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
|
FOR THE NINE AND THREE MONTH PERIODS
ENDED SEPTEMBER 30,
|
(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
|
Amended and Restated Note
Subscription Agreement entered into in, 2013 by 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
|
|
|
|
|
* To be filed by
amendment.
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