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, 2012.
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
incorporation or organization
|
(I.R.S. Employer
Identification No.)
|
200 PROGRESS DRIVE, MONTGOMERVILLE, PA,
18936
(Address of principal executive offices, including postal code.)
(905) 695-4142 and (215) 699-0730
(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 [X] NO [ ]
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 219,450,447 shares of
the registrant's Common Stock outstanding as of November 15, 2012
1PART I.
FINANCIAL INFORMATION
|
|
PAGE
#
|
Item
1.
|
Financial
Statements.
|
|
|
|
|
|
Consolidated
Condensed Balance Sheets as of
|
F2
|
|
September
30, 2012 (unaudited) and December 31, 2011
|
|
|
|
|
|
Consolidated
Condensed Statements of Operations and
|
F3
|
|
Comprehensive
Loss for the Nine and Three Month Periods
|
|
|
Ended
September 30, 2012 and 2011 (unaudited)
|
|
|
|
|
|
Consolidated
Condensed Statement of Changes in Stockholders'
|
F4
|
|
Equity
for the Nine Month Period Ended
|
|
|
September
30, 2012 (unaudited)
|
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows
|
F5
|
|
for
the Nine Month Periods Ended September 30, 2012 and 2011
|
|
|
(unaudited)
|
|
|
|
|
|
Notes
to Consolidated Condensed Financial Statements
|
F6-F20
|
|
(unaudited)
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition
|
|
|
and
Results of Operations
|
2
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
10
|
|
|
|
Item
4.
|
Controls
and Procedures
|
11
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1A.
|
RISK
FACTORS
|
12
|
|
|
|
Item
5.
|
OTHER
INFORMATION
|
12
|
|
|
|
Item
6.
|
EXHIBITS.
|
13
|
ENVIRONMENTAL
SOLUTIONS WORLDWIDE, INC.
|
CONSOLIDATED
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
SEPTEMBER
30,
|
DECEMBER
31,
|
|
|
|
2012
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash and cash equivalents (Note 4)
|
$ 559,109
|
|
$ 1,103,649
|
|
Accounts receivable, net of allowance
|
|
|
|
|
|
for doubtful accounts of $217,732 (2011 - $1,398) (Note 2)
|
783,747
|
|
1,204,734
|
|
Inventory, net of reserve of $252,473 (2011 - $223,007) (Note
5)
|
2,443,494
|
|
2,431,027
|
|
Prepaid expenses and sundry assets
|
162,928
|
|
295,211
|
|
|
|
|
|
|
|
|
Total current assets
|
3,949,278
|
|
5,034,621
|
|
|
|
|
|
|
Property, plant and equipment under construction (Note 6)
|
577,610
|
|
198,416
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated
|
|
|
|
|
depreciation of $4,030,007 (2011 - $6,867,760) (Note 6)
|
1,005,913
|
|
1,271,989
|
|
|
|
|
|
|
|
|
|
$ 5,532,801
|
|
$ 6,505,026
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts payable
|
$ 1,283,179
|
|
$ 1,384,972
|
|
Accrued liabilities
|
649,165
|
|
592,760
|
|
Redeemable Class A special shares (Note 7)
|
-
|
|
453,900
|
|
Customer deposits
|
3,000
|
|
-
|
|
Current portion of loan payable (Note 16)
|
37,058
|
|
-
|
|
Current portion of capital lease obligation (Note 12)
|
-
|
|
1,241
|
|
|
|
|
|
|
|
|
Total current liabilities
|
1,972,402
|
|
2,432,873
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
Loan payable (Note 16)
|
228,613
|
|
-
|
|
|
|
|
|
|
|
|
Total liabilities
|
2,201,015
|
|
2,432,873
|
|
|
|
|
|
|
Commitments and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity (Notes 9 and 10)
|
|
|
|
|
Common stock, $0.001 par value, 250,000,000 (2011 - 250,000,000)
|
|
|
shares authorized; 219,450,447 (2011 - 219,450,447)
|
|
|
|
|
shares issued and outstanding
|
219,450
|
|
219,450
|
|
Additional paid-in capital
|
56,668,756
|
|
56,606,629
|
|
Accumulated deficit
|
(53,556,420)
|
|
(52,753,926)
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
3,331,786
|
|
4,072,153
|
|
|
|
|
|
|
|
|
|
$ 5,532,801
|
|
$ 6,505,026
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
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 PERIOD ENDED SEPTEMBER 30,
|
|
THREE MONTHS PERIOD ENDED SEPTEMBER 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Revenue
|
$7,669,063
|
|
$8,314,076
|
|
$2,793,358
|
|
$3,213,491
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
5,002,206
|
|
7,091,546
|
|
1,802,470
|
|
2,506,812
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
2,666,857
|
|
1,222,530
|
|
990,888
|
|
706,679
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Marketing,
office and general expenses
|
2,548,309
|
|
2,872,802
|
|
682,799
|
|
865,237
|
|
Restructuring
charges
|
-
|
|
1,148,083
|
|
-
|
|
624,809
|
|
Research
and development costs
|
477,582
|
|
591,764
|
|
163,264
|
|
257,867
|
|
Officers'
compensation and directors' fees
|
473,006
|
|
568,290
|
|
161,415
|
|
161,304
|
|
Consulting
and professional fees
|
177,946
|
|
215,126
|
|
42,333
|
|
67,670
|
|
Foreign
exchange loss / (gain)
|
63,698
|
|
68,222
|
|
20,655
|
|
(16,497)
|
|
Depreciation
and amortization (Note 6)
|
152,726
|
|
292,911
|
|
37,609
|
|
78,406
|
|
Impairment
of property, plant and equipment (Note 6)
|
29,984
|
|
275,867
|
|
1,039
|
|
(35,437)
|
|
|
|
|
|
|
|
|
|
|
|
3,923,251
|
|
6,033,065
|
|
1,109,114
|
|
2,003,359
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
(1,256,394)
|
|
(4,810,535)
|
|
(118,226)
|
|
(1,296,680)
|
|
|
|
|
|
|
|
|
|
Gain
on deconsolidation of subsidiary (Note 7)
|
453,900
|
|
-
|
|
-
|
|
-
|
Change
in fair value of exchange feature liability (Note 11)
|
-
|
|
(578,739)
|
|
-
|
|
-
|
Interest
on notes payable to related party
|
-
|
|
(126,850)
|
|
-
|
|
-
|
Interest
accretion expense
|
-
|
|
(3,506,074)
|
|
-
|
|
-
|
Financing
charge on embedded derivative liability
|
-
|
|
(485,101)
|
|
-
|
|
-
|
Gain
on convertible derivative
|
-
|
|
1,336,445
|
|
-
|
|
-
|
Bank
fees related to credit facility covenant waivers
|
-
|
|
(154,205)
|
|
-
|
|
-
|
Gain
on disposal of property and equipment
|
-
|
|
-
|
|
-
|
|
(5,583)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
(802,494)
|
|
(8,325,059)
|
|
(118,226)
|
|
(1,302,263)
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign
currency translation of Canadian subsidiaries
|
-
|
|
(102,366)
|
|
-
|
|
(228,323)
|
|
|
|
|
|
|
|
|
|
Net
loss and comprehensive loss
|
$(802,494)
|
|
$
(8,427,425)
|
|
$
(118,226)
|
|
$(1,530,586)
|
|
|
|
|
|
|
|
|
|
Net
loss per share (basic and diluted) (Note14)
|
$
(0.00)
|
|
$ (0.05)
|
|
$
(0.00)
|
|
$
(0.01)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
(basic
and diluted) (Note14)
|
219,450,447
|
|
154,755,625
|
|
219,450,447
|
|
205,064,429
|
The accompanying notes are an integral part
of these consolidated condensed financial statements.
|
F
3
|
|
|
|
|
|
|
|
|
|
|
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
|
CONSOLIDATED CONDENSED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
|
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER
30, 2012
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Common Stock
|
|
Additional
|
|
Accumulated
|
|
Stockholders'
|
|
Shares
|
|
Amount
|
|
Paid-In Capital
|
|
Deficit
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2012
|
219,450,447
|
|
$
219,450
|
|
$
56,606,629
|
|
$(52,753,926)
|
|
$
4,072,153
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
--
|
|
--
|
|
--
|
|
(802,494)
|
|
(802,494)
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
--
|
|
--
|
|
62,127
|
|
--
|
|
62,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2012
|
219,450,447
|
|
$
219,450
|
|
$
56,668,756
|
|
$(53,556,420)
|
|
$
3,331,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these consolidated condensed financial statements.
|
|
|
|
|
|
|
|
|
|
|
F4
|
|
|
|
|
|
|
|
|
|
|
|
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
|
CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS
|
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER
30,
|
|
|
2012
|
|
2011
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
Net
loss
|
$ (802,494)
|
|
$ (8,325,059)
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
Interest
accretion expense
|
-
|
|
3,506,074
|
|
Change in fair value of exchange feature liability
|
-
|
|
578,739
|
|
Financing
charge on embedded derivative liability
|
-
|
|
485,101
|
|
Loss
on disposal of inventory
|
-
|
|
469,148
|
|
Reserve
on inventory obsolescence
|
252,473
|
|
-
|
|
Depreciation
of property, plant and equipment
|
414,782
|
|
572,057
|
|
Loss
on impairment of property, plant and equipment
|
43,812
|
|
286,444
|
|
Interest
on notes payable to related party
|
-
|
|
126,850
|
|
Stock-based
compensation
|
62,127
|
|
77,118
|
|
Amortization
of patents and trademarks
|
-
|
|
16,145
|
|
Provision
for doubtful accounts
|
213,810
|
|
-
|
|
Gain
on disposal of property and equipment
|
(13,828)
|
|
(10,578)
|
|
Gain
on convertible derivative
|
-
|
|
(1,336,445)
|
|
Gain
on deconsolidation of subsidiary
|
(453,900)
|
|
-
|
|
|
519,276
|
|
4,770,653
|
|
|
|
|
|
Increase
(decrease) in cash flows from operating
|
|
|
|
|
activities
resulting from changes in:
|
|
|
|
|
Accounts
receivable
|
207,177
|
|
657,189
|
|
Inventory
|
(264,940)
|
|
1,079,405
|
|
Prepaid
expenses and sundry assets
|
132,283
|
|
(70,051)
|
|
Accounts
payable and accrued liabilities
|
(45,388)
|
|
(908,569)
|
|
Customer
deposits
|
3,000
|
|
(29,322)
|
|
|
|
|
|
|
|
32,132
|
|
728,652
|
|
|
|
|
|
Net
cash used in operating activities
|
(251,086)
|
|
(2,825,754)
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
Proceeds
from sale of property and equipment
|
13,828
|
|
10,578
|
|
Acquisition
of property, plant and equipment
|
(192,518)
|
|
(27,604)
|
|
Addition
to property, plant and equipment under construction
|
(379,194)
|
|
(2,905)
|
|
|
|
|
|
Net
cash used in investing activities
|
(557,884)
|
|
(19,931)
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
Proceeds
from notes payable to related parties
|
-
|
|
4,000,000
|
|
Proceeds
from loan payable
|
280,787
|
|
-
|
|
Repayment
of loan payable
|
(15,116)
|
|
-
|
|
Rights
offering cost
|
-
|
|
(388,600)
|
|
Issuance
of common stock
|
-
|
|
3,857,180
|
|
Repayment
of bank loan
|
-
|
|
(3,492,108)
|
|
Repayment
of capital lease obligation
|
(1,241)
|
|
(3,479)
|
|
|
|
|
|
Net
cash provided by financing activities
|
264,430
|
|
3,972,993
|
|
|
|
|
|
Net
change in cash and equivalents
|
(544,540)
|
|
1,127,308
|
|
|
|
|
|
Foreign
exchange gain on foreign operations
|
-
|
|
(72,311)
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
1,103,649
|
|
13,328
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
$ 559,109
|
|
$ 1,068,325
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
|
Cash
interest paid
|
$ 3,434
|
|
$ -
|
|
Other
non-cash conversion of loans and related interest
|
$ -
|
|
$ 4,126,850
|
|
Reclassification
of convertible derivative and exchange
|
|
|
|
|
liabilities
to equity
|
$ -
|
|
$ 4,861,256
|
|
Conversion
of accrued expenses to equity
|
$ -
|
|
$ 16,374
|
The accompanying notes are an integral part
of these consolidated condensed financial statements.
|
|
F5
|
|
|
|
|
|
|
NOTES TO THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - NATURE
OF BUSINESS AND GOING CONCERN
Environmental Solutions
Worldwide, Inc. (the "Company" or "ESW") through its
wholly-owned subsidiaries is engaged in the design, development, manufacturing
and sales of emissions control technologies. ESW also provides emissions testing
and environmental certification services with its primary focus on the North
American on-road and off-road diesel engine, chassis and after-treatment market.
