Attached files
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EX-5.1 - EX-5.1 - ENVIRONMENTAL SOLUTIONS WORLDWIDE INC | d28311_ex5-1.htm |
EX-23.1 - EX-23.1 - ENVIRONMENTAL SOLUTIONS WORLDWIDE INC | d28311_ex23-1.htm |
As filed with the Securities and Exchange Commission on
June 7 , 2011
Registration No. 333-174091
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
Form S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
THE SECURITIES ACT OF 1933
Environmental Solutions Worldwide, Inc.
(Exact name of registrant as specified in its
charter)
Florida |
3714 |
13-4172059 |
||||||||
(State or
other jurisdiction of |
(Primary Standard Industrial |
(I.R.S. Employer |
||||||||
incorporation or organization) |
Classification Code Number) |
Identification No.) |
335 Connie Crescent
Concord, Ontario,
Canada L4K 5R2
(905) 695-4142
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Concord, Ontario,
Canada L4K 5R2
(905) 695-4142
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Mark Yung
Executive Chairman
335 Connie Crescent
Concord, Ontario,
Canada L4K 5R2
(905) 695-4142
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Executive Chairman
335 Connie Crescent
Concord, Ontario,
Canada L4K 5R2
(905) 695-4142
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies To:
Joseph A.
Baratta, Esq. Baratta, Baratta & Aidala LLP 546 Fifth Avenue, 6th Floor New York, NY 10036 (212) 750-9700 |
Ernest Wechsler, Esq. Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, New York 10036 (212) 715-9100 |
Approximate date
of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being
registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.
[X]
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
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. (Check
one):
Large accelerated
filer |
[ ] |
Accelerated filer |
[ ] |
|||||||||||
Non-accelerated
filer |
[ ] |
Smaller reporting company |
[X] |
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered |
|
Amount to be Registered |
|
Proposed Maximum Offering Price per Security (1)(2) |
|
Proposed Maximum Aggregate Offering Price(1)(2) |
|
Amount of Registration Fee |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Common Stock, par value $0.001 per share (1) |
42,440,907 | $ | 0.12 | $ | 5,092,909 | $ | 591.29 | |||||||||||
Rights to purchase Common Stock, par value $0.001 per share (2) |
||||||||||||||||||
Total |
$ | 591.29 | (3) |
(1) |
This registration statement relates to (a) the subscription rights to purchase Common Stock, $0.001 par value (the Common Stock), and (b) the shares of Common Stock deliverable upon the exercise of the subscription rights pursuant to the rights offering described in this Registration Statement on Form S-3. The shares of Common Stock deliverable to certain affiliates of the Registrant, which are referred to in the registration statement as Bridge Lenders, are not are not covered by this registration statement. |
(2) |
The subscription rights are being issued without consideration. Pursuant to Rule 457(g), no separate registration fee is payable with respect to the subscription rights being offered hereby, because the subscription rights are being registered in the same registration statement as the securities to be offered pursuant thereto. |
(3) |
Previously paid. |
The
Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may
be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
Subject to completion, dated June 7 ,
2011
Environmental Solutions Worldwide, Inc.
Up to 42,440,907 Shares of Common Stock
Environmental Solutions
Worldwide, Inc., or ESW, is distributing at no charge to the holders of our common stock, par value $0.001 per share, non-transferable subscription
rights to purchase up to an aggregate of 66,666,667 shares of our common stock at a subscription price of $0.12 per share, for up to an aggregate
purchase price of $8.0 million in cash, or by the delivery to us by the holder of an equivalent amount of principal and accrued and unpaid interest of
indebtedness owed by us to such holder, or a combination thereof. Each stockholder will receive one subscription right for each share of our common
stock owned on June 9 , 2011, and each subscription right will entitle its holder to purchase 0.51494 shares of our common stock at the
subscription price. We expect the total purchase price of the shares offered in this rights offering to be approximately $8.0 million, assuming full
participation, payable in cash, or by the delivery to us by the holder of an equivalent amount of principal and accrued and unpaid interest of
indebtedness owed by us to such holder, or a combination thereof.
The purpose of this rights
offering is to raise equity capital in a cost-effective manner that gives all of our stockholders the opportunity to participate. The net proceeds will
be used for general working capital purposes, including the repayment, to the extent then outstanding, of indebtedness of ESW, including under existing
promissory notes in the aggregate principal amount of $4.0 million in favor of Orchard Investments, LLC; Black Family 1997 Trust; Leon D. Black Trust
UAD 11/30/92 FBO Alexander Black; Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black; Leon D. Black Trust UAD 11/30/92 FBO Joshua Black; Leon D. Black
Trust UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan; and Richard Ressler. We refer to these notes as the Bridge Loans and
to each of the lenders individually as a Bridge Lender and collectively as the Bridge Lenders.
The Bridge Lenders beneficially
own in the aggregate 47,045,374 shares of our common stock, representing approximately 36% of our outstanding common stock. As such, the Bridge Lenders
will receive subscription rights to purchase up to an aggregate of 24,225,760 shares of common stock (before giving effect to any oversubscriptions) in
this rights offering. The Bridge Lenders have indicated to us that they intend to exercise their entire allocation of subscription rights, and we
expect the total purchase price thereof to be approximately $2.9 million, payable by the delivery to us by the Bridge Lenders of an equivalent amount
of principal and accrued and unpaid interest owed pursuant to the Bridge Loans.
We have entered into an
investment agreement, which we refer to as the Investment Agreement, with the Bridge Lenders under which the Bridge Lenders have agreed to
backstop the offering by purchasing from us, at the subscription price, any shares not purchased by our existing stockholders (after giving effect to
any oversubscriptions), up to 29,166,667 shares of common stock, for a total purchase price of $3.5 million, which transaction we refer to as the
Backstop Commitment. In addition to their rights to purchase shares pursuant to the rights offering and the Backstop Commitment, the Bridge
Lenders have the option, in their sole discretion, to purchase from us, at the subscription price, any other shares not purchased by our existing
stockholders through this rights offering, which we refer to as the Purchase Option.
If, after giving effect to this
rights offering, the Backstop Commitment and the Purchase Option, any of the Bridge Lenders shall have been unable to exchange any portion of his or
its Bridge Loans, we will offer each Bridge Lender the right to purchase additional shares of common stock at the subscription price (payable through
the exchange of Bridge Loans for common stock) such that each Bridge Lender shall have exchanged all of his or its notes for shares of common stock,
which we refer to as the Additional Subscription Offer. In addition, if Richard Ressler and Orchard Investments, LLC, which we refer to as
the Orchard Investors, collectively acquire less than $1.0 million worth of shares of common stock as part of this rights offering, the
Backstop Commitment, the Purchase Option and the Additional Subscription Offer, we have agreed to offer to the Orchard Investors an additional number
of shares of common stock equal to the shortfall amount at the subscription price.
The rights offering to, and our
other transactions with, the Bridge Lenders are being made in reliance on an exemption from the registration requirements of the Securities Exchange
Act of 1933, as amended. Shares issued in respect of the Bridge Lenders participation in the rights offering and any shares issued pursuant to
the Investment Agreement are not covered by the registration statement of which this prospectus forms a part.
The rights will expire at 5:00
p.m., New York City time, June 30 , 2011, unless extended as described herein, which date we refer to as the expiration date. We may extend the
period for exercising the rights in our sole discretion, subject to the terms of the Investment Agreement described below. You will have no right to
rescind your subscriptions after receipt of your payment of the subscription price except as described in this prospectus. Rights that are not
exercised prior to the expiration date will expire and have no value. Stockholders who do not participate in this rights offering will continue to own
the same number of shares of our common stock and will own a smaller percentage of the total shares of our common stock issued and outstanding after
this rights offering. Based on the transactions contemplated by the Investment Agreement, stockholders who participate in this rights offering and
subscribe to the greatest number of shares of common stock permitted under this rights offering will own a smaller percentage of the total shares of
our common stock issued and outstanding after this rights offering. There is no minimum number of shares that we must sell in order to complete the
rights offering.
Our shares of common stock are
traded on the OTCQB under the symbol ESWW and the Frankfurt Stock Exchange under the symbol EOW. The closing price of our
shares of common stock on June 6 , 2011 was $ 0.08 per share.
We are distributing the rights
and offering the underlying shares of common stock directly to you. We have not employed any brokers, dealers or underwriters in connection with the
solicitation or exercise of rights in the rights offering and no commissions, fees or discounts will be paid in connection with the rights offering.
Bay City Transfer Agency & Registrar is acting as the subscription agent. While certain of our directors, officers and other employees may solicit
responses from you, those directors, officers and other employees will not receive any commissions or compensation for their services other than their
normal compensation.
Per Share |
Total(1) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Subscription
Price |
$ | 0.1200 | $ | 8,000,000 | ||||||
Estimated
Expenses |
$ | 0.0034 | $ | 228,091 | ||||||
Net Proceeds
to ESW |
$ | 0.1166 | $ | 7,771,909 |
(1) |
Assumes the offering is fully subscribed |
An investment in our common
stock involves risks. See Risk Factors beginning on page 12 of this prospectus.
Neither the Securities and
Exchange Commission nor any state securities regulators have approved or disapproved of these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal offense.
Our securities are not being
offered in any jurisdiction where the offer is not permitted under applicable local laws.
The date of this prospectus is [], 2011.
