
404,207
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
3,531,377
|
|
404,207
|
|
|
|
|
|
|
|
|
Total liabilities
|
7,787,505
|
|
2,491,154
|
|
|
|
|
|
|
Commitments and Contingencies (Note 16)
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity (Notes 13 and 14)
|
|
|
|
|
Common stock, $0.001 par value, 250,000,000
|
|
|
|
|
|
shares authorized; 113,464 (2012 - 112,049)
|
|
|
|
|
|
shares issued and outstanding
|
113
|
|
112
|
|
Additional paid-in capital
|
57,201,483
|
|
57,080,047
|
|
Accumulated other comprehensive income
|
344,183
|
|
344,183
|
|
Accumulated deficit
|
(55,363,600)
|
|
(54,510,378)
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
2,182,179
|
|
2,913,964
|
|
|
|
|
|
|
|
|
|
$ 9,969,684
|
|
$ 5,405,118
|
|
|
|
|
|
|
Going concern ( Note 1)
|
|
|
|
Subsequent events (Note 20)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
|
G2
|
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
|
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) / INCOME
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FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30,
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(UNAUDITED)
|
|
|
NINE MONTH PERIOD ENDED SEPTEMBER 30,
|
|
THREE MONTH PERIOD ENDED SEPTEMBER 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
Revenue
|
$ 10,242,470
|
|
$ 7,669,063
|
|
$ 5,497,125
|
|
$ 2,793,358
|
|
|
|
|
|
|
|
|
|
Cost of revenue (Notes 2, 6 and 7)
|
7,734,451
|
|
5,002,206
|
|
2,780,826
|
|
1,802,470
|
|
|
|
|
|
|
|
|
|
Gross profit
|
2,508,019
|
|
2,666,857
|
|
2,716,299
|
|
990,888
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Marketing, office and general expenses
|
3,359,067
|
|
2,548,309
|
|
1,221,541
|
|
682,799
|
|
Officers’ compensation and directors’ fees (Note 15)
|
605,658
|
|
473,006
|
|
169,951
|
|
161,415
|
|
Research and development costs (Note 2 and 7)
|
455,235
|
|
477,582
|
|
214,624
|
|
163,264
|
|
Consulting and professional fees
|
401,132
|
|
177,946
|
|
121,633
|
|
42,333
|
|
Depreciation and amortization (Note 7)
|
177,944
|
|
152,726
|
|
65,366
|
|
37,609
|
|
Foreign exchange (gain) / loss
|
(18,030)
|
|
63,698
|
|
(29,210)
|
|
20,655
|
|
Loss on impairment of property, plant and equipment, net (Note 7)
|
-
|
|
29,984
|
|
-
|
|
1,039
|
|
|
|
|
|
|
|
|
|
|
|
4,981,006
|
|
3,923,251
|
|
1,763,905
|
|
1,109,114
|
|
|
|
|
|
|
|
|
|
(Loss) / income from operations
|
(2,472,987)
|
|
(1,256,394)
|
|
952,394
|
|
(118,226)
|
|
|
|
|
|
|
|
|
|
Gain on deconsolidation of subsidiary (Note 8)
|
-
|
|
453,900
|
|
-
|
|
-
|
Interest on promissory notes payable (Notes 10 and 15)
|
(200,000)
|
|
-
|
|
(127,689)
|
|
-
|
Accretion of discount on promissory notes payable (Note 10)
|
(133,563)
|
|
-
|
|
(87,126)
|
|
-
|
Change in fair value of conversion option derivative liability (Note 11)
|
1,953,328
|
|
-
|
|
2,991,651
|
|
-
|
|
|
|
|
|
|
|
|
|
Net and comprehensive (loss) / income
|
$ (853,222)
|
|
$ (802,494)
|
|
$ 3,729,230
|
|
$ (118,226)
|
|
|
|
|
|
|
|
|
|
Net (loss) / earnings per share (Note 18)
|
|
|
|
|
|
|
|
|
Basic
|
$ (7.55)
|
|
$ (7.31)
|
|
$ 32.87
|
|
$ (1.08)
|
|
Fully diluted
|
$ (7.55)
|
|
$ (7.31)
|
|
$ 5.41
|
|
$ (1.08)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding (basic and diluted)
|
|
|
|
|
|
|
|
|
Basic
|
112,948
|
|
109,725
|
|
113,464
|
|
109,725
|
|
Fully diluted
|
112,948
|
|
109,725
|
|
176,139
|
|
109,725
|
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
|
G3
|
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
|
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2013
|
(UNAUDITED)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Total
|
|
Common Stock
|
|
Additional
|
|
Other Comprehensive
|
|
Accumulated
|
|
Stockholders’
|
|
Shares
|
|
Amount
|
|
Paid-In Capital
|
|
Income
|
|
Deficit
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2013
|
112,049
|
|
$ 112
|
|
$ 57,080,047
|
|
$ 344,183
|
|
$(54,510,378)
|
|
$ 2,913,964
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
(853,222)
|
|
(853,222)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation (Note 13 and 14)
|
2,057
|
|
2
|
|
172,951
|
|
-
|
|
-
|
|
172,953
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock (Note 2)
|
(642)
|
|
(1)
|
|
(51,515)
|
|
-
|
|
-
|
|
(51,516)
|
Balance September 30, 2013
|
113,464
|
|
$ 113
|
|
$ 57,201,483
|
|
$ 344,183
|
|
$(55,363,600)
|
|
$ 2,182,179
|
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
|
G4
|
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
|
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
|
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30,
|
|
|
2013
|
|
2012
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Net and comprehensive loss
|
$ (853,222)
|
|
$ (802,494)
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
used in operating activities:
|
|
|
|
|
Depreciation of property, plant and equipment and amortization of patents
|
461,351
|
|
414,782
|
|
Loss on impairment of property, plant and equipment
|
-
|
|
29,984
|
|
Interest on promissory notes payable
|
200,000
|
|
-
|
|
Amortization of discount on promissory notes payable
|
133,563
|
|
-
|
|
Change in fair value of conversion option derivative liability
|
(1,953,328)
|
|
-
|
|
Stock-based compensation
|
172,953
|
|
62,127
|
|
Allowance for doubtful accounts
|
-
|
|
213,810
|
|
Warranty provision
|
1,573,455
|
|
49,183
|
|
Reserve on inventory obsolescence
|
-
|
|
252,473
|
|
Loss on disposal of inventory
|
195,929
|
|
-
|
|
Gain on deconsolidation of subsidiary
|
-
|
|
(453,900)
|
|
|
|
|
|
|
|
783,923
|
|
568,459
|
|
|
|
|
|
Decrease in cash flows from operating
|
|
|
|
|
activities resulting from changes in:
|
|
|
|
|
Accounts receivable
|
(102,661)
|
|
207,177
|
|
Inventory
|
(1,570,688)
|
|
(264,940)
|
|
Prepaid expenses and sundry assets
|
(340,329)
|
|
132,283
|
|
Accounts payable and accrued liabilities
|
354,030
|
|
(94,571)
|
|
Customer deposits
|
40,132
|
|
3,000
|
|
|
|
|
|
|
|
(1,619,516)
|
|
(17,051)
|
|
|
|
|
|
Net cash used in operating activities
|
(1,688,815)
|
|
(251,086)
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
-
|
|
13,828
|
|
Acquisition of patent and trademarks
|
(42,000)
|
|
-
|
|
Acquisition of property, plant and equipment
|
(349,176)
|
|
(192,518)
|
|
Addition to property, plant and equipment under construction
|
(288,231)
|
|
(379,194)
|
|
|
|
|
|
Net cash used in investing activities
|
(679,407)
|
|
(557,884)
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
Proceeds from notes payable to related parties
|
5,000,000
|
|
-
|
|
Payment for fractional shares
|
(51,516)
|
|
-
|
|
Proceeds of loan payable
|
-
|
|
280,787
|
|
Repayment of loan payable
|
(51,501)
|
|
(15,116)
|
|
Repayment of capital lease obligation
|
-
|
|
(1,241)
|
|
|
|
|
|
Net cash provided by financing activities
|
4,896,983
|
|
264,430
|
|
|
|
|
|
Net change in cash and equivalents
|
2,528,761
|
|
(544,540)
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
253,998
|
|
1,103,649
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
$ 2,782,759
|
|
$ 559,109
|
Supplemental disclosures:
|
|
|
|
|
Cash interest paid
|
$ 10,133
|
|
$ 3,434
|
|
Property, plant and equipment included in accounts payable
|
$ 42,550
|
|
$ -
|
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
|
G5
|
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND GOING CONCERN
Environmental Solutions Worldwide, Inc. (the “Company” or “ESW”) through its wholly-owned subsidiaries is engaged in the design, development, manufacturing and sales of emissions control technologies. ESW also provides emissions testing and environmental certification services with its primary focus on the North American on-road and off-road diesel engine, chassis and after-treatment market. ESW currently manufactures and markets a line of catalytic emission control and enabling technologies for a number of applications focused on the medium and heavy duty diesel (“MHDD”) retrofit market.
The unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplates continuation of the Company as a going concern. The Company has sustained recurring operating losses. As of September 30, 2013, the Company had an accumulated deficit of $55,363,600 and has cash and cash equivalents of $2,782,759. The Company during the three month period ended September 30, 2013 generated Income from Operations of $952,394; however, ESW’s history of losses and the current prevailing economic conditions create uncertainty in the operating results and, accordingly, there is no assurance that the Company will be successful in generating sufficient cash flow from operations or achieving profitability in the near future. As a result, there is substantial doubt regarding the Company’s ability to continue as a going concern. The Company may require additional financing to fund its continuing operations and planned capital investments. The Company’s ability to continue as a going concern is dependent on achieving and maintaining a profitable level of operations.
Effective March 22, 2013, the Company entered into a note subscription agreement, a security agreement and issued senior secured five (5) year convertible promissory notes (collectively the “Notes”) to certain shareholders (the “Senior Secured Lenders”). Pursuant to the Loan Agreements, the Senior Secured Lenders made initial loans to the Company in the principal aggregate amount of $1.4 million on March 22, 2013 (Note 10).
