ESW
believes that it can improve and achieve profitability and grow its business by
continuing to pursue the following strategy:
·
Focus on
delivering controlled growth to its shareholders.
-
Provide integrated solutions to the
emissions market by leveraging its product development, testing and
certification services, and distribution and post-sale services
capabilities.
-
Center the Company's sales strategy
around identified “sweet-spots” that will allow manufacturing efficiency gains
and optimized resource allocation.
·
Educate
the end customers and regulatory agencies about the technology as a supplier of
choice emissions compliance solutions in the market.
·
Enhance
customer service functions.
·
Work with
vendors to optimize ESW's material buys and lead times.
·
Constantly
review operations, processes and products under a Continuous Improvement /
Performance Based culture.
With this growth
strategy in focus, ESW had entered into an asset purchase agreement with the
acting receiver for Cleaire. Cleaire was engaged in the design, development and
manufacturing of retrofit emission control systems for diesel engines. On April
18, 2013, the Court issued the sale order to consummate the transactions
contemplated by the Asset Purchase Agreement for a purchase price of $1.4
million plus a portion of gross profit realized on a certain purchase order.
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 the transaction as an asset acquisition.
Effective April
18, 2013 the Company established a new wholly owned Subsidiary, ESWCT, a
Delaware corporation, which houses the assets purchased from Cleaire. ESWCT will
operate out of San Diego, California.
On May 17, 2013,
ESW received notification from California Air Resource Board (“CARB”) that
ESWCT has met the requirements under Verification Procedure, Warranty, and
In-Use Compliance Requirements for In-Use Strategies to Control Emissions from
Diesel Engines, and the verifications of the LongMile-S™ and Horizon™ products
have been transferred to ESWCT from Cleaire. On June 18, 2013, CARB notified
ESW that the verifications of the Vista™ and Longview™ products have been
transferred to ESWCT form Cleaire.
Effective June
7, 2013, 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, for housing ESWCT manufacturing and diesel particulate filter
cleaning operations. The Lease has a 37-month lease term (commencing on July 1,
2013), with an option to extend the lease term for two additional 36-month
periods. The current base rent under the Lease is $15,300 per month. ESWCT
operations in San Diego California will currently produce the LongMile-S™,
Horizon™
,
Vista™
and Longview™, in the longer term both locations in Pennsylvania and California
will be synergized and be used to produce all products or related components.
ESW has made
significant investments in research and development and obtaining regulatory
approvals for its technologies.
ESW's XtrmCat
product designed for locomotive, Tier 0, turbocharged EMD 645 and 710 engines
was tested at an EPA recognized facility for certification during March and
April 2011 along with the marine product together with a partner company. We
are exploring opportunities to obtain certifications for the aforementioned
locomotive engines.
ESW is currently
pursuing regulatory verifications of the ThermaCat-e, Phoenix™ and Skyline™ Level
III Plus Diesel Particulate Filter System for off-road engines. ESW is also
pursuing the verification of two other passive off road level III products.
ESW believes
that with the current and additional verification of products, ESW covers a
significant portion of the market and gives ESW the competitive advantage to be
the trusted supplier of emissions compliance solution in retrofit market.
The cost of
developing a complete range of products to meet regulations is substantial. ESW
believes that it possesses a competitive advantage in ensuring regulatory
compliance by leveraging its testing and research facility in Montgomeryville,
Pennsylvania to support its certification and verification efforts.
Historically, ESW has also managed to offset some of these development costs
through the application of research grants and tax refunds.
In the first
quarter of 2013, ESW experienced a seasonal reduction in demand for its
ThermaCat, in addition to a growth in market demand for passive-regeneration
retrofit products. Additionally, the shutdown of Cleaire’s operations in
January 2013 created a level of uncertainty in the retrofit market further
affecting sales of the ThermaCat. In the second quarter of 2013 ThermaCat sales
improved primarily due to seasonality and increased enforcement action by CARB.