ESW currently manufactures and markets a line of catalytic emission control and
enabling technologies for a number of applications focused on the retrofit
market.
The unaudited consolidated
condensed financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S.
GAAP"), which contemplates continuation of the Company as a going concern.
The Company has sustained
recurring operating losses. As of September 30, 2012, the Company had an
accumulated deficit of $53,556,420 and cash and cash equivalents of $559,109.
During the fiscal year 2011 there were significant changes made to ESW’s
business. These changes in operations, the relocation of the Company’s
operations, and the prevailing economic conditions all create uncertainty in
the operating results and, accordingly, there is no assurance that the Company
will be successful in generating sufficient cash flow from operations or
achieving profitability in the near future. As a result, there is substantial
doubt regarding the Company's ability to continue as a going concern. The
Company may require additional financing to fund its continuing operations.
Financing may not be available at acceptable terms or may not be available at
all. The Company's ability to continue as a going concern is dependent on
obtaining additional financing and achieving and maintaining a profitable level
of operations.
Effective July 12, 2011, the
Company raised a total of $4 million through the issuance of unsecured
subordinated promissory notes (the “Notes”) to certain shareholders, including
deemed affiliates of certain members of the Board of Directors of the Company.
Proceeds from the Notes funded working capital related to its 2011 sales,
capital investments and other general corporate purposes. Effective May 10,
2011, the Company entered into an Investment Agreement with certain of its
current shareholders and subordinated lenders under unsecured promissory notes
(the “Bridge Lenders") for an aggregate amount of $4 million. As per the
Investment Agreement, the Bridge Lenders agreed to provide a backstop
commitment (the "Backstop Commitment") to a rights offering targeted
by the Company to raise up to $8 million (the “Qualified Offering"). Under
the Backstop Commitment, the Bridge Lenders agreed to purchase any shares
offered in the Qualified Offering that were not purchased by the Company's
shareholders of record, after giving effect to any oversubscriptions.
Effective June 30, 2011 the
Company completed its rights offering. The Company's shareholders subscribed to
38,955,629 shares including over subscriptions. Under the Qualified Offering
shareholders subscribed to $4.7 million, which was subscribed for via cash
($1.9 million), and the exchange of principal and accrued interest on the Notes
and the Bridge Loan Notes (approximately $2.8 million). Under the Backstop
Commitment, the Bridge Lenders purchased 27,714,385 shares of Common Stock at
price of $0.12 per share for approximately $3.3 million, of which $2.0 million
was paid in cash and $1.3 million was paid for through the exchange of the
balance of principal and accrued interest due on the Notes. As a result of these
transactions, the Company satisfied its obligations with the Bridge Lenders and
effectively cancelled the Notes effective June 30, 2011.
Effective July 18, 2011, ESW’s
wholly-owned subsidiary ESW Canada Inc., paid its senior lender the amount of
$1.5 million (Canadian dollars) from the proceeds of the rights offering to
liquidate the outstanding balance on the bank loan. The senior lender has
discharged all liens, encumbrances and securities against the Company and its
subsidiaries and cancelled the June 30, 2010 demand revolving credit facility
agreement.
Effective May 1, 2012 the
Company’s wholly owned subsidiary ESW America Inc. received a $280,787 low
interest loan from The Machinery and Equipment Loan Fund (“MELF”), which is
administered by the Pennsylvania Department of Community and Economic
Development. Proceeds from the loan were used to purchase and upgrade equipment
at the air testing facility.
These unaudited consolidated
condensed 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. All adjustments, consisting only of
normal recurring items, considered necessary for fair presentation have been
included in these unaudited consolidated condensed financial statements.
F6
NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF
CONSOLIDATION
The unaudited consolidated
condensed financial statements include the accounts of the Company and its
wholly-owned subsidiaries, ESW America Inc. ("ESWA"), ESW
Technologies Inc. ("ESWT"), ESW Canada Inc. ("ESWC") and
Technology Fabricators Inc. (“TFI”). All inter-company transactions and
balances have been eliminated on consolidation. Amounts in the unaudited
consolidated condensed financial statements are expressed in U.S. dollars.
Effective February 3, 2012 BBL
Technologies Inc. (“BBL”), a non-operating subsidiary, filed for bankruptcy in
the Province of Ontario, Canada. At the time of filing, BBL had no assets but
had issued and outstanding redeemable Class A special shares. The Company did
not provide any guarantee in relation to these redeemable Class A special
shares. As a result of BBL’s filing for bankruptcy, the Company lost its
control over BBL and has deconsolidated BBL from the unaudited consolidated
condensed financial statements on the filing date. The Company recorded a
$453,900 and $0 gain in the unaudited consolidated condensed statement of
operations and comprehensive loss for the nine and three month periods ended September
30, 2012 respectively, upon deconsolidation of BBL.
ESTIMATES
The preparation of unaudited
consolidated condensed financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expense during the reported period. Actual results could differ from those
estimates. Significant estimates include amounts for inventory valuation,
impairment of property plant and equipment, share-based compensation, accrued
liabilities and accounts receivable exposures.
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
The Company extends unsecured
credit to its customers in the ordinary course of business but mitigates the
associated credit risk by performing credit checks and actively pursuing past
due accounts. An allowance for doubtful accounts is estimated and recorded
based on management's assessment of the credit history with the customer and
current relationships with them. On this basis management has determined that
an allowance for doubtful accounts of $217,732 and $1,398 was appropriate as of
September 30, 2012 and December 31, 2011, respectively.
INVENTORY
Inventory is stated at the lower
of cost or market determined using the first-in, first-out method. Inventory is
periodically reviewed for use and obsolescence, and adjusted as necessary.
Inventory consists of raw materials, work-in-process and finished goods.
PROPERTY, PLANT
AND EQUIPMENT UNDER CONSTRUCTION
The Company capitalizes
customized equipment built to be used in the future day to day operations at
cost. Once complete and available for use, the cost for accounting purposes is
transferred to property, plant and equipment, where normal depreciation rates
apply.
PROPERTY, PLANT
AND EQUIPMENT
Property, plant and equipment are
recorded at cost. Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets, generally 5 to 7 years. Maintenance and
repairs are charged to operations as incurred. Significant renewals and
betterments are capitalized.
F7
IMPAIRMENT
OF LONG-LIVED ASSETS
The Company follows the Accounting
Standards Codification (“ASC”) Topic 360, which requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate
that the assets' carrying amounts may not be recoverable. In performing the
review for recoverability, if future undiscounted cash flows (excluding
interest charges) from the use and ultimate disposition of the assets are less
than their carrying values, an impairment loss represented by the difference
between its fair value and carrying value, is recognized. Properties held for
sale are recorded at the lower of the carrying amount or the expected sales
price less costs to sell. Management reviewed certain assets for impairment in
the first quarter of 2012 (see Note 6 for details).
FAIR VALUE OF
FINANCIAL INSTRUMENTS
ASC Topic 820 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements.
Included in the ASC Topic 820
framework is a three level valuation inputs hierarchy with Level 1 being inputs
and transactions that can be effectively fully observed by market participants
spanning to Level 3 where estimates are unobservable by market participants
outside of the Company and must be estimated using assumptions developed by the
Company. The Company discloses the lowest level input significant to each
category of asset or liability valued within the scope of ASC Topic 820 and the
valuation method as exchange, income or use. The Company uses inputs which are
as observable as possible and the methods most applicable to the specific
situation of each company or valued item.
The carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities
and loan payable approximate fair value because of their short-term nature or
current market rate for the loan payable with a fixed rate. Per ASC Topic 820
framework these are considered Level 2 inputs where inputs other than Level 1
that are observable, either directly or indirectly, such as quoted prices in
active markets for similar assets or liabilities, quoted prices for identical
or similar assets or liabilities in markets that are not active, or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Interest rate risk is the risk
that the value of a financial instrument might be adversely affected by a
change in the interest rates. In seeking to minimize the risks from interest
rate fluctuations, the Company manages exposure through its normal operating
and financing activities.
REVENUE
RECOGNITION
The Company derives revenue
primarily from the sale of its catalytic products. In accordance with Staff
Accounting Bulletin No. 104, revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, the amount is fixed or
determinable and collection is reasonably assured.
The Company also derives revenue
(approximately 7.9% and 4.9% of total revenue during the nine month periods
ended September 30, 2012 and 2011, respectively) from providing air testing and
environmental certification services. Revenues are recognized upon delivery of
testing services when persuasive evidence of an arrangement exists and
collection of the related receivable is reasonably assured.
F8
LOSS PER SHARE
Loss per common share is computed
by dividing the net loss by the weighted average number of common shares
outstanding during the year. Common stock equivalents are excluded from the
computation of diluted loss per share when their effect is anti-dilutive.
INCOME TAXES
Income taxes are computed in
accordance with the provisions of ASC Topic 740, which requires, among other
things, a liability approach to calculating deferred income taxes. The Company
recognizes deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in its financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. The
Company is required to make certain estimates and judgments about the application
of tax law, the expected resolution of uncertain tax positions and other
matters. In the event that uncertain tax positions are resolved for amounts
different than the Company's estimates, or the related statutes of limitations
expire without the assessment of additional income taxes, the Company will be
required to adjust the amounts of the related assets and liabilities in the
period in which such events occur.
Such adjustments may have a
material impact on ESW's income tax provision and results of operations.
SHIPPING AND
HANDLING COSTS
The Company’s shipping and
handling costs of $27,084 and $30,466 are included in cost of sales for the
three month periods ended September 30, 2012 and 2011, respectively.
Additionally, the Company has recorded recoveries of these costs amounting to $23,327
and $19,251, which are included in revenues for the three month periods ended September
30, 2012 and 2011, respectively.
The Company’s shipping and
handling costs of $74,145 and $87,625 are included in cost of sales for the nine
month periods ended September 30, 2012 and 2011, respectively. Additionally,
the Company has recorded recoveries of these costs amounting to $59,324 and $58,952,
which are included in revenues for the nine month periods ended September 30,
2012 and 2011, respectively.
RESEARCH AND
DEVELOPMENT
The Company is engaged in
research and development work. Research and development costs are charged as
operating expense of the Company as incurred. Any grant money received for
research and development work is used to offset these expenditures. For the
three month periods ended September 30, 2012 and 2011, the Company expensed $163,264
and $257,867, net of grant revenues, respectively, towards research and
development costs. For the nine month periods ended September 30, 2012 and
2011, the Company expensed $477,582 and $591,764, net of grant revenues,
respectively, towards research and development costs.