On April 23, 2013 and June 27, 2013, the Company issued additional Notes in the aggregate principal amount $3,600,000 to the Senior Secured Lenders, which represented the last drawdown of the $5 million loan facility (Note 10). The additional Notes were issued on terms substantially similar to the terms set forth in the Notes previously issued on March 22, 2013. Proceeds from the additional Notes are being used by the Company and its subsidiaries to fund the acquisition of assets from Cleaire Advanced Emission Controls, LLC (“Cleaire”) (Note 3), working capital, planned capital investments and other general corporate purposes.
The unaudited consolidated condensed financial statements do not include any adjustments relating to the recoverability and classification of the 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. All adjustments, consisting only of normal recurring items, considered necessary for fair presentation have been included in these unaudited consolidated condensed financial statements. These unaudited consolidated condensed financial statements have been prepared on the same basis as the annual financial statements and should be read in conjunction with those annual financial statements filed on Form 10-K for the year ended December 31, 2012.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The unaudited consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiaries, ESW America Inc. (“ESWA”), ESW Technologies Inc. (“ESWT”), ESW Canada Inc. (“ESWC”), ESW CleanTech Inc. (“ESWCT”) and Technology Fabricators Inc. (“TFI”). All inter-company transactions and balances have been eliminated on consolidation. Amounts in the unaudited consolidated condensed financial statements are expressed in U.S. dollars.
On April 18, 2013, ESW formed ESWCT, a wholly owned subsidiary. ESWCT, a Delaware corporation, is the entity that houses ESW’s San Diego manufacturing operations. ESWCT is located 7706 Trade Street, San Diego, CA, 92121.
REVERSE STOCK-SPLIT
On May 24, 2013, ESW affected a one-for-two thousand reverse stock split of its common stock. As a result all outstanding common stock, and per share amounts contained in the unaudited consolidated condensed financial statements and related notes have been retroactively adjusted to reflect this reverse stock-split for all periods presented. No fractional shares were issued resulting in a decrease to the outstanding shares on a post-split basis. In lieu of fractional shares, holders were paid cash equal to the number of shares of common stock held by any such holder immediately prior to the reverse stock split that were not combined into whole shares, multiplied by the fair market value of one pre-reverse stock split share. In lieu of issuing fractional shares, the Company paid holders cash in aggregate of $51,516 (Note 13).
G6
ESTIMATES
The preparation of unaudited consolidated condensed financial statements in conformity with U.S. 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 unaudited consolidated condensed financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant estimates include amounts for inventory valuation, elements of an asset acquisition as of the date of acquisition, impairment of and useful lives of property plant and equipment, and the valuation of the stock-based compensation, conversion option derivative liability and warranty provisions.
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 the current relationships with them. On this basis management has determined that an allowance for doubtful accounts of $221,212 was appropriate as of both September 30, 2013 and December 31, 2012, respectively.
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-process, finished goods and parts.
PROPERTY, PLANT AND EQUIPMENT UNDER CONSTRUCTION
The Company capitalizes customized equipment built to be used in the future day to day operations at cost. 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.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the Accounting Standards Codification (“ASC”) Topic 360, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the assets’ carrying amounts may not be recoverable. In performing the review for recoverability, if future undiscounted cash flows (excluding interest charges) from the use and ultimate disposition of the assets are less than their carrying values, an impairment loss represented by the difference between its fair value and carrying value, is recognized. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. Management reviewed certain assets for impairment in the first quarter of 2012 (see Note 7 for details).
PATENTS AND TRADEMARKS
Patents and trademarks are measured at the cost incurred to acquire them from an independent third party (see Note 3). Topic 350-20, Goodwill, and 350-30, General 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. Future impairment tests for patents and trademarks will be performed annually in the fiscal fourth quarter, or sooner if warranted.
Patents and trademarks were acquired as part of the Cleaire asset acquisition (Note 3) and are being amortized on a straight-line basis over their estimated useful lives of five years. For the period ended September 30, 2013 and 2012, patents and trademarks amount to $39,900 and $0 respectively. Amortization expense was $2,100 for the nine and three month periods ended September 30, 2013 (September 30, 2012 - $0).
G7
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC Topic 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Included in the ASC Topic 820 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 ASC Topic 820 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 approximate fair value because of their short-term nature. Per ASC Topic 820 framework these are considered Level 2 inputs where inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Our conversion option derivative liability, which is measured at fair value on a recurring basis, is measured using Level 3 inputs.
Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. The promissory notes payable and loan payable both have fixed interest rates therefore the Company is exposed to interest rate risk in that they could not benefit from a decrease in market interest rates. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposure through its normal operating and financing activities.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.
The Company reviews the terms of convertible debt, equity instruments and other financing arrangements to determine whether there are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. Also, in connection with the issuance of financing instruments, the Company may issue freestanding options or warrants to employees and non-employees in connection with consulting or other services. These options or warrants may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.
Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. To the extent that the initial fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received an immediate charge to income is recognized in order to initially record the derivative instrument liabilities at their fair value.
The discount from the face value of the convertible debt or equity instruments resulting from allocating some or all of the proceeds to the derivative instruments, together with the stated rate of interest on the instrument, is amortized over the life of the instrument through periodic charges to income, using the effective interest method.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument, as of the determination date, is reclassified. Any previous charges or credits to income for
changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the unaudited consolidated condensed balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
REVENUE RECOGNITION
The Company derives revenue primarily from the sale of its catalytic products. In accordance with Staff Accounting Bulletin No. 104, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the amount is fixed or determinable and collection is reasonably assured.
The Company also derives revenue (approximately 4.8% and 7.9% of total revenue during the nine month period ended September 30, 2013 and 2012, respectively) from providing air testing and environmental certification services. Revenues are recognized upon delivery of testing services when persuasive evidence of an arrangement exists and collection of the related receivable is reasonably assured.
G8
LOSS/EARNINGS PER SHARE OF COMMON STOCK
Loss per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Common stock equivalents are excluded from the computation of diluted loss per share when their effect is anti-dilutive.
Basic and diluted earnings per share have been determined by dividing the consolidated net earnings available to shareholders for the applicable period by the basic and diluted weighted average number of shares outstanding, respectively. The diluted weighted average number of shares outstanding is calculated as if all dilutive options and restricted stock grants had been exercised or vested at the later of the beginning of the reporting period or date of grant, using the treasury stock method. The dilutive effect of convertible notes has been reflected in diluted weighted average number of shares using the if-converted method.
INCOME TAXES
Income taxes are computed in accordance with the provisions of ASC Topic 740, which requires, among other things, a liability approach to calculating deferred income taxes. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company is required to make certain estimates and judgments about the application of tax law, the expected resolution of uncertain tax positions and other matters. In the event that uncertain tax positions are resolved for amounts different than the Company’s estimates, or the related statutes of limitations expire without the assessment of additional income taxes, the Company will be required to adjust the amounts of the related assets and liabilities in the period in which such events occur. Such adjustments may have a material impact on ESW’s income tax provision and results of operations.
SHIPPING AND HANDLING COSTS
The Company’s shipping and handling costs of $97,301 and $74,145 are included in cost of revenues for the nine month periods ended September 30, 2013 and 2012, respectively. For the three month periods ended September 30, 2013 and 2012 shipping and handling costs amounted to $49,024 and $27,084, respectively. Additionally, the Company has recorded recoveries of these costs amounting to $69,709 and $59,324, which are included in revenues for the nine month periods ended September 30, 2013 and 2012, respectively. For the three month periods ended September 30, 2013 and 2012 shipping and handling revenues amounted to, $29,332 and $23,327, respectively.
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 nine month periods ended September 30, 2013 and 2012, the Company expensed $455,235 and $ 477,582, net of grant revenues, respectively, towards research and development costs. For the three month periods ended September 30, 2013 and 2012, the Company expensed $214,624 and $163,264, net of grant revenues, respectively, towards research and development costs. For the nine month periods ended September 30, 2013 and 2012, gross research and development expense, excluding any offsetting grant revenues, amounted to $496,181 and $ 477,582, respectively, and grant revenues amounted to $40,946 and $0, respectively. For the three month periods ended September 30, 2013 and 2012, grant revenues amounted to $0.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company and its foreign subsidiaries is the U.S. dollar. All of the Company’s revenue and materials purchased from suppliers are denominated in, or linked to, the U.S. dollar. Transactions denominated in currencies other than the functional currency are converted to the functional currency on the transaction date, and any resulting assets or liabilities are further translated at each reporting date and at settlement.
Gains and losses recognized upon such translations are included within foreign exchange gain (loss) in the unaudited consolidated condensed statements of operations and comprehensive (loss) / income.
PRODUCT WARRANTIES
The Company provides for estimated warranty costs at the time of sale and accrues for specific items at the time their existence is known and the amounts are determinable. The Company estimates warranty costs using standard quantitative measures based on industry warranty claim experience and evaluation of specific customer warranty issues. The Company currently estimates warranty costs as 2% of revenue for on-road products and, effective July 1, 2013, the Company revised its warranty accrual for off-road products to 4% of revenue from the prior warranty accrual estimate of 2% of revenue. ESW has estimated a one-time charge of $1,000,000 related to its assumption of warranties for legacy Cleaire products in the field. ESW has also estimated a one-time warranty charge of $504,900 associated with certain verification procedures relating to the ThermaCat. The actual amount of loss associated with such assumption of warranties and/or verification procedures, however, could be materially different. Both of these warranty charges are based on the estimated number of operational units, average remaining warranty life and cost of warrantable failure. These amounts, as well as the on-road and off-road provision have been included in the warranty provision of $1,717,019 as of September 30, 2013.
G9
As of September 30, 2013 and December 31, 2012, $1,717,019 and $143,564, respectively, were accrued as warranty provisions on the unaudited consolidated condensed financial statements. For the nine month periods ended September 30, 2013 and 2012, the total warranty, service, service travel and installation costs included in cost of revenue were $1,687,128 and $216,745, respectively. For the three month periods ended September 30, 2013 and 2012, the total warranty, service, service travel and installation costs included in cost of revenue were $105,294 and $74,311 respectively.
SEGMENT REPORTING
ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information”, establishes standards for the way that public business enterprises report information about operating segments in the Company’s unaudited consolidated condensed financial statements. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. ESW operates in two reportable segments; medium and heavy duty diesel retrofit operations and air testing services (see Note 17). ESW’s chief operating decision maker is the Company’s Executive Chairman.
COMPARATIVE FIGURES
Certain immaterial 2012 figures have been reclassified to conform to the current unaudited consolidated condensed financial statement presentation.