3
Our
ESW America Air Testing business revenue has remained consistent in the first
half of 2013 as compared to the same period in 2012. ESWA contributed a total
of $401,021 of revenue during the first half of 2013.
During the first
half of 2013 ESW entered into a senior secured convertible loan facility of $5
million with certain shareholders of the Company. As of June 30, 2013 the loan
facility has been fully funded. Proceeds of the Loan have funded and will fund
the purchase of the Cleaire assets, working capital, planned capital
investments and other general corporate purposes.
On January 23,
2013, ESW’s Board of Directors approved a one-for-two thousand reverse split of
the Company’s common stock. Upon the completion of the reverse stock split,
which was effective on May 24, 2013, there was no change to the Company’s
authorized shares of common stock, which remained 250,000,000 shares, par value
$0.001 per share. Issued and outstanding common stock was reduced from
228,213,173 shares to approximately 113,464 shares.
4
COMPARISON
OF THE SIX MONTH PERIOD ENDED JUNE 30, 2013 TO THE SIX MONTH PERIOD ENDED JUNE
30, 2012
RESULTS OF
OPERATIONS
The following
management's discussion and analysis of financial condition and results of
operations (MD&A) should be read in conjunction with the MD&A included
in ESW's Annual Report on Form 10-K, for the year ended December 31, 2012. Revenues
for the six month period ended June 30, 2013, decreased by 2.7 percent, to $4,745,345
from $4,875,705 for the comparable period in 2012. The decrease in revenue is
related to reduced sales of military product in 2013 versus prior year, the
growth in market demand for passive-regeneration retrofit products in the first
half of 2013, and uncertainty in the retrofit market with the shutdown of
Cleaire’s operations.
Cost of revenue
as a percentage of revenues for the six month period ended June 30, 2013 was 104.4
percent compared to 65.6 percent for the six month period ended June 30, 2012.
Cost of revenue for the period ended June 30, 2013 increased by $1,753,889 or 54.8
percent. The primary reason for the increase in the cost of revenue during the six
month period ended June 30, 2013 was the inclusion of an estimated one-time
warranty charge of $1,000,000 related to the assumption of warranties for
legacy Cleaire products in the field as well as an additional one-time warranty
charge of $504,900 related to
potential one-off warranty expenses associated with
the ThermaCat. ESW also recorded a one-time write down on inventory amounting
to $230,002 relating to obsolete inventory in ESWCT which was included in the
cost of revenue. Consequently, gross margin for the six month period ended June
30, 2013 was negative 4.4 percent compared to 34.4 percent for the six month
period ended June 30, 2012.
Marketing,
office and general expenses for the six month period ended June 30, 2013 increased
14.6 percent to $2,137,526 from $1,865,510 for the same period in 2012. The increase
is primarily due to: (a) increase in factory expense of $173,994 mainly
resulting from setup expenses for ESWCT, (b) an increase in general
administration expenses of $97,303 primarily due to increased business
insurance expenses and ESWCT related expenses, (c) increase in administration
salaries and wages of $144,112 mainly attributed to start of operations for
ESWCT, and (d) increase in investor relation costs of $195,982 related to costs
in connection with corporate actions including the 2000:1 reverse split. The
increases were offset by (a) decrease in customer service, sales and marketing
and wages and selling expenses of $273,310 mainly related to a 2012 bad debt
provision which was not incurred in 2013, and (b) decrease in facility expenses
of $66,065 resulting from rent and cost savings related to the release of the
Canadian facility in 2012.
Officers’
compensation and directors’ fees for the six month period ended June 30, 2013
increased by $124,116, or 39.8 percent, to $435,707 from $311,591 for six month
period ended June 30, 2012. The increase is mainly related to stock based
compensation expense incurred on issuance of shares of restricted common stock
to a member of the Company’s Board.