For the three month periods ended
September 30, 2012 and 2011, gross research and development expense, excluding
any offsetting grant revenues, amounted to $163,264 and $257,867, respectively,
and grant money amounted to $0 and $0, respectively. For the nine month periods
ended September 30, 2012 and 2011, gross research and development expense,
excluding any offsetting grant revenues, amounted to $477,582 and $870,476,
respectively, and grant money amounted to $0 and $278,712, respectively.
FOREIGN CURRENCY
TRANSLATION
The functional currency of the
Company and its foreign subsidiaries is the U.S. dollar. All of the Company’s
revenue and materials purchased from suppliers are denominated in or linked to
the U.S. dollar. Transactions denominated in currencies other than a functional
currency are converted to the functional currency on the transaction date, and
any resulting assets or liabilities are further translated at each reporting
date and at settlement. Gains and losses recognized upon such translations are
included within foreign exchange gain (loss) in the unaudited consolidated
condensed statements of operations and comprehensive loss.
PRODUCT
WARRANTIES
The Company provides for
estimated warranty costs at the time of sale and accrues for specific items at
the time their existence is known and the amounts are determinable. The Company
estimates warranty costs using standard quantitative measures based on industry
warranty claim experience and evaluation of specific customer warranty issues.
The Company currently estimates warranty costs as 2% of revenue. As of September
30, 2012 and December 31, 2011, $196,743 and $192,674, respectively, was
accrued as warranty provision and included in accrued liabilities. For the
three month periods ended September 30, 2012 and 2011, the total warranty,
service, service travel and installation costs included in cost of sales were $74,311
and $83,712, respectively. For the nine month periods ended September 30, 2012
and 2011, the total warranty, service, service travel and installation costs
included in cost of sales were $216,745 and $175,699, respectively.
F9
SEGMENT
REPORTING
ESW operates in two reportable
segments. ASC 280-10, "Disclosures about Segments of an Enterprise and
Related Information", establishes standards for the way that public
business enterprises report information about operating segments in the
Company’s consolidated condensed financial statements. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. ESW’s operating
segments include manufacturing operations and air testing services (see Note
13). ESW’s chief operating decision maker is the Company’s Executive Chairman.
RESTRUCTURING
CHARGES
In 2011, ESW underwent a
significant restructuring of its operations. ESW recognizes restructuring
expenses as they are incurred. ESW also evaluated the inventory and property,
plant and equipment associated with restructuring actions for impairment. Asset
impairment and accelerated depreciation expenses primarily relate to inventory
write-downs for rationalized products and adjustments in the carrying value of
the closed facilities to the Company’s estimated fair value. In addition, the
remaining useful lives of other property, plant and equipment associated with
the related operations were re-evaluated based on the respective plan,
resulting in the impairment of certain assets. In accordance with ASC
420-10-25-11 costs to terminate an operating lease arise when a lessee will
either: (a) terminate an operating lease; or (b) if it is unable to terminate
the lease, discontinue its use of the asset and continue to make lease payments
over the remaining term of the lease without benefit. When the lease will be
terminated, the lessee should recognize a liability for the cost of terminating
the lease at the time the lease is terminated. If the lease will not be
terminated and the lessee will continue to incur costs under the lease without
future benefit, the lessee should recognize a liability on the cease-use date
(the date the lessee discontinues its use of the asset). In accordance with
paragraphs 420-10-30-7 through 30-9, a liability for the remaining lease
rentals, reduced by actual (or estimated) sublease rentals, would be recognized
and measured at its fair value at the cease-use date. In accordance with
paragraphs 420-10-35-1 through 35-4, the liability would be adjusted for
changes, if any, resulting from revisions to estimated cash flows after the
cease-use date, measured using the credit-adjusted risk-free rate that was used
to measure the liability initially.
As disclosed in Note 12, the
Company entered into an agreement with its former landlord for the full release
of any future obligations under the lease agreement.
COMPARATIVE
FIGURES
Certain 2011 figures have been
reclassified to conform to the current financial statement presentation.
NOTE 3 –
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
In June 2011, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2011-5 – “Comprehensive Income – Presentation of Comprehensive Income”.
This statement removed the presentation of comprehensive income in the
statement of changes in stockholders’ equity. The only two allowable
presentations are below the components of net income in a statement of comprehensive
income or in a separate statement of comprehensive income that begins with
total net income. The guidance was effective for interim or annual
reporting periods beginning after December 15, 2011. The adoption of this ASU
had no effect on the Company's unaudited consolidated condensed financial
statements.
NOTE 4 - CASH
AND CASH EQUIVALENTS
Cash and cash equivalents include
cash and highly liquid investments purchased with original maturities of generally
90 days or less at the date of purchase. At September 30, 2012 and December 31,
2011, all of the Company's cash and cash equivalents consisted of cash.
F10
NOTE 5 - INVENTORY
Inventory
consists of:
|
September 30,
|
December 31,
|
Inventory
|
2012
|
2011
|
|
|
|
Raw
materials
|
$ 1,027,393
|
$ 846,113
|
Work-in-process
|
1,627,338
|
1,705,346
|
Finished
goods
|
41,236
|
102,575
|
|
2,695,967
|
2,654,034
|
Less:
reserve for inventory obsolescence
|
(252,473)
|
(223,007)
|
|
|
|
Total
|
$ 2,443,494
|
$ 2,431,027
|
NOTE 6 -
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following:
|
September 30,
|
December 31,
|
Classification
|
2012
|
2011
|
|
|
|
Plant,
machinery and equipment
|
$ 3,746,328
|
$ 6,294,458
|
Office
equipment
|
152,329
|
357,717
|
Furniture
and fixtures
|
242,090
|
449,147
|
Vehicles
|
19,468
|
25,604
|
Leasehold
improvements
|
875,705
|
1,012,823
|
|
5,035,920
|
8,139,749
|
Less:
accumulated depreciation
|
(4,030,007)
|
(6,867,760)
|
|
|
|
Total
|
$ 1,005,913
|
$ 1,271,989
|
Depreciation
expense recognized in the unaudited consolidated condensed statements of
operations and comprehensive loss was included in the following captions:
|
|
|
September 30,
|
September 30,
|
Depreciation Expense
|
2012
|
2011
|
|
|
|
Cost
of sales
|
$ 82,369
|
$ 44,376
|
Operating
expenses
|
37,609
|
78,406
|
Research
and development
|
-
|
29,180
|
|
|
|
Total
|
$ 119,978
|
$ 151,962
|
|
|
|
|
|
September 30,
|
September 30,
|
Depreciation Expense
|
2012
|
2011
|
|
|
|
Cost
of sales
|
$ 262,056
|
$ 207,920
|
Operating
expenses
|
152,726
|
276,765
|
Research
and development
|
-
|
87,372
|
|
|
|
Total
|
$ 414,782
|
$ 572,057
|
F11
At
September 30, 2012 and December 31, 2011, the Company had $577,610 and
$198,416, respectively, of customized equipment under construction.
At
March 31, 2012, the Company recognized an impairment loss for furniture,
fixtures and office equipment located at its Canadian facility. The estimated
recovery from the sale of furniture, fixtures and office equipment is expected
to be nominal and, accordingly, the Company has valued these assets as $0 and
recorded an impairment loss equal to the full amount of their carrying value.
The
details of impairment losses recognized are summarized in the following table:
|
For the three month period ended
|
Asset grouping
|
September 30, 2012
|
September 30, 2011
|
Effect
of exchange rate fluctuations
|
$ 1,039
|
$ (24,859)
|
Gain
on disposal of plant and equipment
|
-
|
(10,578)
|
|
|
|
Total
impairment loss recognized
|
$ 1,039
|
$ (35,437)
|
|
For the nine month period ended
|
Asset grouping
|
September 30, 2012
|
September 30, 2011
|
Plant
and machinery
|
$
-
|
$ 180,993
|
Leasehold
improvements
|
-
|
93,328
|
Furniture
and fixtures (Abandonment)
|
1,864
|
-
|
Office
equipment (Held for sale)
|
2,207
|
36,983
|
Computer
hardware (Held for sale)
|
19,131
|
-
|
Computer
software (Held for sale)
|
20,610
|
-
|
Total
impairment loss recognized
|
43,812
|
311,304
|
Effect
of exchange rate fluctuations
|
-
|
(24,859)
|
Gain
on disposal of plant and equipment
|
(13,828)
|
(10,578)
|
|
|
|
Total
impairment loss recognized
|
$ 29,984
|
$ 275,867
|
NOTE 7 -
REDEEMABLE CLASS A SPECIAL SHARES
At December 31, 2011, the
redeemable Class A special shares that were issued by the Company's
wholly-owned subsidiary, BBL, without par value, were redeemable on demand by
the holder of the shares, which is a private Ontario Corporation, at $700,000
Canadian (historically translated to $453,900 at December 31, 2011). On
February 3, 2012, BBL filed for bankruptcy and the redeemable Class A special
shares were subsequently cancelled.
F12
NOTE
8 - INCOME TAXES
As of September 30, 2012, there are tax
loss carry forwards for Federal income tax purposes of approximately
$40,550,549 available to offset future taxable income in the United States. The
tax loss carry forwards expire in various years through 2032. The Company does
not expect to incur a Federal income tax liability in the foreseeable future.
Accordingly, a valuation allowance for the full amount of the related deferred
tax asset of approximately $14,192,692 has been established until realizations
of the tax benefit from the loss carry forwards meet the "more likely than
not" criteria.
Originating
|
Loss
|
Year
|
Carryforward
|
|
|
1999
|
$ 407,607
|
2000
|
2,109,716
|
2001
|
2,368,368
|
2002
|
917,626
|
2003
|
637,458
|
2004
|
1,621,175
|
2005
|
2,276,330
|
2006
|
3,336,964
|
2007
|
3,378,355
|
2008
|
3,348,694
|
2009
|
2,927,096
|
2010
|
2,269,987
|
2011
|
2,212,173
|
2012
|
12,739,000
|
|
|
Total
|
$ 40,550,549
|
Additionally, as
of September 30, 2012, the Company's two wholly-owned Canadian subsidiaries
had non-capital tax loss carry forwards of approximately $3,196,134 available
to be used, in future periods, to offset taxable income. The loss carry
forwards expire in 2031. The deferred tax asset of approximately $846,975 has
been fully offset by a valuation allowance until realization of the tax benefit
from the non-capital tax loss carry forwards are more likely than not.
The reconciliation of the difference
between the income tax provision using the statutory tax rates and the
effective tax rate is as follows:
|
For the nine month periods ended
|
|
|
September 30,
|
September 30,
|
|
2012
|
2011
|
Statutory
tax rates:
|
|
|
|
U.S.
|
35.00%
|
35.00%
|
|
Canada
|
26.50%
|
26.50%
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
|
U.S.
|
$ (12,801,667)
|
$ (5,157,452)
|
|
Foreign
|
11,999,173
|
(3,167,607)
|
|
$ (802,494)
|
$ (8,325,059)
|
Expected
tax recovery at statutory tax rates
|
$ (1,300,803)
|
$ (2,644,524)
|
|
Differences
in income taxes resulting from:
|
|
|
|
|
Depreciation
and impairment (foreign operations)
|
(248,226)
|
69,293
|
|
|
Change
in fair value of exchange feature liability
|
-
|
202,559
|
|
|
Financing
charge on embedded derivative liability
|
-
|
169,785
|
|
|
Stock-based
compensation
|
21,745
|
26,982
|
|
|
Gain
on convertible derivative
|
-
|
(467,756)
|
|
|
Long-term
debt interest expense accretion
|
-
|
1,227,126
|
|
|
(1,527,284)
|
(1,416,535)
|
|
Benefit
of losses not recognized
|
1,527,284
|
1,416,535
|
|
Income
tax provision per unaudited consolidated
|
|
|
|
|
condensed
financial statements
|
$ -
|
$ -
|
|
|
|
|
|
|
|
F13
Components
of deferred income tax assets are as follows:
|
September 30,
|
December 31,
|
|
2012
|
2011
|
Property,
plant and equipment
|
$ -
|
$ 488,494
|
Tax
loss carryforwards
|
15,039,667
|
13,255,075
|
|
15,039,667
|
13,743,569
|
Valuation
allowance
|
(15,039,667)
|
(13,743,569)
|
|
|
|
Carrying
value
|
$ -
|
$ -
|
Valuation allowances reflect the
deferred tax benefits that management is uncertain about regarding the
Company's ability to utilize in the future.