NOTE 3 – ASSET ACQUISITION
On April 18, 2013, ESW through a new wholly owned subsidiary ESWCT, completed the transactions contemplated by the Asset Purchase Agreement, dated April 1, 2013 with David P. Stapleton (the “Receiver”), as the receiver for Cleaire, a Delaware limited liability company. Prior to shutdown of its operations in January 2013, Cleaire was engaged in the design, development and manufacturing of retrofit emission control systems for diesel engines. Subject to the terms and conditions of the asset purchase agreement, the Company was selected as (and agreed to act as) the “stalking horse bidder” to buy certain of Cleaire’s assets for a purchase price of $1.4 million plus a portion of gross profit realized on a certain purchase order. The purchased assets included inventory, machinery and equipment and patents and trademarks.
Upon the completion of the Asset Purchase Agreement and in accordance with FASB ASC 805 Business Combinations, the Company determined that the above noted Asset Purchase Agreement transaction does not constitute a business combination, and accordingly has accounted for it as an asset acquisition. The total consideration paid was $1.4 million in cash, plus a portion of gross profit realized on a certain purchase order.
The purchase price allocation is allocated based on the relative fair value of the assets acquired at the asset acquisition date:
Assets acquired
|
|
April 18, 2013
|
Inventory
|
$
|
1,260,000
|
Machinery and equipment
|
|
98,000
|
Patents and trademarks
|
|
42,000
|
|
$
|
1,400,000
|
NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
There are no recently adopted accounting pronouncements that impact the Company’s financial statements.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying unaudited consolidated condensed financial statements.
NOTE 5 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments purchased with original maturities of generally 90 days or less at the date of purchase. At September 30, 2013 and December 31, 2012, all of the Company’s cash and cash equivalents consisted of cash.
G10
NOTE 6 - INVENTORY
Inventory consists of:
|
|
September 30,
|
|
December 31,
|
Inventory
|
|
2013
|
|
2012
|
Raw materials
|
$
|
2,163,670
|
$
|
914,310
|
Work-in-process
|
|
1,403,054
|
|
1,234,375
|
Finished goods
|
|
-
|
|
28,660
|
Parts
|
|
22,786
|
|
37,406
|
|
|
3,589,510
|
|
2,214,751
|
Less: reserve for inventory obsolescence
|
|
(252,473)
|
|
(252,473)
|
Total
|
$
|
3,337,037
|
$
|
1,962,278
|
During the nine and three month periods ended September 30, 2013, ESW recorded a write down on inventory amounting to $195,929 relating to obsolete inventory of ESWCT that was sold as scrap, this amount is included in the cost of revenue. (Nine and three month period ended September 30, 2012 - $0)
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
September 30,
|
|
December 31,
|
Classification
|
|
2013
|
|
2012
|
Plant, machinery and equipment
|
$
|
3,576,101
|
$
|
3,164,175
|
Office equipment
|
|
136,977
|
|
75,572
|
Furniture and fixtures
|
|
1,063
|
|
2,893
|
Vehicles
|
|
17,038
|
|
-
|
Leasehold improvements
|
|
1,045,132
|
|
875,704
|
|
|
4,776,311
|
|
4,118,344
|
|
|
|
|
|
Less: accumulated depreciation
|
|
(3,194,911)
|
|
(2,735,691)
|
|
$
|
1,581,400
|
$
|
1,382,653
|
Depreciation and amortization expense recognized in the unaudited consolidated condensed statements of operations and comprehensive (loss) / income was included in the following captions:
|
|
For the nine months periods ended
|
|
|
September 30,
|
|
September 30,
|
Depreciation Expense
|
|
2013
|
|
2012
|
Depreciation expense included in cost of revenue
|
$
|
280,366
|
$
|
262,056
|
Depreciation expense included in operating expenses
|
|
177,944
|
|
152,726
|
Depreciation expense included in research and development costs
|
|
3,041
|
|
-
|
Total depreciation expense
|
$
|
461,351
|
$
|
414,782
|
|
|
|
|
|
|
|
For the three month periods ended
|
|
|
September 30,
|
|
September 30,
|
Depreciation Expense
|
|
2013
|
|
2012
|
Depreciation expense included in cost of revenue
|
$
|
56,966
|
$
|
82,369
|
Depreciation expense included in operating expenses
|
|
65,366
|
|
37,609
|
Total depreciation expense
|
$
|
122,332
|
$
|
119,978
|
At September 30, 2013 and December 31, 2012, the Company had $329,840 and $350,431, respectively, of customized equipment under construction.
G11
Certain property and equipment are used as collateral for borrowings under the Machinery and Equipment Loan Fund (“MELF”) facility (Note 9). All other property and equipment are used as collateral for borrowing under the senior secured convertible promissory notes payable (Note 10).
At March 31, 2012, the Company recognized an impairment loss for furniture, fixtures and office equipment located at its Canadian facility. The estimated recovery from the sale of furniture, fixtures and office equipment was expected to be nominal and, accordingly, the Company valued these assets as $0 and recorded an impairment loss equal to the full amount of their carrying value.
The details of impairment losses recognized are summarized in the following table:
|
For the nine month period ended
|
Asset grouping
|
September 30, 2013
|
September 30, 2012
|
Furniture & fixtures (Abandonment)
|
$ -
|
$ 1,864
|
Office equipment (Abandonment)
|
-
|
2,207
|
Computer hardware (Abandonment)
|
-
|
19,131
|
Computer software (Abandonment)
|
-
|
20,610
|
Total impairment loss recognized
|
-
|
43,812
|
|
|
|
Gain on disposal of plant and equipment
|
-
|
(13,828)
|
Total impairment loss recognized
|
$ -
|
$29,984
|
For the three month periods ended September 30, 2013 and 2012 impairment losses recognized was $0 and $1,039, respectively.
NOTE 8 – GAIN ON DECONSOLIDATION OF SUBSIDIARY
Effective February 3, 2012 BBL Technologies Inc. (“BBL”), a non-operating subsidiary, filed for bankruptcy in the Province of Ontario, Canada. At the time of filing, BBL had no assets but had issued and outstanding redeemable Class A special shares. The Company did not provide any guarantee in relation to these redeemable Class A special shares. As a result of BBL’s filing for bankruptcy, the Company lost its control over BBL and has deconsolidated BBL from the unaudited consolidated condensed financial statements on the filing date. The Company recorded a $453,900 gain in the unaudited consolidated condensed statement of operations and comprehensive loss for the nine month period ended September 30, 2012, upon deconsolidation of BBL.
NOTE 9 - LOAN PAYABLE
On April 25, 2012, the Company’s wholly-owned subsidiary ESWA entered into the MELF Facility with the Commonwealth of Pennsylvania for up to $500,000 for the purchase of equipment and related purchases. Two (2) draw-downs were permitted under the MELF Facility by ESWA. The first draw-down of $280,787 was made under the MELF Facility in connection with equipment purchased by ESWA on April 25, 2012 (the “Closing Date”). ESWA made one (1) additional draw-down of $219,213 on November 13, 2012 per the terms of the MELF Facility so that the aggregate amount borrowed under the MELF Facility amounts to $500,000. Terms of the MELF Facility include initial interest at three (3%) percent per annum with monthly payments and full repayment of the MELF Facility on or before the first day of the eighty fifth (85) calendar month following the Closing Date. As part of the loan agreement, within three years from the Closing Date ESWA is required to create, or retain, at its current location a certain number of jobs that is specified in the loan application. A breach by ESWA in the creation or maintenance of these jobs shall be considered an event of default under the MELF Facility. In the event ESWA defaults on any payments, the MELF Facility may be accelerated with full payment due along with certain additional modifications including the increase in interest to twelve and one half (12 1/2%) percent. The loan is secured by certain property and equipment and a corporate guarantee of the Company.
As of September 30, 2013 and December 31, 2012, the loan payable amounted to $421,633 and $473,133, respectively.
For the nine month periods ended September 30, 2013 and 2012, the Company paid interest amounting to $10,133 and $3,434 on the loan and also repaid principal in the amount of $51,501 and $15,116, respectively. For the three month periods ended September 30, 2013 and 2012, the Company paid interest amounting to $3,219 and $2,038 on the loan and also repaid principal in the amount of $17,252 and $9,092, respectively. Interest expense is included under Marketing, office and general expenses in the unaudited consolidated condensed statement of operations and comprehensive (loss) / income.
As at September 30, 2013, $70,492 (December 31, 2012 - $68,926) of the loan is repayable in the next 12 months with the remaining $351,141 (December 31, 2012 - $404,207) repayable thereafter.
G12
Principal on the loan is repayable as follows:
Year Ending December 31,
|
Amount
|
2013 (excluding 9 months ended September 30, 2013)
|
$ 17,425
|
2014
|
71,022
|
2015
|
73,182
|
2016
|
75,408
|
Thereafter
|
184,596
|
Total
|
$421,633
|
NOTE 10 – SENIOR SECURED CONVERTIBLE PROMISSORY NOTES
On March 22, 2013, the Company entered into a note subscription agreement, a security agreement (the “Agreements”) and issued senior secured convertible promissory notes (the “Notes”) to four accredited investors who are currently shareholders (the “Holders”) and may be deemed affiliates of the Company (Note 15). Pursuant to the Agreements and Notes, the Holders made initial loans of $1,400,000 to the Company.
On April 23, 2013 and June 27, 2013, the Company issued additional Notes in the principal amount of $1,600,000 and $2,000,000, respectively, to the Senior Secured Lenders. The Notes are due on March 22, 2018. The Notes are a part of a senior secured convertible loan facility of up to $5,000,000 which is now fully drawn down.
The Notes bear interest at a rate of 10% per annum compounded quarterly. Interest is payable semi-annually in arrears in cash and at the Company’s election, during the term of the Notes, up to two accrued and unpaid semi-annual interest payments can be payable in the Company’s common stock valued at the lesser of $80 per share, subject to adjustment (“Conversion Price”), or the market value of the Company’s common stock, with interest payments commencing September 30, 2013.
At the option of the Holders, all principal, and interest amounts outstanding under all of the Notes may be exchanged for shares of the Company’s common stock at the Conversion Price. The Conversion Price is subject to anti-dilution adjustment in the event the Company at any time, while the Notes are outstanding, issues equity securities including common stock or any security convertible or exchangeable for shares of common stock for no consideration or for consideration less than $80 per share. The anti-dilution protection excludes shares of common stock issuable upon the exercise of options or other securities granted to directors, officers, bona fide consultants and employees of the Company issued pursuant to a board approved option or incentive plan or stock, warrants or other securities issued to a bank or other financial institution.