Research and
development ("R&D") expenses for the six month period ended June
30, 2013 decreased by $73,707, or 23.4 percent, to $240,611 versus the six
month period ended June 30, 2012. The primary driver of R&D expenses for
the six month period ended June 30, 2013 was related to ESW's pursuit of the
verification expansion of its Level III product
and transfer of verifications for
new products related to ESWCT. ESW benefitted during the first six month period
of 2013 from research and development tax credits amounting to $40,946. During six
month period ended June 30, 2012 there was no grant funding or tax credit to
offset R&D cost.
Consulting
and professional fees for the six month period ended June 30, 2013 increased by
$143,886, or 106.1 percent, to $279,499 from $135,613 for six month period
ended June 30, 2012. The increase is mainly due to legal and consulting fees in
connection with corporate actions including the setup of the ESWCT subsidiary
and acquisition of certain assets from Cleaire.
Depreciation
and amortization expense for the six month period ended June 30, 2013 decreased
by $2,539, or 2.2 percent to $112,578 from $115,117 for the six month period
ended June 30, 2012.
Foreign
exchange loss for the six month period ended June 30, 2013, was $11,180 as
compared to a loss of $43,043 for the six month period ended June 30, 2012.
This is a result of the fluctuation in the exchange rate of the Canadian Dollar
to the United States Dollar.
Impairment
loss for the six month period ended June 30, 2013 was $0. For the six month
period ended June 30, 2012, ESW had valued the impairment loss at $28,945 for
the balance of the office equipment, furniture and fixtures of ESW Canada Inc.
The former landlord of the Canadian property terminated the lease for the
facility as of May 1, 2012.
Loss
from operations for the six month period ended June 30, 2013 increased by $2,287,213
to $3,425,381 from $1,138,168 for the six month period ended June 30, 2012.
ESW’s loss from operations for the six month period ended June 30, 2013
included the following non-cash items: a one-time warranty provision of
$1,504,900, depreciation expenses of $339,019, loss on write down of inventory of
$230,002 and stock based compensation expense of $172,951. In addition, loss
from operations was higher in the six month period ended June 30, 2013 as
compared to June 30, 2012 due to expenses related to the set-up of ESWCT operations
in San Diego.
5
Effective February 3, 2012 ESW’s wholly-owned
non-operational subsidiary BBL Technologies Inc., (“BBL”) filed for bankruptcy
in the Province of Ontario, Canada. Due to the insolvency of BBL, the
redeemable Class A special shares were cancelled and the Company recorded a
$453,900 gain on the consolidated condensed statement of operations and
comprehensive loss.
During the six
month period ended June 30, 2013, the Company recorded the following costs and
gain related to a senior secured convertible loan facility:
•
|
$71,311
|
-
|
Interest
on notes payable to related parties
|
•
|
$46,437
|
-
|
Debt
related discount amortization
|
•
|
$1,038,323
|
-
|
Loss
on convertible derivative
|
No
costs related to financing and debt transactions were incurred in the six month
period ended June 30, 2012.
COMPARISON
OF THE THREE MONTH PERIOD ENDED JUNE 30, 2013 TO THE THREE MONTH PERIOD ENDED
JUNE 30, 2012
RESULTS OF
OPERATIONS
The following
management's discussion and analysis of financial condition and results of
operations (MD&A) should be read in conjunction with the MD&A included
in ESW's Annual Report on Form 10-K, for the year ended December 31, 2012.
Revenues for the
three month period ended June 30, 2013, increased by 40.3 percent, to $3,289,503
from $2,344,103 for the comparable period in 2012. In the second quarter of
2013, sales of the ThermaCat significantly rose relative to a slow first
quarter.
