Attached files
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended - September 30, 2009.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-30392
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
(Exact name of Company as specified in its charter)
Florida 13-4172059
------------------------------ ------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
335 Connie Crescent.
Concord, Ontario, Canada, L4K 5R2
(Address of principal
executive offices, including postal code.)
(905) 695-4142
(Registrant's telephone number, including area code)
COMMON STOCK, $0.001 PAR VALUE
(Title of class)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Company was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). YES [ ] NO [ ] (Not yet applicable to issuer)
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | | Accelerated Filer | | Non-Accelerated Filer | |
Smaller reporting company [x]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
There were 73,823,851 shares of the registrant's Common Stock outstanding as of
October 29, 2009
FORM 10-Q
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
TABLE OF CONTENTS
PAGE #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets as of September 30, 2009 F2
(unaudited) and December 31, 2008
Consolidated Condensed Statements of Operations and Comprehensive F3
Loss for the Nine and Three Month Periods Ended September 30, 2009
and 2008 (unaudited)
Consolidated Condensed Statements of Changes in Stockholders Equity F4
(Deficit)for the Nine Months Ended September 30, 2009 (unaudited)
Consolidated Condensed Statements of Cash Flows
for the Nine Months F5 Ended September 30, 2009
and 2008 (unaudited)
Notes to Consolidated Condensed Financial Statements (unaudited)F6 - F15
Item 2. Management's Discussion And Analysis Of Financial Condition And 3
Results Of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 14
Item 4. Controls And Procedures 15
PART II. OTHER INFORMATION
Item 1A. Risk Factors 16
Item 5. Other Information. 16
Item 6. Exhibits. 16
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2009 2008
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents (Note 4) $ 878,656 $ 2,247,623
Accounts receivable, net of allowance 867,481 103,728
for doubtful accounts of $NIL (2008 - $1,901) (Note 2)
Inventory (Note 5) 1,110,043 723,812
Prepaid expenses and sundry assets 267,408 313,936
------------ ------------
Total current assets 3,123,588 3,389,099
Property, plant and equipment under construction (Note 6) 149,497 171,445
Property, plant and equipment, net of accumulated
depreciation of $ 4,350,754 2,918,902 3,324,364
(2008 - $3,530,182) (Note 6)
Patents and trademarks, net of accumulated
amortization of $1,848,179 282,543 440,734
(2008 - $1,688,157) (Note 2)
------------ ------------
$ 6,474,530 $ 7,325,642
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 540,854 $ 407,737
Accrued liabilities 971,790 258,155
Bank loan (Note 7) 571,839 77,168
Customer deposits 553,158 12,540
Redeemable class A special shares (Note 8) 453,900 453,900
Current portion of capital lease obligation (Note 14) 9,934 12,001
------------ ------------
Total current liabilities 3,101,475 1,221,501
------------ ------------
Long Term Liabilities
Convertible debentures net of deferred costs 10,309,596 8,943,581
of $41,484 (2008 - $56,419) (Note 9)
Capital lease obligation (Note 14) 12,881 19,005
------------ ------------
Total long term liabilities 10,322,477 8,962,586
------------ ------------
Total liabilities 13,423,952 10,184,087
------------ ------------
Commitments and Contingencies (Note 14)
Stockholders' Equity (Note 11)(Note 12)
Common stock, $0.001 par value, 125,000,000
shares authorized; 73,823,851 shares
issued and outstanding 73,822 72,972
Additional paid-in capital 26,083,635 25,403,485
Accumulated other comprehensive income 491,760 251,526
Accumulated deficit (33,598,639) (28,586,428)
------------ ------------
Total stockholders' deficit (6,949,422) (2,858,445)
------------ ------------
$ 6,474,530 $ 7,325,642
============ ============
The accompanying notes are an integral part of these financial statements
F2
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30,
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30 THREE MONTHS ENDED SEPTEMBER 30
2009 2008 2009 2008
------------ ------------ ------------ ------------
Revenue
Net sales $ 903,670 $ 584,261 $ 448,984 $ 445,775
Cost of sales 563,240 424,283 321,281 319,639
------------ ------------ ------------ ------------
Gross profit 340,430 159,978 127,703 126,136
------------ ------------ ------------ ------------
Operating expenses
Marketing, office and general costs 2,496,647 2,852,191 839,291 836,498
Research and development costs 773,255 1,044,215 127,001 200,923
Officers' compensation and directors fees 503,625 444,478 171,234 148,166
Consulting and professional fees 100,591 107,226 38,459 17,253
Foreign exchange (gain) / loss (17,687) (65,372) 5,778 (7,926)
Depreciation and amortization 854,435 853,353 306,794 283,233
------------ ------------ ------------ ------------
4,710,866 5,236,091 1,488,557 1,478,147
------------ ------------ ------------ ------------
Loss from operations (4,370,436) (5,076,113) (1,360,854) (1,352,011)
Interest on long term debt (620,518) -- (215,518) --
Amortization of deferred costs (14,934) -- (4,977) --
Long term debt accretion (7,080) -- (7,080) --
Interest on notes payable to related party -- (263,764) -- (101,774)
Interest income 757 20,617 18 584
------------ ------------ ------------ ------------
Net loss (5,012,211) (5,319,260) (1,588,411) (1,453,201)
------------ ------------ ------------ ------------
Other comprehensive gain/(loss):
Foreign currency translation of Canadian subsidiaries 240,234 (108,002) 127,672 (26,670)
------------ ------------ ------------ ------------
Net comprehensive loss $ (4,771,977) $ (5,427,262) $ (1,460,739) $ (1,479,871)
------------ ------------ ------------ ------------
Net loss per share (Basic and diluted) $ (0.07) $ (0.07) $ (0.02) $ (0.02)
============ ============ ============ ============
Weighted average number of shares outstanding 73,006,724 72,973,851 73,039,236 72,973,851
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
F3
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2009
(UNAUDITED)
ACCUMULATED
ADDITIONAL COMPREHENSIVE
COMMON STOCK PAID-IN OTHER ACCUMULATED
SHARES AMOUNT CAPITAL INCOME DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2007 72,973,851 $ 72,972 $ 25,665,761 $ 450,318 $(21,495,176) $ 4,693,875
Net loss -- -- -- -- (7,091,252) (7,091,252)
Stock-based compensation -- -- 13,646 -- -- 13,646
Loss on extinguishment of debt
with related party -- -- (275,922) -- -- (275,922)
Foreign currency translation of
Canadian subsidiaries -- -- -- (198,792) -- (198,792)
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2008 72,973,851 $ 72,972 $ 25,403,485 $ 251,526 $(28,586,428) $ (2,858,445)
------------ ------------ ------------ ------------ ------------ ------------
Net loss -- -- -- -- (5,012,211) (5,012,211)
Common stock issued from exercise
of options 850,000 850 424,150 -- -- 425,000
Fair value of convertible debentures 256,000 256,000
Foreign currency translation of
Canadian subsidiaries -- -- -- 240,234 -- 240,234
------------ ------------ ------------ ------------ ------------ ------------
September 30, 2009 73,823,851 $ 73,822 $ 26,083,635 $ 491,760 $(33,598,639) $ (6,949,422)
------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements
F4
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30,
(UNAUDITED)
2009 2008
----------- -----------
Net Loss $(5,012,211) $(5,319,260)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property, plant and equipment 767,693 813,466
Amortization of patents and trademarks 159,583 159,807
Provision for uncollectible accounts 1,901 19,410
Interest on long term debt 620,518 --
Interest on notes to related party -- 263,764
Amortization of deferred costs 14,934 --
Long term debt accretion 7,080 --
Loss on disposal of property, plant and equipment 1,858 --
Stock based compensation -- 13,646
Write down of Inventory -- 28,933
----------- -----------
1,573,567 1,299,026
----------- -----------
Increase (decrease) in cash flows from operating
activities resulting from changes in:
Accounts receivable (701,428) (224,550)
Inventory (287,330) 2,206
Prepaid expenses and sundry assets 63,000 (36,483)
Accounts payable and accrued liabilities 185,032 545,914
Customer deposits 499,257 3,500
----------- -----------
(241,469) 290,587
----------- -----------
Net cash used in operating activities (3,680,113) (3,729,647)
----------- -----------
Investing activities:
Proceeds from sale of property, plant and equipment 305 --
Acquisition of property, plant and equipment (138,933) (285,746)
Property, plant and equipment under construction -- (113,767)
Increase in patents and trademarks (1,108) (4,618)
----------- -----------
Net cash used in investing activities (139,736) (404,131)
----------- -----------
Financing activities:
Convertible debentures 1,600,000 --
Bank loan 623,318 313,430
Repayment of bank loan (180,270) --
Issuance of common stock 425,000 --
Repayment of capital lease obligation (8,549) (8,611)
----------- -----------
Net cash provided by financing activities 2,459,499 1,372,819
----------- -----------
Net decrease in cash and equivalents (1,360,350) (2,760,959)
Foreign exchange gain (loss) on foreign operations (8,617) (108,002)
Cash and cash equivalents, beginning of year 2,247,623 2,891,088
----------- -----------
Cash and cash equivalents, end of period $ 878,656 $ 22,127
=========== ===========
Supplemental disclosures:
Interest received $ 757 $ 20,617
=========== ===========
The accompanying notes are an integral part of these financial statements
F5
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
Environmental Solutions Worldwide Inc. (the "Company" or "ESW") through its
wholly owned subsidiaries is engaged in the design, development, manufacturing
and sales of environmental technologies and testing services with its primary
focus on the international on-road and off-road diesel market. ESW currently
manufactures and markets a line of catalytic emission control and enabling
technologies for a number of applications.
The unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP"), which contemplates continuation of the company as a going
concern. The Company, however, has sustained operating losses and presently
lacks a sufficient source of commercial income, which creates uncertainty about
the Company's ability to continue as a going concern. The Company's ability to
continue operations as a going concern and to realize its assets and to
discharge its liabilities is dependent upon obtaining additional financing
sufficient for continued operations as well as the achievement and maintenance
of a profitable level of operations. Management believes the current business
plan if successfully implemented along with the necessary additional finance may
provide an opportunity for the Company to achieve profitable operations and
allow it to continue as a going concern.
The Company has incurred significant losses to date. As of September 30, 2009,
the Company has an accumulated deficit of $33,598,639 there is no assurance that
the Company will be successful in achieving sufficient cash flow from
operations. The ability of the Company to continue as going concern is dependent
upon the Company obtaining regulatory approvals for its new line of products and
the company's ability to achieve and maintain a profitable level of operations.
During the current year the company has expensed significant resources and
completed the development of products to meet the 2009 emission standards
enforced by the regulators. The Company has received most of the key regulatory
approvals on its products, the delay in achieving regulatory approvals has
impacted the ability of the Company to generate sufficient cash flow from its
operations, the Company may be required to seek additional financing or limit
operations in certain areas to fund its continuing operations and meet its
obligations as they come due. The company is now pursuing regulatory approval of
its Level I, Level II, locomotive and marine products.
These unaudited condensed 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 for a reasonable
period of time.
These statements have not been audited and should be read in conjunction with
the financial statements and the notes thereto included in ESW's Annual Report
on Forms 10-K, and amendments thereto, as filed with the United States
Securities and Exchange Commission for the year ended December 31, 2008. The
methods and policies set forth in the year-end audited consolidated financial
statements are followed in these interim consolidated financial statements.
All adjustments considered necessary for fair presentation and of a normal
recurring nature have been included in these interim consolidated financial
statements. Revenues and operating results for the nine month period ended
September 30, 2009 are not necessarily indicative of the results to be expected
for the full year.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, ESW America Inc., ESW Technologies Inc., ESW
Canada Inc. and BBL Technologies Inc. All inter-company transactions and
balances have been eliminated on consolidation. Amounts in the consolidated
financial statements are expressed in U.S. dollars.
ESTIMATES
The preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reported period. Actual results could differ from
those estimates. Significant estimates include amounts for impairment of
property plant and equipment, intangible assets, share based compensation,
inventory and accounts receivable exposures.