Based on the Company’s current
tax loss position tax benefits to be recognized is more-likely-than-not to be
sustained upon examination by taxing authorities. The Company does not believe
there will be any material changes in its unrecognized tax positions over the
next twelve months.
The Company will recognize
interest and penalties related to unrecognized tax benefits within the income
tax expense line in the unaudited consolidated condensed statements of operations
and comprehensive loss. Accrued interest and penalties will be included within
the related tax liability line in the consolidated condensed balance sheets.
In many cases the Company's
uncertain tax positions are related to tax years that remain subject to
examination by tax authorities. The following describes the open tax years, by
major tax jurisdiction, as of September 30, 2012:
United
States - Federal
|
2008
– present
|
United
States - State
|
2008
– present
|
Canada
- Federal
|
2009
– present
|
Canada
- Provincial
|
2009
– present
|
NOTE 9 -
STOCKHOLDERS' EQUITY
No
stock was issued during the nine month period ended September 30, 2012.
F14
NOTE
10 - STOCK OPTIONS AND WARRANT GRANTS
STOCK OPTIONS
On April 15, 2010, the Board of
Directors (the “Board”) granted an aggregate award of 900,000 stock options to
a former executive officer and former director and one director. The options
vest over a period of three years with an exercise price of $0.65 (fair market
value of the Company's common stock as of the date of grant) with expiry of
five years from the date of award. Effective February 7, 2011, with the
resignation of a director, the unvested portion of the stock options were
cancelled as a result of the resignation. The balance of the stock option
expense of the April 15, 2010 award is as follows:
|
Stock Option
|
Date
|
Expense
|
April
15, 2011
|
$ 62,127
|
April
15, 2012
|
$ 82,836
|
April
15, 2013
|
$ 20,709
|
A summary of option transactions,
including those granted pursuant to the terms of certain employment and other
agreements, is as follows:
|
Stock purchase options
|
Weighted average exercise price
|
Outstanding,
January 1, 2011
|
3,600,000
|
$ 0.68
|
Granted
|
475,000
|
$ 0.12
|
Expired
or cancelled
|
(500,000)
|
$ (0.73)
|
Outstanding,
December 31, 2011
|
3,575,000
|
$ 0.60
|
Expired
|
(2,150,000)
|
$ (0.71)
|
|
|
|
Outstanding,
September 30, 2012
|
1,425,000
|
$ 0.43
|
At September 30, 2012, the
outstanding options have a weighted average remaining life of 22 months. All
options issued prior to 2010 have vested, and the April 15, 2010 options vest
over a period of three years, in three equal parts each year.
No stock options were granted for
the nine month period ended September 30, 2012. The weighted average fair value
of options granted during 2011 was $0.02 and was estimated using the
Black-Scholes option pricing model, using the following assumptions:
|
2011
|
Expected
volatility
|
111%
|
Risk-free
interest rate
|
0.42%
|
Expected
life
|
1.5 yrs
|
Dividend
yield
|
0.00%
|
Forfeiture
rate
|
0.00%
|
F15
The Black-Scholes option-pricing
model used by the Company to calculate options and warrant values was developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock purchase options and warrants. The model also requires highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated values.
At September 30, 2012, the
Company had outstanding options as follows:
Number of
|
Exercise
|
|
Options
|
Price
|
Expiration Date
|
100,000
|
$1.00
|
February 8, 2013
|
250,000
|
$0.27
|
August 6, 2013
|
600,000
|
$0.65
|
April 15, 2015
|
250,000
|
$0.12
|
December 31, 2012
|
225,000
|
$0.12
|
June 30, 2016
|
1,425,000
|
|
|
Effective November 6, 2011, the
Board approved restricted stock grants to seven Board members under the 2010
stock incentive plan. As per the terms of the grant, each of the seven Board
members will receive 150,000 shares vesting in equal parts on December 31,
2011, December 31, 2012 and December 31, 2013 subject to the execution of the
requisite grant agreements. The Board also approved restricted stock grants to two
Board members for serving as chair to various committees. As per the terms of
the grant, each of the two Board members will receive 200,000 shares vesting
immediately subject to the execution of the requisite grant agreements.
Stock-based compensation expense will be recorded as of the vesting terms of
the grants. Of the vested shares 650,000 restricted shares of common stock were
issued as of December 31, 2011.
Effective January 12, 2012, the
Board approved a management incentive plan which includes a 10% restricted
common equity pool for management. Key participants of this plan will be
executive officers and a member of the Company’s Board. Secondary participants
will include other management with a trickle down to other core members of the
team. The program entails a 5 year vesting program commencing January 2012,
with an accelerated vesting schedule for certain participants of the plan. The
equity grants are effective subject to the execution of the requisite grant
agreements. No agreements have been executed to date.
During the nine month periods
ended September 30, 2012 and 2011, $62,127 and $77,118, respectively, has been
recorded in the unaudited consolidated condensed statements of operations and
comprehensive loss for stock-based compensation.
WARRANTS
Warrants issued in connection
with various private placements of equity securities are treated as a capital
transaction and no income statement recognition is required. A summary of
warrant transactions is as follows:
|
Warrants
|
Weighted average
exercise price
|
Outstanding,
January 1, 2010
|
-
|
$ -
|
Granted
|
1,545,000
|
$ 0.65
|
Expired
or cancelled
|
-
|
$ -
|
Outstanding,
December 31, 2010, and 2011,
|
|
|
and
September 30, 2012
|
1,545,000
|
$
0.65
|
F16
In
2010, the Company closed a unit offering in the amount of $300,000 per tranche
for gross proceeds of $600,000 whereby the Company issued 1,500,000 units. The
unit offering was for up to $5 million. The units were in the form of shares of
the Company's common stock, at $0.40 per share plus for each share of common
stock subscribed to under the unit offer the investor received one warrant
exercisable for 1 share of common stock at $0.55; if an Investor Warrant is
exercised between the first and second years from issuance, the exercise price
will be $0.65. All investor warrants as issued are subject to adjustment in the
event of a stock split or similar adjustment by the Company. A commission of 4%
of the gross proceeds was paid and 7.5 units for every $100 of the gross
proceeds raised were payable for brokers’ fees.
No warrants were issued during
the nine month periods ended September 30, 2012 and 2011.
NOTE 11 -
RELATED PARTY TRANSACTIONS
During the nine month period
ended September 30, 2012, in addition to fees and salaries; reimbursement of
business expenses; transactions with related parties include:
•
$225,000 related
to services provided by Orchard Capital Corporation under a services agreement
effective January 30, 2011. On April 19, 2011, the Company's Board ratified a
Services Agreement (the "Agreement") between the Company and Orchard
Capital Corporation ("Orchard") which was approved by the Company's
Compensation Committee. Under the Agreement, Orchard agreed to provide services
that may be mutually agreed to by and between Orchard and the Company including
those duties customarily performed by the Chairman of the Board and executive
of the Company as well as providing advice and consultation on general
corporate matters and other projects as may be assigned by the Company's Board
as needed. Orchard is controlled by Richard Ressler. Certain affiliated entities
of Orchard as well as Richard Ressler own shares of the Company.
•
Mr. Nitin
Amersey who is a director of the Company is listed as a control person with the
Securities and Exchange Commission of Bay City Transfer Agency Registrar Inc.,
the Company's transfer agent. Mr. Amersey is also a control person in Freeland
Venture Resources Inc., which provide Edgar filing services to the Company. For
the nine month period ended September 30, 2012, the Company paid Bay City
Transfer Agency Registrar Inc. and Freeland Venture Resources Inc., $9,896 for
services rendered.
In addition to fees and salaries
and reimbursement of business expenses, during the nine month period ended September
30, 2011 transactions with related parties include:
•
$4,000,000
issuance of unsecured subordinated promissory notes to certain shareholders and
deemed affiliates of certain members of the Board of Directors. Interest
expense on notes payable to related parties amounted to $126,850.
• Investment
agreement with Bridge lenders effective May 10, 2011.
•
The effect of an
exchange feature included in the terms of the Share Subscription Agreement for
$3,000,000 of Convertible Debentures issued on March 19, 2010 ("2010
Debentures") and fully converted including interest into 6,007,595 shares
of common stock on March 25, 2010. At March 31, 2011 the exchange feature
liability related to the convertible debentures was re-valued to $2,280,000
with the change in fair value of exchange feature liability of $578,739 expense
recorded in the unaudited consolidated condensed statements of operations and
comprehensive loss. In March 2010, Orchard invested $1 million in the $3
million convertible debentures offering; of the exchange feature liability
$760,000 was attributed to the investment made by Orchard based on their
relative contribution to the March 2010 subscription, this amount was
transferred to equity as of June 30, 2011. Orchard received 6,333,333
additional shares of Common Stock in conjunction with certain rights under the
Prior Subscription Agreements as the Company closed its Qualified Offering on
June 30, 2011.
•
$200,000 related
to services provided by Orchard under a services agreement effective January
30, 2011.
•
For the nine month
period ended September 30, 2011, the Company paid Bay City Transfer Agency
Registrar Inc. $17,005.
NOTE 12 -
COMMITMENTS AND CONTINGENCIES
LEASES
Effective November 24, 2004, the
Company's wholly-owned subsidiary, ESWA, entered into a lease agreement for
approximately 40,220 square feet of leasehold space at 2 Bethlehem Pike
Industrial Center, Montgomery Township, Pennsylvania. The leasehold space
houses the Company's research and development facilities and also houses ESW’s
manufacturing operations. The lease commenced on January 15, 2005. Effective
October 16, 2009, the Company's wholly-owned subsidiary ESWA entered into a
lease renewal agreement with Nappen & Associates for the leasehold property
in Pennsylvania. There were no modifications to the original economic terms of
the lease under the lease renewal agreement. Under the terms of the lease
renewal, the lease term was extended to February 28, 2013. Effective September
24, 2012, ESWA entered into a second lease amendment agreement with Nappen
& Associates for the leasehold property in Pennsylvania, whereby ESWA
extended the term of the lease agreement by an additional 5 years. There were
no modifications to the original economic terms of the lease. Under the terms
of the second lease renewal, the lease will expire on February 28, 2018.
