NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - NATURE OF BUSINESS
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 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.
As of March 31, 2014, the Company had an accumulated deficit of $53,245,443 and had cash and cash equivalents of $5,719,140. Based on cash and cash equivalents, anticipated revenues and spending levels, the Company estimates that it has sufficient cash resources to meet its anticipated net cash needs through the next twelve months.
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, 2013.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiaries, ESW America Inc. (“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 consolidated condensed financial statements are expressed in U.S. dollars.
ESTIMATES
The preparation of 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 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, impairment of and useful lives of property plant and equipment, the valuation of the stock-based compensation and 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 $265,862 and $250,862 was appropriate as of March 31, 2014 and December 31, 2013, 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.
F6
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.
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.
The loan payable is measured using level 2 inputs; the interest rate on this loan approximates a market rate based on the Company’s incremental borrowing rate.
Our conversion option derivative liability, which is measured at fair value on a recurring basis, is measured using Level 3 inputs.
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 consolidated 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.
F7
The Company also derives revenue (approximately 1.4% and 14.9% of total revenue for the three month periods ended March 31, 2014 and 2013, 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.
EARNINGS
/
LOSS PER SHARE OF COMMON STOCK
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.
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.
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 $136,117 and $20,860 are included in cost of revenues for the three month periods ended March 31, 2014 and 2013, respectively. Additionally, the Company has recorded recoveries of these costs amounting to $41,865 and $14,433, which are included in cost of revenues for the three month period ended March 31, 2014 and in revenue for the three month period ended March 31, 2013.
RESEARCH AND DEVELOPMENT
The Company is engaged in research and development work. Research and development costs are charged as an operating expense as incurred. Any grant money received for research and development work is used to offset these expenditures. For the three month periods ended March 31, 2014 and 2013, the Company expensed $176,737 and $81,740, net of grant revenues, respectively, towards research and development costs. For the three month periods ended March 31, 2014 and 2013, gross research and development expense, excluding any offsetting grant revenues, amounted to $176,737 and $122,686, respectively, and grant revenues amounted to $0 and $40,946, 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 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 consolidated condensed statements of operations and comprehensive income / (loss).
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.
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 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 14). ESW’s chief operating decision maker is the Company’s Executive Chairman.
COMPARATIVE FIGURES
Certain 2013 figures have been reclassified to conform to the current consolidated condensed financial statement presentation.
NOTE 3 – RECENTLY ISSUED ACCOUNTING STANDARDS AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
“Income Taxes (ASC Topic - 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists” (“ASU 2013-11”) was issued during July 2013. FASB issued guidance on how to present an unrecognized tax benefit. The guidance is effective for annual periods beginning after December 15, 2013. The adoption of the accounting pronouncement does not have a material effect on the accompanying consolidated condensed financial statements.
In April 2014, the FASB issued ASC Update No. 2014-08 (Topic 205 and Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASC update modifies the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results. This update also requires additional financial statement disclosures about discontinued operations, as well as disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation. The updated guidance is effective prospectively for years beginning on or after December 15, 2014. The Company expects that the adoption of the accounting pronouncement will not materially affect its financial position or results of operations.
F9
NOTE 4 - 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 March 31, 2014 and December 31, 2013, all of the Company’s cash and cash equivalents consisted of cash.