CONCENTRATION OF CREDIT RISK
The Company's cash balances are maintained in various banks in Canada and the
United States. Deposits held in banks in the United States are insured up to
$250,000 for each bank by the Federal Deposit Insurance Corporation, in Canada
deposits are insured up to $100,000 for each bank by Canada Deposit Insurance
Corporation. The balances at times may exceed these limits.
F6
Accounts Receivable and Concentrations of Credit Risk: The Company performs
on-going credit evaluations of its customer's financial condition and generally
does not require collateral from its customers. Three of ESW's customers
accounted for 47%, 14%, and 13%, respectively of the Company's revenue for the
nine month period ended September 30, 2009 and 62%, 13%, and 6%, respectively of
its accounts receivable as at September 30, 2009. Three of its customers
accounted for 32%, 29%, and 15%, respectively of the Company's revenue in the
fiscal year 2008 and 32%, 31%, and 0%, respectively of its accounts receivable
as at December 31, 2008.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated credit risk by performing credit checks
and actively pursuing past due accounts. An allowance for doubtful accounts is
estimated and recorded based on management's assessment of the credit history
with the customer and current relationships with them. On this basis management
has determined that a reserve of $ nil was appropriate as at September 30, 2009
and that a reserve of $1,901 was appropriate as at December 31, 2008.
INVENTORY
Inventory is stated at the lower of cost (first-in first-out) or market.
Inventory is periodically reviewed for use and obsolescence, and adjusted as
necessary. Inventory consists of raw materials, work in progress and finished
goods.
PROPERTY, PLANT AND EQUIPMENT UNDER CONSTRUCTION
The Company capitalizes at cost, customized equipment built to be used in the
future day to day operations. Once complete and available for use, the cost for
accounting purposes is transferred to property, plant and equipment, where
normal depreciation rates apply.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is computed on
a straight-line basis over the estimated useful lives of the assets, generally 5
to 7 years. Maintenance and repairs are charged to operations as incurred.
Significant renewals and betterments are capitalized.
PATENTS AND TRADEMARKS
Patents and trademarks consist primarily of the costs incurred to acquire them
from an independent third party. The Statement of Financial Accounting Standards
("SFAS") No. 142 "Goodwill and Other Intangible Assets," which was primarily
codified into Topic 350-20, Goodwill, 350-30, Intangibles other than goodwill in
the Accounting Standards Codification ("ASC") requires intangible assets with a
finite life be tested for impairment whenever events or circumstances indicate
that a carrying amount of an asset (or asset group) may not be recoverable. An
impairment loss would be recognized when the carrying amount of an asset exceeds
the estimated discounted cash flow used in determining the fair value of the
asset. ESW conducted a test for impairment in the fourth quarter of 2008 and
found no impairment.
Patents and trademarks are being amortized on a straight-line basis over their
estimated life of ten years. Amortization expense for the nine month period
ended September 30, 2009 and 2008 were $159,625 and $159,807 respectively.
REVENUE RECOGNITION
The Company derives revenue primarily from the sale of its catalytic products.
In accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition
in Financial Statements", which was primarily codified into Topic 605 Revenue
Recognition SEC Staff Accounting Bulletin Topic 13 in the ASC, revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the amount is fixed and determinable, risk of ownership has passed to
the customer and collection of the resulting receivable is reasonably assured.
The Company also derives revenue (less than 8.2% of total revenue) from
providing air testing and environmental certification services. Revenues from
these services are recognized upon performance.
RESEARCH AND DEVELOPMENT
The Company is engaged in research and development work. Research and
development costs, are charged as operating expense of the Company as incurred.
Any grant money received for research and development work will be used to
offset these expenditures. For the nine month period ended September 30, 2009
and 2008 the Company expensed $773,255 and $1,044,215 respectively towards
research and development costs. For the nine month period ended September 30,
2009 and 2008, grant money amounted to $94,356 and $224,430 respectively.
F7
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.
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2008, the FASB issued new guidance on disclosures about derivative
instruments and hedging activities. The new guidance expands existing quarterly
disclosure requirements about an entity's derivative instruments and hedging
activities. The new guidance is effective for fiscal years beginning after
November 15, 2008. All derivatives are recorded on the balance sheet as assets
or liabilities and measured at fair value. For derivatives designated as hedges
of the fair value of assets or liabilities, the changes in fair values of both
the derivatives and the hedged items are recorded in current earnings. For
derivatives designated as cash flow hedges, the effective portion of the changes
in fair value of the derivatives are recorded in Accumulated Other Comprehensive
Income (Loss) and subsequently recognized in earnings when the hedged items
impact earnings. Cash flows of such derivative financial instruments are
classified consistent with the underlying hedged item. The Company currently
does not have any derivative financial instruments subject to accounting or
disclosure under this standard; therefore, the adoption of this standard does
not have a significant effect on the Company's consolidated statement of
financial position, results of operations or cash flows.
In May 2008, the FASB issued new guidance on the hierarchy of generally accepted
accounting principles. The new standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles
(GAAP) for nongovernmental entities. This standard became effective November 15,
2008. Adoption of this standard does not have a significant impact on Company's
results of operations or financial position.
In June 2008, the FASB issued a new guidance on determining whether instruments
granted in share-based payment transactions are participating securities.
Securities participating in dividends with common stock according to a formula
are participating securities. This guidance determined that unvested shares of
restricted stock and stock units with nonforfeitable rights to dividends are
participating securities. Participating securities require the "two-class"
method to be used to calculate basic earnings per share. This method lowers
basic earnings per common share. This guidance takes effect in the first quarter
of fiscal years beginning after December 15, 2008 and will be applied
retrospectively for all periods presented. It was effective for the Company on
January 1, 2009. The adoption of this guidance does not have a significant
effect on the Company's consolidated financial statements.
In June 2008, the FASB ratified the consensus reached on determining whether an
instrument (or embedded feature) is indexed to an entity's own stock. This
consensus clarifies the determination of whether an instrument (or an embedded
feature) is indexed to an entity's own stock, which would qualify as a scope
exception under the standard accounting for derivative instruments and hedging
activities. This consensus is effective for financial statements issued for
fiscal years beginning after December 15, 2008. It was effective for the Company
on January 1, 2009. The adoption of this consensus does not have a significant
effect on the company's consolidated financial statements.
In April 2009, the FASB issued a staff position providing additional guidance
on factors to consider in estimating fair value when there has been a
significant decrease in market activity for a financial asset. The guidance was
effective for interim and annual periods ending after June 15, 2009. The
adoption of this guidance does not have a significant effect on the Company's
consolidated financial statements.
In April 2009, the FASB issued a staff position which changes the method for
determining whether an other-than-temporary impairment exists for debt
securities and the amount of the impairment to be recorded in earnings. The
guidance is effective for interim and annual periods ending after June 15, 2009.
The adoption of this guidance does not have a significant effect on the
Company's consolidated financial statements.
In April 2009, the FASB issued a staff position requiring fair value disclosures
in both interim as well as annual financial statements in order to provide more
timely information about the effects of current market conditions on financial
instruments. The guidance is effective for interim and annual periods ending
after June 15, 2009. The adoption of this guidance does not have a significant
effect on the Company's consolidated financial statements.
In May 2009, the FASB issued new guidance on subsequent events. This standard is
intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether that date represents the date the financial statements
were issued or were available to be issued. This disclosure should alert all
users of financial statements that an entity has not evaluated subsequent events
after that date in the set of financial statements being presented. This
standard is effective for interim and annual periods ending after June 15, 2009.
The adoption of this standard had no significant effect on the Company's
financial condition or consolidated results of operations.
F8
In June 2009, the FASB issued a new guidance accounting for transfer of
financial assets - an amendment of a previous standard. This standard requires
that a transferor recognize and initially measure at fair value all assets
obtained (including a transferor's beneficial interest) and liabilities incurred
as a result of a transfer of financial assets accounted for as a sale. This
standard must be applied as of the beginning of each reporting entity's first
annual reporting period that begins after November 15, 2009. The Company is
currently assessing the impact, if any, of this standard on our consolidated
financial statements.
In June 2009, the FASB issued an amendment to the accounting and disclosure
requirements for the consolidation of variable interest entities. The guidance
affects the overall consolidation analysis and requires enhanced disclosures on
involvement with variable interest entities. The guidance is effective for
fiscal years beginning after November 15, 2009. The Company is currently
assessing the impact of the guidance on its consolidated financial position and
results of operations.
In June 2009, the FASB issued new guidance on accounting standards codification
and the hierarchy of generally accepted accounting principles. The FASB
ACCOUNTING STANDARDS CODIFICATION (TM) (Codification) will become the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. This Statement is effective
for financial statements issued for interim and annual periods ending after
September 15, 2009.
In September 2009, the FASB issued additional guidance on measuring the fair
value of liabilities effective for the first reporting period (including interim
periods) beginning after issuance. The Company is currently assessing the impact
on its consolidated financial position and results of operations.
In September 2009, the FASB issued additional guidance on measuring fair value
of certain alternative investments effective for the first reporting period
(including interim periods) ending after December 15, 2009. The Company is
currently assessing the impact on its consolidated financial position and
results of operations.
In October 2009, the FASB issued amendments to the accounting and disclosure
for revenue recognition. These amendments, effective for fiscal years beginning
on or after June 15, 2010 (early adoption is permitted), modify the criteria for
recognizing revenue in multiple element arrangements and the scope of what
constitutes a non-software deliverable. The Company is currently assessing the
impact on its consolidated financial position and results of operations.
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments purchased
with an original or remaining maturity of 90 days or less at the date of
purchase.
NOTE 5 - INVENTORY
Inventory is summarized as follows:
SEPTEMBER 30, DECEMBER 31,
INVENTORY 2009 2008
---------------------------------------------
Raw materials $ 524,298 $ 503,129
Work-In-Process 562,698 201,173
Finished goods 23,047 19,510
---------------------------------------------
TOTAL $ 1,110,043 $ 723,812
=============================================
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
CLASSIFICATION 2009 2008
-----------------------------------------------------------
Plant, machinery and equipment $ 5,471,416 $ 5,126,108
Office equipment 321,023 294,250
Furniture and fixtures 447,532 424,426
Vehicles 17,842 12,014
Leasehold improvements 1,011,843 997,748
--------------------------
$ 7,269,656 $ 6,854,546
Less: accumulated depreciation (4,350,754) (3,530,182)
--------------------------
$ 2,918,902 $ 3,324,364
--------------------------
At September 30, 2009 and December 31, 2008, the Company had $149,497 and
$171,445, respectively, of customized equipment under construction.
F9
The office equipment above includes $16,499 in assets under capital lease with a
corresponding accumulated depreciation of $14,704 for the period ended September
30, 2009. As at year ended December 31, 2008 office equipment included $17,665
in assets under capital lease with a corresponding depreciation of $11,668.
The plant, machinery and equipment above include $35,626 in assets under capital
lease with a corresponding accumulated depreciation of $16,627 for the period
ended September 30, 2009. As at year ended December 31, 2008, plant, machinery
and equipment included $33,957 in assets under capital lease with a
corresponding accumulated depreciation of $11,539.
NOTE 7 - BANK LOAN
In 2007, ESW's subsidiary, ESW Canada entered into a $2.5 Million revolving
credit facility with Royal Bank of Canada ("RBC"), to finance orders on hand.
Effective September 2, 2008, ESW Canada completed its negotiations with Royal
Bank of Canada and entered into an amendment to the secured commercial loan
agreement. The amended agreement extended the term of the Agreement from June
30, 2008 through June 30, 2009. In addition to extending the term of the
Agreement, certain financial covenants were also amended. The amended
arrangement provided for a revolving facility available by way of a series of
term loans of up to $750,000 to finance future production orders. Effective
August 21, 2009, the term of the secured commercial loan agreement with RBC was
extended through to April 30, 2010. The Credit Facility is guaranteed by the
Company and its subsidiary ESW Canada through the pledge of their assets to RBC.