The Notes are secured by a lien on and a security interest in all assets of the following wholly owned subsidiaries of the Company: TFI, ESWCT, ESWA and ESWT, excluding certain collateral subject to pre-existing liens.
The Company further agreed to conduct a rights offering to all of its holders of common stock, offering the right to purchase up to their pro-rata Company ownership amount of senior secured convertible promissory notes.
On March 22, 2013, April 23, 2013 and June 27, 2013, the Company recorded a discount on the Notes equal to the fair value of the conversion option derivative liability. This discount is amortized using the effective interest rate method at an interest rate of 9.6%, 17.3% and 38.3% for the March 22, April 23 and June 27 Notes, respectively, over the term of the Notes.
|
|
Nine months ended September 30, 2013
|
|
Year ended
December 31, 2012
|
Face value of March 22, 2013 notes payable
|
$
|
1,400,000
|
$
|
|
Face value of April 23, 2013 notes payable
|
|
1,600,000
|
|
|
Face value of June 27, 2013 notes payable
|
|
2,000,000
|
|
-
|
Total face value of promissory notes payable
|
|
5,000,000
|
|
|
Discount on promissory notes payable
|
|
(3,079,102)
|
|
-
|
Accretion of discount on promissory notes payable
|
|
133,563
|
|
-
|
|
$
|
2,054,461
|
$
|
-
|
During the nine month periods ended September 30, 2013 and 2012, accretion of discount on promissory notes payable amounted to $133,563 and $0, respectively. During the three month periods ended September 30, 2013 and 2012, accretion of discount on promissory notes payable amounted to $87,126 and $0, respectively.
During the nine month periods ended September 30, 2013 and 2012, interest expense on the Notes amounted to $200,000 and $0, respectively. During the three month periods ended September 30, 2013 and 2012, interest expense on Notes amounted to $127,689 and $0, respectively.
G13
NOTE 11 – CONVERSION OPTION DERIVATIVE LIABILITY
The Company’s Notes are subject to anti-dilution adjustments that allow for the reduction in the Conversion Price in the event the Company subsequently issues equity securities including common stock or any security convertible or exchangeable for shares of common stock for no consideration or for consideration less than $80 per share. Simultaneously with any reduction to the Conversion Price, the number of shares of common stock that may be converted increases proportionately. The Company accounted for the conversion option in accordance with ASC Topic 815. Accordingly, the conversion option is not considered to be solely indexed to the Company’s own stock and, as such, recorded as a liability.
The Company’s conversion option derivative liability for the $1.4 million Notes was measured at fair value at March 22, 2013 and subsequently at September 30, 2013 using a binomial model. The Company’s conversion option derivative liability for the $1.6 million Notes was measured at fair value at April 23, 2013 and September 30, 2013 using a binomial model. The Company’s conversion option derivative liability for the $2 million Notes was measured at fair value at June 27, 2013 and September 30, 2013 using a binomial model.
Since the Conversion Price contains an anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease as the share price decreased was incorporated into the valuation calculation.
The inputs into the binomial model are as follows:
|
March 22, 2013
|
April 23, 2013
|
June 27, 2013
|
September 30, 2013
|
Closing share price
|
$40
|
$54
|
$80
|
$25
|
Conversion price
|
$80
|
$80
|
$80
|
$80
|
Risk free rate
|
0.80%
|
0.71%
|
1.38%
|
1.39%
|
Expected volatility
|
110%
|
126%
|
114%
|
122%
|
Dividend yield
|
0%
|
0%
|
0%
|
0%
|
Expected life
|
5 years
|
4.92 years
|
4.75 years
|
4.50 years
|
The fair value of the conversion option derivative liability was $1,125,775 at September 30, 2013 and $0 at December 31, 2012. The change in the fair value of the conversion option derivative liability of $1,953,328 was recorded as a gain in the unaudited consolidated condensed statement of operations for the nine months ended September 30, 2013. The change in the fair value of the conversion option derivative liability of $2,991,651 was recorded as a gain in the unaudited consolidated condensed statement of operations for the three months ended September 30, 2013.
|
|
Nine months ended
September 30, 2013
|
|
Year ended
December 31,
2012
|
Beginning balance: Conversion option derivative liability
|
$
|
-
|
$
|
-
|
Origination of conversion option derivative liability on March 22, 2013
|
|
526,810
|
|
-
|
Gain on change in fair value of conversion option derivative liability
|
|
(292,570)
|
|
-
|
Origination of conversion option derivative liability on April 23, 2013
|
|
905,569
|
|
-
|
Origination of conversion option derivative liability on June 27, 2013
|
|
1,646,723
|
|
-
|
Loss on change in fair value of conversion option derivative liability, June 30, 2013
|
|
1,330,894
|
|
-
|
Gain on change in fair value of conversion option derivative liability, September 30, 2013
|
|
(2,991,651)
|
|
-
|
Ending balance: Conversion option derivative liability on September 30, 2013
|
$
|
1,125,775
|
$
|
-
|
NOTE 12 - INCOME TAXES
The Company calculates its income tax expense by estimating the annual effective tax rate and applying that rate to the year-to-date ordinary income at the end of the period. The Company records a tax valuation allowance when it is more likely than not that it will not be able to recover the value of its deferred tax assets. As of September 30, 2013 and 2012, the Company calculated its estimated annualized effective tax rate at 0%, for both the United States and Canada. The Company had no income tax expense on its $853,222 pre-tax loss for the nine months ended September 30, 2013. The Company recognized no income tax expense based on its $802,494 pre-tax loss for the nine months ended September 30, 2012.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest accrued on uncertain tax positions as well as interest received from favorable tax settlements within interest expense. The Company recognizes penalties accrued on unrecognized tax benefits within general and administrative expenses. As of September 30, 2013 and 2012, the Company had no uncertain tax positions.
G14
The Company does not anticipate any significant changes to the total amounts of unrecognized tax benefits in the next twelve months. In many cases the Company’s uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by major tax jurisdiction, as of September 30, 2013:
United States – Federal
|
2009 – present
|
United States – State
|
2009 – present
|
Canada – Federal
|
2010 – present
|
Canada – Provincial
|
2010 – present
|
NOTE 13 - STOCKHOLDERS’ EQUITY
Effective November 6, 2011, the Company’s board of directors (the “Board”), on the recommendation of its compensation committee, approved restricted stock grants to seven Board members under the 2010 stock incentive plan. As per the terms of the grant each of the seven Board members will receive 75 shares vesting in equal parts on December 31, 2011, December 31, 2012 and December 31, 2013 subject to the execution of the requisite grant agreements. Stock-based compensation expense will be recorded based on the vesting terms of the grants. Of the vested shares 350 restricted shares of common stock have been issued as of September 30, 2013.
Effective December 10, 2012, the Board, on the recommendation of its compensation committee, approved a one-time grant of 4,114 shares of restricted common stock from treasury to a member of the Company’s Board for services rendered as Executive Chairman, 2,057 shares of which were issued upon the date of grant, and 2,057 shares of which were issued on February 28, 2013 (Note 15). The shares of common stock were issued from treasury not under the Company’s 2010 stock incentive plan.
Shares of restricted common stock issued above were valued at the quoted market price on the dates of grant. During the nine month periods ended September 30, 2013 and 2012, $152,245 and $0, respectively, has been recorded in officers’ compensation and directors’ fees in the unaudited consolidated condensed statements of operations and comprehensive (loss) / income for the fair value of each grant of restricted common stock. These amounts along with stock option expense (Note 14) have been included as stock-based compensation in the unaudited consolidated condensed statement of changes in stockholders equity.
NOTE 14 - STOCK OPTIONS AND RESTRICTED STOCK PLAN
STOCK OPTION
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, 2012
|
1,788
|
$1,200
|
Expired
|
(1,200)
|
(1,300)
|
OUTSTANDING, DECEMBER 31, 2012
|
588
|
$1,000
|
Expired
|
(175)
|
(957)
|
OUTSTANDING, SEPTEMBER 30, 2013
|
413
|
$1,010
|
At September 30, 2013 and December 31, 2012, the outstanding options have a weighted average remaining life of 22 months and 23 months, respectively. No stock options were granted during the nine month periods ended September 30, 2013 and 2012.
The Black-Scholes option-pricing 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.
During the nine month period ended September 30, 2013 and 2012, $20,708 and $62,127 respectively, of stock option expense has been recorded in officers’ compensation and directors’ fees in the unaudited consolidated condensed statements of operations and comprehensive (loss) / income. At September 30, 2013, the Company had outstanding options as follows:
Number of
|
Exercise
|
|
Options
|
Price
|
Expiration Date
|
300
|
$1,300
|
April 15, 2015
|
113
|
$240
|
June 30, 2016
|
413
|
|
|
G15
RESTRICTED STOCK PLAN
Effective November 6, 2011, the Board, on the recommendation of its compensation committee, approved restricted stock grants to seven Board members under the 2010 stock incentive plan. As per the terms of the grant, each of the seven Board members received 75 shares vesting in equal parts on December 31, 2011, December 31, 2012 and December 31, 2013 subject to the execution of the requisite grant agreements. Stock-based compensation expense will be recorded as of the vesting terms of the grants. Of these shares, 175 will vest December 31, 2013.
Effective January 12, 2012, the Board, on the recommendation of its compensation committee, approved a management incentive plan which includes a 10% restricted stock pool for management. Key participants of this plan will be executive officers. Secondary participants will include other management and certain other employees. The program provides for 5 year vesting. The equity grants are effective subject to the execution of the requisite grant agreements. Stock-based compensation expense will be recorded as of the vesting terms of the grants, and no grant agreements have been executed to date.
On March 20, 2013, the Company received the written consent of shareholders holding a majority of the outstanding shares of the Company’s common stock on a proposal to approve and adopt the Environmental Solutions Worldwide, Inc. 2013 Stock Plan (the “2013 Stock Plan”). The 2013 Stock Plan replaces the Company’s 2010 Stock Incentive Plan, which replaced the Company’s 2002 Stock Option Plan. While previously granted awards under the Company’s 2010 Stock Incentive Plan and 2002 Stock Option Plan will remain in effect in accordance with the terms of the individual awards, the 2013 Stock Plan will replace the Company’s 2010 Stock Incentive Plan and 2002 Stock Option Plan for future grants.