TABLE OF CONTENTS
Page |
||||||
---|---|---|---|---|---|---|
ABOUT THIS
PROSPECTUS |
iv | |||||
CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS |
iv | |||||
PROSPECTUS
SUMMARY |
1 | |||||
Environmental
Solutions Worldwide, Inc. |
1 | |||||
The Rights
Offering |
1 | |||||
QUESTIONS AND
ANSWERS ABOUT THE RIGHTS OFFERING |
7 | |||||
RISK FACTORS
|
12 | |||||
Risks Related
to Our Company |
12 | |||||
Risks Related
to this Rights Offering |
17 | |||||
Risks
Associated with an Investment in Our Common Stock |
19 | |||||
USE OF
PROCEEDS |
22 | |||||
DETERMINATION OF
OFFERING PRICE |
22 | |||||
DILUTION
|
22 | |||||
CAPITALIZATION
|
23 | |||||
PRICE RANGE OF
COMMON STOCK AND DIVIDEND POLICY |
24 | |||||
THE RIGHTS
OFFERING |
24 | |||||
Background of
the Rights Offering |
24 | |||||
The
Investment Agreement |
25 | |||||
Subscription
Rights |
26 | |||||
Expiration of
the Rights Offering and Extensions, Amendments and Termination |
27 | |||||
Conditions to
the Rights Offering |
28 | |||||
Method of
Exercising Subscription Rights |
28 | |||||
Method of
Payment |
29 | |||||
Medallion
Guarantee May Be Required |
30 | |||||
Subscription
Agent |
30 | |||||
Delivery of
Subscription Materials and Payment |
30 | |||||
Guaranteed
Delivery Procedures |
30 | |||||
Calculation
of Subscription Rights Exercised |
31 | |||||
Escrow
Arrangements |
31 | |||||
Notice to
Beneficial Holders |
31 | |||||
Beneficial
Owners |
31 | |||||
Determinations Regarding the Exercise of Your Subscription Rights |
31 | |||||
No Revocation
or Change |
32 | |||||
Non-Transferability of the Rights |
32 | |||||
Rights of
Subscribers |
32 | |||||
Foreign
Stockholders and Stockholders with Army Post Office or Fleet Post Office Addresses |
32 | |||||
No Board
Recommendation |
32 | |||||
Shares of
Common Stock Outstanding After the Rights Offering |
32 | |||||
Fees and
Expenses |
33 | |||||
Questions
About Exercising Subscription Rights |
33 | |||||
Other Matters
|
33 | |||||
PLAN OF
DISTRIBUTION |
33 | |||||
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
35 | |||||
Overview
|
35 | |||||
Comparison of
the Three Month Period Ended March 31, 2011 to the Three Month Period Ended March 31, 2010 |
39 | |||||
Comparison of
Year Ended December 31, 2010 to Year Ended December 31, 2009 |
41 | |||||
Liquidity and
Capital Resources |
43 |
i
Page | ||||||
---|---|---|---|---|---|---|
Contractual
Obligations |
47 | |||||
Critical
Accounting Policies and Estimates |
48 | |||||
Recently
Adopted Accounting Pronouncements |
51 | |||||
Foreign
Currency Transactions |
52 | |||||
BUSINESS
|
53 | |||||
General
|
53 | |||||
Industry
Trends |
53 | |||||
Business
Strategy |
54 | |||||
Principal
Products and Their Markets |
55 | |||||
Distribution
|
56 | |||||
Competition
|
56 | |||||
Raw Materials
|
57 | |||||
Customers
|
58 | |||||
Patent and
Trademarks |
58 | |||||
Product
Certification |
58 | |||||
Warranty
Matters |
59 | |||||
Manufacture
and Testing Services |
59 | |||||
Research and
Development |
60 | |||||
Environmental
Matters |
60 | |||||
Employees
|
60 | |||||
Properties
|
60 | |||||
Legal
Proceedings |
60 | |||||
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
61 | |||||
MANAGEMENT
|
61 | |||||
EXECUTIVE
COMPENSATION |
66 | |||||
Summary
Compensation Table |
66 | |||||
Employment
Agreements |
67 | |||||
Outstanding
Equity Awards at Fiscal Year End |
67 | |||||
Stock Option
Plan |
68 | |||||
Compensation
of Non-Management Directors |
69 | |||||
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS |
71 | |||||
Note Payable
to Related Party |
71 | |||||
Convertible
Debenture Issued to Related Party |
71 | |||||
Contracts and
Agreements |
72 | |||||
Services
Agreement |
72 | |||||
The
Investment Agreement |
73 | |||||
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
73 | |||||
DESCRIPTION OF
COMMON STOCK |
76 | |||||
Common Stock
|
76 | |||||
CERTAIN MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES |
76 | |||||
LEGAL MATTERS
|
78 | |||||
EXPERTS
|
78 | |||||
WHERE YOU CAN
FIND ADDITIONAL INFORMATION |
78 | |||||
DISCLOSURE OF
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES |
78 |
ii
Page | ||||||
---|---|---|---|---|---|---|
INDEX TO
FINANCIAL STATEMENTS |
F-1 | |||||
INFORMATION NOT
REQUIRED IN PROSPECTUS |
II-1 | |||||
Item 13.
Other Expenses of Issuance and Distribution. |
II-1 | |||||
Item 14.
Indemnification of Directors and Officers. |
II-1 | |||||
Item 15.
Recent Sales of Unregistered Securities. |
II-1 | |||||
Item 16.
Exhibits. |
II-2 | |||||
Item 17.
Undertakings |
II-7 | |||||
SIGNATURES
|
II-10 |
iii
ABOUT THIS PROSPECTUS
You should rely only on the
information contained in this prospectus or any free writing prospectus we may authorize to be delivered to you. We have not authorized anyone to
provide you with different or additional information. We are not making an offer of securities in any state or other jurisdiction where the offer is
not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of
this prospectus regardless of its time of delivery, and you should not consider any information in this prospectus to be investment, legal or tax
advice. We encourage you to consult your own counsel, accountant and other advisors for legal, tax, business, financial and related advice regarding an
investment in our securities.
Unless we otherwise indicate or
unless the context requires otherwise, all references in this registration statement to the Company, ESW, we,
us or our refer to Environmental Solutions Worldwide, Inc. and its subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus contains certain
forward-looking statements regarding, among other things, our anticipated financial and operating results. Investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date hereof. We undertake 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, we caution investors that
actual financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, us. Such
forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or
achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking
statements.
The words anticipate,
believe, estimate, expect, intend, will, should, may,
plan, and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. Such statements
reflect our current views with respect to future events and are subject to certain risks, uncertainties, and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected, intended, or planned. We assume no obligation and do not intend to update these forward-looking
statements.
iv
PROSPECTUS SUMMARY
The following summary provides
an overview of certain information about us and this offering and may not contain all the information that is important to you. This summary is
qualified in its entirety by, and should be read together with, the information contained in other parts of this prospectus. You should read this
entire prospectus carefully before making a decision about whether to invest in our securities.
Environmental Solutions Worldwide, Inc.
We are engaged in the design,
development, manufacture and sale of environmental and emission technologies. We are 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. We also offer
engine and after treatment emissions verification testing and certification services.
Our focus is to be a leading
player in the environmental emissions market by providing leading-edge catalyst technology as well as best-in-class engine and vehicle emissions
testing services. Our strategy is centered on identifying and deploying resources against our sweet-spot products, where we have identified
our core competencies and differentiation in the marketplace. Our core geographical focus is North America and we will opportunistically explore
business development opportunities in other markets if accretive to us in the short term. By focusing financial, human and intellectual capital on our
core competencies and markets, we are targeting profitable growth in the short term and value creation for our shareholders over the long
term.
We were incorporated in the State
of Florida in 1987. Our principal executive offices are located at 335 Connie Crescent, Concord, Ontario, Canada L4K 5R2. Our telephone number is (905)
695-4142. Our web site is www.cleanerfuture.com. Information contained on our web site does not constitute a part of this prospectus.
Effective February 17, 2011 and
April 27, 2011, we became a party to certain note subscription agreements and issued unsecured subordinated promissory notes to each of the Bridge
Lenders. Pursuant to these note subscription agreements and promissory notes, the Bridge Lenders agreed to make, and made, loans to us in the principal
aggregate amount of $4.0 million, which we refer to as the Bridge Loans, subject to the terms and conditions set forth therein. The Bridge
Loans bear interest at a rate of 10% per annum, payable in-kind on a monthly basis. The maturity date of the Bridge Loans is the earlier of: (i) the
consummation of a rights offering of our common stock registered under the Securities Act of 1933, as amended, at a sale price of $0.12 per share
pursuant to which we raise at least an incremental $3.5 million of cash and permit all Bridge Lenders to exchange their Bridge Loans (and the other
Bridge Loans paid in-kind for the payment of interest under the Bridge Loans) for shares of common stock at such price per share, which we refer to as
a Qualified Offering, or (ii) June 17, 2011. The Bridge Lenders, at their sole discretion, may extend the maturity date beyond June 17,
2011. We expect to request that the Bridge Lenders extend the maturity date of the Bridge Loans until the closing date of the
transactions contemplated by the Investment Agreement, which is expected to occur within a few days after the closing of this rights offering.
We understand from the Bridge Lenders that they will comply with this request. The purpose of this rights offering is to raise equity
capital in accordance with the Bridge Loans. See The Rights Offering Background of the Rights Offering The Bridge Loans
beginning on page 24 .