The facility has been guaranteed to the bank under Export Development Canada
("EDC") pre-shipment financing program. Borrowings under the revolving credit
agreement bear interest at 1.5% above the bank's prime rate of interest.
Repayments of any loans are required no later than one year from the date of the
advancement of that loan. Obligations under the revolving credit agreement are
collateralized by a first-priority lien on the assets of the Company and its
subsidiary ESW Canada, Inc. including, accounts receivable, inventory, equipment
and other tangible and intangible property, including the capital stock of all
direct subsidiaries.
For the period ended September 30, 2009, $571,839 was owed under the
aforementioned facility. As at December 31, 2008, $77,168 was owed under the
facility.
NOTE 8 - REDEEMABLE CLASS A SPECIAL SHARES
700,000 Class A special shares $ 453,900 (based on the historical
Authorized, issued, and exchange rate at the time of
outstanding. issuance.)
The redeemable Class A special shares are issued by the Company's wholly-owned
subsidiary BBL Technologies, Inc. ("BBL") without par value, and are redeemable
on demand by the holder of the shares, which is a private Ontario Corporation,
at $700,000 Canadian Dollars (which translates to $653,778 at September 30,
2009). As the redeemable Class A special shares were issued by the Company's
wholly-owned subsidiary BBL, the maximum value upon which the Company is liable
is the net book value of BBL. As at September 30, 2009 BBL has an accumulated
deficit of $1,185,714 USD ($1,839,279 Canadian dollars as at September 30, 2009)
and therefore, the holder would be unable to redeem the redeemable Class A
special shares at their ascribed value.
NOTE 9 - CONVERTIBLE DEBENTURES
On August 28, 2009, the Company completed a transaction whereby it issued $1.6
million of 9% convertible debentures (the " 2009 Debentures") to six accredited
investors. Of the $1.6 million received by the Company, $500,000 was received
from a director of the Company through the exchange of a $300,000 unsecured 9%
subordinated demand short term loan previously provided to the Company on August
11, 2009 and an additional $200,000 investment made by the director in the
offering. The 2009 Debentures are for a term of three (3) years and are
convertible into shares of the Company's common stock at the option of the
holder by dividing the principal amount of the 2009 Debenture to be converted by
$0.50. The 2009 Debentures earn interest at a rate of 9% per annum payable in
cash or in shares of the Company's common stock at the option of the holder. If
the Holder elects to receive interest in shares of common stock, the number of
shares of common stock to be issued for interest shall be determined by dividing
accrued interest by $0.50. Subject to the holder's right to convert, the Company
has the right to redeem the 2009 Debentures at a price equal to one hundred and
ten percent (110%) multiplied by the then outstanding principal amount plus
unpaid interest to the date of redemption. Upon maturity, the debenture and
interest is payable in cash or common stock at the option of the Holder. The
2009 Debentures contain customary price adjustment protections.
At the time the 2009 Debentures were issued, the Company recorded a debt
discount for a beneficial conversion feature in the amount of $256,000. The debt
discount is the aggregate intrinsic value calculated as the difference between
the market price of the Company's share of stock on August 28, 2009 and the
conversion price of the 2009 Debentures. The debt discount is being accreted
over the three (3) year life of the debentures using the effective yield method.
The effective yield on the debentures is 15.52%. As of September 30, 2009,
interest in the amount of $13,019 has accrued in accounts payable and accrued
liabilities.
F10
ACCRETION OF THE DISCOUNT:
Face value of convertible debenture $ 1,600,000
Less: Beneficial conversion feature (256,000)
-----------
Book value upon issuance 1,344,000
Accretion of the debt discount 7,080
-----------
September 30, 2009 $ 1,351,080
-----------
On November 3, 2008, the Company completed a transaction whereby it issued $6.0
million of 9% convertible debentures (the "Debentures") to six accredited
investors. The Debentures are for a term of three (3) years and are convertible
into shares of the Company's common stock at the option of the holder at any
time six (6) months after the date of issuance of the Debenture by dividing the
principal amount of the Debenture to be converted by $0.25. The Debentures earn
interest at a rate of 9% per annum payable in cash or in shares of the Company's
common stock at the option of the holder. If the Holder elects to receive
interest in shares of common stock, the number of shares of common stock to be
issued for interest shall be determined by dividing accrued interest by $0.25.
Subject to the holder's right to convert, the Company has the right to redeem
the Debentures at a price equal to one hundred and ten percent (110%) multiplied
by the then outstanding principal amount plus unpaid interest to the date of
redemption. Upon maturity, the debenture and interest is payable in cash or
common stock at the option of the Holder. The Debentures contain customary price
adjustment protections.
From the proceeds of the November 2008 debentures, the Company repaid
$2,200,000, the principal portion only, of a previously issued Consolidated Note
in the amount of $2,308,148 to a company controlled by a trust to which a
director and shareholder of the Company is the beneficiary. The debt holder
agreed to have the remaining amount of $433,923, due under the Consolidated
Note, applied to a subscription of a Debenture under the November 3, 2008
offering.
Concurrently, the Company repaid a Consolidated Subordinated Note that it had
previously issued to a debt holder who is a director and shareholder of the
Company, in the principal amount of $1,002,589. The debt holder has agreed to
have the full amount of principal and accumulated interest, in the amount of
$1,158,024 due under the Consolidated Subordinated Note, applied to a
subscription of a Debenture under the offering.
Additionally the Company's $1.5 million credit facility also provided by the
same debt holder, from which the Company had drawn down the sum of $1,103,000 as
of November 3, 2008, was also satisfied by way of issuance of Debentures under
the November 3, 2008 offering. With the agreement to settle all the notes
previously issued by the Debt holder is subscribing to an aggregate of
$2,566,077 of Debentures under the offering.
As at September 30, 2009, total Convertible Debentures amounted to $10,309,596
net of deferred costs of $41,484 and debt discount of $248,920, with
corresponding accrued interest of $746,272. As at December 31, 2008, the
Convertible Debenture amounted to $8,943,581 net of deferred costs of $56,419,
with corresponding accrued interest of $125,753.
LEGAL FEES RELATED TO CONVERTIBLE DEBENTURES
The Company has recorded a deferred cost asset of $59,738 for legal fees paid in
relation to the issuance of the November 2008 Convertible Debentures. The
deferred costs will be amortized over the term of the November 2008 Convertible
Debenture. As at September 30, 2009, the deferred cost asset and related
amortization was $41,484 and $14,934 respectively. As at December 31, 2008, the
deferred cost asset and related amortization was $56,419 and $3,319
respectively. Legal fees have been presented net against the related instrument.
NOTE 10- INCOME TAXES
As at September 30, 2009, there are tax loss carry forwards for Federal income
tax purposes of approximately $23,491,499 available to offset future taxable
income in the United States. The tax loss carry forwards expire in various years
through 2027. The Company does not expect to incur a Federal income tax
liability in the foreseeable future. Accordingly, a valuation allowance for the
full amount of the related deferred tax asset of approximately $8,222,025 has
been established until realizations of the tax benefit from the loss carry
forwards are more likely than not.
Additionally, as at September 30, 2009, the Company's two wholly owned Canadian
subsidiaries had non-capital tax loss carry forwards of approximately $6,424,434
to be used, in future periods, to offset taxable income. The loss carry forwards
expire in various years through 2029 The deferred tax asset of approximately
$2,152,185 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.
F11
For the nine month period ended September 30,
2009 2008
-----------------------------
Statutory tax rate:
U.S. 35.0% 35.0%
Foreign 33.5% 36.1%
Income (loss) before income taxes:
U.S. $ (3,089,746) $ (2,741,368)
Foreign (1,922,465) (2,577,892)
-----------------------------
$ (5,012,211) $ (5,319,260)
-----------------------------
Expected income tax recovery $ (1,725,437) $ (1,890,098)
Differences in income tax resulting from:
Depreciation (Foreign operations) $ 23,124 $ (3,593)
Stock Based Compensation $ -- $ 4,776
Accrued interest on loans $ 217,181 $ --
-----------------------------
$ (1,485,132) $ (1,888,915)
Benefit of losses not recognized $ 1,485,132 $ 1,888,915
-----------------------------
Income tax provision (recovery) per financial statements $ -- $ --
-----------------------------
Deferred income tax assets and liabilities consist of the following difference:
As at September 30,
2009 2008
-----------------------------
Assets
Capital Assets - Tax Basis (Foreign operations only) $ 1,410,069 $ 1,995,508
Capital Assets - Book Value (Foreign operations only) (1,130,916) (1,710,939)
-----------------------------
Net Capital Assets/ (Liabilities) $ 279,153 $ 284,569
Tax loss carry forwards 29,915,933 23,633,045
-----------------------------
Net temporary differences (foreign operations only) $ 30,195,086 $ 23,917,614
Statutory tax rate:
U.S. 35.0% 35.0%
Foreign 33.5% 36.1%
Temporary differences (foreign operations only) $ 10,467,726 $ 8,416,671
Valuation allowance $(10,467,726) $ (8,416,671)
-----------------------------
Carrying Value $ -- $ --
=============================
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109" which was primarily codified into
Topic 740-10-30, Income Tax in the Accounting Standards Codification prescribes
a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in an
income tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities.
There was not a material impact on the Company's consolidated financial position
and results of operations as a result of the adoption of the provisions of FIN
48. The Company does not believe there will be any material changes in its
unrecognized tax positions over the next twelve months.
The Company will recognize interest and penalties related to unrecognized tax
benefits within the income tax expense line in the consolidated statement of
operations. Accrued interest and penalties will be included within the related
tax liability line in the consolidated balance sheet.
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, 2009:
United States - Federal 2005 - present
United States - State 2005 - present
Canada - Federal 2006 - present
Canada - Provincial 2006 - present
Valuation allowances reflect the deferred tax benefits that management is
uncertain of the Company's ability to utilize in the future.
NOTE 11 - ISSUANCE OF COMMON STOCK
On June 24, 2009 the Company received $425,000 from the exercise of options at
$0.50 per share and issued 850,000 shares of restricted common stock. For the
year ended December 31, 2008 there was nil issuance of common shares.
F12
NOTE 12 - STOCK OPTIONS AND WARRANT GRANTS
A total of $ nil and $13,646 for stock based compensation has been recorded for
the nine month period ended September 30, 2009 and September 30, 2008,
respectively. There were no stock option grants for the nine month period ended
September 30, 2009.
On February 7, 2008 the Board of Directors granted an aggregate award of 400,000
stock options to five employees, two executive officers and one director. The
options vested immediately with exercise prices of $0.71 and $1.00 per share
(above fair-market value at the date of grant) with expiry ranging from three
and five years from the date of award.
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, 2008 6,996,667 $ 0.60
Granted 100,000 $ 0.71
Granted 300,000 $ 1.00
Expired (1,276,667) ($ 0.72)
---------- -------
OUTSTANDING, JANUARY 1, 2009 6,120,000 $ 0.65
Granted -- --
Expired (1,450,000) ($ 0.50)
Exercised (850,000) ($ 0.50)
---------- -------
OUTSTANDING, SEPTEMBER 30, 2009 3,820,000 $ 0.75
========== =======
At September 30, 2009, the outstanding options have a weighted average remaining
life of 24 months.
The weighted average fair value of options granted during 2008 was $0.93 and was
estimated using the Black-Scholes option-pricing model, and the following
assumptions:
2008
-----------------
Expected volatility 49% - 52%
Risk-free interest Rate 3.00%
Expected life 1.5 yrs - 2.5 yrs
Dividend yield 0.00%
Forfeiture rate 0.00%
The Black-Scholes model used by the Company to calculate options and warrant
values, was developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock purchase options and warrants. The model also requires
highly subjective assumptions, including future stock price volatility and
expected time until exercise, which greatly affect the calculated values.
Accordingly, management believes that this model does not necessarily provide a
reliable single measure of the fair value of the Company's stock options and
warrants.