F17
Effective December 20, 2004, the
Company's wholly-owned subsidiary, ESWC, entered into a lease agreement for
approximately 50,000 square feet of leasehold space in Concord, Ontario,
Canada. The leasehold space previously housed the Company's executive offices
and the manufacturing operations. The renewed lease period commenced on October
1, 2010 and ended on September 30, 2015. Effective May 1, 2012, the landlord
terminated the lease agreement for the facility. The facility had been
vacated prior to the lease termination. Thereafter effective May 22,
2012, ESWC and its former landlord entered into an agreement for the full
release of any future obligations under the lease agreement subject to
payment of a mutually agreed consideration payable through September
2012. The agreement provides for a full and complete release of ESWC
by the landlord for the consideration and terms under the lease agreement. ESWC
has fulfilled its terms of the release. The following is a summary of the
minimum annual lease payments:
Year
Ending December 31,
|
Amount
|
|
|
2012
(excluding the nine months ended September 30, 2012)
|
$ 45,248
|
2013
|
180,990
|
2014
|
180,990
|
2015
|
180,990
|
2016
|
180,990
|
2017
|
180,990
|
2018
|
30,165
|
|
|
Total
|
$ 980,363
|
LEGAL MATTERS
From time to time, the Company
may be involved in a variety of claims, suits, investigations and proceedings
arising from the ordinary course of our business, collections claims, breach of
contract claims, labor and employment claims, tax and other matters. Although
claims, suits, investigations and proceedings are inherently uncertain and
their results cannot be predicted with certainty, ESW believes that the
resolution of current pending matters will not have a material adverse effect
on its business, consolidated financial position, results of operations or cash
flow. Regardless of the outcome, litigation can have an adverse impact on ESW
because of legal costs, diversion of management resources and other factors.
The Company is pursuing a lawsuit
in New York for collection of unpaid invoices related to goods delivered to a
former dealer.
CAPITAL LEASE
OBLIGATION
As of September 30, 2012 and
December 31, 2011, the Company’s capital lease obligation amounted to $0 and
$1,241, respectively.
NOTE 13 –
OPERATING SEGMENTS
The Company has two principal
operating segments, air testing services and catalyst manufacturing. These
operating segments were determined based on the nature of the products and
services offered. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision-maker in deciding how to allocate
resources and in assessing performance. The Company’s Executive Chairman has
been identified as the chief operating decision-maker, and directs the
allocation of resources to operating segments based on the profitability and
cash flows of each respective segment.
The Company evaluates performance
based on several factors, of which the primary financial measure is net income.
The accounting policies of the business segments are the same as those
described in “Note 2: Summary of Accounting Policies.” No intersegment sales
were made for the nine month periods ended September 30, 2012 and 2011. The
following tables show the operations of the Company’s reportable segments:
F18
For the three
month period ended September 30, 2012
|
|
Catalyst
|
Air Testing
|
Unallocated
|
Total
|
|
|
|
|
|
Revenue
|
$ 2,596,922
|
$ 196,436
|
$ -
|
$ 2,793,358
|
Net
income / (loss)
|
$ 330,400
|
$42,507
|
$ (491,133)
|
$ (118,226)
|
|
|
|
|
|
For the nine month period ended September
30, 2012
|
|
Catalyst
|
Air Testing
|
Unallocated
|
Total
|
|
|
|
|
|
Revenue
|
$ 7,061,463
|
$ 607,599
|
$ -
|
$ 7,669,063
|
Net
loss
|
$ (12,485)
|
$ (407,628)
|
$ (382,381)
|
$ (802,494)
|
|
|
|
|
|
As of September 30, 2012
|
|
Catalyst
|
Air Testing
|
Unallocated
|
Total
|
|
|
|
|
|
Total
assets
|
$ 3,897,161
|
$ 1,509,682
|
$ 125,958
|
$ 5,532,801
|
Property,
plant and equipment
|
|
|
|
|
under construction
|
$ 19,750
|
$ 557,860
|
$ -
|
$ 577,610
|
Property,
plant and equipment
|
$ 199,494
|
$ 806,419
|
$ -
|
$ 1,005,913
|
Accounts
receivable
|
$ 663,712
|
$ 120,035
|
$ -
|
$ 783,747
|
Inventories
|
$ 2,368,061
|
$ 75,433
|
$ -
|
$ 2,443,494
|
|
|
|
|
|
For the three month period ended
September 30, 2011
|
|
Catalyst
|
Air Testing
|
Unallocated
|
Total
|
|
|
|
|
|
Revenue
|
$ 2,985,390
|
$ 228,101
|
$ -
|
$ 3,213,491
|
Net
loss
|
$ (706,163)
|
$ (435,169)
|
$ (160 ,931)
|
$ (1,302,263)
|
|
|
|
|
|
For the nine month period ended
September 30, 2011
|
|
Catalyst
|
Air Testing
|
Unallocated
|
Total
|
|
|
|
|
|
Revenue
|
$ 7,907,566
|
$ 406,510
|
$ -
|
$ 8,314,076
|
Net
loss
|
$ (3,184,167)
|
$ (1,118,121)
|
$ (4,022,771)
|
$ (8,325,059)
|
|
|
|
|
|
As of December 31, 2011
|
|
Catalyst
|
Air Testing
|
Unallocated
|
Total
|
|
|
|
|
|
Total
assets
|
$ 4,329,986
|
$ 1,551,848
|
$ 623,192
|
$ 6,505,026
|
Property,
plant and equipment
|
|
|
|
|
under construction
|
$-
|
$ 198,416
|
$ -
|
$ 198,416
|
Property,
plant and equipment
|
$ 328,489
|
$ 943,500
|
$ -
|
$ 1,271,989
|
Accounts
receivable
|
$ 1,028,720
|
$ 176,014
|
$ -
|
$ 1,204,734
|
Inventories
|
$ 2,393,507
|
$ 37,520
|
$ -
|
$ 2,431,027
|
|
|
|
|
|
|
NOTE
14 - LOSS PER SHARE
Potential common shares of
1,425,000 related to ESW's outstanding stock options and 1,545,000 shares
related to ESW's outstanding warrants, were excluded from the computation of
diluted loss per share for the nine and three month periods ended September 30,
2012 because the inclusion of these shares would be anti-dilutive.
Potential common shares of
3,575,000 related to ESW's outstanding stock options and 1,545,000 shares
related to ESW's outstanding warrants were excluded from the computation of
diluted loss per share for the nine and three month periods ended September 30,
2011 because the inclusion of these shares would be anti-dilutive.
F19
NOTE 15 - RISK
MANAGEMENT
CONCENTRATIONS
OF CREDIT RISK AND ECONOMIC DEPENDENCE
The Company's cash balances are maintained
in various banks in Canada and the United States. Deposits held in banks in the
United States are insured up to $250,000 per depositor for each bank by the
Federal Deposit Insurance Corporation. Deposits held in banks in Canada are
insured up to $100,000 Canadian per depositor for each bank by The Canada
Deposit Insurance Corporation, a federal crown corporation. Actual balances at
times may exceed these limits.
Accounts Receivable and
Concentrations of Credit Risk: The Company performs on-going credit evaluations
of its customers' financial condition and generally does not require collateral
from its customers. Three of its customers accounted for 26.9%, 20.4% and 8.1%,
respectively, of the Company's revenue during the nine month period ended September
30, 2012 and 33.0%, 17.2% and 15.7%, respectively, of its accounts receivable
as of September 30, 2012.
Three of its customers accounted
for 40.1%, 12.9% and 9.1%, respectively, of the Company's revenue during the
nine month period ended September 30, 2011 and 31.9%, 17.9% and 11.4%,
respectively, of its accounts receivable as of September 30, 2011.
For the nine month period ended September
30, 2012, the Company purchased approximately 18.5% and 13.4% of its inventory
from two vendors. For the nine month period ended September 30, 2011, the
Company purchased approximately 26.9% and 18.3% of its inventory from two
vendors. The accounts payable to these vendors aggregated approximately $548,792
and $170,679 as of September 30, 2012 and 2011, respectively.
NOTE 16 – LOAN
PAYABLE
On April 25, 2012, the Company’s
wholly-owned subsidiary ESWA entered into a MELF Facility with the Commonwealth
of Pennsylvania for up to $500,000 for the purchase of equipment and related
purchases. Two (2) draw-downs are permitted under the MELF Facility by
ESWA. The first draw down of $280,787 was made under the MELF Facility in
connection with equipment purchased by ESWA on April 25, 2012 (the “Closing
Date”). ESWA may make one (1) additional draw-down per the terms of the MELF
Facility so that the aggregate amount borrowed under the MELF Facility may be
up to $500,000. Terms of the MELF Facility include initial interest at three
(3%) percent per annum, monthly blended payments of $3,710 and full repayment
of the MELF Facility on or before the first day of the eighty-fifth (85)
calendar month following the Closing Date. As part of the loan agreement,
within three years from the Closing Date ESWA is required to create, or retain,
at its current location a certain number of jobs that is specified in the loan application.
A breach by ESWA in the creation or maintenance of these jobs shall be
considered an event of default under the MELF Facility. In the event ESWA
defaults on any payments, the MELF Facility may be accelerated with full
payment due along with certain additional modifications including the increase
in interest to twelve and one half (12 1/2%) percent. The loan is secured by
certain property and equipment and corporate guarantee of the Company.
As of September 30, 2012 and
December 31, 2011, the loan payable amounted to $265,671 and $0, respectively.
For the nine month period ended September 30, 2012, the Company paid interest
amounting to $3,434 (September 30, 2011 - $0) on the loan and also repaid
principal in the amount of $15,116 (September 30, 2011 - $0).
Loan maturities based on
outstanding principal are as follows:
Year
Ending December 31,
|
Amount
|
|
|
2012
(excluding the nine months ended September 30, 2012)
|
$ 6,100
|
2013
|
37,244
|
2014
|
38,376
|
2015
|
39,544
|
2016
|
40,746
|
Thereafter
|
103,661
|
|
|
Total
|
$ 265,671
|
NOTE 17 -
SUBSEQUENT EVENTS
On November 12,
2012, the Company’s wholly-owned subsidiary ESWA made the second draw down per
the terms of the MELF Facility in the amount of $219,213. All other terms of
the MELF facility remain unchanged. With the second draw down total borrowings
under the MELF Facility amount to $500,000.
F20
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 consolidated condensed 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
cautions 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, for the year ended December 31, 2011 as
filed with the Securities and Exchange Commission.
GENERAL OVERVIEW
Environmental Solutions Worldwide
Inc. ("we," "us," "ESW" or the
"Company") is a publicly traded company engaged through its
wholly-owned subsidiaries ESW Canada Inc. (“ESWC”), ESW America Inc. (“ESWA”),
Technology Fabricators Inc. (“TFI”) and ESW Technologies Inc. (“ESWT”),
(together the "ESW Group of Companies") in the design, development,
manufacture and sale of emission technologies and services. ESW is currently
focused on the international medium duty and heavy duty diesel engine market for
on-road and off-road vehicles as well as the utility engine, mining, marine,
locomotive and military industries. ESW also offers engine and after treatment
emissions verification testing and certification services.
ESW's focus is to be an
integrated solutions provider to the environmental emissions market by
providing leading-edge catalyst technology as well as best-in-class engine and
vehicle emissions testing and certification services. The Company's strategy is
centered on identifying and deploying resources against its
"sweet-spot" products and services, where ESW has identified its core
competencies and differentiation in the marketplace. ESW's core geography focus
is North America, and will opportunistically explore business development
opportunities in other markets if accretive to the Company in the short term.
By focusing financial, human and intellectual capital on ESW's core
competencies and markets, the Company is targeting profitable growth in the
short term and value creation for its shareholders over the long term.
ESW was incorporated in the State
of Florida in 1987. Our principal executive offices are located at 200 Progress
Drive, Montgomeryville, PA, 18936. Our telephone number is (905) 695-4142 and
(215) 699 0730. Our website is www.cleanerfuture.com. Information contained on
our website does not constitute a part of this 10-Q report.