The Rights Offering
Issuer
|
Environmental Solutions Worldwide, Inc. |
|||||
Rights Granted
|
We
will distribute to each stockholder of record on June 9 , 2011 at no charge, one non-transferable subscription right for each share of our common
stock then owned by such stockholder. The rights will be evidenced by non-transferable subscription rights certificates. If and to the extent that our
stockholders exercise their right to purchase our common stock we will issue up to 66,666,667 shares and receive net proceeds of up to $7.8 million in
cash, or by the delivery to us by the holder of an equivalent amount of principal and accrued and unpaid interest of indebtedness owed by us to such
holder, or a combination thereof. |
1
Subscription
Rights |
Through your basic subscription right, you are entitled to purchase 0.51494 shares of our common stock for each subscription right at the
subscription price. We will not issue fractional shares, but rather will round down the aggregate number of shares you are entitled to receive to the
nearest whole number. |
|||||
Subscription
Price |
$0.12
per share, which shall be paid in cash or by the delivery to us by the holder of an equivalent amount of principal and accrued and unpaid interest of
indebtedness owed by us to such holder, or a combination thereof. |
|||||
Shares of Common
Stock Outstanding after the Offering |
230,076,232 shares, assuming full subscription. |
|||||
Oversubscription
Rights |
We do
not expect that all of our stockholders will exercise all of their basic subscription rights. If you fully exercise your basic subscription right, the
oversubscription right of each right entitles you to subscribe for additional shares of our common stock unclaimed by other holders of rights in this
offering at the same subscription price per share. If an insufficient number of shares are available to fully satisfy all oversubscription right
requests, the available shares will be distributed proportionately among stockholders who exercised their oversubscription rights based on the number
of shares each stockholder subscribed for under its basic subscription rights. The subscription agent will return any excess payments by mail without
interest or deduction promptly after the expiration of the subscription period. |
|||||
Non-Transferability of Rights |
The
subscription rights are not transferable, other than to affiliates of the recipient (i.e. entities which control the recipient or are controlled by or
under common control with the recipient) or a transfer of rights to the estate of the recipient upon the death of such recipient. |
|||||
Record Date
|
As of
5:00 p.m., New York City time, on June 9 , 2011. |
|||||
Expiration Date
|
5:00
p.m., New York City time, on June 30 , 2011, subject to extension or earlier termination. |
|||||
Amendment,
Extension and Termination |
We
may extend the expiration date at any time after the record date or we may amend or modify the terms of the rights offering. We also reserve the right
to terminate the rights offering at any time prior to the expiration date for any reason, in which event all funds received in connection with the
rights offering will be returned without interest or deduction to those persons who exercised their subscription rights. |
|||||
Fractional Shares
|
We
will not issue fractional shares of our common stock, but rather will round down the aggregate number of shares you are entitled to receive to the
nearest whole share. |
2
Procedure for
Exercising Rights |
You
may exercise your subscription rights by properly completing and executing your rights certificate and delivering it, together with the subscription
price for each share of common stock for which you subscribe, to the subscription agent on or prior to the expiration date. If you use the mail, we
recommend that you use insured, registered mail, return receipt requested. If you cannot deliver your rights certificate to the subscription agent on
time, you may follow the guaranteed delivery procedures described under The Rights Offering Guaranteed Delivery Procedures beginning
on page 30 . |
|||||
No Revocation
|
Once
you submit the form of rights certificate to exercise any subscription rights, you may not revoke or change your exercise or request a refund of monies
paid. All exercises of rights are irrevocable, even if you subsequently learn information about us that you consider to be
unfavorable. |
|||||
Payment
Adjustments |
If
you send a payment that is insufficient to purchase the number of shares requested, or if the number of shares requested is not specified in the rights
certificate, the payment received will be applied to exercise your subscription rights to the extent of the payment. If the payment exceeds the amount
necessary for the full exercise of your subscription rights, including any oversubscription rights exercised and permitted, the excess will be returned
to you as soon as practicable. You will not receive interest or a deduction on any payments refunded to you under the rights
offering. |
|||||
How Rights
Holders Can Exercise Rights Through Others |
If you hold our common stock through a broker, custodian bank or other nominee, we will ask your broker, custodian bank or other nominee to notify you of the rights offering. If you wish to exercise your rights, you will need to have your broker, custodian bank or other nominee act for you. To indicate your decision, you should complete and return to your broker, custodian bank or other nominee the form entitled Beneficial Owners Election Form. You should receive this form from your broker, custodian bank or other nominee with the other rights offering materials. You should contact your broker, custodian bank or other nominee if you believe you are entitled to participate in the rights offering but you have not received this form. |
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How Foreign
Stockholders and Other Stockholders Can Exercise Rights |
The subscription agent will not mail rights certificates to you if you are a stockholder whose address is outside the United States or if you have an Army Post Office or a Fleet Post Office address. Instead, we will have the subscription agent hold the subscription rights certificates for your account. To exercise your rights, you must notify the subscription agent prior to 11:00 a.m., New York City time, at least three business days prior to the expiration date, and establish to the |
3
satisfaction of the subscription agent that you are permitted to exercise your subscription rights under applicable law. If you do not follow
these procedures by such time, your rights will expire and will have no value. |
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Material U.S.
Federal Income Tax Consequences |
A holder will not recognize income or loss for U.S. Federal income tax purposes in connection with the receipt or exercise of subscription rights in the rights offering. For a detailed discussion, see Certain Material U.S. Federal Income Tax Consequences beginning on page 76 . You should consult your tax advisor as to the particular consequences to you of the rights offering. |
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Issuance of Our
Common Stock |
We
will issue certificates representing shares purchased in the rights offering as soon as practicable after the expiration of the rights
offering. |
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Conditions
|
The
completion of the rights offering is not subject to the satisfaction of any conditions. We reserve the right to amend, extend, cancel, terminate or
otherwise modify the rights offering at any time before completion of the rights offering for any reason. See The Rights Offering
Conditions to the Rights Offering. |
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No Recommendation
to Rights Holders |
An
investment in shares of our common stock must be made according to your evaluation of your own best interests and after considering all of the
information herein, including the Risk Factors section of this prospectus. Neither we nor our board of directors are making any
recommendation regarding whether you should exercise your subscription rights. |
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Use of Proceeds
|
The
purpose of this rights offering is to raise equity capital in a cost-effective manner that gives all of our stockholders the opportunity to
participate. Assuming the rights offering is fully-subscribed, the net proceeds available to us from the rights offering will be approximately $7.8
million in cash, or by the delivery to us by the holder of an equivalent amount of principal and accrued and unpaid interest of indebtedness owed by us
to such holder, or a combination thereof. In the event we receive $7.8 million of cash as proceeds from the rights offering, then we will use a portion
of the proceeds received by us to repay the outstanding amounts due under the Bridge Loans (approximately $4.1 million) and our Demand Credit Agreement
with Canadian Imperial Bank of Commerce (CIBC), dated March 10, 2010, which we refer to as the Demand Credit Agreement
(approximately $1.3 million). The Bridge Loans mature on June 17, 2011, and we expect to request that the Bridge Lenders extend the
maturity date until the closing date of the transactions contemplated by the Investment Agreement, which is expected to occur within a
few days after the closing of this rights offering. We understand from the Bridge Lenders that they will comply with this request. The
Demand Credit Agreement matures on the earlier of the completion of |
4
this rights offering and June 30, 2011, and the lender has indicated that any reasonable request for an extension beyond June 30,
2011 will be considered in light of this rights offering. We will use the excess proceeds (approximately $2.4 million) for general working capital
purposes. Alternatively, we may receive as proceeds from the rights offering the delivery to us of the Bridge Loans (approximately $4.1 million), in
which case the balance of $3.6 million received in cash will be used for repayment of the Demand Credit Agreement (approximately $1.3 million) and the
excess for general working capital purposes (approximately $2.4 million). In addition, we may incur further indebtedness, which may include additional
financing arrangements with the Bridge Lenders, to fund our working capital needs prior to completion of this rights offering. In the event that we
incur such indebtedness, we expect to use the proceeds from this rights offering for repayment thereof. |
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Bridge Lender
Participation |
The
Bridge Lenders beneficially own in the aggregate 47,045,374 shares of our common stock, representing approximately 36% of our outstanding common stock.
As such, the Bridge Lenders will receive subscription rights to purchase up to an aggregate of 24,225,760 shares of common stock (before giving effect
to any oversubscriptions) in this rights offering. The Bridge Lenders have indicated to us that they intend to exercise their entire allocation of
basic subscription rights, and we expect the total purchase price thereof to be approximately $2.9 million, payable by the delivery to us by the Bridge
Lenders of an equivalent amount of principal and accrued and unpaid interest owed under the Bridge Loans. The rights offering is being made to the
Bridge Lenders in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended. Shares issued in respect of
the Bridge Lenders participation in the rights offering are not covered by the registration statement of which this prospectus forms a part. The
Bridge Lenders are not soliciting participation by the holders of rights in the rights offering or engaging in any other marketing or sales activity in
connection therewith. |
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Backstop
Commitment and Investment Agreement |
We have entered into the Investment Agreement with the Bridge Lenders which provides for the Backstop Commitment. Pursuant to the Backstop Commitment, the Bridge Lenders have agreed to collectively backstop this rights offering by purchasing from us, at the subscription price, any shares not purchased by our existing stockholders (after giving effect to any oversubscriptions), up to 29,166,667 shares of common stock, for a total purchase price of $3.5 million. In addition to their rights to purchase shares pursuant to the rights offering and the Backstop Commitment, we have offered to the Bridge Lenders the Purchase Option, pursuant to which the Bridge Lenders have the option, in their sole discretion, to purchase from us, at the |
5
subscription price, any other shares not purchased by our existing stockholders through this rights offering. |
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If,
after giving effect to this rights offering, the Backstop Commitment and the Purchase Option, any of Bridge Lenders shall have failed to exchange any
portion of his or its Bridge Loans, we will offer such Bridge Lender the right to purchase additional shares of common stock at the subscription
price (payable through the exchange of the Bridge Loans for common stock) such that each Bridge Lender shall have exchanged all of his or its Bridge
Loans for shares of common stock, which offer we refer to as the Additional Subscription Offer. In the event the Orchard Investors
collectively acquire shares having a value of less than $1.0 million based on the subscription price after giving effect to the (i) the rights offering
(including any over-subscription), (ii) the Backstop Commitment, (iii) the Purchase Option and (iv) purchases by the Orchard Investors pursuant to the
Additional Subscription Offer (such shortfall in the value of shares purchased below $1.0 million, the Shortfall Amount), we have agreed,
which offer we refer to as the Special Additional Subscription Offer , to offer to the Orchard Investors an additional number
of shares of common stock having a value equal to the Shortfall Amount (based on the subscription price) at the subscription price. |
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The
closing of the Investment Agreement is subject to satisfaction or waiver of customary conditions, including compliance with covenants and the accuracy
of representations and warranties provided in the Investment Agreement, consummation of the rights offering and the receipt of all requisite approvals
and authorizations under applicable law. If all the conditions to the Investment Agreement are met, the Backstop Commitment will ensure that we raise
net proceeds of $6.2 million through the offering and the Backstop Commitment. If the Bridge Lenders elect to exercise the Purchase Option, we will
raise net proceeds of $7.8 million through this offering and the transactions contemplated by the Investment Agreement. |
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Certain
Anti-Dilution Rights |
Pursuant to certain securities subscription agreements we entered into on (i) March 23, 2010 for 9% convertible debentures and (ii) November
9, 2010 and December 8, 2010 for units comprised of common stock and warrants to purchase shares of common stock, which we refer to as the Prior
Subscription Agreements, the investors under the Prior Subscription Agreements were granted certain anti-dilution rights. The closing of this
rights offering and the consummation of the transactions under the Investment Agreement will result in the investors collectively receiving
approximately 22,500,000 additional shares of common stock under the Prior Subscription Agreements, which we refer to as the Anti-Dilution
Shares. |
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Subscription
Agent |
Bay
City Transfer Agency & Registrar |
6
For additional information
concerning the rights offering, see The Rights Offering, beginning on page 24 .