Effective August 1, 2013, the Board, on the recommendation of its compensation committee, approved a one-time restricted stock grant to seven Board members under the 2013 stock incentive plan (the “2013 Stock Plan”). This restricted stock issuance will replace a restricted stock issuance that was planned for 2012 but not completed in 2012. As per the terms of the grants, each of the seven Board members will receive 500 shares vesting two-thirds on December 31, 2013 and one-third on December 31, 2014, subject to the execution of the requisite grant agreements. Stock-based compensation expense will be recorded as of the vesting terms of the grants. No grant agreements have been executed to date. Of these shares 2,338 will vest December 31, 2013.
Also effective August 1, 2013, the Board, on the recommendation of its compensation committee, approved additional restricted stock grants to seven Board members under the 2013 stock incentive plan. These grants form a portion of the Board compensation for 2013. Three of the seven Board members will receive 500 shares each, two of the seven Board members will receive 513 shares each and two of the seven Board members will receive 396 shares each. All such grants will vest in equal parts on December 31, 2013, December 31, 2014 and December 31, 2015 subject to the execution of the requisite grant agreements. Stock-based compensation expense will be recorded as of the vesting terms of the grants. No grant agreements have been executed to date. Of these shares 1,107 will vest December 31, 2013.
NOTE 15 - RELATED PARTY TRANSACTIONS
In addition to reimbursement of business expenses, transactions with related parties include:
·
On April 19, 2011, the Company’s Board ratified a Services Agreement (the “Orchard Agreement”) between the Company and Orchard Capital Corporation (“Orchard”) which was approved by the Company’s Compensation Committee and was effective January 30, 2011. Under the Orchard Agreement, Orchard agreed to provide services that may be mutually agreed to by and between Orchard and the Company including those duties customarily performed by the Chairman of the Board and executive of the Company as well as providing advice and consultation on general corporate matters and other projects as may be assigned by the Company’s Board as needed. Orchard is controlled by Richard Ressler. Certain affiliated entities of Orchard as well as Richard Ressler own shares of the Company. On August 1, 2013, the Company’s Board ratified a change to the compensation terms under Services Agreement between the Company and Orchard Capital Corporation. Compensation under the agreement was increased to $430,000 from $300,000 per annum effective August 1, 2013. During the nine month periods
ended September 30, 2013 and 2012, management fees charged to operations amounted to $246,667 and $225,000, respectively. During the three month periods ended September 30, 2013 and 2012, management fees charged to operations amounted to $96,667 and $75,000, respectively. At September 30, 2013, $0 (December 31, 2012 - $75,000) is included in accounts payable and $96,667 (December 31, 2012 - $0) is included in accrued liabilities.
G16
·
Mr. Nitin Amersey, a director of the Company, is listed as a control person with the Securities and Exchange Commission of Bay City Transfer Agency Registrar Inc., the Company’s transfer agent, and of Freeland Venture Resources Inc., which provides Edgar filing services to the Company. During the nine month periods ended September 30, 2013 and 2012, the Company incurred fees to these entities controlled by Mr. Amersey amounting to $60,794 and $9,896, respectively. During the three month periods ended September 30, 2013 and 2012, the Company incurred fees to these entities amounting to $2,765 and $7,545, respectively. During the nine month period ended September 30, 2013 and 2012 the Company paid Mr. Amersey $23,000 and $22,500, respectively, as fees for services performed as audit committee chairperson. During the three month period ended September 30, 2013 and 2012 the Company paid Mr. Amersey $8,000 and $7,500 respectively as fees. At September 30, 2013, accounts payable includes $14,141 (December 31, 2012 - $0) of the amounts due.
·
Mr. John Dunlap, a director of the Company, is the President of Dunlap Group, which provides consulting services to the Company related to regulatory and regulatory compliance matters. During the nine month periods ended September 30, 2013 and 2012, the Company paid fees to Dunlap Group amounting to $22,766 and $0, respectively. During the three month period ended September 30, 2013 and 2012, the Company paid fees to Dunlap Group amounting to $1,770 and $0, respectively. During the nine month period ended September 30, 2013 and 2012 the Company paid Mr. Dunlap $23,000 and $22,500, respectively, as fees for services performed as compensation committee chairperson. During the three month period ended September 30, 2013 and 2012 the Company paid Mr. Dunlap $8,000 and $7,500 respectively as fees.
·
During the nine month period ended September 30, 2013 and 2012 the Company paid each of Mr. John Suydam and Mr. Zohar Loshitzer $1,667 and $0, respectively, as fees for serving as a director of the Company. During the three month period ended September 30, 2013 and 2012 the Company paid each of Mr. John Suydam and Mr. Zohar Loshitzer $1,667 and $0, respectively, as fees.
·
Effective December 10, 2012, the Board approved a one-time grant of 4,114 shares of restricted common stock from treasury to Mr. Mark Yung, a member of the Company’s Board, for services rendered as Executive Chairman, 2,057 shares of which were issued upon the date of grant, and 2,057 shares of which were issued on February 28, 2013 (Note 13). The issued shares were valued at the quoted market price on the grant date. During the nine month periods ended September 30, 2013 and 2012, $152,245 and $0, respectively, has been recorded in officers’ compensation and directors’ fees in the unaudited condensed consolidated statements of operations and comprehensive (loss) / income for the fair value of each grant of restricted common shares. The shares of common stock were issued from treasury, not under the Company’s 2010 stock incentive plan.
·
On March 22, 2013, April 23, 2013 and June 27, 2013, the Company issued an aggregate amount of $5,000,000 unsecured convertible promissory notes to certain shareholders and deemed affiliates of certain members of the Board of Directors (Note 10). During the nine month periods ended September 30, 2013 and 2012, interest expense on the Notes amounted to $200,000 and $0, respectively. During the three month periods ended September 30, 2013 and 2012, interest expense on the Notes amounted to $127,689 and $0, respectively.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
LEASES
Effective November 24, 2004, the Company’s wholly-owned subsidiary, ESWA, entered into a lease agreement for approximately 40,220 square feet of leasehold space at 200 Progress Drive, Montgomeryville, Pennsylvania. The leasehold space houses the Company’s emissions testing facilities and ESW’s manufacturing operations. The lease commenced on January 15, 2005. Effective October 16, 2009, the Company’s wholly-owned subsidiary ESWA entered into a lease renewal agreement with Nappen & Associates for the leasehold property in Pennsylvania. 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 was extended to February 28, 2013. Effective September 24, 2012, ESWA entered into a second lease amendment agreement with Nappen & Associates for the leasehold property in Pennsylvania, whereby ESWA extended the term of the lease agreement by an additional 5 years. There were no modifications to the original economic terms of the lease. Under the terms of the second lease renewal, the lease will expire on February 28, 2018.
On June 7, 2013, the Company’s wholly-owned subsidiary, ESWCT, entered into a commercial real estate lease with Trepte Industrial Park, Ltd., a California limited partnership. ESWCT leased approximately 18,000 square feet of commercial property located in San Diego, California, to be used primarily for housing ESWCT’s manufacturing and diesel particulate filter cleaning operations. The Lease provides for a 37-month lease term (commencing July 1, 2013), with an option exercisable by ESWCT to extend the lease term for two additional 36-month periods. The current base rent under the Lease is $15,300 per month. Concurrently with the signing of the Lease and pursuant to the terms thereof, ESWCT paid to the Lessor an amount equal to $155,600, which amount reflects the first month’s base rent, the security deposit, the funding required for improvements done by the Lessor at ESWCT’s request, and pre-paid rent. The amount will be credited against monthly base rent payable by ESWCT beginning in January 2014 and each month thereafter, provided that ESWCT shall not have defaulted under the Lease.
G17
The following is a summary of the minimum annual lease payments for the Pennsylvania and San Diego leases:
Year Ending December 31,
|
|
Amount
|
2013 (excluding the nine months ended September 30, 2013)
|
$
|
91,147
|
2014
|
|
242,344
|
2015
|
|
372,935
|
2016
|
|
279,799
|
2017
|
|
180,990
|
2018
|
|
30,165
|
Total
|
$
|
1,197,380
|
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, collections claims, 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.
·
The Company is pursuing a lawsuit in New York for collection of unpaid invoices related to goods delivered to a former distributor.
·
The Company was notified of a revised claim filed in the Ontario, Canada Superior Court of Justice on a dispute with a past vendor of ESW Canada; this claim had previously been deemed settled, due to inaction by the vendor. The revised claim is pending. The Company cannot predict the outcome of this matter at this time.
·
The Company is defending a claim brought against Cleaire by HNT Technology, Inc. (“HNT”), a former vender of Cleaire, on August 20, 2013 in the United States Bankruptcy Court, Northern District of California, San Jose Division (the “Bankruptcy Court”), in which HNT named ESW and ESWCT as co-defendants with Cleaire, alleging that ESWCT is the successor in interest to Cleaire. The complaint alleged that Cleaire had breached an agreement to purchase certain products from HNT. ESW has entered into an Agreement to Purchase Inventory and Equipment and Settle Litigation (the “Settlement Agreement”) with the trustee (the “Trustee”) of HNT, pursuant to which ESW will purchase the inventory to which the claim relates. Under the Settlement Agreement, which was approved by the Bankruptcy Court on October 31, 2013, the complaint by HNT will be dismissed and ESW and ESWCT will be released of all claims following ESW’s payment of the purchase price of $30,000 under the Settlement Agreement to the Trustee. ESW expects to make the purchase price payment to the Trustee on or before November 30, 2013.
WARRANTY PROVISIONS
The Company is also exposed to warranty contingencies associated with certain verification procedures relating to the ThermaCat and to the assumption of warranties for legacy Cleaire products in the field. The Company has recorded a provision for these as disclosed in Note 2 to our quarterly and annual consolidated financial statements for the nine months ended September 30, 2013; however, the actual amount of loss could be materially different.
NOTE 17 – OPERATING SEGMENTS
The Company has two principal operating segments, air testing services and catalyst manufacturing for MHDD retrofits. These operating segments were determined based on the nature of the products and services offered. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and
in assessing performance. The Company’s Executive Chairman has been identified as the chief operating decision-maker, and directs the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.