In 2012, ESW continues to focus
on optimizing the Company's operations around its "sweet spots" and
capturing a greater market share in the catalytic converter and emissions
testing markets whilst ensuring steps towards profitable growth. The key
factors that are in ESW's favor are: (a) continued regulatory push for
emissions reductions in the United States, (b) funding available from public
agencies, (c) a market-leading Level III active catalytic converter technology
and an established distribution network in North America, and (d) CARB and EPA
certification and verification capable emissions and durability testing
services.
ESW believes that it can improve
and achieve profitability and grow its business by continuing to pursue the
following strategy:
• Focus on delivering controlled
and profitable growth to its shareholders.
• Provide integrated solutions to
the emissions market by leveraging its product development, testing and
certification services, and distribution and post-sale services capabilities.
• Center the Company's sales
strategy around identified "sweet-spots" that will allow
manufacturing efficiency gains and optimized resource allocation.
• Educate the end customers and
regulatory agencies about the technology and ensure realistic delivery
expectations.
• Enhance customer service
functions.
• Work with vendors to optimize
ESW's material buys and lead times.
• Constantly review operations,
processes and products under a Continuous Improvement / Performance Based
culture.
2
ESW has made significant
investments in research and development and obtaining regulatory approvals for
its technologies.
Effective July 16, 2012, the
California Air Resources Board (“CARB”) verified the ThermaCat-e Active Level
III Plus Diesel Particulate Filter System targeted at EGR engines for retrofit
on 1993 through 2009 on-road engine model years, having engine displacement
between 4 and 13 liters and a horse power (HP) rating between 150 to 400 HP.
This new CARB Executive Order DE-12-005 extends the range of applications for
the ThermaCat product line in step with the changing marketplace demands.
On August 23, 2011, ESW received
notification from the United States Environmental Protection Agency
("EPA") that the Company's XtrmCat Kit is now certified for 2 stroke,
Category 2, marine engines. The certifications are applicable to Electro-Motive
Diesel (“EMD”) 710 and 645 engines. The XtrmCat can achieve Tier 0 and Tier I
compliance as per 40 CFR 1042 when retrofitted to EMD 710 and 645 engines. Despite
limited traction to date due to a competitive product landscape, ESW continues
to pursue opportunities to commercialize this technology into the marketplace.
ESW's XtrmCat product designed
for locomotive, Tier 0, turbocharged EMD 645 and 710 engines was tested at an
EPA recognized facility for certification during March and April 2011 along
with the marine product together with a partner company. We are exploring
opportunities to obtain certifications for the aforementioned locomotive
engines.
ESW is pursuing the verification
of a ThermaCat-e Active Level III Plus Diesel Particulate Filter System
targeted at EGR off-road engines.
ESW believes that with the
additional certifications/verification of the above range of products, ESW will
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 cost of developing a complete
range of products to meet regulations is substantial. ESW believes that it
possesses a competitive advantage in ensuring regulatory compliance by
leveraging its testing and research facility in Montgomeryville, Pennsylvania
to support its certification and verification efforts. Historically, ESW has
also managed to offset some of these development costs through the application
of research grants and tax refunds.
ESW made the following adjustments to
its business in 2011 to improve its operational results in 2012, and continues
to improve and adjust its strategy based on demand and business needs.
1)
ESW
has reviewed and continues to review its costs for inefficiencies and has taken
steps to reduce its operating expenses. Key cost reduction initiatives during
2011 included the restructuring of its management team, the termination of
certain contracts and the re-negotiation of board and consulting obligations,
amongst others. In addition, during the second semester of 2011, ESW reduced
its overhead costs by re-locating its Canadian manufacturing operations to its
facilities located in Pennsylvania, United States and subsequently terminating
its Lease Agreement in May 2012 under favorable settlement and release terms. Further
ESW has executed a second lease amendment for its Montgomeryville, PA facility
with the lease term extended out to February 2018 under the same economic terms
of the in place lease agreement.
ESW
will continuously revisit opportunities to further streamline the business.
2)
ESW
is closely monitoring its bill of materials and costing and periodically
revises pricing to its dealers to help recover product margins. ESW has also
revised its overall commercial policies, including its general terms and conditions
and lead time expectations on its products. Changes have also been implemented
to ESW's costing and quoting processes, including frequent periodic review of
its bill of materials and the proactive negotiation of raw material prices.
3)
ESW
is focusing on increasing sales volumes on its core "sweet spot"
products to reduce production complexities and improve inventory management.
ESW has also implemented new continuous improvement programs such as the
cross-functional "Product and Process Review" stream led by ESW's
engineering team searching for product, product quality and product development
process enhancements.
4)
ESW
has revisited relationships with critical vendors, in addition to setting up
favorable payment plans to reduce the outstanding balances with these vendors.
ESW has also secured and continues to secure volume discounts on critical
components. ESW has also identified and engaged new vendors in the U.S. for
parts supply. In addition, there is a greater focus on outsourcing opportunity
for labor intensive parts.
5)
ESW
has revised and implemented its new warranty policy to ensure that warranty
terms and conditions meet industry standards whilst mitigating warranty risks
to the fullest extent possible. ESW has also launched a new front end and back end
website to assist its distributors and installers in day to day operations,
training and processes.
6)
ESW
is in the process of continuously engaging its existing dealers to help better
understand ESW's business and product positioning and to strengthen ESW's
partnership with its distribution base. ESW is also opportunistically adding
new independent emissions focused dealers to enhance the Company’s North
American sales coverage. ESW has made substantial inroad
in improving its dealership network through the termination of
certain dealers, and the addition of certain dealers in states such as
California, New York, Connecticut, New Jersey, Pennsylvania and
Florida.
7) ESW is focusing on increasing
revenue from testing services provided to third parties from its Air Testing
Facility in Montgomeryville, Pennsylvania. ESW’s Air Testing Services in
Montgomeryville, PA continues to see a sizeable increase in business, in line
with ESW’s effort to increase revenues from these operations.
As a result from these actions, the
Company has improved its operating results in 2012. The Company has reduced
inefficiencies in personnel-related costs, manufacturing costs and other
discretionary expenditures that are within the Company's control
.
The Company has lowered its overhead costs while maintaining its focus on the
sales, marketing and customer service efforts. The changes in the business have
lowered the overall operating costs in the Company and have improved the
Company's overall results in 2012. This has been accomplished without
affecting the Company's positioning of its existing products and testing
services as well as its efforts to develop and deliver the next generation of
leading emissions products and services.
4
COMPARISON OF THE NINE MONTH
PERIOD ENDED SEPTEMBER 30, 2012 TO THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
2011
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, 2011.
Revenues for the nine month
period ended September 30, 2012, decreased by 7.8 percent, to $7,669,063 from $8,314,076
for the comparable period in 2011. The decrease in revenue is related to
reduced retrofit funding opportunities and lack of enforcement of regulations
by regulatory agencies, which has impacted the overall retrofit market. The
decrease in revenue was offset by increases in parts sales, sales of military
product, and by increasing revenues for testing services.
Cost of sales as a percentage of
revenues for the nine month period ended September 30, 2012 was 65.2 percent
compared to 85.3 percent for the nine month period ended September 30, 2011.
The reduction in cost of sales in the current period of 2012 versus 2011 is
reflective of the changes that were implemented in the Company’s operations
since February 2011, such as the streamlining of the Canadian manufacturing
operations, ESW’s focus on optimizing pricing and its materials costs, and the
changing product mix with the growing contribution of the Air Testing
Services. In addition, the results for the nine month period ended September
30, 2012 were negatively impacted by a write-down of inventory in the amount of
$252,473 compared to a provision for slow moving inventory in the nine month
period ended September 30, 2011 in the amount of $418,987. Consequently, gross
margin for the nine month period ended September 30, 2012 was 34.8 percent
compared to 14.7 percent for the nine month period ended September 30, 2011.
Marketing, office and general
expenses for the nine month period ended September 30, 2012 decreased 11.3
percent to $2,548,309 from $2,872,802 for the same period in 2011. The decrease
is primarily due to: (a) decrease in factory expense of $301,540 resulting from
cost saving initiatives and higher factory overheads applied to cost of sales,
(b) decrease in customer service , sales and marketing and wages and selling
expenses of $129,974, (c) decrease in facility expenses of $53,381 resulting
from rent and cost savings related to the release of the Canadian facility, (d)
decrease in administration salaries and wages of $77,890, mainly attributed to
an offsetting grant of $75,000 related to a Job Creation Tax Credit from the
Pennsylvania Department of Community and Economic Development and (e) a
decrease in investor relation costs of $28,201. The decreases were offset by:
(a) a provision for uncollectable accounts of $213,810 recorded for two
distributors with whom the Company has had a commercial dispute, and (b) an
increase in general administration expenses of $52,683 attributed to hiring
expenses for new employees and technology support expenses.
The Company incurred $0 and $1,148,083
as restructuring charges for the nine month periods ended September 30, 2012
and 2011, respectively. The restructuring costs for the first nine months of
2011 consisted primarily of severance, vacation payouts, relocation of
operations and other restructuring related agreements.
Research and development
("R&D") expenses for the nine month period ended September 30,
2012 decreased by $114,182, or 19.3 percent, to $477,582 versus the nine month
period ended September 30, 2011. The primary driver of R&D expenses for the
nine month period ended September 30, 2012 and September 30, 2011 was related
to ESW's pursuit of the verification expansion of its Level III product. ESW
benefitted during the first nine month period of 2011 from grant money
amounting to $278,712. During the nine month period ended September 30, 2012
there was no grant funding to offset R&D cost.
Officers’ compensation and
directors’ fees for the nine month period ended September 30, 2012 decreased by
$95,284, or 16.8 percent, to $473,006 from $568,290 for the nine month period
ended September 30, 2011. Included in the September 30, 2012 officers’
compensation and directors’ fees is $62,127 of stock-based compensation
expenses for options issued in 2010 to a past officer and director. The
decrease in fees is mainly due to changes in executive management and the board
compensation structure of ESW.
Consulting and professional fees
for the nine month period ended September 30, 2012 decreased by $37,180, or 17.3
percent, to $177,946 from $215,126 for the nine month period ended September
30, 2011. The costs are fairly consistent to prior year expenses except for
ongoing monthly accruals for the estimated 2012 annual audit fees as opposed to
year end accruals in 2011.
Foreign exchange loss for the nine
month period ended September 30, 2012, was $63,698 as compared to a loss of $68,222
for the nine month period ended September 30, 2011. 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, 2012 decreased by $140,185,
or 47.9 percent to $152,726 from $292,911 for the nine month period ended September
30, 2011. The depreciation costs for the nine month period ended September 30,
2012 were substantially lower due to: (a) write-off of assets located in ESW’s
Canadian operations as a result of the relocation of operations in 2011, (b)
application of additional depreciation to cost of sales, (c) fully amortized
patents, and (d) full depreciation for a portion of the assets.
5
The Company has
valued the impairment loss at $29,984 for the balance of the office equipment,
furniture and fixtures of ESW Canada Inc. as of September 30, 2012. The former
landlord of the Canadian property terminated the lease for the facility as of
May 1, 2012, and effective May 22, 2012, ESW Canada and its former landlord
entered into an agreement for the full release of any future obligations under
the prior lease agreement. For the nine month period ended September 30, 2011,
the Company had valued the impairment loss at $275,867 related to the transfer
of manufacturing operations to Pennsylvania, USA.