Before investing in our common
stock, you should carefully read and consider the information set forth in Risk Factors beginning on page 12 of this prospectus and
all other information appearing elsewhere in this prospectus.
QUESTIONS AND ANSWERS ABOUT THE RIGHTS
OFFERING
Q: |
What is a rights offering? |
A: |
A rights offering is an opportunity for you to purchase additional shares of our common stock at a fixed price and in an amount at least proportional to your existing interest in us. However, based on the transactions contemplated by the Investment Agreement, your percentage ownership of us may decrease even if you subscribe to the greatest number of shares of common stock as permitted under this rights offering. See The Rights Offering Shares of Common Stock Outstanding After the Rights Offering beginning on page 32 . |
Q: |
Why are we engaging in a rights offering, how did we decide on a maximum aggregate gross proceeds of $8.0 million, and how will we use the proceeds from the rights offering? |
A: |
The purpose of this rights offering is to raise equity capital in a cost-effective manner that gives all of our stockholders the opportunity to participate. The net proceeds will be used for repayment of the Bridge Loans and the Demand Credit Agreement and general working capital purposes. We decided to raise up to approximately $8.0 million of gross proceeds based on our obligations to repay indebtedness under the Bridge Loans and Demand Credit Agreement and projected working capital, capital investment and other general corporate needs. |
Q: |
How was the $0.12 per share subscription price established? |
A: |
In setting the subscription price, we reviewed and considered a number of factors, including the amount of proceeds desired, our need for liquidity and equity capital, alternatives available to us for raising equity capital, the historic market price, the liquidity and the historic volatility of the market price of our common stock, the historic trading volume of our common stock, our business prospects, our recent and anticipated operating results, the price at which our stockholders might be willing to participate in the rights offering, the desire to provide an opportunity to our stockholders to participate in the rights offering on a pro rata basis and general conditions in the securities market. The subscription price for this rights offering was proposed to, reviewed and approved by the disinterested members of our board of directors. The subscription price is not necessarily related to the book value of our assets, net worth, past operations, cash flows, losses, financial condition, or any other established criteria for valuing us and may or may not be considered the fair value of our common stock to be offered in the rights offering. You should not assume or expect that, after the rights offering, our common shares will trade at or above the subscription price. We can give no assurance that our common shares will trade at or above the subscription price in any given time period. |
Q: |
Am I required to subscribe in the rights offering? |
A: |
No. |
Q: |
What is the basic subscription right? |
A: |
Each subscription right evidences a right to purchase 0.51494 shares of our common stock at a subscription price of $0.12 per share, which shall be paid in cash or by the delivery to us by the holder of an equivalent amount of principal and accrued and unpaid interest of indebtedness owed by us to such holder, or a combination thereof. |
Q: |
What is the oversubscription right? |
A: |
We do not expect that all of our stockholders will exercise all of their basic subscription rights. If you fully exercise your basic subscription right, the oversubscription right of each right entitles you to subscribe for additional shares of our common stock unclaimed by other holders of rights in this offering at the same subscription price per share. If an insufficient number of shares are available to fully satisfy all oversubscription |
7
right requests, the available shares will be distributed proportionately among stockholders who exercised their oversubscription rights based on the number of shares each stockholder subscribed for under its basic subscription rights. The subscription agent will return any excess payments by mail without interest or deduction promptly after the expiration of the subscription period. |
Q: |
Who will receive subscription rights? |
A: |
Holders of our common stock will receive one non-transferable subscription right for each share of common stock owned as of June 9 , 2011, the record date. |
Q: |
How many shares may I purchase if I exercise my subscription rights? |
A: |
You will receive one non-transferable subscription right for each share of our common stock that you owned on June 9 , 2011, the record date. Each subscription right evidences a right to purchase 0.51494 shares of our common stock at a subscription price of $0.12 per share, payable in cash, an equivalent amount of principal and accrued and unpaid interest of indebtedness owed by us, or a combination thereof. You may exercise any number of your subscription rights. |
Q: |
What happens if I choose not to exercise my subscription rights? |
A: |
If you choose not to exercise your subscription rights you will retain your current number of shares of common stock. As a result, the percentage of the common stock that you own will decrease and your voting rights and other rights will be diluted. |
Q: |
Do you need to achieve a certain participation level in order to complete the rights offering? |
A: |
No. We may choose to consummate, amend, extend or terminate the rights offering regardless of the number of shares actually purchased. |
Q: |
Can you terminate the rights offering? |
A: |
Yes. Our board of directors may decide to terminate the rights offering at any time prior to the expiration of the rights offering, for any reason. If we cancel the rights offering, any money or indebtedness received from subscribing stockholders will be refunded as soon as practicable, but no later than 10 business days from the announcement that the rights offering is terminated, without interest or a deduction on any payments refunded to you under the rights offering. See The Rights Offering Expiration of the Rights Offering and Extensions, Amendments and Termination. |
Q: |
May I transfer my subscription rights if I do not want to purchase any shares? |
A: |
No. Should you choose not to exercise your rights, you may not sell, give away or otherwise transfer your rights. However, rights will be transferable to affiliates of the recipient (i.e. entities which control the recipient or are controlled by or under common control with the recipient) and by operation of law, for example, upon the death of the recipient. |
Q: |
When will the rights offering expire? |
A: |
The subscription rights will expire and will have no value, if not exercised prior thereto, at 5:00 p.m., New York City time, on June 30 , 2011, unless we decide to extend the rights offering expiration date until some later time or terminate it earlier. See The Rights Offering Expiration of the Rights Offering and Extensions, Amendments and Termination. The subscription agent must actually receive all required documents and payments in cash, or by the delivery to us by the holder of an equivalent amount of principal and accrued and unpaid interest of indebtedness owed by us to such holder, or a combination thereof, before the expiration date. There is no maximum duration for the rights offering. |
Q: |
How do I exercise my subscription rights? |
A: |
You may exercise your subscription rights by properly completing and executing your rights certificate and delivering it, together in full with the subscription price for each share of common stock you subscribe for, to the subscription agent on or prior to the expiration date. If you use the mail, we recommend that you use insured, registered mail and return receipt requested. If you cannot deliver your rights certificate to the |
8
subscription agent on time, you may follow the guaranteed delivery procedures described under The Rights Offering Guaranteed Delivery Procedures beginning on page 30 . |
Q: |
What should I do if I want to participate in the rights offering but my shares are held in the name of my broker, custodian bank or other nominee? |
A: |
If you hold our common stock through a broker, custodian bank or other nominee, we will ask your broker, custodian bank or other nominee to notify you of the rights offering. If you wish to exercise your rights, you will need to have your broker, custodian bank or other nominee act for you. To indicate your decision, you should complete and return to your broker, custodian bank or other nominee the form entitled Beneficial Owner Election Form. You should receive this form from your broker, custodian bank or other nominee with the other rights offering materials. You should contact your broker, custodian bank or other nominee if you believe you are entitled to participate in the rights offering but you have not received this form. |
Q: |
What should I do if I want to participate in the rights offering, but I am a stockholder with a foreign address or a stockholder with an Army Post Office or Fleet Post Office address? |
A: |
The subscription agent will not mail rights certificates to you if you are a stockholder whose address is outside the United States or if you have an Army Post Office or a Fleet Post Office address. To exercise your rights, you must notify the subscription agent prior to 11:00 a.m., New York City time, at least three business days prior to the expiration date, and establish to the satisfaction of the subscription agent that you are permitted to exercise your subscription rights under applicable law. If you do not follow these procedures by such time, your rights will expire and will have no value. |
Q: |
Will I be charged a sales commission or a fee if I exercise my subscription rights? |
A: |
We will not charge a brokerage commission or a fee to rights holders for exercising their subscription rights. However, if you exercise your subscription rights through a broker, dealer or nominee, you will be responsible for any fees charged by your broker, dealer or nominee. |
Q: |
Has the board of directors made a recommendation regarding the rights offering? |
A: |
Neither the Company nor our board of directors is making any recommendation as to whether you should exercise your subscription rights. You are urged to make your decision based on your own assessment of the rights offering, after considering all of the information herein, including the Risk Factors section of this prospectus, and your best interests. |
Q: |
May stockholders in all states participate in the rights offering? |
A: |
Although we intend to distribute the rights to all stockholders, we reserve the right in some states to require stockholders, if they wish to participate, to state and agree upon exercise of their respective rights that they are acquiring the shares for investment purposes only, and that they have no present intention to resell or transfer any shares acquired. Our securities are not being offered in any jurisdiction where the offer is not permitted under applicable local laws. |
Q: |
Is the exercise of my subscription rights risky? |
A: |
The exercise of your subscription rights involves significant risks. Exercising your rights means buying additional shares of our common stock and should be considered as carefully as you would consider any other equity investment. Among other things, you should carefully consider the risks described under the heading Risk Factors, beginning on page 12 . |
Q: |
How many shares of our common stock will be outstanding after the rights offering? |
A: |
The number of shares of our common stock that will be outstanding after the rights offering will depend on the number of shares that are purchased in the rights offering and pursuant to the Investment Agreement. If we sell all of the shares being offered in the rights offering, the Additional Subscription Offer and the Special Additional Subscription Offer, then we will issue approximately 100,612,465 shares of common stock. In that case, we will have approximately 230,076,232 shares of common stock outstanding after the rights offering, the consummation of the transactions contemplated by the Investment Agreement, and after giving effect to |
9
the issuance of the Anti-Dilution Shares. This would represent an increase of approximately 78% in the number of outstanding shares of common stock. See The Rights Offering Shares of Common Stock Outstanding After the Rights Offering on page 32 . |
Q: |
What will be the proceeds of the rights offering? |
A: |