At September 30, 2009, the Company had outstanding options as follows:
NUMBER OF EXERCISE
OPTIONS PRICE EXPIRATION DATE
----------------------------------------------------
150,000 $0.50 December-01-09
175,000 $0.71 February-16-10
795,000 $1.00 December-31-10
100,000 $0.71 February-06-11
100,000 $1.00 February-06-11
2,150,000 $0.71 February-16-12
100,000 $1.00 February-08-13
250,000 $0.27 August-06-13
----------------------------------------------------
3,820,000
====================================================
Warrants issued in connection with various private placements of equity
securities, are treated as a cost of capital and no income statement recognition
is required. A summary of warrant transactions is as follows:
WEIGHTED AVERAGE
DETAILS WARRANT SHARES EXERCISE PRICE
---------------------------------------------------------------------
Outstanding, January 1, 2008 3,272,500 $ 1.28
Granted -- --
Exercised -- --
Expired 3,272,500 $(1.28)
---------------------------------------------------------------------
Outstanding, January 1, 2009 -- --
Granted -- --
---------------------------------------------------------------------
Outstanding, September 30, 2009 -- --
=====================================================================
There are no outstanding warrants as of September 30, 2009.
F13
NOTE 13 - RELATED PARTY TRANSACTIONS
During the nine month period ended September 30, 2009 and 2008, the Company paid
shareholders and their affiliates $nil and $100,000, respectively for various
services, and fees rendered in addition to salaries and reimbursement of
business expenses. All transactions are recorded at the exchange amounts.
CONSULTING AGREEMENT
In 2008, a director and shareholder of the company provided consulting services
to the company under a consulting agreement. The agreement provided for a
monthly retainer of $12,500 per month. In December 2008 the agreement was
terminated.
CONVERTIBLE DEBENTURE ISSUED TO RELATED PARTY
On August 28, 2009, the Company completed a transaction whereby it issued $1.6
million of 9% convertible debentures to six accredited investors. A director who
is also a shareholder of the Company participated in the August convertible
debenture offering with a principal investment of $500,000.
On November 3, 2008, the Company completed a transaction whereby it issued $6.0
million of 9% convertible debentures to six accredited investors. Based on the
beneficial ownership position in the Company, The Leon Black 1997 Family Trust
is included as a related party, all other entities participating in the November
convertible debenture offering disclaim beneficial ownership (see beneficial
ownership table PART III - ITEM 12 of the Company's 10K report filed with the
Securities Exchange Commission for the year ended December 31, 2008). The Leon
Black 1997 Family Trust participated in the November convertible debenture
offering with a principal investment of $2,000,000.
Further information required by this item is included under the caption "NOTE 9
- CONVERTIBLE DEBENTURES".
As at September 30, 2009, the principal amount of Convertible Debenture net of
accretion due to related party amounted to $5,422,213 with a corresponding
accrued interest of $410,116, and debt discount of $77,787. At December 31,
2008, Convertible Debenture due to related party amounted to $5,000,000 with a
corresponding accrued interest of $68,548.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
LEASES
Effective November 24, 2004, the Company's wholly owned subsidiary ESW America,
Inc. entered into a lease agreement. The leasehold space houses the Company's
research and development facilities. The lease commenced on January 15, 2005 and
expires January 31, 2010. Under the terms of the lease agreement the Company has
the option to extend the lease for an additional period of five years.
Effective December 20, 2004, the Company's wholly owned subsidiary ESW Canada,
Inc. entered into an offer to Lease agreement. The leasehold space houses the
Company's executive offices and a high volume manufacturing plant. The
possession of the leasehold space took place on May 24, 2005 and the term of the
lease will run for a period of five (5) years from the commencement date of July
15, 2005.
Effective October 16, 2009, the company entered into a lease renewal agreement
see NOTE 17 - SUBSEQUENT EVENTS for further details.
The following breakdown is the total, of the minimum annual lease payments, for
both leases.
YEAR $
2009 $118,795
2010 $328,084
2011 $180,990
2012 $180,990
2013 $ 30,165
LEGAL MATTERS
From time to time, the Company may be involved in a variety of claims, suits,
investigations and proceedings arising from the ordinary course of our business,
breach of contract claims, labor and employment claims, tax and other matters.
Although claims, suits, investigations and proceedings are inherently uncertain
and their results cannot be predicted with certainty, ESW believes that the
resolution of current pending matters will not have a material adverse effect on
its business, consolidated financial position, results of operations or cash
flow. Regardless of the outcome, litigation can have an adverse impact on ESW
because of legal costs, diversion of management resources and other factors. In
addition, it is possible that an unfavourable resolution of one or more such
proceedings could in the future materially and adversely affect ESW's financial
position, results of operations or cash flows in a particular period.
F14
CAPITAL LEASE OBLIGATION
The Company is committed to the following lease payments in connection with the
acquisition of capital assets under capital leases:
YEAR $
2009 5,996
2010 14,157
2011 3,094
2012 1,289
-------
TOTAL $24,536
Less imputed interest (1,721)
-------
Total obligation under capital lease $22,815
Less current portion (9,934)
-------
TOTAL LONG-TERM PORTION $12,881
=======
The Company has incurred $5,599 of interest expense on capital leases for the
nine month period ended September 30, 2009. For the nine month period ended
September 30, 2008 the company had incurred $3,263 interest expense on capital
leases.
NOTE 15 - LOSS PER SHARE
Potential common shares of 3,820,000 related to ESW's outstanding stock options
were excluded from the computation of diluted loss per share for the period
ended September 30, 2009. As at September 30, 2008, potential common shares of
6,120,000 related to ESW's outstanding stock options were excluded from the
computation of diluted earnings/(loss) per share as the effect of inclusion of
these shares and the related interest expense would have been antidilutive.
The reconciliation of the number of shares used to calculate the diluted loss
per share is calculated as follows:
For the nine month period For the three month period
ended September 30, ended September 30,
2009 2008 2009 2008
------------ ------------ ------------ ------------
NUMERATOR
Net (loss) for the period $ (5,012,211) $ (5,319,260) $ (1,588,411) $ (1,453,201)
Interest, amortization & accretion on debentures $ 642,532 $ -- $ 227,575 $ --
Interest on notes to related party $ -- $ 263,764 $ -- $ 101,775
------------ ------------ ------------ ------------
$ (4,369,679) $ (5,055,496) $ (1,360,836) $ (1,351,426)
DENOMINATOR
Weighted average number of shares outstanding 73,006,724 72,973,851 73,039,236 72,973,851
Dilutive effect of:
Stock options -- -- -- --
Warrants -- -- -- --
Convertible Debt conversion -- -- -- --
Notes Payable to related party conversion -- -- -- --
------------ ------------ ------------ ------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 73,006,724 72,973,851 73,039,236 72,973,851
------------ ------------ ------------ ------------
NOTE 16 - COMPARATIVE FIGURES
Certain 2008 figures have been reclassified to conform to the financial
statements presentation adopted in 2009. The presentation includes Other
Comprehensive Income in the Consolidated Condensed Statement of Operations and
Consolidated Condensed Statement Of Changes In Stockholders Equity (Deficit).
NOTE 17 - SUBSEQUENT EVENTS
The Company has evaluated transactions, events and circumstances for
consideration of recognition or disclosure through November 13, 2009, the date
these interim financial statements were available for issue, and has reflected
or disclosed those items within the condensed consolidated financial statements
as deemed appropriate.
Effective October 16, 2009, the Company's wholly owned subsidiary ESW America,
Inc. entered into a lease renewal agreement with Nappen & Associates for the
leasehold property at Pennsylvania which houses the Company's research and
development facilities. There were no modifications to the original economic
terms of the lease under the lease renewal agreement. Under the terms of the
lease renewal, the lease term will now expire February 28, 2013.
F15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with ESW's Financial
Statements and Notes thereto included elsewhere in this Report.
This Form 10-Q contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of ESW's business.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. ESW undertakes no obligation
to publicly release any modifications or revisions to these forward-looking
statements to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events. In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, ESW
caution investors that actual financial and operating results may differ
materially from those projected in forward-looking statements made by, or on
behalf of, ESW. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause the actual results, performance,
or achievements to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements. This
report should be read in conjunction with ESW's Annual Report on Forms 10-K, and
amendments thereto for the year ended December 31, 2008 as filed with the
Securities and Exchange Commission.
GENERAL OVERVIEW
Environmental Solutions Worldwide Inc. ("ESW" or the "Company") is a publicly
traded company engaged through its wholly owned subsidiaries ESW Canada Inc.,
ESW America Inc. and ESW Technologies Inc. (the ESW Group of Companies) in the
design, development, manufacturing and sales of environmental technologies. The
ESW Group of Companies currently manufacture and market a diversified line of
catalytic emission control products and support technologies for diesel,
gasoline and alternative fuelled engines. The ESW Group of Companies also
operates a comprehensive Environmental Protection Agency (EPA), California Air
Resources Board (CARB) and the Mine Safety and Health Administration (MSHA)
recognized emissions testing and verification laboratory.
ESW's primary business objective is to capitalize on the growing global
requirement of reducing emissions, by offering catalyst technology solutions to
the market and build upon its military product lines for sales to the U.S. and
NATO countries. ESW has and continues to seek to develop relationships with
Original Equipment Manufacturers (OEM's) of engines for both automotive and
other markets. As part of ESW's efforts to grow its business, as well as to
achieve increased production and distribution efficiencies ESW has made capital
investments in its manufacturing capability to support its products as well as
expensing money on research and development in order for new products to be
developed that meet the new legislative regulations.
Through the year ended 2008 and the first half of 2009, ESW incurred significant
research and development costs. This investment in ESW's products was necessary
for ESW to comply with new regulations which came into force starting January of
2009. The products that ESW has developed cover the following primary technology
levels established by CARB:
o Level I + (+ INDICATES 2009 NO2 COMPLIANCE)
o Diesel Oxidation Catalyst - PM reduction greater than 25%
o High performance Diesel Oxidation Catalyst - PM reduction greater than 30%
o Level II +
o Diesel Oxidation Catalyst with Crank Case Ventilation - PM reduction
greater than 50%
o Level III +
o Off Road Active Diesel Particulate Filter - PM reduction greater than 85%
o On Road Active Diesel Particulate Filter - PM reduction greater than 85%
On May 04, 2009, ESW announced that it's wholly owned subsidiary ESW Canada Inc.
has received notification from CARB that the Company's Therma Cat(TM) Active
Level III Plus Diesel Particulate Filter has been approved for off-road
applications. ESW's Therma Cat(TM) has been verified as a Level III device for
use in a wide variety of medium/heavy-duty diesel off-road engines powering both
tracked and rubber tired equipment. The Therma Cat(TM), as verified, proved
capable of reducing diesel Particulate Matter (PM), Carbon Monoxide (CO) and
Hydro Carbon (HC) in excess of 85%. The Therma Cat(TM) has also met the
nationwide stringent nitrogen dioxide (NO2) limitations. This new NO2 limit,
which came into effect on January 1, 2009, requires that all verified diesel
retrofits sold and installed in North America must not increase NO2 emissions by
more than 20%.
On June 1, 2009, ESW announced that its wholly owned subsidiary ESW Canada Inc.
has received notification from First Student Transportation Services that the
Company's Therma Cat(TM) Active Level III Plus catalyst system installed on one
of it's buses has passed the first inspection for usage on school buses carrying
children on California roads, the inspection was conducted by that the
California Highway Patrol (CHP). In January of 2009 ESW's Therma Cat(TM)
successfully met the applicable Federal Motor Vehicle Safety Standards 301
(FMVSS301) crash test for school buses at a recognized third party testing
facility in Wisconsin. At the conclusion of the test, although the bus was
deemed a total loss, the Therma Cat(TM) passed the crash protocol with a zero
failure rate. In a separate test procedure at the same facility, the Therma
Cat(TM) Active Level III Plus catalyst system and school bus installation kit
were tested on a 1000 hour 100,000 mile vibration and shock durability
simulation machine. Again, the system passed the test protocol with zero failure
to the system or installation components.