NOTE 5 - INVENTORY
Inventory consists of:
|
|
March 31,
|
|
December 31,
|
Inventory
|
|
2014
|
|
2013
|
Raw materials
|
$
|
2,414,781
|
$
|
1,964,412
|
Work-in-process
|
|
1,589,561
|
|
1,950,642
|
Finished goods
|
|
-
|
|
6,868
|
Parts
|
|
6,245
|
|
17,954
|
|
|
4,010,587
|
|
3,939,876
|
Less: reserve for inventory obsolescence
|
|
(221,357)
|
|
(246,509)
|
Total
|
$
|
3,789,230
|
$
|
3,693,367
|
During the three month period ended March 31, 2014, ESW recorded a write down on inventory against reserve of $25,152, in addition, there was recovery from sale of scrap inventory of $3,050. During the year ended December 31, 2013, ESW recorded a write down on inventory of $230,002 which was subsequently sold as scrap for $252,352 resulting in a net gain on disposal of scrap inventory of $22,350 included in the cost of revenue.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
March 31,
|
|
December 31,
|
Classification
|
|
2014
|
|
2013
|
Plant, machinery and equipment
|
$
|
3,986,359
|
$
|
3,583,451
|
Office equipment
|
|
173,707
|
|
186,916
|
Furniture and fixtures
|
|
127,937
|
|
1,063
|
Vehicles
|
|
34,762
|
|
17,038
|
Leasehold improvements
|
|
1,079,881
|
|
1,079,881
|
|
|
5,402,646
|
|
4,868,349
|
Less: accumulated depreciation
|
|
(3,411,784)
|
|
(3,294,168)
|
|
$
|
1,990,862
|
$
|
1,574,181
|
Depreciation expense recognized in the consolidated condensed statements of operations and comprehensive income / (loss) was included in the following captions:
|
|
For the three month periods ended
|
|
|
March 31,
|
|
March 31,
|
Depreciation Expense
|
|
2014
|
|
2013
|
Depreciation expense included in cost of revenue
|
$
|
90,997
|
$
|
112,439
|
Depreciation expense included in operating expenses
|
|
26,619
|
|
55,120
|
Depreciation expense included in research and development costs
|
|
-
|
|
3,042
|
Total depreciation expense
|
$
|
117,616
|
$
|
170,601
|
At March 31, 2014 and December 31, 2013, the Company had $72,472 and $431,022, respectively, of customized equipment under construction.
Certain property and equipment of the Company and its subsidiaries is used as collateral for borrowings under the Machinery and Equipment Loan Fund (“MELF”) facility (Note 7). All other property and equipment of the Company and its subsidiaries is used as collateral for borrowing under the senior secured convertible promissory notes payable (Note 8).
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 March 31, 2014 and December 31, 2013, the loan payable (current and long-term) amounted to $386,651 and $404,207, respectively. For the three month periods ended March 31, 2014 and 2013, the Company paid interest amounting to $2,988 and $3,506 on the loan and also repaid principal in the amount of $17,556 and $17,038, respectively. Interest expense is included under Marketing, office and general expenses in the consolidated condensed statements of operations and comprehensive income / (loss).
As at March 31, 2014 $70,966 (December 31, 2013 - $71,022) of the loan is repayable in the next 12 months with the remaining $315,685 (December 31, 2013 - $333,185) repayable thereafter.
Principal on the loan is repayable as follows:
Year Ending December 31,
|
Amount
|
2014 (excluding the three months ended March 31, 2014)
|
$ 53,466
|
2015
|
73,182
|
2016
|
75,408
|
2017
|
77,702
|
2018
|
80,065
|
Thereafter
|
26,828
|
Total
|
$ 386,651
|
NOTE 8 – SENIOR SECURED CONVERTIBLE PROMISSORY NOTES
On March 22, 2013, the Company entered into a note subscription agreement and 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 12). 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 Holders. 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 an 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.
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 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.
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 substantially similar to the Notes.
On February 12, 2014, the Securities And Exchange Commission declared effective a Form S-1 Registration Statement under the Securities Act Of 1933 originally filed by the Company on December 23, 2013 (“Registration Statement”). The Registration Statement relates to the subscription rights offering to existing Company shareholders that the Company agreed to conduct in connection with the 2013 issuance of senior secured convertible promissory notes to accredited investors. The Registration Statement registers an aggregate of $4,596,929 new 10% Senior Secured Convertible Promissory Notes due 2018 (the “New Notes”) as well as potential 152,899 shares of common stock issuable upon conversion of the Notes and, if applicable, as payment of interest on the Notes by the Company. In March, 2014, the Company filed a form 424B3 with the Securities And Exchange Commission (the “prospectus”) and commenced the rights offering by mailing the prospectus and related documents to the Company’s shareholders of record as of February 13, 2014.