Cost of revenue
as a percentage of revenues for the three month period ended June 30, 2013 was
117.5 percent compared to 62.1 percent for the three month period ended June
30, 2012. Cost of revenue for the period ended June 30, 2013 increased by $2,407,970
or 165.3 percent. The primary reason for the increase in the cost of revenue
during the three month period ended June 30, 2013 was the inclusion of an
estimated one-time warranty charge of $1,504,900 related to the assumption
of warranties for legacy Cleaire products in the field as well as potential
one-off warranty expenses associated with the ThermaCat. ESW also
recorded a one-time write down on inventory amounting to $230,002 which was included
in the cost of revenue. Consequently, gross margin for the three month period
ended June 30, 2013 was negative 17.5 percent compared to 37.9 percent for the three
month period ended June 30, 2012.
Marketing,
office and general expenses for the three month period ended June 30, 2013
increased 103.0 percent to $1,370,131 from $675,060 for the same period in
2012. The increase is primarily due to: (a) increase in factory expense of $208,141
mainly resulting from setup expenses for ESWCT, (b) increase in general
administration expenses of $193,411 primarily due to the increased business
insurance expenses and ESWCT related expenses, (c) increase in administration
salaries and wages of $135,937 mainly attributed to start of operations for
ESWCT, (d) increase in investor relation costs of $76,548 related to costs in
connection with corporate actions, (e) increase in customer service, sales and
marketing and wages and selling expenses of $2,458, and (f) increase in
facility expenses of $78,576 resulting from rent expenses for ESWCT.
Officers’
compensation and directors’ fees for the three month period ended June 30, 2013
decreased by $23,990, or 15.5 percent, to $130,494 from $154,484 for the three
month period ended June 30, 2012.
Research and
development ("R&D") expenses for the three month period ended
June 30, 2013 decreased by $26,899, or 14.5 percent, to $158,871 versus $185,770
for the three month period ended June 30, 2012. The primary driver of R&D
expenses for the three month period ended June 30, 2013 was related to ESW's
pursuit of the verification expansion of its Level III product and transfer of
verifications for new products related to ESW CleanTech Inc. During the three
month period ended June 30, 2013 and 2012 there was no grant funding or tax
credit to offset R&D cost.
Consulting
and professional fees for the three month period ended June 30, 2013 increased
by $132,753, or 166.7 percent, to $212,382 from $79,629 for the three month
period ended June 30, 2012. The increase is mainly due to legal and consulting
fees in connection with corporate actions including the setup of the ESWCT
subsidiary and acquisition of certain assets from Cleaire.
Depreciation
and amortization expense for the three month period ended June 30, 2013 increased
by $18,523, or 47.6 percent to $57,458 from $38,935 for the three month period
ended June 30, 2012.
Foreign
exchange loss for the three month period ended June 30, 2013, was $3,068 as
compared to a loss of $11,612 for the three month period ended June 30, 2012.
This is a result of the fluctuation in the exchange rate of the Canadian Dollar
to the United States Dollar.
6
Loss from operations for the three month period
ended June 30, 2013 increased by $2,249,484, to $2,507,681 from $258,197 for
the three month period ended June 30, 2012. ESW’s loss from operations for the
three month period ended June 30, 2013 included the following non-cash items: a
one-time warranty provision of $1,504,900, depreciation expenses of $168,418
and loss on write down of inventory of $230,002. In addition loss from
operations was higher in the three month period ended June 30, 2013 as compared
to June 30, 2012 due to expenses related to the set-up of ESWCT operations in
San Diego.
During the three
month period ended June 30, 2013, the Company recorded the following costs and
gain related to a senior secured convertible loan facility:
•
|
$68,811
|
-
|
Interest
on notes payable to related parties
|
•
|
$44,381
|
-
|
Debt
related discount amortization
|
•
|
$1,330,893
|
-
|
Loss
on convertible derivative
|
No
costs related to financing and debt transactions were incurred in the six month
period ended June 30, 2012.
LIQUIDITY AND
CAPITAL RESOURCES
ESW's principal
sources of operating capital have been the proceeds from its various financing
transactions. During the six month period ended June 30, 2013, the Company used
$2,244,937 of cash to sustain operating activities compared with $1,005,746 for
the six month period ended June 30, 2012. As of June 30, 2013 and 2012, the
Company had cash and cash equivalents of $2,550,537 and $78,556, respectively.