Loss from operations for the nine
month period ended September 30, 2012 decreased by $3,554,141, or 73.9 percent,
to $1,256,394 from $4,810,535 for the nine month period ended September 30,
2011. ESW’s loss from operations for the nine month period ended September 30,
2012 included the following non-cash items: reserve for inventory obsolescence
of $252,473, allowance for doubtful accounts of $213,810, depreciation expenses
of $414,782, an impairment loss of $29,984, a foreign exchange loss of $63,698
and stock based compensation expense of $62,127. In addition, cash costs of
$153,034 related to the rent and other facility costs of the Canadian facility
are included in loss from operations for the nine month period ended September
30, 2012. This amount includes the expenses for the full release of the
Canadian facility and its lease obligations.
Effective February 3, 2012 ESW’s
wholly-owned non-operational subsidiary BBL Technologies Inc., (“BBL”) filed
for bankruptcy in the Province of Ontario, Canada. Due to the insolvency of
BBL, the redeemable Class A special shares were cancelled and the Company
recorded a $453,900 gain on the Consolidated Condensed Statement of Operations
and Comprehensive Loss.
In the nine month period ended September
30, 2011, the Company incurred the following costs related to various financing
and debt transactions:
• $578,739
-
Change in fair value of exchange feature liability
• $126,850
-
Interest on notes payable to related party
• $3,506,074 -
Interest accretion expense
• $485,101
-
Financing charge on embedded derivative liability
• ($1,336,445) -
Gain on convertible derivative
• $154,205 -
Bank fees related to credit facility covenant waivers
No costs related to financing and debt
transactions were incurred in the nine month period ended September 30, 2012.
COMPARISON
OF THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2012 TO THE THREE MONTH PERIOD
ENDED SEPTEMBER 30, 2011
RESULTS OF
OPERATIONS
The following MD&A of
financial condition and results of operations 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, 2011.
Revenues for the three month
period ended September 30, 2012, decreased by 13.1 percent to $2,793,358 from
$3,213,491 for the three month period ended September 30, 2011. The decrease in
revenue is related to reduced retrofit funding opportunities and lack of
enforcement of regulations by regulatory agencies, which has impacted the
overall retrofit market. The decrease in revenue was offset by increases in
part sales, sales of a military product, and by increasing revenues for testing
services.
Cost of sales as a percentage of
revenues for the three month period ended September 30, 2012 was 64.5 percent
compared to 78.0 percent for the three month period ended September 30, 2011.
The reduction in cost of sales in the current period of 2012 versus 2011 is
reflective of the changes that were implemented in the Company’s operations
since February 2011, such as the streamlining of the Canadian manufacturing
operations, ESW’s focus on optimizing pricing and its materials costs, and the
changing product mix with the growing contribution of the Air Testing
Services. In addition, the results for the three month period ended September
30, 2012 were negatively impacted by a write-down of inventory in the amount of
$145,112. Consequently, the gross margin for the three month period ended September
30, 2012 was 35.5 percent compared to 22.0 percent for the three month period
ended September 30, 2011.
Marketing, office and general
expenses for the three month period ended September 30, 2012 decreased by 21.1
percent to $682,799 from $865,237 for the three month period ended September
30, 2011. The decrease is primarily due to: (a) decrease in sales and marketing
wages and selling expenses by $104,687, (b) decrease in facility expenses of $79,861
resulting from release of the Canadian facility in May 2012, and (c) decrease
in administration salaries and wages of $55,673. The decreases were offset by: (a)
increase in investor relation costs of $16,083, (b) increase in general
administration expenses of $38,790, and (c) increase in factory expense of
$2,910.
The Company incurred $0 and $624,809
as restructuring charges for the three month periods ended September 30, 2012
and 2011, respectively. The restructuring costs for the three months ended
September of 2011 consisted primarily of severance, vacation payouts,
operations relocation expenses and other restructuring related agreements.
6
R&D expenses
for the three month period ended September 30, 2012 decreased by $94,603, or 36.7
percent, to $163,264 from $257,867 for the three month period ended September
30, 2011. The primary driver of R&D expenses for the three month period
ended September 30, 2012 versus the comparable period in 2011 was related to
ESW's pursuit of the verification expansion of its Level III product. During
the three month periods ended September 30, 2012 and 2011 there was no grant
funding to offset R&D cost.
Officers’
compensation and directors’ fees for the three month period ended September 30,
2012 was in line with September 30, 2011 expenses.
Consulting and professional fees
for the three month period ended September 30, 2012 decreased by 37.4 percent
to $42,333 from $67,670 for the three month period ended September 30, 2011. The
costs are fairly consistent to prior year expenses except for ongoing monthly
accruals for the estimated 2012 annual audit fees as opposed to year end
accruals in 2011.
Foreign exchange loss for the
three month period ended September 30, 2012 was $20,655 as compared to a gain
of $16,497 for the three month period ended September 30, 2011. 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, 2012 decreased by 52.0
percent to $37,609 from $78,406 for the three month period ended September 30,
2011. The depreciation costs for the three month period ended September 30,
2012 were substantially lower due to: (a) write-off of assets located in ESW’s
Canadian operations as a result of the relocation of operations in 2011, (b)
application of additional depreciation to cost of sales, (c) fully amortized patents,
and (d) full depreciation for a portion of the assets.
The Company recognized a minor
impairment loss for the three months ended September 30, 2012 due exchange rate
fluctuation on the value of impaired property and equipment. The impairment occurred
as the former landlord of the Canadian property terminated the lease for the
facility as of May 1, 2012, and effective May 22, 2012, ESW Canada and its
former landlord entered into an agreement for the full release of any future
obligations under the prior lease agreement. Gain on impairment of property
plant and equipment for the three month period September 30, 2011 was $35,437
related to recovery from sale of impaired equipment due to the transfer of
manufacturing operations to Pennsylvania, USA.
Loss from operations for the
three month period ended September 30, 2012 decreased by $1,178,454, or 90.9
percent, to $118,226 from $1,296,680 for the three month period ended September
30, 2011. ESW’s loss from operations for the three month period ended September
30, 2012 included the following non-cash items: (a) reserve for inventory
obsolescence of $145,112, (b) depreciation expenses of $119,978, (c) stock
based compensation expense of $20,709, and (d) a foreign exchange loss of $20,655.
In the three month period ended September
30, 2011, the Company incurred a $5,583 gain related to the disposal of
property and equipment related to various financing and debt transactions.
No costs related to financing and debt
transactions were incurred in the three month period ended September 30, 2012.
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, 2012, the
Company used $251,086 of cash to sustain operating activities compared with $2,825,754
for the nine month period ended September 30, 2011. As of September 30, 2012
and 2011, the Company had cash and cash equivalents of $559,109 and $1,068,325,
respectively.
Net cash used in operating
activities for the nine month period ended September 30, 2012 amounted to
$251,086. This amount was attributable to the net loss of $802,494, plus
non-cash expenses such as depreciation, impairment loss, stock based
compensation, gain on deconsolidation of BBL and others of $519,276, and an increase
in net operating assets and liabilities of $32,132. Net cash used in operating
activities for the nine month period ended September 30, 2011 amounted to
$2,825,754. This amount was attributable to the net loss of $8,325,059, plus
non-cash expenses such as depreciation, amortization, interest accretion
expense, change in fair value of exchange feature liability and others of
$4,770,653, and an increase in net operating assets and liabilities of
$728,652.
Net cash used in investing
activities was $557,884 for the nine month period ended September 30, 2012, as
compared to $19,931 used in investing activities for the nine month period
ended September 30, 2011.
Net cash provided by financing
activities totaled $264,430 through a loan payable in the amount of $280,787 with
repayment of $15,116 in principal and repayment under capital lease obligation
amounting to $1,241 for the nine month period ended September 30, 2012, as
opposed to net cash provided by financing activities of $3,972,993 for the nine
month period ended September 30, 2011. In the prior year period of 2011, $4,000,000
was provided through the issuance of the notes payable to related parties and
$3,857,180 from the issuance of common stock through a rights offering,
$388,600 was paid towards rights offering costs, $3,492,108 was repaid under
ESW's CIBC credit facility and $3,479 was repaid under capital lease
obligation.
7
ESW
operates in a capital intensive and highly regulated industry, where a long
lead time to bring new products into market is considered normal. ESW continues
to invest in research and development to improve its technologies and bring
them to the point where its customers have a high confidence level to purchase
our products.
During nine month periods ended September
30, 2012 and in 2011, ESW did not produce sufficient cash from operations to
support its expenditures. Prior financings supported the Company's operations
during the period. ESW's principal use of liquidity relates to the Company's
working capital needs and to finance any further capital expenditures or
tooling needed for production and/or its testing facilities.
ESW anticipates certain capital
expenditures in 2012 related to the general operation of its business as well
as to upgrade the Air Testing Services facilities in Montgomeryville,
Pennsylvania.
Overall, capital adequacy is monitored
on an ongoing basis by our management and reviewed quarterly by the Board of
Directors.
Competition is expected to intensify as
the market for ESW's products expands. ESW's ability to continue to gain
significant market share will depend upon its ability to continue to develop
strong relationships with regulators, distributors, customers and develop new
products. Increased competition in the market place could result in lower
average pricing which could adversely affect ESW's margins and pricing for its
products.
ESW's ability to service its
indebtedness, other obligations and commitments in cash will depend on its
future operating performance and ability to raise capital, which will be
affected by prevailing economic conditions, financial, business, regulatory and
other factors. Certain of these factors are beyond ESW's control. ESW may need
additional financing to meet its financial projections and obligations.
Significant assumptions underlie ESW's projections, including, among other
things, that ESW will be successful in implementing its business strategy, that
some of ESW's 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 future indebtedness and to meet other obligations and
commitments, ESW might be required to refinance or to dispose of 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. In such circumstance, ESW
would have to issue shares of its common stock as repayment of these
obligations, which would be of a dilutive nature to ESW's present shareholders.
DEBT
STRUCTURE
On April 25, 2012, the Company’s
wholly-owned subsidiary ESWA entered into a Machinery and Equipment Loan Fund
(“MELF Facility”) with the Commonwealth of Pennsylvania for up to $500,000 for
the purchase of equipment and related purchases. Two (2) draw-downs are
permitted under the MELF Facility by ESWA. The first draw-down of $280,787
was made under the MELF Facility in connection with equipment purchased by ESWA
on April 25, 2012 (the “Closing Date”). ESWA may make one (1) additional
draw-down per the terms of the MELF Facility so that the aggregate amount
borrowed under the MELF Facility may be up to $500,000. Terms of the MELF
Facility include initial interest at three (3%) percent per annum with monthly
payments and full repayment of the MELF Facility on or before the first day of
the eighty fifth (85) calendar month following the Closing Date. As part of the
loan agreement, within three years from the Closing Date ESWA is required to
create, or retain, at its current location a certain number of jobs that is
specified in the loan application. A breach by ESWA in the creation or
maintenance of these jobs shall be considered an event of default under the
MELF Facility. In the event ESWA defaults on any payments, the MELF Facility
may be accelerated with full payment due along with certain additional
modifications including the increase in interest to twelve and one half (12
1/2%) percent. In connection with the MELF Facility, the Company entered into a
Guaranty and a Loan and Security Agreement on behalf of its wholly-owned
subsidiary ESWA.
As of September 30, 2012 and December
31, 2011, the loan payable amounted to $265,671 and $0, respectively. For the
nine month period ended September 30, 2012, the Company paid interest amounting
to $3,434 (September 30, 2011 - $0) on the loan and also repaid principal in
the amount of $15,116 (September 30, 2011 - $0).