On August 10, 2009, ESW announced that its wholly owned subsidiary ESW Canada
Inc. has received notification from the California Air Resources Board (CARB)
that the Company's Therma Cat(TM) Active Level III Diesel Particulate Filter has
been approved for On-road applications for 1993 through 2006 model year On-Road
vehicle applications powered by 5 to 10 liter diesel engines. The Therma
Cat(TM), as verified, proved capable of reducing diesel Particulate Matter (PM),
Carbon Monoxide (CO) and Hydro Carbon (HC) in excess of 85% while meeting the
nationwide stringent nitrogen dioxide (NO2) limitations. This new NO2 limit,
which came into effect on January 1, 2009, requires that all verified diesel
emission retrofit technologies sold and installed in North America must not
increase NO2 emissions by more than 20%.
3
On September 29, 2009, ESW's wholly owned subsidiary ESW Canada Inc. received
notification from CARB that its proprietary Therma Cat(TM) Active Level III Plus
diesel engine emission reduction technology has been extended to include up to
350 horsepower (hp), 15.2 liter off-road diesel engines as per Executive Order
(EO) DE-09-010-01. With the CARB extended EO, the Therma Cat(TM) System now
covers off-road diesel engines model years 1996 to 2009 between 175 to 350 hp
and 5 to 15.2 Liter displacement, excluding those that are equipped with exhaust
gas recirculation systems. The EO permits the Therma Cat(TM) to be applied to
over 1100 engine families encompassing in excess of 3000 individual engines.
ESW to date has shipped 62 Therma Cat(TM) Active Level III Plus Diesel
Particulate Filter Systems. Of the total 62 systems sold, 30 Systems were sold
in the third quarter of 2009 through the company's dealership network in the
states of California, New York, Texas and Maryland. Installed applications
include on-highway cement mixers, dump trucks, port equipment and off-road
excavators and loaders. Through the first half of 2009, ESW has actively pursued
the Therma Cat(TM) Active Level III Plus Diesel Particulate Filter On Road and
Off road verifications, ESW believes that the verifications achieved in 2009
cover a significant portion of the market and give ESW the competitive advantage
to be the technology of first choice in retrofit and OEM applications. The
Therma Cat(TM) On- and Off-Road products are anticipated to account for a
significant portion of ESW's future revenues. Based on feedback received from
our customers and distribution network, the Level I and Level II product
certification / verification program has been delayed considering more states
are adopting California emission standards which are more stringent and in line
with the Level III requirements. ESW intends to complete the Level I and Level
II product certification / verification program submissions; the delay in the
timeline is due to the delays caused in obtaining the on road verification for
the Therma Cat(TM) Active Level III Plus catalyst system and the expansion in
the demographic of vehicles covered under the new product verifications. ESW
believes that such adjustments to its business plan are necessary to meet market
and customers expectations.
ESW continues to purse regulatory approval of its Level I, Level II, locomotive
and marine products. The regulatory approval process with EPA and CARB is
complex and requires a lengthy process of durability testing which must precede
final certification/verification of ESW's products. ESW does not control the
timeliness of the certification/verification process; however, ESW has taken
steps to ensure the efficacy of ESW's contribution to the
certification/verification process.
LOCOMOTIVE AND MARINE INITIATIVES:
In 2005 ESW launched a product compatible with two stroke diesel engines called
Xtrm Cat(TM) it is a heavy duty oxidation catalytic converter used to reduce
particulate matter. It is designed for large two stroke diesel engines typically
found in the locomotive or marine industries. It is also designed to reduce
hydrocarbons, carbon monoxide and unpleasant odours.
In October of 2008, the Xtrm Cat(TM), achieved the status of an `Emerging
Technology' from the EPA. ESW worked closely with EPA to establish the test plan
for this new technology, providing data from Southwest Research Institute (SwRI)
to support the claim that ESW's product was capable of reducing 25% or greater
Particulate Matter (PM). This achievement was demonstrated with the Xtrm Cat(TM)
DOC installed as a post turbo catalyst/muffler application on the Elector-Motive
Diesel test engine and required no other engine modifications. Since then, ESW
has been diligently pursuing the EPA verification/certification of the
technology as per the initial listing requirement.
On April 07, 2009 ESW announced that the company has been awarded a $731,000
Grant for Environmental Protection Agency (EPA) Verification of its XTRM Cat(TM)
Marine / Locomotive Catalyst. This new grant is intended to support ESW in the
final testing of the XTRM Cat(TM) technology in real-world applications along
with providing a platform for EPA verification. In March of 2009 the EPA
finalized more stringent emissions standards for locomotives and marine
compression-ignition engines opening the door for this newly regulated market.
The grant is made possible by the New Technology Research and Development (NTRD)
Program. The NTRD Program is funded by the State of Texas through the Texas
Commission on Environmental Quality (TCEQ). NTRD grants are designed to expedite
the commercialization of new and innovative emission reduction technologies that
will improve the air quality of Texas. ESW has been awarded the grant in part
due to the significant progress and success that was achieved with the XTRM
Cat(TM) on Electro-Motive Diesel 2-stroke diesel engines in 2007 during which
it was previously awarded a $250,000 TCEQ grant. As per the terms of the grant
the project has a total budget of $731,000, TECQ also has the discretion to
increase the amount of funds available under the budget. Of the total budget 19%
is attributed to ESW's cost share and the balance $591,000 will be reimbursed by
TECQ.
In October of 2009 The `Emerging Technology' listing extension was granted by
the EPA after a comprehensive investigation of the progress ESW had achieved
with the Xtrm Cat(TM) towards the final verification/certification over the past
year on Electro-Motive Diesel 2 Stroke marine/locomotive engines. ESW is
currently working closely with various stakeholders; both marine and locomotive
based to generate the final necessary field data required for completing the
stated goal for this new technology.
On June 10, 2009 ESW announced that the Company's wholly owned subsidiary ESW
Canada Inc. (ESWC) has received sales orders amounting to $266,000 for five Xtrm
Cat(TM) Locomotive Diesel Oxidation Catalysts from Advanced Global Engineering
in Atlantic Beach, Florida and West Coast Express (TransLink) in Vancouver,
British Columbia, Canada. As of September 2009 ESW has a customer deposit of
$538,793 towards delivery of the Xtrm Cat(TM) towards a $1.5 Million contract.
ESW believes that the Xtrm Cat(TM) product has a significant potential in the
locomotive and marine emissions retrofit sector.
4
The field of emission control is very complex and requires a variety of
different technologies to be employed. ESW has and continues to develop
additional products that meet the needs of its customers and industry standards.
ESW has partnered with several strategic alliances assuring immediate access to
leading edge technologies. ESW has also expensed significant resources in
developing an active dealer and support distribution network for several key
markets, currently ESW has dealers in Georgia, Florida, Ohio, North Carolina,
Pennsylvania, New York, New Jersey, Connecticut, Washington, Colorado, Texas,
Illinois, Delaware and Maryland .
ESW's manufacturing production facility located in Concord Ontario Canada is
adequately capitalised to support delivery of its verified products and the rail
and marine products. Minor capital additions and production tooling changes to
meet customer demands are an ongoing expense. ESW's Tech Center based in
Montgomeryville Pennsylvania houses all of ESW's emission testing laboratories
and testing capabilities. The facilities include several testing systems,
including engine and vehicle chassis test cells. These cells are used for
certification and verification for engines ranging from 0.5 to in excess of 600
horse power. This facility also manufactures and provides the catalytic and
chemical wash coat solutions for the Concord Ontario Canada plant. Effective
October 16, 2009, ESW America, Inc. entered into a lease renewal agreement.
There were no modifications to the original economic terms of the lease under
the lease renewal agreement. Under the terms of the lease renewal, the lease
term will now expire February 28, 2013.
Both ESW's facilities are in full compliance with ISO 9001:2000. ESW currently
holds a full registration certificate effective until March 2010 for ESW America
and January 2010 for ESW Canada.
As ESW has a substantial amount of indebtedness, its ability to generate cash,
both to fund operations and service debt, is also a significant area of focus
for the Company. See "Liquidity and Capital Resources" below for further
discussion of cash flows.
COMPARISON OF THREE MONTH PERIOD ENDED SEPTEMBER 30, 2009 TO THREE MONTH PERIOD
ENDED SEPTEMBER 30, 2009
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations (MD&A) should be read in conjunction with the MD&A
included in ESW's Annual Report on Forms 10-K, for the year ended December 31,
2008.
Revenues for the three month period ended September 30, 2009 increased by $3,209
or 0.7 percent, to $448,984 from $445,775 for the three month period ended
September 30, 2008. Sales remained at lower levels in first two months of the
current three month period as the company focused its efforts on obtaining
verification for its Level III diesel catalyst on road product and extension of
existing verifications. The revenue is consistent over the prior year period and
is related to sales of ESW's newly verified product that meet new regulations
and the locomotive product.
Cost of sales as a percentage of revenues for the three month period ended
September 30, 2009 was 71.6 percent compared to 71.7 percent for the three month
period ended September 30, 2008. The gross profit for the three month period
ended September 30, 2009 was 28.4 percent as compared to a gross margin of 28.3
percent for the three month period ended September 30, 2008. The consistency was
mainly due to the efforts by ESW in the current period to streamline its product
installation capabilities for its new line of products.
Marketing, office and general expenses for the three month period ended
September 30, 2009 increased by $2,793, or 0.3 percent, to $839,291 from
$836,498 for the three month period ended September 30, 2008. The expenses are
consistent with the prior year period.
Research and development expenses for the three month period ended September 30,
2009 decreased by $73,922, or 36.8 percent, to $127,001 from $200,923 for the
three month period ended September 30, 2008. ESW continues to aggressively
pursue the verification of its Level I, Level II, locomotive and marine
products, the decrease in the cost of research and development is marginally due
to the product development cycle being completed, ESW has received verification
for its Therma Cat(TM) Active Level III Plus Diesel Particulate Filter on- and
off-road products and also an expansion on the engine family size for the Therma
Cat(TM) Active Level III Plus Diesel Particulate Filter off road product.
Officer's compensation and director's fees for the three month period ended
September 30, 2009 increased by $23,068 or 15.6 percent, to $171,234 from
$148,166 for the three month period ended September 30, 2008. The increase in
fees is mainly due to change in status of a director who was previously an
inside director in the prior year period to a outside director as of January
2009, a wage increase for an officer of the company effected January 2009 and
the effect of exchange rate differences on Canadian Dollar contracts for
officers of the company.
Consulting and professional fees for the three month period ended September 30,
2009 increased by $21,206 or 122.9 percent, to $38,459 from $17,253 for the
three month period ended September 30, 2008. The increase is mainly attributed
to an increase in audit fees and fees related to SOX 404 consulting.
5
Foreign exchange loss for the three month period ended September 30, 2009 was
$5,778 as compared to a gain of $7,926 for the three month period ended
September 30, 2008. This is a result of the fluctuation in the exchange rate of
the Canadian Dollar to the United States Dollar.
Depreciation and amortization expense for the three month period ended September
30, 2009 increased by $23,561, or 8.3 percent to $306,794 from $283,233 for the
three month period ended September 30, 2008.