Net cash used in
operating activities for the six month period ended June 30, 2013 amounted to $2,244,937.
This amount was attributable to the net loss of $4,582,452, plus non-cash
expenses such as depreciation, stock based compensation, conversion option derivative
liability, discount on promissory notes payable, warranty provisions and others
of $3,403,943, less a decrease in net operating assets and liabilities of $1,066,428.
Net cash used in
operating activities for the six month period ended June 30, 2012 amounted to $1,005,746.
This amount was attributable to the net loss of $684,268, plus non-cash
expenses such as stock based compensation, gain on deconsolidation of BBL and
others of $231,734, less a decrease in net operating assets and liabilities of
$553,212.
Net cash used in
investing activities was $372,805 for the six month period ended June 30, 2013,
as compared to $292,869 used in investing activities for the six month period
ended June 30, 2012.
Net cash
provided by financing activities totaled $4,914,281 through a loan payable
repayment of $34,204 in principal and $5,000,000 proceeds from notes payable to
related parties and re-purchase of common stock of $51,515 for the six month
period ended June 30, 2013, as opposed to net cash provided by financing
activities of $273,522 for the six month period ended June 30, 2012. In the
prior year period of 2012, $280,787 was provided from proceeds of a loan
payable, $6,024 used in loan payable principal repayment and $1,241 was used
for repayment under capital lease obligation.
ESW
operates in a capital intensive and highly regulated industry, where a long
lead time to bring new products into market is considered normal. ESW continues
to invest in research and development to improve its technologies and bring
them to the point where its customers have a high confidence level to purchase
our products.
During
the six month period ended June 30, 2013 and in 2012, ESW did not produce
sufficient cash from operations to support its expenditures, prior and current
financings supported the Company's operations during the period. ESW's
principal use of liquidity relates to the Company's working capital needs and
to finance any further capital expenditures or tooling needed for production
and/or its testing facilities.
ESW
anticipates certain capital expenditures during the remainder of 2013 related
to the general operation of its business as well as to upgrade the Air Testing
Services facilities in Montgomeryville, Pennsylvania according to a board
approved capital expenditure plan.
Overall,
capital adequacy is monitored on an ongoing basis by our management and
reviewed quarterly by the Board of Directors.
The Company has sustained
recurring operating losses. As of June 30, 2013, the Company had an accumulated
deficit of $59,092,830 and cash and cash equivalents of $2,550,537. ESW’s
history of losses and the current 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. The Company may
require additional financing to fund its continuing operations and planned
capital investments.
7
DEBT STRUCTURE
At June 30,
2013, ESW had $6,523,688 (December 31, 2012 - $473,133) of debt on the
consolidated condensed balance sheet, of this amount $69,966 (December 31, 2012
- $68,926) is repayable in the next 12 months.
On April 25,
2012, the Company’s wholly-owned subsidiary ESWA entered into a Machinery and
Equipment Loan Fund (“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. In connection with the MELF Facility, the Company entered into a
Guaranty and a Loan and Security Agreement on behalf of its wholly-owned
subsidiary ESWA.
On
March 22, 2013, the Company entered into a note subscription agreement and a
security agreement and issued senior secured five (5) year convertible
promissory notes (collectively the “Loan Agreements”) to Black Family Partners
LP, John J. Hannan, Orchard Investments, LLC and Richard Ressler (each
individually a “Senior Secured Lender” or “Holder” and collectively the “Senior
Secured Lenders” or “Holders”) who are current shareholders and may be deemed
affiliates of the Company. The Loan Agreements are a part of a senior secured
convertible loan facility of up to $5 million (the “Senior Secured Loan
Facility”) wherein the Senior Secured Lenders agreed that at any time prior to
March 22, 2014, upon approval of the Company’s board of directors, additional
closings can take place for up to the $5 million of the facility in which each
Holder will be required to purchase additional Notes allocated among the
Holders as agreed to in the Loan Agreements (each a “Subsequent Closing” or
“Subsequent Closings”).The Loan Agreements and the Senior Secured Loan Facility
were approved by the independent directors of the Company.