If we sell all the shares being offered, we will receive net proceeds of approximately $7.8 million in cash, or by the delivery to us by the holder of an equivalent amount of principal and accrued and unpaid interest of indebtedness owed by us to such holder, or a combination thereof. We are offering shares in the rights offering with no minimum purchase requirement. In the event we receive $7.8 million of cash as net proceeds from the rights offering, then we will use a portion of the proceeds received by us to repay the outstanding amounts due under the Bridge Loans (approximately $4.1 million) and the Demand Credit Agreement (approximately $1.3 million). The Bridge Loans mature on June 17, 2011, and we expect to request that the Bridge Lenders extend the maturity date until the closing date of the transactions contemplated by the Investment Agreement, which is expected to occur within a few days after the closing of this rights offering. We understand from the Bridge Lenders that they will comply with this request. The Demand Credit Agreement matures on the earlier of the completion of this rights offering and June 30, 2011, and the lender has indicated that any reasonable request for an extension beyond June 30, 2011 will be considered in light of this rights offering. We will use the excess proceeds (approximately $2.4 million) for general working capital purposes. Alternatively, we may receive as proceeds from the rights offering the delivery to us of the Bridge Loans (approximately $4.1 million), in which case the balance of $3.6 million received in cash will be used for repayment of the Demand Credit Agreement (approximately $1.3 million) and the excess for general working capital purposes (approximately $2.4 million). In addition, we may incur further indebtedness, which may include additional financing arrangements with the Bridge Lenders, to fund our working capital needs prior to completion of this rights offering. In the event that we incur such indebtedness, we expect to use the proceeds from this rights offering for repayment thereof. |
Q: |
After I exercise my rights, can I change my mind and cancel my purchase? |
A: |
No. Once you exercise and send in your subscription rights certificate and payment, as provided herein, you cannot revoke the exercise of your subscription rights, even if you later learn information about us that you consider to be unfavorable and even if the market price of our common stock falls below the $0.12 per share subscription price. You should not exercise your subscription rights unless you are certain that you wish to purchase additional shares of our common stock at a price of $0.12 per share. See The Rights Offering No Revocation or Change. |
Q: |
What are the material U.S. Federal income tax consequences of exercising my subscription rights? |
A: |
A holder will not recognize income or loss for U.S. Federal income tax purposes in connection with the receipt or exercise of subscription rights in the rights offering. For a detailed discussion, see Certain Material U.S. Federal Income Tax Consequences. You should consult your tax advisor as to the particular consequences to you of the rights offering. |
Q: |
If the rights offering is not completed, for any reason, will my subscription payment be refunded to me? |
A: |
Yes. If the rights offering is not completed, for any reason, any cash received from subscribing stockholders will be refunded as soon as practicable, without interest or deduction, and any indebtedness received from subscribing stockholders, which will accrue interests in accordance with its terms while held by the subscription agent, will be returned as soon as practicable, without deduction. |
Q: |
If I exercise my subscription rights, when will I receive shares of common stock I purchased in the rights offering? |
A: |
We will deliver certificates representing the shares of our common stock purchased in the rights offering as soon as practicable after the expiration of the rights offering and after all pro rata allocations and adjustments have been completed. We will not be able to calculate the number of shares to be issued to each exercising holder until 5:00 p.m., New York City time, on the third business day after the expiration date of the rights offering, which is the latest time by which subscription rights certificates may be delivered to the subscription |
10
agent under the guaranteed delivery procedures described under The Rights Offering Guaranteed Delivery Procedures. |
Q: |
To whom should I send my forms and payment? |
A: |
If your shares are held in the name of a broker, dealer or other nominee, then you should send your subscription documents, rights certificate and payment in cash or by the delivery to us by the holder of an equivalent amount of principal and accrued and unpaid interest of indebtedness owed by us to such holder, or a combination thereof, to that record holder. If you are the record holder, then you should send your subscription documents, rights certificate and payment, as provided herein, by hand delivery, first class mail or courier service to Bay City Transfer Agency & Registrar, the subscription agent. The address for delivery to the subscription agent is as follows: |
By Mail: |
By Overnight Delivery: |
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Bay City
Transfer Agency & Registrar Trust Account P.O. Box 874 Bay City, MI 48707 |
Bay City
Transfer Agency & Registrar 300 Center Avenue, Suite 202B Bay City, MI 48708 |
Your delivery to a different address or other than by the methods set forth above will not constitute valid delivery. |
Q: |
What if I have other questions? |
A: |
If you have other questions about the rights offering, please contact us at Environmental Solutions Worldwide, Inc., 335 Connie Crescent, Concord, Ontario, Canada L4K 5R2 or by telephone at (905) 695-4142. |
11
RISK FACTORS
Investing in our common stock
involves risks. You should carefully consider the risks described below and all of the other information contained in this prospectus before you make a
decision to participate in the offering and purchase shares of our common stock. If any of these risks occur, our business, financial condition or
results of operations could suffer, and you could lose part or all of your investment.
Risks Related to Our Company
If the
rights offering and the transactions contemplated by the Investment Agreement are not consummated or we are not able to obtain alternative financing,
we may not have an immediate source of funds to meet our working capital requirements and to satisfy our repayment obligations under the Bridge
Loans.
We have limited funds and are
dependent upon the consummation of the rights offering and the transactions contemplated by the Investment Agreement to fund our working capital needs.
If we fail to consummate this rights offering or the transactions contemplated by the Investment Agreement, we may not be able to execute our current
business plan and fund business operations long enough to achieve profitability. Our ultimate success is therefore dependent upon our ability to raise
additional capital through this rights offering and the transactions contemplated by the Investment Agreement.
Moreover, we are dependent upon
the consummation of the rights offering and the transactions contemplated by the Investment Agreement to fulfill our obligations under the Bridge Loans
and the Demand Credit Agreement. We have incurred an aggregate of $4.1 million of indebtedness (which includes accrued interest) under the Bridge
Loans, and as of June 6 , 2011, we have outstanding indebtedness under the Demand Credit Agreement of $1.3 million. The Bridge Loans mature on
June 17, 2011, and we expect to request that the Bridge Lenders extend the maturity date until the closing date of the
transactions contemplated by the Investment Agreement, which is expected to occur within a few days after the closing of this rights offering.
We understand from the Bridge Lenders that they will comply with this request. The Demand Credit Agreement matures on the earlier
of the completion of this rights offering and June 30, 2011, and the lender has indicated that any reasonable request for an extension beyond
June 30, 2011 will be considered in light of this rights offering. In the absence of deleveraging our balance sheet and restructuring our capital
structure (whether as a result of this rights offering and the Investment Agreement or otherwise), we may not have sufficient liquidity to satisfy our
obligations under the Demand Credit Agreement and the Bridge Loans and to continue our current operations. In this event, we could face a default and
acceleration of our debt and other obligations.
There can be no assurance that
this rights offering or the transactions contemplated by the Investment Agreement will be consummated. If we fail to consummate this rights offering
and the transactions contemplated by the Investment Agreement, we will be forced to seek alternative sources of capital to support our business
operations. Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue
in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights,
the issuance of warrants or other derivative securities, and the issuance of incentive awards under equity employee incentive plans, which may have
additional dilutive effects to existing stockholders. Further, we may incur substantial costs in pursuing future capital and/or financing, including
investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash
expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial
condition and results of operations.
Our ability to obtain needed
financing may be impaired by such factors as the condition of the economy and capital markets, both generally and specifically in our industry, and the
fact that we are not profitable, which could impact the availability or cost of future financings.
If the amount of capital we are
able to raise from financing activities, together with our revenues and cash flows from operations, is not sufficient to satisfy our capital needs, we
may be required to cease operations.
12
Our auditor has expressed
substantial doubt as to our ability to continue as a going concern.
Based on our experience of
negative cash flows from operations and our dependency upon future financing, our auditor has expressed substantial doubt as to our ability to continue
as a going concern.
We have sustained recurring
operating losses. As of December 31, 2010, we had an accumulated deficit of $44.0 million and cash and cash equivalents of $0.1 million and were in
violation of certain financial covenants under the Demand Credit Agreement for which a waiver was obtained. As of March 31, 2011, we had an accumulated
deficit of $47.0 million and cash and cash equivalents of $1.0 million. There can be no assurance that we will be successful in achieving sufficient
cash flow from operations in the near future and there can be no assurance that we will either achieve or maintain profitability in the future. As a
result, there is substantial doubt regarding our ability to continue as a going concern. We will require additional financing to fund our continuing
operations. We have sought additional funds through the Bridge Loans, this rights offering and the Investment Agreement. Our ability to continue as a
going concern is dependent on obtaining additional financing through this rights offering and the transactions contemplated by the Investment Agreement
and achieving and maintaining a profitable level of operations. The outcome of these matters cannot be predicted at this time, and we can provide no
assurance that we will be able to raise additional funds.
Even if we are able to raise
additional cash or obtain financing through the public or private sale of debt or equity securities, funding from joint-venture or strategic partners,
debt financing or short-term loans, the terms of such transactions may be unduly expensive or burdensome to us or disadvantageous to our existing
stockholders.
We may need additional
financing after completion of this rights offering, which may be unavailable or costly.
Even if we are successful in
consummating this rights offering and the transactions contemplated by the Investment Agreement, our ability to meet our financial projections and
obligations will then depend on our ability to achieve our operating plan.
We may be unable to implement
certain elements of our operating plan following completion of this rights offering due to continuing pressures on our operating cash flow. Our ability
to achieve and sustain operating profitability will depend on many factors, including actions taken by regulatory bodies relating to the verification
and certification of our products, the extent to which our products obtain market acceptance, the timing and size of customer purchases, and customers
and distributors concerns about the stability of our business which could cause them to seek alternatives to our products. Our sales are unpredictable
in light of the highly competitive environment that is focused on federal and state-level public budgets. If we receive a large order (defined by
management as one in which monthly production and deliveries would exceed $2 million), we will need to either negotiate extremely favorable payment
terms providing for at least some advance payment or we will need to obtain either debt or equity financing to allow us to meet our working capital
needs. In addition, our business, our future performance and our liquidity will be affected by general industry and market conditions and growth rates
and general economic and political conditions, including the global economy and other future events.