Interest expense on long-term debt was $215,518 for the three month period ended
September 30, 2009 as compared to $ nil for the three month period ended
September 30, 2008. Amortization of deferred costs amounted to $4,977 and Long
Term Debt Accretion amounted to $7,080 for the three month period ended
September 30, 2009 as compared to $ nil for the three month period ended
September 30, 2008
On August 28, 2009, the Company completed a transaction whereby it issued $1.6
million of 9% convertible debentures (the " 2009 Debentures") to six accredited
investors. On November 3, 2008, the Company completed a transaction whereby it
issued $6.0 million of 9% convertible debentures (the "Debentures") to six
accredited investors. See "NOTE 10 - CONVERTIBLE DEBENTURES" for complete
details. At the time the 2008 Debentures were issued, the company recorded a
deferred cost asset of $59,738 for legal fees paid in relation to the issuance
of the November 2008 Convertible Debentures. The deferred costs will be
amortized over the term of the November 2008 Convertible Debenture. At the time
the 2009 Debentures were issued, the Company recorded a debt discount for a
beneficial conversion feature in the amount of $256,000. The debt discount is
the aggregate intrinsic value calculated as the difference between the market
price of the Company's share of stock on August 28, 2009 and the conversion
price of the 2009 Debentures. The debt discount is being accreted over the three
(3) year life of the debentures using the effective yield method. The effective
yield on the debentures is 15.52%.
Interest expense on the notes payable to related party was $nil for the three
month period ended September 30, 2009 as compared to $101,774 for the three
month period ended September 30, 2008. In November 2008, the Company settled all
previously issued promissory notes through a partial repayment of principal and
the balance of principal and interest was converted into a subscription of
$3,000,000 of Debentures under the November 3, 2008 offering.
COMPARISON OF NINE MONTH PERIOD ENDED SEPTEMBER 30, 2009 TO NINE MONTH PERIOD
ENDED SEPTEMBER 30, 2009
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations (MD&A) should be read in conjunction with the MD&A
included in ESW's Annual Report on Forms 10-K, and amendments thereto for the
year ended December 31, 2008.
Revenues for the nine month period ended September 30, 2009 increased by
$319,409 or 54.7 percent, to $903,670 from $584,261 for the nine month period
ended September 30, 2008. The increase in revenue is mainly related to sales of
ESW's newly verified Level III products that meet new regulations and are seeing
an increase in customer acceptance.
Cost of sales as a percentage of revenues for the nine month period ended
September 30, 2009 was 62.3 percent compared to 72.6 percent for the nine month
period ended September 30, 2008. The gross profit for the nine month period
ended September 30, 2009 was 37.7 percent as compared to a gross margin of 27.4
percent for the nine month period ended September 30, 2008. The improvements in
the gross margin are mainly due to the efforts by ESW to streamline its product
installation capabilities, helped marginally by higher volume orders.
Marketing, office and general expenses for the nine month period ended September
30, 2009 decreased by $355,544, or 12.5 percent, to $2,496,647 from $2,852,191
for the nine month period ended September 30, 2008. The decrease is primarily
due to a decrease in Facility of $65,018 as a result of higher sales volumes and
higher overhead costs attributed to sales. Administration salaries and wages
were lower by $412,803 and plant related expenses were lower by $58,967 as
support for ESW's research and development programs declined and a consulting
agreement in the prior year was terminated. Investor relations expense was lower
by $8,922.These decreases were offset by an increase in sales and marketing
salaries and wages and selling expenses by $181,831 increased focus on business
development and product marketing efforts, the company has also set up a
customer service department. General and administration costs increased
marginally by $8,335 as the Company incurred recruitment expenses for high skill
air testing technicians.
Research and development expenses for the nine month period ended September 30,
2009 decreased by $270,960, or 25.9 percent, to $773,255 from $1,044,215 for the
nine month period ended September 30, 2008. ESW continues to aggressively pursue
the verification of its Level I, Level II, locomotive and marine products, the
decrease in the cost of research and development is marginally due to the
product development cycle being completed, ESW has received verification for its
ThermaCat(TM) Active Level III Plus Diesel Particulate Filter on and off road
products and also an expansion on the engine family size for the ThermaCat(TM)
Active Level III Plus Diesel Particulate Filter off road product.
Officer's compensation and director's fees for the nine month period ended
September 30, 2009 increased by $59,147 or 13.3 percent, to $503,625 from
$444,478 for the nine month period ended June 30, 2008. The increase in fees is
mainly due to change in status of a director who was previously an inside
director in the prior year nine month period to a outside director as of January
2009, a wage increase for an officer of the company effected January 2009 and
the effect of exchange rate differences on Canadian Dollar contracts for
officers of the company.
6
Consulting and professional fees for the nine month period ended September 30,
2009 decreased by $6,635 or 6.2 percent, to $100,591 from $107,226 for the nine
month period ended September 30, 2008.
Foreign exchange gain for the nine month period ended September 30, 2009 was
$17,687 as compared to a gain of $65,372 for the nine month period ended
September 30, 2008. This is a result of the fluctuation in the exchange rate of
the Canadian Dollar to the United States Dollar.
Depreciation and amortization expense for the nine month period ended September
30, 2009 increased by $1,082, or 0.1 percent to $854,435 from $853,353 for the
nine month period ended September 30, 2008.
Interest expense on long-term debt was $620,518 for the nine month period ended
September 30, 2009 as compared to $ nil for the nine month period ended
September 30, 2008. Amortization of deferred costs amounted to $14,934 and Long
Term Debt Accretion amounted to $7,080 for the nine month period ended September
30, 2009 as compared to $ nil for the nine month period ended September 30, 2008
On August 28, 2009, the Company completed a transaction whereby it issued $1.6
million of 9% convertible debentures (the " 2009 Debentures") to six accredited
investors. On November 3, 2008, the Company completed a transaction whereby it
issued $6.0 million of 9% convertible debentures (the "Debentures") to six
accredited investors. See "NOTE 10 - CONVERTIBLE DEBENTURES" for complete
details. At the time the 2008 Debentures were issued, the company recorded a
deferred cost asset of $59,738 for legal fees paid in relation to the issuance
of the November 2008 Convertible Debentures. The deferred costs will be
amortized over the term of the November 2008 Convertible Debenture. At the time
the 2009 Debentures were issued, the Company recorded a debt discount for a
beneficial conversion feature in the amount of $256,000. The debt discount is
the aggregate intrinsic value calculated as the difference between the market
price of the Company's share of stock on August 28, 2009 and the conversion
price of the 2009 Debentures. The debt discount is being accreted over the three
(3) year life of the debentures using the effective yield method. The effective
yield on the debentures is 15.52%.
Interest expense on the notes payable to related party was $nil for the nine
month period ended September 30, 2009 as compared to $263,764 for the nine month
period ended September 30, 2008. In November 2008, the Company settled all
previously issued promissory notes through a partial repayment of principal and
the balance of principal and interest was converted into a subscription of
$3,000,000 of Debentures under the November 3, 2008 offering.
7
LIQUIDITY AND CAPITAL RESOURCES
ESW's principal sources of operating capital have been the proceeds from its
various financing transactions; during the nine month period ended September 30,
2009, the Company used $3,680,113 of cash to sustain operating activities as its
sales were low. As of September 30, 2009 and 2008, the Company had cash and cash
equivalents of $878,656 and $22,127 respectively.
Net Cash used in operating activities for the nine month period ended September
30, 2009 amounted to $3,680,113. This amount was attributable to the net loss of
$5,012,211, plus non cash expenses such as depreciation, amortization, interest
on long term debt and others of $1,573,567, and a decrease in net operating
assets and liabilities of $241,469. Net Cash used in operating activities for
the nine month period ended September 30, 2008 amounted to $3,729,647. This
amount was attributable to the loss of 5,319,260, plus non cash expenses such as
depreciation, amortization, and others of $1,299,026, and an increase in net
operating assets and liabilities of $290,587.
Net Cash used in investing activities was $139,736 for the nine month period
ended September 30, 2009 as compared to $404,131 for the nine month period ended
September 30, 2008. The capital expenditures during the nine month period ended
September 30, 2009 were primarily dedicated to production tooling required for
ESW's new product lines.
Net cash provided by financing activities totalled $2,459,499 for the nine month
period ended September 30, 2009 as compared to $1,372,819 provided by financing
activities for the nine month period ended September 30, 2008. In the current
period $425,000 was provided through the exercise of option, $443,048 was
obtained under ESW`s bank loan ($623,318 net of repayment of $180,270),
$1,600,000 through the issuance of convertible debentures, and $8,549 repaid
under capital lease obligation.
In 2007, ESW's subsidiary, ESW Canada entered into a $2.5 Million revolving
credit facility with Royal Bank of Canada ("RBC"), to finance orders on hand.
Effective September 2, 2008, ESW Canada completed its negotiations with Royal
Bank of Canada and entered into an amendment to the secured commercial loan
agreement. The amended agreement extended the term of the Agreement from June
30, 2008 through June 30, 2009. In addition to extending the term of the
Agreement, certain financial covenants were also amended. The amended
arrangement provided for a revolving facility available by way of a series of
term loans of up to $750,000 to finance future production orders. Effective
August 21, 2009, the term of the secured commercial loan agreement with RBC was
extended through to April 30, 2010. The Credit Facility is guaranteed by the
Company and its subsidiary ESW Canada through the pledge of their assets to RBC.
The facility has been guaranteed to the bank under Export Development Canada
("EDC") pre-shipment financing program. Borrowings under the revolving credit
agreement bear interest at 1.5% above the bank's prime rate of interest.
Repayments of any loans are required no later than one year from the date of the
advancement of that loan. Obligations under the revolving credit agreement are
collateralized by a first-priority lien on the assets of the Company and its
subsidiary ESW Canada, Inc. including, accounts receivable, inventory, equipment
and other tangible and intangible property, including the capital stock of all
direct subsidiaries.
As at September 30, 2009 $571,839 is outstanding and due to RBC under the Credit
Facility. As of December 31, 2008, $77,168 was outstanding and due to RBC under
the Credit Facility.
On August 28, 2009, the Company completed a transaction whereby it issued $1.6
million of 9% convertible debentures (the " 2009 Debentures") to six accredited
investors. Of the $1.6 million received by the Company, $500,000 was received
from a director of the Company through the exchange of a $300,000 unsecured 9%
subordinated demand short term loan previously provided to the Company on August
11, 2009 and an additional $200,000 investment made by the director in the
offering. The 2009 Debentures are for a term of three (3) years and are
convertible into shares of the Company's common stock at the option of the
holder by dividing the principal amount of the 2009 Debenture to be converted by
$0.50. The 2009 Debentures earn interest at a rate of 9% per annum payable in
cash or in shares of the Company's common stock at the option of the holder. If
the Holder elects to receive interest in shares of common stock, the number of
shares of common stock to be issued for interest shall be determined by dividing
accrued interest by $0.50. Subject to the holder's right to convert, the Company
has the right to redeem the 2009 Debentures at a price equal to one hundred and
ten percent (110%) multiplied by the then outstanding principal amount plus
unpaid interest to the date of redemption. Upon maturity, the debenture and
interest is payable in cash or common stock at the option of the Holder. The
2009 Debentures contain customary price adjustment protections.
On November 3, 2008, ESW issued $6.0 million of convertible debentures (the
"Debentures") to six accredited investors under Rule 506 of Regulation D. The
Debentures are for a term of three years and are convertible into shares of the
Company's common stock at the option of the holder at any time six (6) months
after the date of issuance of the Debenture by dividing the principal amount of
the Debentures to be converted by $0.25. ESW used $2.2 Million of the November
2009 debt to pay down a previously issued promissory note as well as settling
all the other notes previously issued by the Company through additional $3.0
Million issuance of convertible Debentures.
Currently ESW has $10,309,596 million of Convertible debt at September 30, 2009
net of deferred costs of $41,484 and debt discount of $248,920. (See Debt
structure for further details.)
Based on ESW's current operating plan, management believes that at September 30,
2009 cash balances, anticipated cash flows from operating activities, and, the
appropriate borrowings from other available financing sources, such as the
issuance of debt or equity securities will be sufficient to meet our working
capital needs on a short-term basis. Overall, capital adequacy is monitored on
an ongoing basis by our management and reviewed quarterly by the Board of
Directors.
8
The industry that ESW operates in is capital intensive and there is a timing
issue bringing product to market which is considered normal for this industry.