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 (Note 9). 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.
|
|
Period ended
March 31, 2014
|
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
|
|
225,882
|
Balance January 1, 2014
|
$
|
2,146,780
|
Accretion of discount on promissory notes payable
|
|
94,774
|
Balance March 31, 2014
|
$
|
2,241,554
|
During the three month periods ended March 31, 2014 and 2013, accretion of discount on the Notes amounted to $94,774 and $2,056 respectively.
During the three month periods ended March 31, 2014 and 2013, interest expense on the Notes amounted to $128,522 and $3,500, respectively.
For the periods ended March 31, 2014 and December 31, 2013, interest expense accrued on the Notes included in accrued liabilities on the consolidated condensed balance sheets amounted to $256,299 and $127,777, respectively.
NOTE 9 – CONVERSION OPTION DERIVATIVE LIABILITY
The Company’s Notes are subject to anti-dilution adjustments that allow for reductions 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, is recorded as a liability.
The Company’s conversion option derivative liability for the Notes was measured at fair value on the dates of issue and at March 31, 2014 using a binomial lattice 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
|
December 31, 2013
|
March 31, 2014
|
Closing share price
|
$40
|
$54
|
$80
|
$26
|
$50
|
Conversion price
|
$80
|
$80
|
$80
|
$80
|
$80
|
Risk free rate
|
0.80%
|
0.71%
|
1.38%
|
1.75%
|
1.32%
|
Expected volatility
|
110%
|
126%
|
114%
|
117%
|
124%
|
Dividend yield
|
0%
|
0%
|
0%
|
0%
|
0%
|
Expected life
|
5 years
|
4.92 years
|
4.75 years
|
4.25 years
|
4.00 years
|
The fair value of the conversion option derivative liability was $2,317,260 at March 31, 2014 and $1,131,745 at December 31, 2013. The change in the fair value of the conversion option derivative liability of $1,185,515 was recorded as a loss in the consolidated condensed statement of operations for the three month period ended March 31, 2014 and $292,570 was recorded as a gain in the three month period ended March 31, 2013.
Conversion option derivative liability, beginning balance
|
$
|
-
|
Origination of conversion option derivative liability on March 22, 2013
|
|
526,810
|
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
|
Gain on change in fair value of conversion option derivative liability, December 31, 2013
|
|
(1,947,357)
|
Balance, December 31, 2013
|
$
|
1,131,745
|
Loss on change in fair value of conversion option derivative liability, March 31, 2014
|
|
1,185,515
|
Balance, March 31, 2014
|
$
|
2,317,260
|
NOTE 10 - 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.
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 March 31, 2014 and December 31, 2013, the Company had no uncertain tax positions
and 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 $421,222 pre-tax income for the three months ended March 31, 2014 due to the availability of loss carry-forwards. The Company recognized no income tax expense based on its $630,685 pre-tax loss for the three months ended March 31, 2013.
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 March 31, 2014:
United States – Federal
|
2009 – present
|
United States – State
|
2009 – present
|
Canada – Federal
|
2010 – present
|
Canada – Provincial
|
2010 – present
|
F13
NOTE 11 - STOCK OPTIONS AND RESTRICTED STOCK PLAN
Stock-based compensation consists of stock options and restricted stock granted by the Company as follows:
|
|
For the three month periods ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2014
|
|
2013
|
Stock options
|
$
|
-
|
$
|
20,708
|
Restricted stock grants
|
|
45,690
|
|
152,245
|
Total stock-based compensation
|
$
|
45,690
|
$
|
172,953
|
For the three month period ended March 31, 2014, $45,690 (March 31, 2013 - $152,245) has been recorded in consulting and professional fees related to the vesting of restricted stock grants.
As at March 31, 2014, $45,690 (March 31, 2013 - $Nil) amount has been included in shares to be issued on the consolidated condensed statements of changes in stockholders' equity.