Consequently, we may have to
raise additional funds, which may be costly, to operate our business and provide other needed capital, and we may be unable to do so on favorable terms
or at all. Our actual funding requirements could vary materially from our current estimates. We base our financial projections on assumptions that we
believe are reasonable but which contain significant uncertainties that could affect our business, our future performance and our liquidity. If we are
unable to access the capital and commercial bank credit markets, obtain additional equity capital, sell assets or otherwise raise additional financing
in a timely manner, our financial condition and ability to operate our business will be significantly affected and one possible outcome may be
bankruptcy or insolvency.
In addition, our senior
management has spent, and will continue to spend, significant time managing these liquidity and other planning issues, which diverts managements
attention from operational and other business concerns and could negatively affect our results of operations.
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In the past, we have failed
to meet certain covenants included in the Demand Credit Agreement. If we are unable to raise sufficient funds through this rights offering, restructure
the Demand Credit Agreement or find alternative financing, we would encounter difficulties in funding our operations, which would have a material
adverse affect on our business, financial condition and results of operations.
We have relied upon the Demand
Credit Agreement to meet a portion of our working capital requirements. As of June 6 , 2011, we had $1.3 million of outstanding indebtedness
under the Demand Credit Facility. Borrowings under the facility are limited to a percentage of accounts receivable plus a percentage of inventories
(capped at $ 1.0 million or 50% of the accounts receivable portion) less any prior ranking claims. The Demand Credit Agreement contains covenants
regarding our maintenance of an adjusted net worth of $4.0 million and an adjusted current ratio of at least 1.25 to 1. From November 8, 2010 through
December 31, 2010, we received waivers of certain financial covenants under the Demand Credit Agreement. Without the waivers, we would not have been in
compliance with the covenants. We are dependent upon this rights offering or alternative equity financing to comply with the terms of the Demand Credit
Agreement. The Demand Credit Agreement matures on the earlier of the completion of this rights offering and June 30, 2011. The lender advised
us that any reasonable request for an extension beyond June 30, 2011 will be considered in light of this rights offering. In the event that we
do not complete this rights offering by June 30, 2011, we cannot assure you that we ultimately reach an agreement with the lender regarding an
extension of the maturity date or other restructuring of the loan or that any such agreement will be on favorable terms to us. Our ability
to restructure or refinance the Demand Credit Agreement depends on the condition of the capital markets and our financial condition. Any refinancing of
the Demand Credit Agreement could be at higher interest rates and may require us to comply with different covenants, which could restrict our business
operations.
If we are unsuccessful in
restructuring the Demand Credit Agreement or in finding a suitable alternative, the lender could accelerate all of our outstanding debt and we would
encounter difficulties in funding our operations. As a result, we could be required to dispose of material assets or operations or raise alternative
funding through the issuance of debt or equity securities. There is no assurance that we would be able to consummate such dispositions or that we will
be able to raise additional cash or obtain financing through the public or private sale of debt or equity securities in terms that are favorable to us
or advantageous to our existing shareholders.
If we fail to restructure or
otherwise repay our debt, or if we are required to use a significant portion or all of our cash and current assets to repay our debt, our business,
financial condition and results of operations would be materially adversely affected.
Our results may fluctuate
due to certain regulatory, marketing and competitive factors over which we have little or no control.
The factors listed below, some of
which we cannot control, may cause our revenues and result of operations to fluctuate significantly:
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actions taken by regulatory bodies relating to the verification and certification of our products; |
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the extent to which our products obtain market acceptance; |
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the timing and size of customer purchases; and |
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customer and distributors concerns about the stability of our business which could cause them to seek alternatives to our products. |
We are currently dependent
on a few major customers / distributors for a significant portion of our revenues.
We recorded sales from 30
customers/distributors in fiscal year 2010 as compared to 26 in fiscal year 2009. Three of our distributors/customers accounted for 21%, 19%, and 13%,
respectively, of our revenue in the fiscal year 2010. Three of our customers accounted for 45%, 20%, and 9%, respectively, of our revenue for the
fiscal year 2009. We will continue to establish long-term relationships with new customers and foster greater opportunities with existing distributors.
The loss of, or major reduction in business from, one or more of the major distributors could have a material adverse effect on our liquidity,
financial position, or results of operations.
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We do not have a long
history of selling and marketing our products.
At the current time, we have
limited marketing capabilities as compared to many of our competitors. We do not have a large sales, promotion and marketing budget. We are constrained
by the lack of working capital and our ability to raise the necessary cash flow from business operations to re-invest in our marketing programs. As a
result of our limited marketing capabilities, we are forced to rely upon customer/distributor referrals, trade publications and a small sales force.
Our competitors have direct advertising and sales promotion programs for their products as well as sales and marketing personnel that may have a
competitive advantage over us in contacting prospective customers/distributors. Our position in the industry is considered minor in comparison to that
of our competitors. We continue to develop and explore new marketing methods and techniques such as, trade show representation and sales programs
directed toward customers / distributors. Our ability to compete at the present time is limited. Our success depends upon the ability to market,
penetrate and expand markets and form alliances with third party distributors.
There can be no assurances
that:
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our selling efforts will be effective; |
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we will obtain an expanded degree of market acceptance; or |
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we will be able to successfully form additional relationships with distributors to market our products. |
We depend upon the
marketability of our core products.
Catalytic converters are our
primary products. We may have to cease operations if our primary products fail to achieve market acceptance and/or generate significant revenues.
Additionally, the marketability of our products is dependent upon obtaining and maintaining verification and certifications as well as the
effectiveness of the product in relation to various environmental regulations as well as competitors products in the various jurisdictions we
market and sell our products.
We may not be able to
obtain direct or indirect regulatory certification or verification approvals with respect to certain products.
The industry that we operate in
is regulated. In the U.S. these regulations are enforced by U.S. Environmental Protection Agency (EPA) and California Air Resources Board
(CARB). We plan to further develop and market catalytic converter products and support technologies that meet new regulations enforced by
these agencies. See Business Product Certification. If we are unable to demonstrate the feasibility of these products or obtain in a
timely manner the verification and or certifications for our products from such regulatory agencies as the EPA or CARB, we may have to abandon the
products or alter our business plan. Such modifications to our business plan will have an adverse effect on revenue and our ability to achieve
profitability. The regulatory approval process with EPA and CARB is complex and requires lengthy durability testing which must precede final
certification/verification of our products. We do not control the timeliness of the certification/verification process; however, we have taken steps to
ensure the efficacy of our contribution to the certification/verification process.
We face constant changes in
governmental standards by which our products are evaluated.
We believe that due to the
constant focus on the environment and clean air standards throughout the world, we will be required in the future to adhere to new and more stringent
regulations. Governmental agencies constantly seek to improve standards required for verification and or certification of products intended to promote
clean air. In the event our products fail to meet these ever changing standards, some or all of our products may become obsolete or de-listed from
government verification having a direct negative effect on our ability to generate revenue and become profitable.
We do not have a long
history of manufacturing our products and do not have a long history of manufacturing our products in commercial quantities.
We may encounter difficulties in
ramping up production of current and any future products due to:
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lack of working capital; |
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quality control and assurance issues; |
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raw material supplies, lead times and prices; |
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shortages of qualified personnel; and |
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equipment capable of producing large quantities |
Any of the foregoing would affect
our ability to meet increases in demand should our products gain market acceptance and reduce growth in our sales revenues.
We face intense competition
and rapid technological advances from competitors.
Competition among companies that
provide solutions for pollutant emissions from diesel engines is intense. Several companies market products that compete directly with our products.
Other companies offer products that potential customers may consider to be acceptable alternatives to our products and services. We face direct
competition from companies with far greater financial, technological, manufacturing and personnel resources, including Corning, NGK and Emitec. Corning
and NGK are the two major manufacturers of ceramic cores, which are integral components in current catalytic converter production, and Emitec is the
major manufacturer of metal cores. We also face direct competition with companies like BASF/Engelhard and Johnson Matthey, who purchase their
substrates from others, and do further processing with their own formulas and fabrication for direct sale to the market place. Newly developed products
could be more effective and cost efficient than our current products or those we may develop in the future. Many of our current and potential future
competitors have substantially more engineering, sales and marketing capabilities, substantially greater financial, technological and personnel
resources, and broader product lines than us. We also face indirect competition in the form of alternative fuel consumption vehicles such as those
using methanol, hydrogen, ethanol and electricity.
We claim certain
proprietary rights in connection with the design and manufacture of our products.
The protections provided by
patents and those sought by pending patents are important to our business, although we believe that no individual right is material to our business at
the present time. There can be no assurance that these patents, combined with pending patent applications or existing or future trade secret
protections that we seek will survive legal challenge, or provide meaningful levels of protection. Additionally, there can be no assurances when these
patents or pending patents may be assigned to us directly. The Canadian patent registered to one of our subsidiaries only affords protection against
the manufacture, use or sale of the patented technology within Canada. The U.S. patent application for our method of producing a catalytic element was
filed on October 1, 2004 and a patent was issued as of December 2, 2008. We do not presently have any worldwide patent protection or any immediate
plans to file for protection in any foreign countries other than Canada. There can be no assurances that any patents we may have or have applied for or
any agreements we have in place or will enter into will protect our technology and or prevent competitors from employing the use of our design and
production information.
We are dependent upon
attracting and retaining key technical, sales and senior management personnel.
Our future success depends in
significant part, on the continued services of key technical, sales and senior management personnel. The loss of our executive officers or other key
employees could have materially adverse effects on our business, results of operations and financial condition. Our success depends upon our continued
ability to attract and attain highly qualified technical, sales and managerial personnel. There can be no assurances that we can attract, assimilate or
retain other highly qualified technical, sales and managerial personnel in the future. At the present time certain of our key employees and or
subsidiaries do not have employment contracts and may be viewed as employees at will.