ESW continues to invest in research and development to prove up its technologies
and bring them to the point where its customers have a high confidence level
allowing them to place larger orders. The length of time a customer needs to
build confidence in ESW's technologies cannot be predetermined and as a result,
ESW has sustained operating losses as a result of not generating sufficient
sales to generate a profit from operations. There is no assurance that the
Company will be successful in achieving sufficient cash flow from its current
operations. This indicates a working capital deficiency and a potential concern
about the Company's ability to continue to operate as going concern, ESW's
management believes that the revenues will increase based on ESW`s recently
achieved product verifications.
During the nine months of 2009 and the fiscal year 2008 ESW did not produce
sufficient cash from operations to support its expenditures; the August 28, 2009
$1.6 million offering of convertible debentures; the November 3, 2008 $6.0
million offering of convertible debentures along with continued borrowing on
ESW's credit facility and the exercise of outstanding derivatives afforded ESW
the opportunity to support its operations and to execute its business plan.
ESW's principal use of liquidity will be to finance any further capital
expenditures or tooling needed for production, to provide working capital
availability and to pay previously issued debt. ESW does not anticipate having
any major capital expenditures in 2009 related to the general operation of its
business, however should the need arise for further tooling or equipment as a
result of specific orders or the introduction of new product lines, ESW would
evaluate the need and make provisions as necessary. ESW does not expect that
total capital expenditures for 2009 will amount to more than $300,000.
Should ESW not be profitable, it will need to finance its operations through
other capital financings. ESW continues to seek, equity financing and/or debt
financing in the form of private placements at favourable terms, or the exercise
of currently outstanding derivatives that would provide additional capital. ESW
also has a good history of receiving capital infusions when needed. However,
such additional financing may not be available to ESW, if and when needed, on
acceptable terms or at all. ESW intends to retain any future earnings to retire
debt, finance the expansion of its business, necessary capital expenditures, and
for general corporate purposes.
ESW's operating profitability requires increased sales coupled with lower
overall cost to manufacture its products and to improve both sales and
administrative productivity through process and system enhancements. This will
be largely dependent on the success of ESW's initiatives to streamline its
infrastructure and drive its operational efficiencies across the Company. ESW's
failure to successfully implement these initiatives, or the failure of such
initiatives to result in improved profit margins, could have a material adverse
effect ESW's liquidity, financial position, and results of operations.
ESW believes the success of its newly developed products will continue to
motivate others to develop similar designs, many of the same functional and
physical characteristics as ESW's product. ESW has patents covering the
technology embodied in its products, and intend to enforce those patents as
appropriate. If ESW is not successful in enforcing its patents, competition from
such products could adversely affect ESW's market share and prices for its
products. Although overall pricing has been stable recently, the average price
of ESW's products may decline in the future. There is no assurance that current
or future products will be able to successfully compete with products developed
by others.
ESW expects an increase in consulting and audit fees related to the impact of
our Sarbanes-Oxley internal control certification efforts, with which the
company is required to be in compliance by June 15, 2010.
ESW has 700,000 Class A special shares recorded at $453,900 (based on the
historical exchange rate at the time of issuance.), authorized, issued, and
outstanding. The Class A special shares are issued by ESW's wholly-owned
subsidiary BBL Technologies, Inc. ("BBL") without par value, and are redeemable
on demand by the Holder of the shares which is a private Ontario Corporation at
$700,000 Canadian (which translates to $653,778 at September 30, 2009). As the
Class A special shares are issued by ESW's wholly-owned subsidiary BBL, the
maximum value upon which ESW is liable is the net book value of BBL. At
September 30, 2009 BBL had an accumulated deficit and therefore would be unable
to redeem the Class A special shares at their ascribed value.
DEBT STRUCTURE
On August 28, 2009, the Company completed a transaction whereby it issued $1.6
million of 9% convertible debentures (the " 2009 Debentures") to six accredited
investors. Of the $1.6 million received by the Company, $500,000 was received
from a director of the Company through the exchange of a $300,000 unsecured 9%
subordinated demand short term loan previously provided to the Company on August
11, 2009 and an additional $200,000 investment made by the director in the
offering. The 2009 Debentures are for a term of three (3) years and are
convertible into shares of the Company's common stock at the option of the
holder by dividing the principal amount of the 2009 Debenture to be converted by
$0.50. The 2009 Debentures earn interest at a rate of 9% per annum payable in
cash or in shares of the Company's common stock at the option of the holder. If
the Holder elects to receive interest in shares of common stock, the number of
shares of common stock to be issued for interest shall be determined by dividing
accrued interest by $0.50. Subject to the holder's right to convert, the Company
has the right to redeem the 2009 Debentures at a price equal to one hundred and
ten percent (110%) multiplied by the then outstanding principal amount plus
unpaid interest to the date of redemption. Upon maturity, the debenture and
interest is payable in cash or common stock at the option of the Holder. The
2009 Debentures contain customary price adjustment protections. (See Note 10:
Convertible Debt for further details)
On November 3, 2008, the Company completed a transaction whereby it issued $6.0
million of 9% convertible debentures to six accredited investors. The Debentures
are for a term of three years and are convertible into shares of the Company's
common stock at the option of the holder at any time six (6) months after the
date of issuance of the Debenture by dividing the principal amount of the
Debenture to be converted by $0.25. The Debentures earn interest at a rate of 9%
per annum payable in cash or in shares of the Company's common stock at the
option of the holder. If the Holder elects to receive interest in shares of
common stock, the number of shares of common stock to be issued for interest
shall be determined by dividing accrued interest by $0.25. Subject to the
holder's right to convert, the Company has the right to redeem the Debentures at
a price equal to one hundred and ten percent (110%) multiplied by the then
outstanding principal amount plus unpaid interest to the date of redemption.
Upon maturity, the debenture and interest is payable in cash or common stock at
the option of the Holder. The Debentures contain customary price adjustment
protections. (See Note 10: Convertible Debt for further details)
9
From the proceeds of the November 2008 offering, the Company elected to repay
$2.2 million, the principal portion only, of a previously issued Consolidated
Note to a company controlled by a trust to which a director and shareholder of
the Company is the beneficiary. The debt holder has agreed to have the remaining
amount of $433,923, due under the note, to be applied to a subscription to a
Debenture under the November 3, 2008 offering. Concurrently, the Company has
agreed to repay a Consolidated Subordinate Note that it had previously issued to
debt holder who is a director and shareholder of the Company in the principal
amount of $1.02 million. The debt holder has agreed to have the full amount of
principal and accumulated interest, in the amount of $1,158,024 due under the
note, applied to a subscription of a Debenture under the offering. Additionally
the Company's $1.5 million credit facility also provided by the same debt
holder, on which the Company had drawn down the sum of $1,103,000 as of November
3, 2008, was also satisfied by way of issuance of Debentures under the November
3, 2008 offering. With the agreement to settle all the notes previously issued
by the Debt holder is subscribing to an aggregate of $2,566,077 of Debentures
under the offering.
As at September 30, 2009, Convertible Debentures amounted to $10,309,596 net of
deferred costs of $41,484 and debt discount of $248,919, with corresponding
accrued interest of $746,272. As at December 31, 2008, the Convertible Debenture
amounted to $8,943,581 net of deferred costs of $56,419, with corresponding
accrued interest of $125,753.
In 2007, ESW's subsidiary, ESW Canada entered into a $2.5 Million revolving
credit facility with Royal Bank of Canada ("RBC"), to finance orders on hand.
Effective September 2, 2008, ESW completed its negotiations with Royal Bank of
Canada and entered into an amendment to the secured commercial loan agreement.
The amended agreement extended the term of the Agreement from June 30, 2008
through June 30, 2009. In addition to extending the term of the Agreement,
certain financial covenants were also amended. The amended arrangement provided
for a revolving facility available by way of a series of term loans of up to
$750,000 to finance future production orders. Effective August 21, 2009, the
term of the secured commercial loan agreement with RBC was extended through to
April 30, 2010. The Credit Facility is guaranteed by the Company and its
subsidiary ESW Canada through the pledge of their assets to RBC. The facility
has been guaranteed to the bank under Export Development Canada ("EDC")
pre-shipment financing program. Borrowings under the revolving credit agreement
bear interest at 1.5% above the bank's prime rate of interest. Repayments of any
loans are required no later than one year from the date of the advancement of
that loan. Obligations under the revolving credit agreement are collateralized
by a first-priority lien on the assets of the Company and its subsidiary ESW
Canada, Inc. including, accounts receivable, inventory, equipment and other
tangible and intangible property, including the capital stock of all direct
subsidiaries.
As at September 30, 2009, $571,839 is outstanding and due to RBC under the
Credit Facility. As of December 31, 2008, $ 77,168 was outstanding and due to
RBC under the Credit Facility.
The amount of availability of the loan at any time is dependent upon various
factors, including, the amount of open export orders on hand, and the amount of
eligible receivables. The terms relating to the credit agreement specifically
note that at the time of any borrowing under the credit agreement, the Company's
subsidiary ESW Canada Inc. maintain a tangible net worth of at least $1.1
million. The credit agreement contains, among other things, covenants,
representations and warranties and events of default customary for a facility of
this type for both the Company and its subsidiary ESW Canada Inc. Such covenants
include certain restrictions on the incurrence of additional indebtedness,
liens, acquisitions and other investments, mergers, consolidations, liquidations
and dissolutions, sales of assets, dividends and other repurchases in respect of
capital stock, voluntary prepayments of certain other indebtedness, capital
expenditures and transactions with affiliates, subject to certain exceptions.
Under certain conditions amounts outstanding under the credit agreements may be
accelerated. Such events include failure to pay any principal, interest or other
amounts when due, failure to comply with covenants, breach of representations or
warranties in any material respect, non-payment or acceleration of other
material debt, entry of material judgments not covered by insurance, or a change
of control of the Company.
ESW's ability to service our indebtedness in cash will depend on its future
performance, which will be affected by prevailing economic conditions,
financial, business, regulatory and other factors. Certain of these factors are
beyond ESW's control. ESW believes that, based upon its current business plan,
it will be able to meet its debt service obligations when due. Significant
assumptions underlie this belief, including, among other things, that ESW will
be successful in implementing its business strategy, that some of ESW's new
products that have received verification from the appropriate regulatory
authorities will obtain customer and market acceptance, and that there will be
no material adverse developments in ESW's business, liquidity or capital
requirements. If ESW cannot generate sufficient cash flow from operations to
service its indebtedness and to meet other obligations and commitments, ESW
might be required to refinance its debt or to dispose off assets to obtain funds
for such purpose. There is no assurance that refinancing or asset dispositions
or raising funds from sales of equity or otherwise could be effected on a timely
basis or on satisfactory terms, ESW's ability to pay principal and interest on
its debt would be impaired. In such circumstance, ESW would have to issue shares
of its common stock as repayment of this debt, which would be of a dilutive
nature to ESW's present shareholders.
10
CONTRACTUAL OBLIGATIONS
LEASES
Effective November 24, 2004, the Company's wholly owned subsidiary ESW America,
Inc. entered into a lease agreement. The leasehold space houses the Company's
research and development facilities. The lease commenced on January 15, 2005 and
expires January 31, 2010. Under the terms of the lease agreement the Company has
the option to extend the lease for an additional period of five years.
Effective December 20, 2004, the Company's wholly owned subsidiary ESW Canada,
Inc. entered into an offer to Lease agreement. The leasehold space houses the
Company's executive offices and a high volume manufacturing plant. The
possession of the leasehold space took place on May 24, 2005 and the term of the
lease will run for a period of five (5) years from the commencement date of July
15, 2005.
Effective October 16, 2009, the company entered into a lease renewal agreement
see NOTE 17 - SUBSEQUENT EVENTS for further details.
The following breakdown is the total, of the minimum annual lease payments, for
both leases.