G18
The Company evaluates performance based on several factors, of which the primary financial measure is net income. The accounting policies of the business segments are the same as those described in “Note 2: Summary of Accounting Policies.” No intersegment sales were recorded for the nine month periods ended September 30, 2013 and 2012. The following tables show the operations and certain assets of the Company’s reportable segments:
For the nine months period ended September 30, 2013
|
|
|
MHDD Retrofit
|
|
Air Testing
|
|
Unallocated
|
|
Total
|
Revenue
|
$
|
9,749,652
|
$
|
492,818
|
$
|
-
|
$
|
10,242,470
|
Net (loss) / income
|
$
|
(336,606)
|
$
|
(737,491)
|
$
|
220,875
|
$
|
(853,222)
|
|
|
|
|
|
|
|
|
|
For the three months period ended September 30, 2013
|
|
|
MHDD Retrofit
|
|
Air Testing
|
|
Unallocated
|
|
Total
|
Revenue
|
$
|
5,405,327
|
$
|
91,798
|
$
|
-
|
$
|
5,497,125
|
Net income / (loss)
|
$
|
1,433,792
|
$
|
(253,555)
|
$
|
2,548,993
|
$
|
3,729,230
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013
|
|
|
MHDD Retrofit
|
|
Air Testing
|
|
Unallocated
|
|
Total
|
Total assets
|
$
|
5,922,899
|
$
|
1,590,237
|
$
|
2,456,548
|
$
|
9,969,684
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
under construction
|
$
|
1,570
|
$
|
328,270
|
$
|
-
|
$
|
329,840
|
Property, plant and equipment
|
$
|
495,033
|
$
|
1,086,367
|
$
|
-
|
$
|
1,581,400
|
Accounts receivable
|
$
|
1,357,196
|
$
|
67,785
|
$
|
-
|
$
|
1,424,981
|
Inventories
|
$
|
3,337,037
|
$
|
-
|
$
|
-
|
$
|
3,337,037
|
Patents
|
$
|
39,900
|
$
|
-
|
$
|
-
|
$
|
39,900
|
|
|
|
|
|
|
|
|
|
For the nine months period ended September 30, 2012
|
|
|
MHDD Retrofit
|
|
Air Testing
|
|
Unallocated
|
|
Total
|
Revenue
|
$
|
7,061,464
|
$
|
607,599
|
$
|
-
|
$
|
7,669,063
|
Net loss
|
$
|
(12,485)
|
$
|
(407,628)
|
$
|
(382,381)
|
$
|
(802,494)
|
|
|
|
|
|
|
|
|
|
For the three months period ended September 30, 2012
|
|
|
MHDD Retrofit
|
|
Air Testing
|
|
Unallocated
|
|
Total
|
Revenue
|
$
|
2,596,922
|
$
|
196,436
|
$
|
-
|
$
|
2,793,358
|
Net (loss) income
|
$
|
330,400
|
$
|
42,507
|
$
|
(491,133)
|
$
|
(118,226)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
MHDD Retrofit
|
|
Air Testing
|
|
Unallocated
|
|
Total
|
Total assets
|
$
|
3,614,649
|
$
|
1,776,344
|
$
|
14,125
|
$
|
5,405,118
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
under construction
|
$
|
1,399
|
$
|
349,032
|
$
|
-
|
$
|
350,431
|
Property, plant and equipment
|
$
|
205,135
|
$
|
1,177,518
|
$
|
-
|
$
|
1,382,653
|
Accounts receivable
|
$
|
1,203,355
|
$
|
118,965
|
$
|
-
|
$
|
1,322,320
|
Inventories
|
$
|
1,952,276
|
$
|
10,002
|
$
|
-
|
$
|
1,962,278
|
All of the Company’s revenue for the nine and three month periods ended September 30, 2013 and 2012 was derived from the United States. Net property, plant and equipment (including property, plant and equipment under construction) located outside of the United States are less than 10% of total assets at September 30, 2013 and 2012.
G19
NOTE 18 – LOSS/EARNINGS PER SHARE
LOSS PER SHARE
We have excluded 413 shares of restricted common stock issuable upon exercise of ESW’s outstanding stock options, and 175 shares of restricted stock from the computation of diluted loss per share for the nine month period ended September 30, 2013 as the inclusion of these shares would be anti-dilutive. We have also excluded 62,500 shares of common stock that would be issuable based on an exercise price of $80 per share related to the senior secured convertible promissory notes, as well as the additional shares issuable if the holders elect to convert interest or if the conversion option derivative liability is triggered by a future financing, from the computation of diluted loss per share as their effect would be anti-dilutive.
EARNINGS PER SHARE
We have excluded 413 shares of restricted common stock issuable upon exercise of ESW’s outstanding stock options from the calculation of earnings per share for the three month period ended September 30, 2013, as the exercise price of such options exceeded the average share price for the three month period ended September 30, 2013. The reconciliation of the number of shares used to calculate the diluted earnings per share for the three month period ended September 30, 2013 is estimated as follows:
|
|
NINE MONTH PERIODS
ENDED SEPTEMBER 30,
|
|
THREE MONTH PERIODS ENDED SEPTEMBER 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
Net and comprehensive (loss) / income
|
$ (853,222)
|
|
$ (802,494)
|
|
$ 3,729,230
|
|
$ (118,226)
|
|
|
|
|
|
|
|
|
|
Interest on promissory notes payable
|
-
|
|
-
|
|
127,689
|
|
-
|
Amortization of discount on promissory notes payable
|
-
|
|
-
|
|
87,126
|
|
-
|
Change in fair value of conversion option derivative liability
|
-
|
|
-
|
|
(2,991,651)
|
|
-
|
|
$ (853,222)
|
|
$ (802,494)
|
|
$ 952,394
|
|
$ (118,226)
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
112,948
|
|
109,725
|
|
113,464
|
|
109,725
|
Dilutive effect of :
|
|
|
|
|
|
|
|
Stock options
|
-
|
|
-
|
|
-
|
|
-
|
Warrants
|
|
-
|
|
-
|
|
-
|
|
-
|
Restricted stock grants
|
-
|
|
-
|
|
175
|
|
-
|
Promissory notes payable conversion
|
-
|
|
-
|
|
62,500
|
|
-
|
Diluted weighted average shares outstanding
|
|
112,948
|
|
109,725
|
|
176,139
|
|
109,725
|
We have excluded 712 shares of common stock issuable upon exercise of ESW’s outstanding stock options, and 772 shares issuable upon conversion of ESW’s outstanding warrants, from the computation of diluted loss per share for the nine and three month period ended September 30, 2012 as the inclusion of these shares would be anti-dilutive.
NOTE 19 - RISK MANAGEMENT
CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE
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 customers’ financial condition and generally does not require collateral from its customers. Two of its customers accounted for 30.2% and 19.0%, respectively, of the Company’s revenue during the nine month period ended September 30, 2013 and 46.2% and 17.2% respectively, of its accounts receivable as of September 30, 2013.
G20
Three of its customers accounted for 26.9%, 20.4% and 8.1%, respectively, of the Company’s revenue during the nine month period ended September 30, 2012 and 33.0%, 17.2% and 15.7%, respectively, of its accounts receivable as of September 30, 2012.
For the nine month period ended September 30, 2013, the Company purchased approximately 15.1% and 10.6% of its inventory from two vendors. For the nine month period ended September 30, 2012, the Company purchased approximately 18.5% and 13.4% of its inventory from two vendors. The accounts payable to these vendors aggregated $546,481 and $548,792 as of September 30, 2013 and 2012, respectively.
NOTE 20 - SUBSEQUENT EVENTS
Effective October 1, 2013 the Company elected to pay and paid interest on the Senior Secured Convertible Promissory Notes in the form of Common stock, as per the terms of the Notes. The Company issued 8,000 shares as interest payment to four note holders for interest accrued up to September 30, 2013 totaling $200,000. The conversion price of the shares was $25 for the interest payment, which was based upon the market value of the Company’s common stock on the date of such payment (determined by calculating the average closing price of the Company’s common stock for the twenty trading days preceding such date). Per the terms of the note interest payments can be paid in the Company’s common stock valued at the lesser of $80 per share, subject to adjustment, or the market value of the Company’s common stock.
Effective October 1, 2013, the Company’s wholly-owned subsidiary, ESWCT, entered into a commercial real estate lease with Marina Bay Crossing, LLC, a California Limited Liability Company, ESWCT leased approximately 1,808 square feet of commercial property located in Richmond, California, to be used primarily for housing ESWCT’s engineering and service operations. The facility also serves as a training facility servicing northern California. The Lease provides for a 12-month lease term (commencing October 1, 2013), with an option exercisable by ESWCT to extend the lease term for one additional 12-month period. The current rent under the Lease is $2,182 per month.
Effective October 4, 2013, the Company registered 20,000 shares of Common Stock (par value $0.001 per share) under a registration statement on Form S-8 that are issuable under the 2013 Stock Plan.
G21
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by the registrant in connection with the sale of the common stock being registered. All of the amounts shown are estimates except the SEC registration fee.
SEC Registration Fee....................................................................................................................
|
$ 804
|
Subscription Agent Fees and Expenses.....................................................................................
|
50,000
|
Legal Fees and Expenses.............................................................................................................
|
125,000
|
Costs of Printing............................................................................................................................
|
25,000
|
Accounting Fees and Expenses...................................................................................................
|
10,000
|
Miscellaneous Expenses..............................................................................................................
|
5,010
|
Total................................................................................................................................................
|
|
|
|
Item 14. Indemnification of Directors and Officers.
In accordance with the Florida Corporation Act, which we refer to as the “Act,” our Articles of Incorporation, which we refer to as the “Articles,” contain provisions which state that, to the fullest extent permitted by law, no director or officer shall be personally liable to us or our shareholders for damages for breach of any duty owned to us or our shareholders. We also have the power, by a by-law provision or a resolution of our stockholders or directors, to indemnify our officers and directors against any contingency or peril as may be determined to be in our best interests and in connection therewith to secure policies of insurance.
We have entered into Director Indemnification Agreements with the members of our board of directors. Each Director Indemnification Agreement provides that, to the fullest extent permitted by law and subject to exceptions specified in the Director Indemnification Agreement, we shall hold harmless and indemnify the director, and advance expenses incurred by the director, including reasonable attorney fees and court costs, in connection with any proceeding covered by the Director Indemnification Agreement. Our obligations under each Director Indemnification Agreement shall continue following the time that the director ceases to be a director of the Company, so long as the director is subject to any proceeding covered by the Director Indemnification Agreement.