We are dependent upon key
suppliers for certain materials which are one of the necessary components of our products.
The production process of our
products includes certain raw materials including:
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stainless steel; |
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particulate filters; |
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precious metals; and |
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electronic components. |
An extended interruption of the
supply of precious metals and components necessary for the production of our products could have an adverse effect on us. Further, a substantial price
increase of the raw materials that are components of our products could also have an adverse effect on our business. We currently rely on third party
vendors to provide certain components of our products. We currently do not have any fixed commitments from suppliers to provide
supplies.
We do not have a
significant level of product recall insurance due to its high cost.
Our catalytic converter products
are subject to extended warranty programs that could generate substantive product liability and warranty claims against us. Our Therma CatTM Active Level III Plus on-road catalyst system, which has been verified as a Level III
technology, is typically required to meet CARB limited warranty standard of 5 years or 100,000 miles, or 5 years or 150,000 miles, or 2 years unlimited
miles depending on engine application. Our Therma Cat(TM) Active Level III Plus off-road catalyst system, which has been verified as a Level III
technology, is typically required to meet CARB limited warranty standard of 5 years or 4,200 hours. Any failure of our product may result in a recall
or a claim against us. Due to the high cost of product recall insurance, we do not maintain significant amounts of insurance to protect against claims
associated with use of our products. Any claim against us, whether or not successful, may result in expenditure of substantial funds and litigation and
may require managements time and use of our resources and may have a materially adverse impact on our overall ability to continue
operations.
Our success depends on our
ability to develop joint ventures and/or relationships for development and sale of our products.
Our success partially depends on
the relationships that we develop with various suppliers, original equipment manufacturers (OEMs), dealers, and distributors for the
further development and deployment of our technology in the field. We do not manage these entities nor is it assured that we will be able to create
relationships with these entities. The absence of such relationships could adversely impact our business plans.
Risks Related to this Rights Offering
The
subscription price is not an indication of our value.
The subscription price does not
necessarily bear any relationship to the book value of our assets, to our operations, cash flows or financial condition, or to any other established
criteria for value. You should not consider the subscription price an indication of our value or any assurance of future value. After the date of this
prospectus, our common stock may trade at prices above or below the subscription price.
Your interest in us will be
diluted as a result of this offering and the transactions contemplated by the Investment Agreement.
Stockholders who do not fully
exercise their rights should expect that they will, at the completion of this offering, own a smaller proportional interest in us than would otherwise
be the case had they fully exercised their rights. In addition, all stockholders will own a smaller proportional interest in us than they owned prior
to the offering as a result of the Anti-Dilution Shares and if the Additional Subscription Offer and/or the Special Additional Subscription Offer are
triggered. See The Rights Offering Shares of Common Stock Outstanding After the Rights Offering on page 32 .
This offering may cause the
price of our common stock to decrease.
The subscription price per share
is lower than the average of the closing sales prices of our common stock over the thirty (30) trading day period ended June 6 , 2011. The
subscription price, together with the number of shares of common stock we propose to issue and ultimately will issue if this offering is completed, may
result in an immediate decrease in the market value of our common stock. This decrease may continue after the completion
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of this offering. If that occurs, you may have committed to buy shares of common stock in the rights offering at a price greater than the prevailing market price. Further, if a substantial number of rights are exercised and the holders of the shares received upon exercise of those rights choose to sell some or all of those shares, the resulting sales could depress the market price of our common stock. There is no assurance that following the exercise of your rights you will be able to sell your common stock at a price equal to or greater than the subscription price.
You could be committed to
buying shares of common stock above the prevailing market price.
Once you exercise your rights,
you may not revoke such exercise even if you later learn information that you consider to be unfavorable to the exercise of your rights. Our shares of
common stock are traded on the OTCQB under the symbol ESWW and the Frankfurt Stock Exchange under the symbol EOW. On June
6 , 2011, the closing sales price of our shares of common stock was $ 0.08 per share. We cannot assure you that the market price of our shares
of common stock will not decline prior to the expiration of this offering or that, after shares of common stock are issued upon exercise of rights, a
subscribing rights holder will be able to sell shares of common stock purchased in this offering at a price greater than or equal to the subscription
price. You should not exercise your subscription rights unless you are certain that you wish to purchase additional shares of our common stock at the
subscription price.
The subscription rights are
non-transferable and there is no market for the subscription rights.
Other than in very limited
circumstances, you may not sell, give away or otherwise transfer your subscription rights. Because the subscription rights are non-transferable, there
is no market or other means for you to directly realize any value associated with the subscription rights. You must exercise the subscription rights
and acquire additional shares of our common stock to realize any value.
There can be no guarantee
that the transactions contemplated by the Investment Agreement will be consummated.
The Backstop Commitment is
subject to certain conditions. See The Rights Offering The Investment Agreement. If those conditions are not met, the Bridge Lenders
will not be obligated to purchase any shares of our common stock through the Backstop Commitment. Consequently, there can be no guarantee that the
transactions contemplated by the Investment Agreement will be consummated and that 66,666,667 shares will be issued in connection with this offering.
When deciding whether to purchase additional shares of our common stock in the offering, you should not assume that we will receive the minimum level
of funding associated with the Backstop Commitment.
If you exercise your
subscription rights, you may be unable to sell any shares you purchase at a profit and your ability to sell may be delayed by the time required to
deliver the shares to you.
The public trading price of our
common stock may decline after you elect to exercise your subscription rights. If that occurs, you will have committed to buy shares of common stock at
a price above the prevailing market price and you will have an immediate unrealized loss. Moreover, we cannot assure you that following the exercise of
the subscription rights you will be able to sell your shares of common stock at a price equal to or greater than the subscription price. Until shares
are delivered after completion of the offering, you may not be able to sell the shares of our common stock that you purchase in the offering. Shares of
our common stock purchased in the offering will be delivered as soon as practicable after completion of the offering. We will not pay you interest on
any funds delivered to the subscription agent pursuant to the exercise of subscription rights.
We may cancel the offering
at any time. If we cancel the offering, neither we nor the subscription agent will have any obligation to you except to return your subscription
payments.
We may unilaterally cancel the
offering at any time in our sole discretion. If we cancel the offering, the subscription rights will be void and will have no value, and neither we nor
the subscription agent will have any obligation with respect to the subscription rights except to return, without interest or penalty, any subscription
payments actually received.
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To exercise your
subscription rights, you must act promptly and follow the subscription instructions carefully.
If you desire to purchase shares
of our common stock in the offering, you must act promptly to ensure that all required forms and payments are actually received by the subscription
agent at or prior to 5:00 p.m., New York City time, on June 30 , 2011, the current expiration date of the offering. If you fail to complete and
sign the required subscription forms, send an incorrect payment amount, or otherwise fail to follow the subscription procedures that apply to your
desired transaction, the subscription agent may, depending on the circumstances, reject your subscription or accept it to the extent of the payment
received. Neither we nor the subscription agent has any obligation to contact you concerning, or attempt to correct, an incomplete or incorrect
subscription form or payment. We have the sole discretion to determine whether a subscription exercise properly follows the subscription procedures.
See The Rights Offering for additional details regarding exercise of your subscription rights.
Following the offering and
the consummation of the transaction contemplated by the Investment Agreement, the Bridge Lenders may be able to exert significant influence on, or may
control, our affairs and actions, including matters submitted for a stockholder vote.
The Bridge Lenders collectively
own 47,045,374 shares of common stock, which is equivalent to 36% of the currently issued and outstanding common stock as of June 6 , 2011 on an
undiluted basis. As such, all or some of these shareholders if they act as a group may be able to exert significant influence on, or may control,
aspects of our business operations including the election of board members the acquisition or disposition of assets and the future issuance of
shares.
If transactions contemplated by
the Investment Agreement are consummated and the Bridge Lenders purchase the maximum percentage of our common stock pursuant to the Investment
Agreement, assuming full subscription of the rights offering by all stockholders, the Bridge Lenders will own 39% of our outstanding common stock
following the closing of the offering and the consummation of the transactions contemplated by the Investment Agreement. If no stockholders subscribe
for shares in this rights offering (other than the Bridge Lenders) and if the Bridge Lenders exercise their option to purchase all shares offered in
this right offering, the Bridge Lenders will own 52% of our outstanding common stock following the closing of the offering and the consummation of the
transactions contemplated by the Investment Agreement.
As a result, the Bridge Lenders,
if they act as a group, will have considerable influence over, or may control, our corporate affairs and actions, including matters submitted for a
stockholder vote. The interests of the Bridge Lenders may be different than your interests.
Following the offering and
the consummation of the transaction contemplated by the rights offering, we will issue additional shares in connection with prior offerings which will
cause additional dilution.
Pursuant to certain securities
subscription agreements we entered into in March 2010, we issued $3 million of 9% convertible debentures to five accredited investors which have since
been converted into 6.0 million shares of our common stock. Additionally, in November 2010 and December 2010, we completed an offering in the aggregate
of $600,000 to one accredited investor whereby we issued units comprised of 1.5 million shares of common stock and a like number of warrants to
purchase 1.5 shares of common stock. The investors under these prior subscription agreements were granted certain anti-dilution rights and will receive
approximately 22,500,000 of additional shares of common stock as a result of this rights offering.
Risks Associated with an Investment in Our Common
Stock
The price
of our common stock has been highly volatile.
During 2010, our common stock
traded as low as $0.16 per share and as high as $0.86 per share. Some of the factors leading to the volatility include:
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price and volume fluctuation in the stock market at large and market conditions which are not necessarily related to our operating performance; |
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fluctuation in our operating results; |
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concerns about our ability to finance continuing operations; |
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financing arrangements which may require the issuance of a significant number of shares in relation to the number of shares of our common stock currently outstanding; |
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announcements of agreements, technological innovations, certification/verifications or new products which we or our competitors make; |
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costs and availability of precious metals used in the production of our products; and |
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fluctuations in market demand and supply of our products. |
Our common stock is
currently traded on the OTC Markets OTCQB Tier and the Frankfurt Stock Exchange and an investors ability to trade our common stock may be
limited by trading volume.