YEAR $
2009 $118,795
2010 $328,084
2011 $180,990
2012 $180,990
2013 $ 30,165
CAPITAL LEASE OBLIGATION
The Company is committed to the following lease payments in connection with the
acquisition of capital assets under capital leases:
YEAR $
2009 5,996
2010 14,157
2011 3,094
2012 1,289
-------
TOTAL $24,536
Less imputed interest (1,721)
-------
Total obligation under capital lease $22,815
Less current portion (9,934)
-------
TOTAL LONG-TERM PORTION $12,881
=======
The Company has incurred $5,599 interest expense on capital leases for the nine
month period ended September 30, 2009. For the nine month period ended September
30, 2008 the company had incurred $3,263 interest expense on capital leases.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued new guidance on disclosures about derivative
instruments and hedging activities. The new guidance expands existing quarterly
disclosure requirements about an entity's derivative instruments and hedging
activities. The new guidance is effective for fiscal years beginning after
November 15, 2008. All derivatives are recorded on the balance sheet as assets
or liabilities and measured at fair value. For derivatives designated as hedges
of the fair value of assets or liabilities, the changes in fair values of both
the derivatives and the hedged items are recorded in current earnings. For
derivatives designated as cash flow hedges, the effective portion of the changes
in fair value of the derivatives are recorded in Accumulated Other Comprehensive
Income (Loss) and subsequently recognized in earnings when the hedged items
impact earnings. Cash flows of such derivative financial instruments are
classified consistent with the underlying hedged item. The Company currently
does not have any derivative financial instruments subject to accounting or
disclosure under this standard; therefore, the adoption of this standard does
not have a significant effect on the Company's consolidated statement of
financial position, results of operations or cash flows.
In May 2008, the FASB issued new guidance on the hierarchy of generally accepted
accounting principles. The new standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles
(GAAP) for nongovernmental entities. This standard became effective November 15,
2008. Adoption of this standard does not have a significant impact on Company's
results of operations or financial position.
11
In June 2008, the FASB issued a new guidance on determining whether instruments
granted in share-based payment transactions are participating securities.
Securities participating in dividends with common stock according to a formula
are participating securities. This guidance determined that unvested shares of
restricted stock and stock units with nonforfeitable rights to dividends are
participating securities. Participating securities require the "two-class"
method to be used to calculate basic earnings per share. This method lowers
basic earnings per common share. This guidance takes effect in the first quarter
of fiscal years beginning after December 15, 2008 and will be applied
retrospectively for all periods presented. It was effective for the Company on
January 1, 2009. The adoption of this guidance does not have a significant
effect on the Company's consolidated financial statements.
In June 2008, the FASB ratified the consensus reached on determining whether an
instrument (or embedded feature) is indexed to an entity's own stock. This
consensus clarifies the determination of whether an instrument (or an embedded
feature) is indexed to an entity's own stock, which would qualify as a scope
exception under the standard accounting for derivative instruments and hedging
activities. This consensus is effective for financial statements issued for
fiscal years beginning after December 15, 2008. It was effective for the Company
on January 1, 2009. The adoption of this consensus does not have a significant
effect on the company's consolidated financial statements.
In April 2009, the FASB issued a staff position providing additional guidance
on factors to consider in estimating fair value when there has been a
significant decrease in market activity for a financial asset. The guidance was
effective for interim and annual periods ending after June 15, 2009. The
adoption of this guidance does not have a significant effect on the Company's
consolidated financial statements.
In April 2009, the FASB issued a staff position which changes the method for
determining whether an other-than-temporary impairment exists for debt
securities and the amount of the impairment to be recorded in earnings. The
guidance is effective for interim and annual periods ending after June 15, 2009.
The adoption of this guidance does not have a significant effect on the
Company's consolidated financial statements.
In April 2009, the FASB issued a staff position requiring fair value disclosures
in both interim as well as annual financial statements in order to provide more
timely information about the effects of current market conditions on financial
instruments. The guidance is effective for interim and annual periods ending
after June 15, 2009. The adoption of this guidance does not have a significant
effect on the Company's consolidated financial statements.
In May 2009, the FASB issued new guidance on subsequent events. This standard is
intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether that date represents the date the financial statements
were issued or were available to be issued. This disclosure should alert all
users of financial statements that an entity has not evaluated subsequent events
after that date in the set of financial statements being presented. This
standard is effective for interim and annual periods ending after June 15, 2009.
The adoption of this standard had no significant effect on the Company's
financial condition or consolidated results of operations.
In June 2009, the FASB issued a new guidance accounting for transfer of
financial assets - an amendment of a previous standard. This standard requires
that a transferor recognize and initially measure at fair value all assets
obtained (including a transferor's beneficial interest) and liabilities incurred
as a result of a transfer of financial assets accounted for as a sale. This
standard must be applied as of the beginning of each reporting entity's first
annual reporting period that begins after November 15, 2009. The Company is
currently assessing the impact, if any, of this standard on our consolidated
financial statements.
In June 2009, the FASB issued an amendment to the accounting and disclosure
requirements for the consolidation of variable interest entities. The guidance
affects the overall consolidation analysis and requires enhanced disclosures on
involvement with variable interest entities. The guidance is effective for
fiscal years beginning after November 15, 2009. The Company is currently
assessing the impact of the guidance on its consolidated financial position and
results of operations.
In June 2009, the FASB issued new guidance on accounting standards codification
and the hierarchy of generally accepted accounting principles. The FASB
ACCOUNTING STANDARDS CODIFICATION (TM) (Codification) will become the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. This Statement is effective
for financial statements issued for interim and annual periods ending after
September 15, 2009.
In September 2009, the FASB issued additional guidance on measuring the fair
value of liabilities effective for the first reporting period (including interim
periods) beginning after issuance. The Company is currently assessing the impact
on its consolidated financial position and results of operations.
In September 2009, the FASB issued additional guidance on measuring fair value
of certain alternative investments effective for the first reporting period
(including interim periods) ending after December 15, 2009. The Company is
currently assessing the impact on its consolidated financial position and
results of operations.
In October 2009, the FASB issued amendments to the accounting and disclosure for
revenue recognition. These amendments, effective for fiscal years beginning on
or after June 15, 2010 (early adoption is permitted), modify the criteria for
recognizing revenue in multiple element arrangements and the scope of what
constitutes a non-software deliverable. The Company is currently assessing the
impact on its consolidated financial position and results of operations.
12
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
ESW's significant accounting policies are summarized in Note 2 to the
Consolidated Financial Statements included its quarterly reports and its 2008
Annual Report to Shareholders. In preparing the financial statements, we make
estimates and assumptions that affect the expected amounts of assets and
liabilities and disclosure of contingent assets and liabilities. We apply our
accounting policies on a consistent basis. As circumstances change, they are
considered in our estimates and judgments, and future changes in circumstances
could result in changes in amounts at which assets and liabilities are recorded.
FOREIGN CURRENCY TRANSACTIONS
The results of operations and the financial position of ESW's operations in
Canada is principally measured in Canadian currency and translated into U.S.
dollars. The future effects of foreign currency fluctuations between U.S.
dollars and Canadian dollars will be somewhat mitigated by the fact that certain
expenses will be generally incurred in the same currency in which revenues will
be generated. The future reported income of ESW's Canadian subsidiary would be
higher or lower depending on a weakening or strengthening of the U.S. dollar
against the Canadian currency. During the third quarter of 2009, the Company
experienced a net gain on foreign exchange due the weakening of the U.S. Dollar
against the Canadian dollar.
A portion of ESW's assets are based in its foreign operation and are translated
into U.S. dollars at foreign currency exchange rates in effect as of the end of
each period, Accordingly, ESW's consolidated stockholders' investment will
fluctuate depending upon the weakening or strengthening of the Canadian currency
against the U.S. dollar.
Adjustments resulting from ESW's foreign Subsidiaries' financial statements are
included as a component of other comprehensive income within stockholders equity
because the functional currency of subsidiaries is non-USD.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ESW is exposed to financial market risks, including changes in currency exchange
rates and interest rates. The Company also has foreign currency exposures at its
foreign operations related to buying and selling currencies other than the local
currencies. The risk under these interest rate and foreign currency exchange
agreement is not considered to be significant.
FOREIGN EXCHANGE RISK
ESW's foreign subsidiaries conduct their businesses in local currency pre
dominantly the Canadian Dollar. ESW's exposure to foreign currency transaction
gains and losses is the result of certain net receivables due from its foreign
subsidiaries. ESW's exposure to foreign currency translation gains and losses
also arises from the translation of the assets and liabilities of its
subsidiaries to U.S. dollars during consolidation. ESW recognized a translation
gain of $240,234 for the nine month period ended September 30, 2009 reported in
the Consolidated Statements of Changes in Stockholders' Equity (Deficit)
primarily as a result of the exchange rates differences between the US dollar
against the Canadian Dollar.
ESW's strategy for management of currency risk relies primarily upon conducting
its operations in the countries' respective currency and ESW may, from time to
time, engage in hedging intended to reduce its exposure to currency
fluctuations. At September 30, 2009, ESW had no outstanding forward exchange
contracts.
INTEREST RATE RISK
ESW invests in highly liquid investments purchased with an original or remaining
maturity of three months or less at the date of purchase. These investments are
fixed rate investments. Investments in fixed rate interest earning products
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates. However due to
the limited amount of investment in such securities and their terms restricted
to three months or less, ESW does not expect the impact on these investments to
be material. At September 30, 2009, ESW had nil investments.
The interest payable on one of ESW`s subsidiaries bank loan is based on variable
interest rates and therefore affected by changes in market interest rates. The
Canadian prime business interest rates have decreased over the last two years.
Falling interest rates have positively impacted interest expense. Due to the
short term nature of these loans the impact of changing interest rates is not
considered significant.
ESW currently has no variable-rate, long-term debt that exposes ESW to interest
rate risk. Generally, the fair market value of ESW`s fixed interest rate
convertible debentures will increase as interest rates fall and decrease as
interest rates rise. As at September 30, 2009, Convertible Debenture amounted to
$10,309,596 net of deferred costs of $41,484 and debt discount of $248,920.
14
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURE
EVALUATION OF THE COMPANY'S DISCLOSURE AND INTERNAL CONTROLS
The Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" as of the end of the period covered by this
report. This evaluation was done with the participation of management, under the
supervision of the Chief Executive Officer ("CEO") and Chief Accounting Officer
("CAO").
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a cost
effective control system, misstatements due to error or fraud may occur and not
be detected. The Company conducts periodic evaluations of its internal controls
to enhance, where necessary, its procedures and controls.
CONCLUSIONS
Based on our evaluation, the CEO and CAO concluded that the registrant's
disclosures, controls and procedures are effective to ensure that information
required to be disclosed in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Security Exchange Commission rules and forms.
(b) CHANGES IN INTERNAL CONTROLS
Not applicable.
15
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS.
In evaluating an investment in our common stock, investors should consider
carefully, among other things, the risk factors previously disclosed in Part I,
Item 1 of our Annual Report to the Securities and Exchange Commission for the
year ended December 31, 2008, as well as the information contained in this
Quarterly Report and our other reports and registration statements filed with
the Securities and Exchange Commission. There has been no material changes in
the risk factors as previously disclosed under "Risk Factors" in Part I, Item 1
of our Annual Report to the Securities and Exchange Commission for the year
ended December 31, 2008.
ITEM 5. OTHER INFORMATION
Effective October 16, 2009, the Issuer's (the "Company") wholly owned subsidiary
ESW America, Inc. entered into a lease renewal agreement with Nappen &
Associates 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. There
were no modifications to the original economic terms of the lease under the
lease renewal agreement. Under the terms of the lease renewal, the lease term
will now expire February 28, 2013.
ITEM 6. EXHIBITS
EXHIBITS:
31.1 Certification of Chief Executive Officer and President pursuant to the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Accounting Officer, pursuant to the Sarbanes-Oxley
Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: November 13, 2009
Concord, Ontario Canada
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
BY: /S/ DAVID J. JOHNSON
--------------------
DAVID J. JOHNSON
CHIEF EXECUTIVE OFFICER AND PRESIDENT
/S/ PRAVEEN NAIR
---------------------
PRAVEEN NAIR
CHIEF ACCOUNTING OFFICER
1