STOCK OPTIONS
A summary of option transactions, including those granted pursuant to the terms of certain employment and other agreements follows:
Details
|
Stock Purchase Options
|
Weighted Average Exercise Price
|
Outstanding, January 1, 2013
|
588
|
$1,000
|
Expired
|
(175)
|
(957)
|
Balance, January 1, 2014
|
413
|
$1,010
|
Expired
|
-
|
-
|
Outstanding, March 31, 2014
|
413
|
$1,010
|
At March 31, 2014 and December 31, 2013, the outstanding options have a weighted average remaining life of 16 months and 19 months, respectively. No stock options were granted during the three month periods ended March 31, 2014 and 2013.
During the three month periods ended March 31, 2014 and 2013, $0 and $20,708 respectively, of stock option expense has been recorded in officers’ compensation and directors’ fees in the consolidated condensed statements of operations and comprehensive income / (loss). At March 31, 2014, the Company had outstanding options as follows:
Number of Options
|
Exercise Price
|
Expiration Date
|
300
|
$1,300
|
15-Apr-15
|
113
|
$240
|
30-Jun-16
|
413
|
|
|
RESTRICTED STOCK PLAN
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.
The 2013 Stock Plan authorizes the granting of awards to employees (including officers) and directors of, and consultants to, the Company and its subsidiaries in the form of any combination of non-statutory stock options (“NSOs”), incentive stock options (“ISOs”), stock appreciation rights (“SARs”), shares of restricted stock, restricted stock units (“RSUs”) and performance shares and share units, other stock-based awards in the Committee’s discretion, and dividend equivalent rights (collectively, “Awards”). Under the Plan, the Company may deliver authorized but unissued shares of common stock, treasury shares of common stock, and shares of common stock acquired by the Company for the purposes of the Plan. Each Award will be evidenced by an agreement between the recipient and the Company setting forth the terms of the Award, as determined by the Committee. A maximum of 20,000 shares of
common stock will be available for grants pursuant to Awards under the Plan. The maximum number of shares of common stock with respect to which any individual may be granted Options or Stock Appreciation Rights during any one calendar year is 2,500 shares.
The 2013 Stock Plan is administered by the Compensation Committee. The Compensation Committee has authority, subject to ratification by the Board, to interpret the 2013 Stock Plan, adopt administrative regulations, determine the recipients of Awards, and determine and amend the terms of Awards.
Shares of restricted common stock issued were valued at the quoted market price on the dates of grant. During the three month periods ended March 31, 2014 and 2013, $45,690 and $152,245, respectively, has been recorded in officers’ compensation and directors’ fees in the consolidated condensed statements of operations and comprehensive income / (loss) for the fair value of each grant of restricted common stock. These amounts along with stock option expense have been included in stock-based compensation in the consolidated condensed statements of changes in stockholders equity.
Date of Issuance
|
Number of restricted common stock issued
|
Stockholder’s Equity
|
Note
|
28-Feb-13
|
2,057
|
$152,245
|
(1)
|
31-Dec-13
|
3,620
|
123,345
|
(2)
|
31-Dec-13
|
658
|
17,108
|
(3)
|
Total December 31, 2013
|
6,335
|
$292,698
|
|
Three months ended March 31, 2014
|
-
|
-
|
|
Total March 31, 2014
|
-
|
$ -
|
|
(1) 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. The shares of common stock were issued from treasury not under the Company’s 2010 stock incentive plan. Effective February 28, 2013, the Company issued 2,057 shares of restricted common stock valued at $152,245 from treasury, in accordance with the grant.
(2) Effective December 31, 2013, the Company issued 3,620 shares of restricted common stock valued at $123,345 to seven board members under the 2013 Stock Plan as per the approved board compensation structure.
(3) Effective December 31, 2013, the Company issued 658 shares of restricted common stock valued at $17,108 to two executive officers under the 2013 Stock Plan as per their approved executive compensation arrangements. 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
The following tables show the outstanding equity awards (unvested portion of restricted stock grants) at March 31, 2014.