Pursuant
to the Loan Agreements, the Senior Secured Lenders made loans to the Company in
the principal aggregate amount of $5 million (the “Loan”), subject to the terms
and conditions set forth in the Loan Agreements and represented by senior
secured convertible promissory notes (the “Notes”), dated March 22, 2013,
April 23,
2013 and June 27, 2013.
Proceeds of the
Loan were directed at the purchase of the Cleaire assets, as well as to fund
working capital, planned capital investments and other general corporate
purposes of the Company and/or its subsidiaries.
The Notes are
secured by a lien on and a security interest in all assets of the following
wholly owned subsidiaries of the Company: Technology Fabricators, Inc., ESW
America, Inc., ESW CleanTech Inc., and ESW Technologies, Inc., excluding
certain collateral subject to pre-existing liens. 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 form of the Company’s common stock, $0.001, par value (the “Common Stock”)
valued at the lesser of $80, subject to adjustment (the “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 of the Notes
representing a majority of the then-outstanding principal balance of the Notes,
all principal, and interest amounts then 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 a
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 in connection.
As a part of the
Senior Secured Loan Facility, the Company further agreed to conduct a rights
offering to all of its holders of Common Stock, offering all such holders the
right to purchase up to their pro-rata Company ownership amount of senior
secured five (5) year convertible promissory notes that will be similar to the
Notes (the “Rights Offering”).
8
CONTRACTUAL
OBLIGATIONS
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 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. 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, pursuant to which ESWCT leased approximately 18,000 square
feet of commercial property located in San Diego, California, from the Lessor
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), subject to ESWCT’s option 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.
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 six months ended June 30, 2013)
|
$
|
182,295
|
2014
|
|
242,344
|
2015
|
|
372,935
|
2016
|
|
279,799
|
2017
|
|
180,990
|
2018
|
|
30,165
|
Total
|
$
|
1,288,528
|
|
|
|
|
|
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 ESWC, this claim was previously deemed settled, due to
inaction by the vendor. That motion is pending: the Court has not ruled upon
it. The Company cannot predict the outcome of this matter at this time.
The Company is
also exposed to contingencies on its various warranty programs related to the
products produced by TFI and ESWCT. The Company has recorded a provision for
these as disclosed in Note 2; however, the actual amount of loss could be
materially different.
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
consolidated condensed financial statements.
9
SIGNIFICANT
ACCOUNTING POLICIES AND ESTIMATES
ESW's
significant accounting policies are summarized in Note 2 to the consolidated
condensed financial statements included in its quarterly reports and its 2012
Annual Report to Shareholders. In preparing the consolidated condensed
financial statements, we make estimates and assumptions that affect the
expected amounts of assets and liabilities and disclosure of contingent assets
and liabilities. We apply our accounting policies on a consistent basis. As
circumstances change, they are considered in our estimates and judgments, and
future changes in circumstances could result in changes in amounts at which
assets and liabilities are recorded.
FOREIGN CURRENCY
TRANSACTIONS
The 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 unaudited consolidated condensed statements of operations and
comprehensive loss.
10
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ESW is exposed
to financial market risks, including changes in currency exchange rates and
interest rates. The Company has foreign currency exposures at its foreign
operations related to buying and selling currencies other than the local
currencies. The risk under these interest rate and foreign currency exchange
agreement is not considered to be significant.
FOREIGN EXCHANGE
RISK
ESW's exposure
to foreign currency translation gains and losses also arises from the
translation of the assets and liabilities of its subsidiaries to U.S. dollars
during consolidation. These risks have been significantly mitigated by the move
of ESW’s manufacturing operations to Pennsylvania, USA.