The rights of indemnification provided by the Director Indemnification Agreement are not exclusive and specifically supplement the rights to indemnification provided to the directors in our Articles of Incorporation and By-laws and applicable law.
We maintain a policy of directors’ and officers’ liability insurance that insures our directors and officers against the costs of defense, settlement or payment of a judgment under certain circumstances.
Item 15. Recent Sales of Unregistered Securities.
Effective November 9, 2010, we completed the first tranche of a unit offering. The unit offering was for up to $5 million. Each unit was offered at a price of $800 and was comprised of one (1) share of our common stock and one (1) two year warrant exercisable for one (1) share of common stock (the “Unit Offering” or “Offering”). Each warrant is exercisable in the first year following issuance at an exercise price of $1,100 per share and thereafter if the warrant has not been exercised in the first year the warrant may be exercisable in the second year following issuance for $1,300 per share (the “Warrant”). In connection with the first tranche under the Offering, we received a gross amount before fees and expenses of $300,000 and issued a total of 375 restricted shares of its common stock and a Warrant to acquire an additional 375 shares of common stock to an accredited investor, after giving effect to the reverse stock split.
Effective December 8, 2010, we completed the second tranche of the Unit Offering in which we received a gross amount before fees and expenses of $300,000 and issued a total of 375 restricted shares of our common stock and a Warrant to acquire an additional 375 shares of common stock to an accredited investor, after giving effect to the reverse stock split.
II - 1
Effective February 17, 2011 and April 27, 2011, we became party to certain note subscription agreements and issued unsecured subordinated promissory notes, which bore interest at 10% per annum (the “2011 Notes”), to each of Orchard Investments, LLC (“Orchard”); Black Family 1997 Trust; Leon D. Black, UAD 11/30/92 FBO Alexander Black; Leon D. Black, UAD 11/30/92 FBO Benjamin Black; Leon D. Black, UAD 11/30/92 FBO Joshua Black; Leon D. Black, UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan and Richard Ressler. Pursuant to these note subscription agreements and promissory notes, the Existing Lenders agreed to make, and made, loans to us in the principal aggregate amount of $4.0 million subject to the terms and conditions set forth therein. The 2011 Notes were exchanged for our common stock in July 2011.
Effective March 22, 2013, April 23, 2013 and June 27, 2013, we entered into the Existing Loan with the Existing Lenders and issued the Existing Notes to the Existing Lenders.
The sales of the securities described above were not registered under the Securities Act because they were made in transactions exempt from registration under Section 4(2) of the Securities Act and the provisions of Regulation D promulgated thereunder.
Item 16. Exhibits.
The following exhibits are filed herewith or incorporated by reference herein:
|
|
3.1
|
Articles of Incorporation of the Company. (1)
|
3.2
|
Bylaws of the Company. (1)
|
3.3
|
Articles of Incorporation of the Company, as amended as of November 29, 2001. (Originally filed as exhibit 3.2) (5)
|
3.4
|
Articles of Incorporation of the Company as amended July 20, 2005 (Originally filed as exhibit 3.3)(13)
|
3.5
|
Bylaws of the Company as amended January 3, 2006 (15)
|
3.6
|
Articles of Incorporation of the Company, as amended as of October 13, 2010. (34)
|
3.7
|
Bylaws of the Company as amended January 25, 2011 (Originally filed as exhibit 3.1) (35)
|
3.8
|
Articles of Amendment to the Articles of Incorporation of Environmental Solutions Worldwide, Inc. (43)
|
4.1
|
Form of Warrant Certificate issued April, 1999. (1)
|
4.2
|
Form of Warrant Certificate for 2002 Unit Private Placement (7)
|
4.3
|
Form of three (3) year Warrant Certificate exercisable at $0.90 per share issued on April and July 2005. (13)
|
4.4
|
Form of three (3) year Warrant Certificate exercisable at $2.00 per share issued on April and July 2005. (13)
|
4.5
|
Form of three (3) year Warrant Certificate exercisable at $3.00 per share issued on April and July 2005. (13)
|
4.6
|
Form of Specimen of Common Stock Certificate. (Originally filed as exhibit 4.1)
|
4.7
|
Note Subscription Agreement entered into on March 22, 2013 by Environmental Solutions Worldwide, Inc. and Black Family Partners LP, John J. Hannan, Orchard Investments, LLC and Richard Ressler. (40)
|
4.8
|
Form of Senior Secured Promissory Note issued on March 22, 2013 by Environmental Solutions Worldwide, Inc. in favor of
Black Family Partners LP, John J. Hannan, Orchard Investments, LLC and Richard Ressler
. (40)
|
4.9
|
Form of Security Agreement, dated as of March 22, 2013, by and among Technology Fabricators, Inc. ESW America Inc., ESW Technologies Inc. and Orchard Capital Corp. (40)
|
4.10
|
Form of Senior Secured Promissory Note issued on April 23, 2013 by Environmental Solutions Worldwide, Inc. in favor of the Senior Secured Lenders. (41)
|
II - 2
4.11
|
Form of Senior Secured Promissory Note issued on June 27, 2013 by Environmental Solutions Worldwide, Inc. in favor of Black Family Partners LP, John J. Hannan, Orchard Investments, LLC and Richard Ressler (44)
|
4.12
|
Form of Amended and Restated Note Subscription Agreement by and between Environmental Solutions Worldwide, Inc. and Black Family Partners LP, John J. Hannan, Orchard Investments, LLC and Richard Ressler.
|
5.1
|
Opinion of Holland & Knight LLP
|
10.1
|
Form of Agreement dated January 29, 1999 by and between the shareholders BBL Technologies, Inc. and the Company. (1)
|
10.2
|
Form of Consulting Agreement dated March 31, 1999 by and between May Davis Group and the Company. (1)
|
10.3
|
Form of Commission Agreement dated March 31, 1999 by and between May Davis Group and the Company. (1)
|
10.4
|
Form of Option Agreement dated June 21, 1999, between David Coates o/a Fifth Business and the Company. (1)
|
10.5
|
Form of Option Agreement dated June 21 1999 between Zoya Financial Corp. and the Company. (1)
|
10.6
|
Form of Consulting Agreement with Bruno Liber dated January 29, 2000.
|
10.7
|
Form of Office Offer to Lease for Environmental Solutions Worldwide Inc. dated October 6, 1999. (2)
|
10.8
|
Form of Financial relations agreement with Continental Capital & Equity Corporation dated December 5, 2000. (4)
|
10.9
|
Form of Employment Agreement between John A. Donohoe, Jr. and the Company dated as of September 10, 2003. (6)
|
10.10
|
Form of Employment Agreement between Robert R. Marino and the Company dated as of September 10, 2003. (6)
|
10.11
|
Form of Employment Agreement between David J. Johnson and the Company dated as of September 10, 2003. (6)
|
10.12
|
Form of Subscription Agreement for 2001 Common Stock Placement. (7)
|
10.13
|
Form of Subscription Agreement for 2002 Unit Private Placement and related representation letters. (7)
|
10.14
|
Form of unsecured subordinated promissory note issued by the Company to AB Odinia, dated August 27, 2004. (Originally filed as exhibit 10.1) (8)
|
10.15
|
Form of Securities Subscription Agreement between the Company and Investor for the purchase of 4% Convertible Debentures and three (3) year warrant exercisable at $1.00 per share dated September, 2004. (Originally filed as exhibit 10.1) (9)
|
10.16
|
Form of 4% Three (3) Year Debenture issued by the Company dated September, 2004.(Originally filed as exhibit 10.2) (9)
|
10.17
|
Form of Three (3) Year Warrant to purchase the Company’s Common Stock at $1.00 a share dated September, 2004.(Originally filed as exhibit 10.3) (9)
|
10.18
|
Form of Registration Rights Agreement dated September, 2004. (Originally filed as exhibit 10.4) (9)
|
10.19
|
Form of Lease agreement and amended lease agreement between the Company’s wholly-owned subsidiary ESW America Inc. and Nappen & Associates dated on November 16, 2004. (12)
|
10.20
|
Form of Subscription Agreement dated April and July 2005 for Common Stock at $0.85 and Warrants exercisable at $0.90, $2.00 and $3.00 per share. (13)
|
10.21
|
Form of Registration rights Agreement dated April and July 2005. (13)
|
10.22
|
Form of $1.2 Million Unsecured Subordinated Promissory Note dated June 30, 2006. (16)
|
10.23
|
Form of $1 Million Unsecured Subordinated Promissory Note dated September 7, 2006. (17)
|
10.24
|
Form of Separation Agreement and Release of Claims by and between the Company and Stan Kolaric dated October 12, 2006. (20)
|
10.25
|
Form of $500,000 Unsecured Subordinated Promissory Note dated November 17, 2006. (18)
|
10.26
|
Form of Contract for Investor Relations Service by and between the Company and Delta 2005 AG dated December 12, 2006. (20)
|
II - 3
10.27
|
Form of Consolidated $2.3 Million Unsecured Subordinated Demand Promissory Note dated February 9, 2007. (20)
|
10.28
|
Form of $500,000 Unsecured Subordinated Demand Promissory Note by and between the Company and Mr. Bengt Odner, dated February 15, 2007. (20)
|
10.29
|
Form of Employment Agreement between David J. Johnson and the Company dated as of January 1, 2007. (20) 10.30 Form of Assignment by Inventor by and between the Company and David Johnson dated February 16, 2007. (20)
|
10.31
|
Form of Consolidated 1.002 Million Note by and between the Company and Mr. Bengt Odner dated March 13, 2007. (20)
|
10.32
|
Form of $2.5 Million Financing Loan Agreement by and between ESW Canada Inc. and Royal Bank of Canada dated March 5, 2007 (20)
|
10.33
|
Letter Agreement dated October 11, 2007 and effective November 2, 2007 by and between the Company’s wholly-owned subsidiary ESW Canada Inc. and Royal Bank of Canada amending the terms of the Credit Facility Agreement dated as of March 2, 2007. (21)
|
10.34
|
Form of Employment Agreement between Stefan Boekamp and the Company dated as of February 4, 2008. (23)
|
10.35
|
Form of Employment Agreement between Praveen Nair and the Company dated as of February 4, 2008. (23)
|
10.36
|
Form of Credit Facility Agreement between the Company and Mr. Bengt Odner Dated June 2, 2008 (24)
|
10.37
|
Form of $500,000 Unsecured Subordinated Demand Promissory Note by and between the Company and Mr. Bengt Odner, dated June 2, 2008 (24)
|
10.38
|
Form of Securities Subscription Agreement between the Company and Investor for the purchase of 9% three (3) year Convertible Debentures (25)
|
10.39
|
Form of 9% Three (3) Year Debenture issued by the Company dated November 3, 2008. (25)
|
10.40
|
Form of Registration Rights Agreement dated November 3, 2008. (25)
|
10.41
|
Form of Consulting Agreement between Joey Schwartz and the Company dated as of February 4, 2008 (26)
|
10.42
|
Form of Securities Subscription Agreement between the Company and Investor Ledelle Holdings Ltd. for the purchase of 9% three (3) year Convertible Debentures dated November 7, 2008. (26)