Vesting date
|
Number of restricted common stock outstanding (unvested)
|
January 12, 2014
|
658 (1)
|
December 31, 2014
|
2,269
|
January 12, 2015
|
658
|
December 31, 2015
|
1,104
|
January 12, 2016
|
658
|
January 12, 2017
|
660
|
Total
|
6,007
|
(1) 658 shares of restricted common stock are fully vested however the issuance of the stock certificate is not complete.
F15
NOTE 12 - RELATED PARTY TRANSACTIONS
AND BALANCES
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. Compensation under the agreement was increased to $430,000 from $300,000 per annum effective August 1, 2013. During the three month periods ended March 31, 2014 and 2013, management fees charged to operations amounted to $107,500 and $75,000, respectively. As at March 31, 2014, $107,500 (December 31, 2013 - $107,500) is included in accrued liabilities.
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. For the three month period ended March 31, 2014, the Company paid $16,179 to Bay City Transfer Agency Registrar Inc., for services rendered and $11,580 to Freeland Venture Resources Inc., for services rendered. For the three month period ended March 31, 2013, the Company paid $45,114 to Bay City Transfer Agency Registrar Inc., for services rendered and $4,320 to Freeland Venture Resources Inc., for services rendered. At March 31, 2014, accounts payable includes $0 (December 31, 2013 - $1,000) due to these entities.
During the three month periods ended March 31, 2014 and 2013 the Company paid Mr. Amersey $9,000 and $7,500, respectively, as fees, for services performed as audit committee chairperson.
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 three month periods ended March 31, 2014 and 2013, the Company paid fees to Dunlap Group amounting to $3,393 and $12,313, respectively. During the three month periods ended March 31, 2014 and 2013 the Company paid Mr. Dunlap $9,000 and $7,500, respectively, as fees, for services performed as compensation committee chairperson.
During three month periods ended March 31, 2014 and 2013 the Company paid each of Mr. John Suydam and Mr. Zohar Loshitzer $5,000 and $0, respectively, as fees, for serving as a director of the Company.
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 11). The issued shares were valued at the quoted market price on the grant date. During the three month periods ended March 31, 2014 and 2013, $0 and $152,245, respectively, has been recorded in officers’ compensation and directors’ fees in the consolidated condensed statements of operations and comprehensive income / (loss) for the fair value of the 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 8). During the three month periods ended March 31, 2014 and 2013, interest expense on the Notes amounted to $128,522 and $3,500, respectively. At March 31, 2014 and December 31, 2013, interest expense accrued on the Notes included in accrued liabilities on the consolidated condensed balance sheets amounted to $256,299 and $127,777, respectively.
NOTE 13 - 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. This 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 this lease is $15,300 per month. Concurrently with the signing of this lease and pursuant to the terms thereof, ESWCT paid to the Lessor an amount equal to $155,600 which is included in prepaid expenses and other assets, this 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 (“Prepaid Rent”). The amount was credited against monthly base rent payable by ESWCT starting January 2014 and each month thereafter. At March 31, 2014 balance of the Prepaid Rent amounted to $56,282.
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. This 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 this lease is $2,182 per month.
The following is a summary of the minimum annual lease payments for the Pennsylvania and California leases:
Year Ending December 31,
|
|
Amount
|
2014 (excluding the three months ended March 31, 2014)
|
$
|
210,189
|
2015
|
|
372,935
|
2016
|
|
279,799
|
2017
|
|
180,990
|
2018
|
|
30,165
|
Total
|
$
|
1,074,078
|
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 filed in the Supreme Court of the State of New York, County of Nassau, on October 18, 2012 for collection of unpaid invoices related to goods delivered to a former distributor.
·
On October 15, 2013, the Company was notified of a revised claim filed in the Ontario, Canada Superior Court of Justice in connection with a dispute with a past vendor of ESW Canada. Effective January 29, 2014, the Company settled this claim. The Company paid the vendor $15,000 as part of the settlement and full discharge of the matter.