CONTRACTUAL OBLIGATIONS
LEASES
Effective November 24, 2004, the
Company's wholly-owned subsidiary, ESWA, entered into a lease agreement for
approximately 40,220 square feet of leasehold space at 2 Bethlehem Pike
Industrial Center, Montgomery Township, Pennsylvania. The leasehold space
houses the Company's research and development facilities and also houses ESW’s
manufacturing operations. The lease commenced on January 15, 2005. Effective
October 16, 2009, the Company's wholly-owned subsidiary ESWA entered into a
lease renewal agreement with Nappen & Associates for the leasehold property
in Pennsylvania. There were no modifications to the original economic terms of
the lease under the lease renewal agreement. Under the terms of the lease
renewal, the lease term was extended to February 28, 2013. Effective September
24, 2012, ESWA entered into a second lease amendment agreement with Nappen
& Associates for the leasehold property in Pennsylvania, whereby ESWA
extended the term of the lease agreement by an additional 5 years. There were
no modifications to the original economic terms of the lease. Under the terms
of the second lease renewal, the lease will expire on February 28, 2018.
8
Effective December 20, 2004, the
Company's wholly-owned subsidiary, ESWC, entered into a lease agreement for
approximately 50,000 square feet of leasehold space in Concord, Ontario,
Canada. The leasehold space previously housed the Company's executive offices
and the manufacturing operations. The renewed lease period commenced on October
1, 2010 and ended on September 30, 2015. Effective May 1, 2012, the landlord
terminated the lease agreement for the facility. The facility had been
vacated prior to the lease termination. Thereafter effective May 22,
2012, ESWC and its former landlord entered into an agreement for the full
release of any future obligations under the lease agreement subject to
payment of a mutually agreed consideration payable through September
2012. The agreement provides for a full and complete release of ESWC
by the landlord for the consideration and terms under the lease agreement. ESWC
has fulfilled its terms of the release. The following is a summary of the
minimum annual lease payments:
Year
Ending December 31,
|
Amount
|
|
|
2012
(excluding the nine months ended September 30, 2012)
|
$ 45,248
|
2013
|
180,990
|
2014
|
180,990
|
2015
|
180,990
|
2016
|
180,990
|
2017
|
180,990
|
2018
|
30,165
|
|
|
Total
|
$ 980,363
|
LEGAL MATTERS
From time to time, the Company
may be involved in a variety of claims, suits, investigations and proceedings
arising from the ordinary course of our business, collections claims, breach of
contract claims, labor and employment claims, tax and other matters. Although
claims, suits, investigations and proceedings are inherently uncertain and
their results cannot be predicted with certainty, ESW believes that the
resolution of current pending matters will not have a material adverse effect
on its business, consolidated financial position, results of operations or cash
flow. Regardless of the outcome, litigation can have an adverse impact on ESW
because of legal costs, diversion of management resources and other factors.
The Company is pursuing a lawsuit
in New York for collection of unpaid invoices related to goods delivered to a
former dealer.
CAPITAL LEASE
OBLIGATION
As of September 30, 2012 and
December 31, 2011, the Company’s capital lease obligation amounted to $0 and
$1,241, respectively.
RECENTLY ADOPTED
ACCOUNTING PRONOUNCEMENTS
In June 2011, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2011-5 – “Comprehensive Income – Presentation of Comprehensive Income”.
This statement removed the presentation of comprehensive income in the
statement of changes in stockholders’ equity. The only two allowable
presentations are below the components of net income in a statement of
comprehensive income or in a separate statement of comprehensive income that
begins with total net income. The guidance was effective for interim or
annual reporting periods beginning after December 15, 2011. The adoption of
this ASU had no effect on the Company's unaudited consolidated condensed
financial statements.
SIGNIFICANT
ACCOUNTING POLICIES AND ESTIMATES
ESW's significant accounting
policies are summarized in Note 2 to the consolidated condensed financial
statements included its quarterly reports and its 2011 Annual Report to
Shareholders. In preparing the consolidated condensed financial statements, we make
estimates and assumptions that affect the expected amounts of assets and
liabilities and disclosure of contingent assets and liabilities. We apply our
accounting policies on a consistent basis. As circumstances change, they are
considered in our estimates and judgments, and future changes in circumstances
could result in changes in amounts at which assets and liabilities are
recorded.
FOREIGN CURRENCY
TRANSACTIONS
The functional currency of the
Company and its foreign subsidiaries is the U.S. dollar. Most of the Company’s
revenue and materials purchased from suppliers are denominated in or linked to
the U.S. dollar. Transactions denominated in currencies other than a functional
currency are converted to the functional currency on the transaction date, and
any resulting assets or liabilities are further translated at each reporting
date and at settlement. Gains and losses recognized upon such translations are
included within foreign exchange gain (loss) in the consolidated condensed
statements of operations and comprehensive loss.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ESW is exposed to financial
market risks, including changes in currency exchange 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.
ESW's exposure to foreign
currency translation gains and losses also arises from the translation of the
assets and liabilities of its subsidiaries to U.S. dollars during
consolidation. These risks have been significantly mitigated by the move of
ESW’s manufacturing operations to Pennsylvania, USA.
During the year 2011, the Company
changed the functional currency of its Canadian operations from the Canadian
dollar to the U.S. dollar. For the nine month period ended September 30, 2011,
ESW recognized a translation gain $102,366 reported as other comprehensive
income in the consolidated condensed statements of operations and comprehensive
loss.
In the consolidated condensed
statements of operations and comprehensive loss for the nine month period ended
September 30, 2012, ESW has recognized a translation loss of $63,698 as
compared to a loss of $68,222 in September 30, 2011 primarily as a result of
exchange rate differences between the U.S. dollar and the Canadian dollar.
INTEREST
RATE RISK
ESW currently has no
variable-rate long-term debt that exposes ESW to interest rate risk.
10
ITEM 4. CONTROLS
AND PROCEDURES
(a) EVALUATION OF DISCLOSURE
CONTROLS AND PROCEDURE
EVALUATION OF
THE COMPANY'S DISCLOSURE AND INTERNAL CONTROLS
The Company evaluated the
effectiveness of the design and operation of its "disclosure controls and
procedures" as of the end of the period covered by this report. This
evaluation was done with the participation of management, under the supervision
of the Executive Chairman ("EC") and Chief Financial Officer
("CFO").
LIMITATIONS ON
THE EFFECTIVENESS OF CONTROLS
A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because
of changes in conditions, or the degree of compliance with the policies or procedures
may deteriorate. Because of the inherent limitations in a cost effective
control system, misstatements due to error or fraud may occur and not be
detected. The Company conducts periodic evaluations of its internal controls to
enhance, where necessary, its procedures and controls.
CONCLUSIONS
Based on our evaluation, the EC
and CFO concluded that the registrant's disclosures, controls and procedures
are effective to ensure that information required to be disclosed in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Security
Exchange Commission rules and forms.
(c) CHANGES IN INTERNAL CONTROLS
Not applicable.
11
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, 2011, as
well as the information contained in this report and our other reports and
registration statements filed with the Securities and Exchange Commission.
ITEM 5. OTHER
INFORMATION
Effective September 24, 2012, the
Company’s wholly owned subsidiary ESW America Inc. (“ESWA”) entered into a
second lease amendment agreement with Nappen & Associates for the leasehold
property in Pennsylvania, whereby ESWA extended the expiry of the lease
agreement by an additional 5 years from March 1, 2013. There were no
modifications to the original economic terms of the lease. Under the terms of
the second lease renewal, the lease will now expire on February 28, 2018.
On
November 12, 2012, the Company’s wholly-owned subsidiary ESWA made the second
draw down per the terms of the MELF Facility in the amount of $219,213. All
other terms of the MELF facility remain unchanged. With the second draw down
total borrowings under the MELF Facility amount to $500,000.
12
ITEM 6. EXHIBITS
EXHIBITS:
31.1
|
Certification
of Executive Chairman and Chief Financial Officer pursuant to the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Chief Financial Officer, pursuant to the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
101.ins
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XBRL
Instance
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101.xsd
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XBRL
Schema
|
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101.cal
|
XBRL
Calculation
|
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|
101.def
|
XBRL
Definition
|
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101.lab
|
XBRL
Label
|
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101.pre
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XBRL
Presentation
|
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 15, 2012
Montgomeryville, PA, USA
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
BY:
/S/
MARK YUNG
MARK YUNG
EXECUTIVE CHAIRMAN
/S/
PRAVEEN NAIR
PRAVEEN NAIR
CHIEF FINANCIAL OFFICER
13
EXHIBIT
31.1
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I,
Mark Yung, certify that:
1. I have reviewed this amended
quarterly report on Form 10Q of Environmental Solutions Worldwide, Inc;
2. Based on my knowledge, this
quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
3. Based on my knowledge, the
financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;
4. The registrant's other
certifying Officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15(d)-15(f) for the Registrant and we have:
a) Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating
to the Registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this
quarterly report is being prepared;
b) Designed such internal control
over financial reporting or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance the generally accepted
accounting principles;
c) Evaluated the effectiveness of
the Registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and
procedures as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any
change in the registrant's internal control over financial reporting that
occurred during the registrant's third fiscal quarter of 2012 that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other
certifying officers and I have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee of the registrant's Board
of Directors (or persons performing the equivalent function):
a) All significant deficiencies
in the design or operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrant's internal controls.
DATE:
NOVEMBER 15, 2012
BY:
/S/ MARK YUNG
MARK YUNG
EXECUTIVE CHAIRMAN
14
EXHIBIT
31.2
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Praveen Nair, certify that:
1. I have reviewed this amended
quarterly report on Form 10Q of Environmental Solutions Worldwide, Inc;
2. Based on my knowledge, this
quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
3. Based on my knowledge, the
financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;
4. The registrant's other
certifying Officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15(d)-15(f) for the Registrant and we have:
a) Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating
to the Registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this
quarterly report is being prepared;
b) Designed such internal control
over financial reporting or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance the generally accepted
accounting principles;
c) Evaluated the effectiveness of
the Registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and
procedures as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any
change in the registrant's internal control over financial reporting that
occurred during the registrant's third fiscal quarter of 2012 that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other
certifying officers and I have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee of the registrant's Board
of Directors (or persons performing the equivalent function):
a) All significant deficiencies
in the design or operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrant's internal controls.
DATE: NOVEMBER 15, 2012
/S/ PRAVEEN NAIR
PRAVEEN NAIR
CHIEF FINANCIAL OFFICER
15
EXHIBIT
32.1
CERTIFICATION PURSUANT TO 18 U. S. C.
SECTION 1350 AS
ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Amended
Quarterly Report on Form 10-Q of Environmental Solutions Worldwide, Inc. (the
"Company") for the quarterly period September 30, 2012 (the
"Report"), Mark Yung, Executive Chairman of the Company, hereby
certify, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) To my knowledge, the Report
fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) To my knowledge, the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
DATE:
NOVEMBER 15, 2012
BY:
/S/ MARK YUNG
MARK YUNG
EXECUTIVE CHAIRMAN
A signed original of this written
statement required by Section 906, or other document authenticating,
acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section
906, has been provided to Environmental Solutions Worldwide, Inc. and will be
retained by Environmental Solutions Worldwide, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
16
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U. S. C.
SECTION 1350 AS
ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Amended
Quarterly Report on Form 10-Q of Environmental Solutions Worldwide, Inc. (the
"Company") for the quarterly period September 30, 2012 (the
"Report"), Praveen Nair, Chief Financial Officer of the Company,
hereby certify, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1). To my knowledge, the Report
fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) To my knowledge, the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
DATE:
NOVEMBER 15, 2012
/S/
PRAVEEN NAIR
PRAVEEN NAIR
CHIEF FINANCIAL OFFICER
A signed original of this written
statement required by Section 906, or other document authenticating,
acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section
906, has been provided to Environmental Solutions Worldwide, Inc. and will be
retained by Environmental Solutions Worldwide, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
17
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