|
10.43
|
Form of 9% Three (3) Year Debenture issued by the Company to Investor Ledelle Holdings Ltd. dated November 7, 2008. (26)
|
10.44
|
Form of Registration Rights Agreement between the Company and Investor Ledelle Holdings Ltd. for the purchase of 9% three (3) year Convertible Debentures (25)
|
10.45
|
Form of Securities Subscription Agreement between the Company and Investor Mr. Bengt Odner. for the purchase of 9% three (3) year Convertible Debentures Dated November 7, 2008. (26)
|
10.46
|
Form of 9% Three (3) Year Debenture issued by the Company to Investor Mr. Bengt George Odner dated November 7, 2008. (26)
|
10.47
|
Form of Registration Rights Agreement between the Company and Investor Ledelle Holdings Ltd. for the purchase of 9% three (3) year Convertible Debentures (25)
|
10.48
|
Form of Amendment to Employment Agreement between Praveen Nair and the Company effective as of January 1, 2009 (26)
|
10.49
|
Form of 9% Unsecured Promissory Note (27)
|
10.50
|
Form of Letter Agreement Amendment to Secured Commercial Loan Agreement by and between ESW Canada Inc. and Royal Bank of Canada dated as of August 24, 2009 (28) 10.51 Form of Securities Subscription Agreement for 9% Convertible Debentures dated as of August 28, 2009 (29)
|
10.51
|
Form of 9% Three (3) year debentures (29)
|
10.53
|
Lease Renewal Agreement by and between the Company’s wholly-owned subsidiary ESW America Inc. and Nappen Associates effective October 16, 2009
|
10.54
|
Form of 9% Unsecured Promissory Note effective December 29, 2009 (30)
|
II - 4
10.55
|
Form of Securitas Subscription Agreement for 9% Convertible Debentures dated as of March 19, 2010 (31)
|
10.56
|
Form of 9% three year Convertible Debenture dated as of March 19, 2010 (31)
|
10.57
|
Form of Registration Rights Agreement dated as of March 19, 2010 (31)
|
10.58
|
Form of Loan Agreement by and between the Company’s wholly-owned subsidiary ESW Canada, Inc. and Canadian Imperial Bank of Commerce effective March 31, 2010.
|
10.59
|
Form of Guarantee of Loan Guarantee of Loan Agreement by and between Canadian Imperial Bank of Commerce and the Company, and the Company’s wholly-owned subsidiaries ESW America Inc. and ESW Technologies Inc.
|
10.60
|
Form of Patent and Trademark Security Agreement by and between the Company’s wholly-owned subsidiary ESW Technologies Inc. and Canadian Imperial Bank of Commerce
|
10.61
|
Environmental Solutions Worldwide Inc. Nominating and Governance Committee Charter as of August 10, 2010 (33)
|
10.62
|
Environmental Solutions Worldwide, Inc. Audit Committee Charter as of August 10, 2010 (33)
|
10.63
|
Environmental Solutions Worldwide Inc. Compensation Committee Charter as of August 10, 2010 (33)
|
10.64
|
Form of Subordinated Note Subscription Agreement as of February 17, 2011 (36)
|
10.65
|
Form of Unsecured Subordinated Promissory Note as of February 17, 2011 (36) 14.1 Code of ethics adopted March 28, 2005 by the Company’s board of directors. (12)
|
10.66
|
Investment Agreement, dated May 10, 2011, by and between the Company and the Bridge Lenders (37)
|
10.67
|
Form of Services Agreement by and between the Company and Orchard Capital Corp. dated as of January 30, 2011. (38)
|
10.68
|
Environmental Solutions Worldwide amended 2010 stock incentive plan as of April 19, 2011. (38)
|
10.69
|
Form of Registration Rights Agreement as of July 12, 2011 (39)
|
10.70
|
Asset Purchase Agreement, dated April 1, 2013, by and between David P. Stapleton, as the receiver for Cleaire Advanced Emission Controls, LLC, and Environmental Solutions Worldwide, Inc. (42)
|
14.2
|
Code of ethics as amended March 28, 2006 by the Company’s board of directors. (15)
|
16.1
|
Letter from James E. Scheifley & Associates, P. C. (1)
|
16.2
|
Letter from Daren, Martenfeld, Carr, Testa and Company LLP dated February 2001. (3)
|
16.3
|
Letter of resignation from Goldstein and Morris Certified Public Account P.C. dated October 20, 2004 (10)
|
16.4
|
Letter from Goldstein and Morris Certified Public Account P.C. dated November 23, 2004 (11)
|
16.5
|
Letter from Deloitte & Touche LLP dated May 29, 2009 (32)
|
21.1
|
List of subsidiaries. (1)
|
23.1
|
Consent of MNP LLP, Independent Registered Public Accounting Firm
|
23.2
|
Consent of Holland & Knight LLP (contained in Exhibit 5.1)
|
24.1
|
Power of Attorney (contained on signature page)
|
99.1
|
Form of Subscription Rights Certificate*
|
99.2
|
Form of Instruction for Use of Registrant’s Subscription Rights Certificates*
|
99.3
|
Form of Letter to Stockholders*
|
99.4
|
Form of Letter to Brokers, Dealers, Trust Companies and Other Nominees*
|
99.5
|
Form of Letter to Clients*
|
99.6
|
Form of Nominee Holder Certification*
|
99.7
|
Form of Notice of Guaranteed Delivery*
|
99.8
|
Form of Beneficial Owner Election*
|
|
|
|
|
* Previously filed.
II - 5
(1) Incorporated herein by reference from the Registrant’s Form 10 Registration Statement (SEC File No. 000-30392) filed with the Securities and Exchange Commission of November 18, 1999
(1) Incorporated herein by reference from the Registrant’s Form 10 Registration Statement (SEC File No. 000-30392) filed with the Securities and Exchange Commission of November 18, 1999
(2) Incorporated herein by reference from the Registrant’s 10-K filed with the Securities and Exchange Commission on March 30, 2000.
(3) Incorporated herein by reference from the Registrant’s Form 8-K/A filed with the Securities and Exchange Commission on March 14, 2001.
(4) Incorporated herein by reference from the Registrant’s 10-KSB filed with the Securities and Exchange Commission on April 16, 2001.
(5) Incorporated herein by reference from the Registrants Form 10-KSB filed with the Securities and Exchange Commission on April 01, 2002.
(6) Incorporated herein by reference from the Registrant’s Form 10-QSB/A filed with the Securities and Exchange Commission on November 26, 2003.
(7) Incorporated by reference from an exhibit filed with the Registrant’s Registration Statement on Form S-2 (File No. 333-112125) filed on January 22, 2004.
(8) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on September 2, 2004.
(9) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on September 17, 2004.
(10) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on October 22, 2004.
(11) Incorporated herein by reference from the Registrants Form 8-K/A filed with the Securities and Exchange Commission on December 2, 2004.
(12) Incorporated by reference to the Registrant’s Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005.
(13) Incorporated herein by reference from the Registrants Form 10-QSB filed with the Securities and Exchange Commission on August 15, 2005.
(14) Incorporated herein by reference from the Registrants Form S-8 Registration Statement SEC File No. 333-127549) filed on August 15, 2005.
(15) Incorporated herein by reference from the Registrants Form 10-KSB filed with the Securities and Exchange Commission on April 3, 2006.
(16) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on June 30, 2006.
(17) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on September 7, 2006.
(18) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on November 17, 2006.
II - 6
(19) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on February 14, 2007.
(20) Incorporated herein by reference from the Registrants Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2007.
(21) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on November 8, 2007.
(22) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on February 1, 2008.
(23) Incorporated herein by reference from the Registrants Form 10-KSB/A filed with the Securities and Exchange Commission on April 29, 2008.
(24) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on June 2, 2008.
(25) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on November 7, 2008.
(26) Incorporated herein by reference from the Registrants Form 10-K filed with the Securities and Exchange Commission on April 9, 2009.
(27) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on January 05, 2010.
(28) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on August 26, 2009.
(29) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on September 2, 2009.
(30) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on January 5, 2010.
(31) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on March 23, 2010.
(32) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on June 2, 2010.
(33) Incorporated herein by reference from the Registrants Form 10Q filed with the Securities and Exchange Commission on August 13, 2010.
(34) Incorporated herein by reference from the Registrants Form 10Q filed with the Securities and Exchange Commission on September 09, 2010.
(35) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on January 28, 2011.
(36) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on February 22, 2011.
II - 7
(37) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on May 10, 2011.
(38) Incorporated herein by reference from the Registrants Form 10-Q filed with the Securities and Exchange Commission on May 16, 2011.
(39) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on July 15, 2011.
(40) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on March 28, 2013.
(41) Incorporated by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on April 29, 2013.
(42) Incorporated herein by reference from the Registrants Form 10-Q filed with the Securities and Exchange Commission on May 20, 2013.
(43) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on May 24, 2013.
(44) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on July 1, 2013.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the “Act”);
(ii) To reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement.
(2) That, for the purpose of determining any liability under the Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II - 8
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is a part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, superseded or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of an undersigned registrant relating to this offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to this offering prepared by, or on behalf of, the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to this offering containing material information about an undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in this offering made by the undersigned registrant to the purchaser.
(c) The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer and the amount of unsubscribed securities to be offered to the public. If any public offering of the securities is to be made on terms differing from those set forth on the cover page of the prospectus, a post-effective amendment will be filed to set forth the terms of such offering.
Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
II - 9