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. In 2013, ESW had estimated a one-time charge of $1,000,000 related to its assumption of warranties for legacy Cleaire products in the field and 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 warranty provision have been included in the warranty provision of $1,788,274 as of March 31, 2014 on the consolidated condensed balance sheets (December 31, 2013 - $1,723,769).
F17
For the three months periods ended March 31, 2014 and 2013, the total warranty, service, service travel and installation costs included in cost of revenue was $127,837 and $19,112, respectively.
STOCK ISSUANCE
Effective August 1, 2013, the Board of Directors on the recommendation of the Compensation Committee approved the issuance of 2,350 shares of common stock to the Executive Chairman of the Company for services, contingent upon conversion of the Notes, in order to maintain his percentage ownership interest in the Company.
NOTE 14 – 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.
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. The following tables show the operations and certain assets of the Company’s reportable segments:
For the three month period ended March 31, 2014
|
|
|
MHDD Retrofit
|
|
Air Testing
|
|
Unallocated
|
|
Adjustments and eliminations
|
|
Consolidated
|
Revenue from external customers
|
$
|
6,898,625
|
$
|
96,959
|
$
|
-
|
$
|
-
|
$
|
6,995,584
|
Intersegment revenue
|
$
|
-
|
$
|
252,260
|
$
|
-
|
$
|
(252,260) (1)
|
$
|
-
|
Net income / (loss)
|
$
|
2,521,599
|
$
|
(75,664)
|
$
|
(2,024,713)
|
$
|
-
|
$
|
421,222
|
Property, plant and equipment additions
|
$
|
118,565
|
$
|
415,732
|
$
|
-
|
$
|
-
|
$
|
534,297
|
Equipment under construction reductions
|
$
|
(2,070)
|
$
|
(356,480)
|
$
|
-
|
$
|
-
|
$
|
(358,550)
|
Interest expense
|
$
|
-
|
$
|
2,988
|
$
|
128,522
|
$
|
-
|
$
|
131,510
|
Depreciation
|
$
|
53,681
|
$
|
63,935
|
$
|
-
|
$
|
-
|
$
|
117,616
|
As of March 31, 2014
|
|
|
MHDD Retrofit
|
|
Air Testing
|
|
Unallocated
|
|
Adjustments and eliminations
|
|
Consolidated
|
Total assets
|
$
|
8,096,692
|
$
|
1,653,951
|
$
|
4,696,333
|
$
|
-
|
$
|
14,446,976
|
Equipment under construction
|
$
|
12,960
|
$
|
59,512
|
$
|
-
|
$
|
-
|
$
|
72,472
|
Property, plant and equipment
|
$
|
610,969
|
$
|
1,379,893
|
$
|
-
|
$
|
-
|
$
|
1,990,862
|
Accounts receivable
|
$
|
1,923,918
|
$
|
91,300
|
$
|
-
|
$
|
-
|
$
|
2,015,218
|
Inventories
|
$
|
3,789,230
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
3,789,230
|
For the three month periods ended March 31, 2013
|
|
|
MHDD Retrofit
|
|
Air Testing
|
|
Unallocated
|
|
Adjustments and eliminations
|
|
Consolidated
|
Revenue from external customers
|
$
|
1,239,128
|
$
|
216,714
|
$
|
-
|
$
|
-
|
$
|
1,455,842
|
Intersegment revenue
|
$
|
-
|
$
|
23,013
|
$
|
-
|
$
|
(23,013) (1)
|
$
|
-
|
Net (loss)
|
$
|
(177,480)
|
$
|
(196,363)
|
$
|
(256,842)
|
$
|
-
|
$
|
(630,685)
|
Property, plant and equipment additions
|
$
|
-
|
$
|
41,991
|
$
|
-
|
$
|
-
|
$
|
41,991
|
Equipment under construction reductions
|
$
|
-
|
$
|
(21,488)
|
$
|
-
|
$
|
-
|
$
|
(21,488)
|
Interest expense
|
$
|
-
|
$
|
3,506
|
$
|
3,500
|
$
|
-
|
$
|
7,006
|
Depreciation
|
$
|
24,141
|
$
|
146,460
|
$
|
-
|
$
|
-
|
$
|
170,601
|
As of December 31, 2013
|
|
|
MHDD Retrofit
|
|
Air Testing
|
|
Unallocated
|
|
Adjustments and eliminations
|
|
Consolidated
|
Total assets
|
$
|
7,202,958
|
$
|
1,557,127
|
$
|
3,654,927
|
$
|
-
|
$
|
12,415,012
|
Equipment under construction
|
$
|
15,030
|
$
|
415,992
|
$
|
-
|
$
|
-
|
$
|
431,022
|
Property, plant and equipment
|
$
|
546,086
|
$
|
1,028,095
|
$
|
-
|
$
|
-
|
$
|
1,574,181
|
Accounts receivable
|
$
|
1,833,950
|
$
|
54,561
|
$
|
-
|
$
|
-
|
$
|
1,888,511
|
Inventories
|
$
|
3,693,367
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
3,693,367
|
(1) There amounts represent revenues earned from services performed for the MHDD Retrofit segment and its profits, they are eliminated upon consolidation.