In the
consolidated condensed statements of operations and comprehensive loss for the
six month period ended June 30, 2013, ESW has recognized a translation loss of
$11,180 as compared to a loss of $43,043 for the six month period ended June
30, 2012. For the three month period ended June 30, 2013 and 2012, ESW has
recognized a translation loss of $3,068 and $11,612 respectively, the losses
are a result of exchange rate differences between the U.S. dollar and the
Canadian dollar.
INTEREST RATE
RISK
ESW currently
has no variable-rate long-term debt that exposes ESW to interest rate risk.
11
ITEM 4. CONTROLS
AND PROCEDURES
(a) EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURE
EVALUATION OF THE
COMPANY'S DISCLOSURE AND INTERNAL CONTROLS
The Company
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" as of the end of the period covered by this
report. This evaluation was done with the participation of management, under
the supervision of the Executive Chairman ("EC") and Chief Financial
Officer ("CFO").
LIMITATIONS ON
THE EFFECTIVENESS OF CONTROLS
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost
effective control system, misstatements due to error or fraud may occur and not
be detected. The Company conducts periodic evaluations of its internal controls
to enhance, where necessary, its procedures and controls.
CONCLUSIONS
Based on our
evaluation, the EC and CFO concluded that the registrant's disclosures,
controls and procedures are effective to ensure that information required to be
disclosed in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms.
(c) CHANGES IN
INTERNAL CONTROLS
Not applicable.
12
PART II OTHER INFORMATION
ITEM 1A. RISK
FACTORS
In evaluating an
investment in our common stock, investors should consider carefully, among
other things, the risk factors previously disclosed in Part I, Item 1 of our
Annual Report on Form 10-K for the year ended December 31, 2012, as well as the
information contained in this report and our other reports and registration
statements filed with the Securities and Exchange Commission.
ITEM 5. OTHER
INFORMATION
None.
13
ITEM 6. EXHIBITS
EXHIBITS:
3.1
|
Articles of Amendment to the Articles
of Incorporation of Environmental Solutions Worldwide, Inc. (incorporated by
reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on
May 24, 2013)
|
|
|
4.1
|
Form of Senior Secured Promissory Note
issued on April 23, 2013 by Environmental Solutions Worldwide, Inc. in favor
of the Senior Secured Lenders (incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 8-K filed on April 29, 2013)
|
|
|
4.2
|
Form of Senior Secured Promissory Note
issued on June 27, 2013 by Environmental Solutions Worldwide, Inc. in favor
of the Senior Secured Lenders (incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 8-K filed on July 1, 2013)
|
|
|
10.1
|
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.
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q for the quarter ended March 31, 2013)
|
|
|
31.1*
|
Certification
of Executive Chairman pursuant to the Sarbanes-Oxley Act of 2002.
|
|
|
31.2*
|
Certification
of Chief Financial Officer, pursuant to the Sarbanes-Oxley Act of 2002.
|
|
|
32.1*
|
Certification
pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.2*
|
Certification
pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
99.1
|
Temporary
Hardship Exemption Provided by Rule 201
|
|
|
101.ins*
|
XBRL Instance
|
|
|
101.xsd*
|
XBRL Schema
|
|
|
101.cal*
|
XBRL
Calculation
|
|
|
101.def*
|
XBRL
Definition
|
|
|
101.lab*
|
XBRL Label
|
|
|
101.pre*
|
XBRL
Presentation
|
* Furnished
herewith..
14
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this Report to be signed on its behalf by the undersigned thereunto duly
authorized.
DATED: AUGUST 21,
2013
Montgomeryville, PA, USA
ENVIRONMENTAL
SOLUTIONS WORLDWIDE, INC.
BY:
/S/ MARK YUNG
MARK YUNG
EXECUTIVE CHAIRMAN
/S/ PRAVEEN NAIR
PRAVEEN NAIR
CHIEF FINANCIAL OFFICER
15