All of the Company’s revenue for the three month periods ended March 31, 2014 and 2013 were derived from the United States. All property, plant and equipment (including property, plant and equipment under construction) were located in the United States at March 31, 2014 and December 31, 2013.
NOTE 15 –
EARNINGS / (LOSS) PER SHARE
Potential common shares of 413 related to ESW's outstanding stock options and potential common shares of 6,007 related to ESW’s restricted stock grants were excluded from the computation of diluted loss per share for the three month period ended March 31, 2014 because the inclusion of these shares would be anti-dilutive. Potential common shares of 62,500 based on an exercise price of $80 per share related to the senior secured convertible promissory notes and additional 5,126 shares issuable for interest or should the conversion option derivative liability be triggered by a future financing, have also not been included in the computation of diluted earnings per share for the three month period ended March 31, 2014 as their effect would be anti-dilutive.
Potential common shares of 538 related to ESW's outstanding stock options were excluded from the computation of diluted loss per share for the three month period ended March 31, 2013 because the inclusion of these shares would be anti-dilutive. Potential common shares of 17,500 based on an exercise price of $80 per share related to the senior secured convertible promissory notes and additional
potential shares issuable should the holders elect to convert interest or should the conversion option derivative liability be triggered by a future financing, have also not been included in the computation of diluted loss per share for the three month period ended March 31, 2013 as their effect would be anti-dilutive.
NOTE 16 - 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.
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.
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. Three of its customers accounted for 15.8%, 14.6% and 13.7%, respectively, of the Company's revenue during the three month period ended March 31, 2014 and 24.5%, 12.7% and 9.8%, respectively, of its accounts receivable as of March 31, 2014.
Three of its customers accounted for 11.3%, 10.0% and 8.3%, respectively, of the Company's revenue during the three month period ended March 31, 2013 and 18.8%, 15.9% and 10.1%, respectively, of its accounts receivable as of March 31, 2013.
For the three month period ended March 31, 2014, the Company purchased approximately 12.28% and 10.4% of its inventory from two vendors. For the three month period ended March 31, 2013, the Company purchased approximately 23.4% and 12.0% of its inventory from two vendors.
The accounts payable to these vendors aggregated $63,844 and $506,658 as of March 31, 2014 and 2013.
NOTE 17 - SUBSEQUENT EVENTS
Effective April 1, 2014 the Company elected to pay and paid the second interest payments on the Senior Secured Convertible Promissory Notes in the form of Common stock, as per the terms of the Notes. The Company issued 5,126 shares as interest payment to four note holders for interest accrued up to March 31, 2014 totaling $256,299. The conversion price of the shares was $50 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 Notes, up to two interest payments could 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.
On May 9, 2014, we completed the rights offering to our shareholders described in Note 8, and our shareholders purchased $122,486 principal amount of New Notes in the aggregate.
F20