The trading volume in our common
stock has been relatively limited. A consistently active trading market for our common stock may not continue on the OTC Markets or the Frankfurt Stock
Exchange. The average daily trading volume of our common stock for the year ended December 31, 2010 was approximately 24,796 shares. Our common stock
started trading on the Frankfurt Exchange on March 16, 2007, and as such, we have a limited trading history and there can be no assurances that there
will be increased liquidity in our common stock.
Our board of directors may
explore alternative listings of our common stock if deemed beneficial to our shareholders. If we were to seek an alternative listing of our common
stock, we may incur significant expenditures beyond those anticipated for general business operations.
Our stock was previously quoted
on the OTCBB under the symbol ESWW.OB. On February 23, 2011, our common stock was removed from the OTCBB automated quotation system. Our
common stock along with the securities of over 600 other issuers were deleted from the OTCBB due to the quotation inactivity by the Market Makers of
the respective issuers affected under Exchange Act Rule 15c2-11.
We may issue more shares
which would result in substantial dilution.
Our certificate of incorporation
authorizes the issuance of a maximum of 250,000,000 shares of common stock. As of June 6 , 2011, we have 129,463,767 issued and outstanding
shares of common stock. In the future, we may engage in equity financings which may result in the issuance of additional securities without stockholder
approval and may result in substantial dilution in the percentage of our common stock held by our then existing stockholders. Moreover, the common
stock issued in any such financing may be valued on an arbitrary or non-arms-length basis by our management, resulting in an additional reduction
in the percentage of common stock held by our then existing stockholders. Our board of directors has the power to issue any or all of such authorized
but unissued shares without stockholder approval. To the extent that additional shares of common stock are issued in connection with an equity
financing, dilution to the interests of our stockholders will occur and the rights of the holders of common stock might be materially adversely
affected. In addition, we may issue additional shares of common stock pursuant to our equity incentive plans, pursuant to which we have reserved up to
5,000,000 shares of common stock for issuance. The issuance of shares under our plans will result in a dilution of your investment.
We do not expect to pay
dividends on our common stock and investors will only be able to receive cash in respect of their shares of common stock upon the sale of their
shares.
We have never paid any cash
dividends on our common stock, and we have no intention in the foreseeable future to pay any cash dividends on our common stock. Therefore, an investor
in our common stock will obtain an economic benefit from the common stock only after an increase in its trading price and only by selling the common
stock.
Our stockholders have
approved a reverse stock split and a reverse stock split could have certain adverse effects.
In September 2010, our
stockholders approved an amendment of our articles of incorporation at the discretion of the board of directors to effect a combination of our shares
of common stock, or reverse stock split, at a ratio of up to eight shares of common stock converted into one share of common stock with the par value
remaining
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the same. The authorization to permit our board of directors the discretion to effectuate a reverse split will be limited to certain instances where our board of directors in its best judgment determines that a reverse split will be beneficial to us and our shareholders for business opportunities in the future or for potential listings on a new exchange that is intended to provide greater liquidity in shares of our common stock. In the proposed share combination, the par value of our common stock and the amount of authorized stock will not change. All the fractional shares resulting from a combination would be rounded up to the nearest whole share.
A reverse stock split could have
certain adverse consequences, including:
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If the reverse stock split is effected and the market price of our common stock declines, the percentage decline may be greater than would occur in the absence of a reverse stock split. |
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There can be no assurance that the total market capitalization of our common stock (the aggregate value of all our common stock at the then market price) after a reverse stock split is implemented will be equal to or greater than the total market capitalization before a reverse stock split or that the per share market price of our common stock following the implementation of a reverse stock split will increase in proportion to the reduction in the number of shares of our common stock outstanding before a reverse stock split. |
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If the reverse stock split is effected, the resulting per-share stock price may not attract institutional investors or investment funds and may not satisfy the investing guidelines of such investors and, consequently, the trading liquidity of our common stock may not be improved. While the Board of Directors may believe that a higher stock price may help generate investor interest, there can be no assurance that the implementation of a reverse stock split will result in a per-share price that will attract institutional investors or investment funds or that such share price will satisfy the investing guidelines of institutional investors or investment funds. As a result, the trading liquidity of our common stock may not necessarily improve. |
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Since the number of issued and outstanding shares of common stock would decrease as result of the reverse stock split, the number of authorized but unissued shares of common stock may increase on a relative basis. If we issue additional shares of common stock, the ownership interest of our current stockholders would be diluted, possibly substantially. |
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The proportion of unissued authorized shares to issued shares could, under certain circumstances, have an anti-takeover effect. For example, the issuance of a large block of common stock could dilute the stock ownership of a person seeking to effect a change in the composition of the board of directors or contemplating a tender offer or other transaction for the combination of the company with another company. |
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The reverse stock split may result in some stockholders owning odd lots of less than 100 shares of common stock. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in round lots of even multiples of 100 shares. |
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USE OF PROCEEDS
The purpose of this rights
offering is to raise equity capital in a cost-effective manner that gives all of our stockholders the opportunity to participate. Assuming the rights
offering is fully-subscribed, the net proceeds available to us from the rights offering, after deducting estimated offering expenses of $230,000
payable by us, will be approximately $7.8 million in cash, or by the delivery to us by the holder of an equivalent amount of principal and accrued and
unpaid interest of indebtedness owed by us to such holder, or a combination thereof.
In the event we receive $7.8
million of cash as net proceeds from the rights offering, then we will use a portion of the proceeds received by us to repay the outstanding amounts
due under the Bridge Loans which includes accrued interest (approximately $4.1 million) and the Demand Credit Agreement (approximately $1.3 million).
The excess (approximately $2.4 million) will be used for general working capital purposes, capital investments, and other general corporate purposes.
Alternatively, we may receive as net proceeds from the rights offering the delivery to us of the Bridge Loans (approximately $4.1 million), in which
case the balance of $3.6 million of net proceeds will be used for repayment of the Demand Credit Agreement (approximately $1.3 million). The excess
(approximately $2.4 million) will be used for general working capital purposes, capital investments, and other general corporate purposes. In addition,
we may incur further indebtedness, which may include additional financing arrangements with the Bridge Lenders, to fund our working capital needs prior
to completion of this rights offering. In the event that we incur such indebtedness, we expect to use the proceeds from this rights offering for
repayment thereof.
DETERMINATION OF OFFERING PRICE
In setting the subscription
price, we reviewed and considered a number of factors, including the amount of proceeds desired, our need for liquidity and equity capital,
alternatives available to us for raising equity capital, the historic market price, the liquidity and the historic volatility of the market price of
our common stock, the historic trading volume of our common stock, our business prospects, our recent and anticipated operating results, the price at
which our stockholders might be willing to participate in the rights offering, the desire to provide an opportunity to our stockholders to participate
in the rights offering on a pro rata basis and general conditions in the securities market. The subscription price for this rights offering was
proposed to, reviewed and approved by the disinterested members of our board of directors. The subscription price is not necessarily related to the
book value of our assets, net worth, past operations, cash flows, losses, financial condition, or any other established criteria for valuing us and may
or may not be considered the fair value of our common stock to be offered in the rights offering. You should not assume or expect that, after the
rights offering, our common shares will trade at or above the subscription price. We can give no assurance that our common shares will trade at or
above the subscription price in any given time period.
DILUTION
If you invest in our common stock
in this offering, your ownership interest will be diluted to the extent of the difference between the $0.12 offering price and the pro forma net
tangible book value per share. Our historical net tangible book value as of March 31, 2011 was $(2,863,961), or $(0.02) per share. Historical net
tangible book value per share is determined by dividing our net tangible book value by the actual number of outstanding shares of common stock. Our
historical net tangible book value per share as of March 31, 2011 is determined using 129,463,767 shares outstanding as of March 31, 2011, which
excludes 3,400,000 shares issuable upon the exercise of stock options outstanding and 1,545,000 shares issuable upon the exercise of warrants
outstanding as of March 31, 2011.
Dilution in historical net
tangible book value per share represents the difference between the amount per share paid by the purchaser of shares of common stock in this rights
offering and the pro forma net tangible book value per share of common stock immediately after the closing of this offering.
After giving effect to the
assumed issuance of 100,612,465 shares of common stock pursuant to this rights offering, the Additional Subscription Offer, the Special Additional
Subscription Offer and the Anti-Dilution Shares, and after deducting estimated offering expenses payable by us of $230,000, our pro forma net tangible
book value as of March 31, 2011 would have been approximately $9,125,312, or $0.04 per share of common stock. This amount represents an immediate
increase of $0.06 per share to our shareholders on shares of common stock owned prior
22
to this rights offering and an immediate dilution of $0.06 per share from the subscription price of $0.12 per share on shares of common stock purchased in this rights offering. Our pro forma net tangible book value per share as of March 31, 2011 is determined using 230,076,232 shares outstanding as of March 31, 2011, which excludes 3,400,000 shares issuable upon the exercise of stock options outstanding and 1,545,000 shares issuable upon the exercise of warrants outstanding as of March 31, 2011.
CAPITALIZATION
The following table sets forth
our historical and pro forma cash and cash equivalents and capitalization as of March 31, 2011. The pro forma information gives effect to an assumed
$8.0 million in gross proceeds raised from this rights offering.
For purposes of this table, we
have assumed that the rights offering is fully subscribed, resulting in $8.0 million in gross proceeds. However, it is not possible to predict how many
shares of common stock will be subscribed for in this rights offering, and therefore, how much gross proceeds will actually be raised.
This table should be read in
conjunction with our consolidated financial statements and the notes thereto included in this prospectus.
March 31, 2011 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Actual |
Pro-forma |
||||||||||
Bank loan
|
$ | 1,636,444 | $ | | |||||||
Exchange
feature liability |
2,712,600 | | |||||||||
Notes payable
to related party, net of debt discount of $1,950,000 (2010$0) |
1,050,000 | | |||||||||
Convertible
derivative liability |
2,148,656 | | |||||||||
Total Debt
|
$ | 7,547,700 | $ | | |||||||
Stockholders equity (deficit): |
|||||||||||
Common stock,
$0.001 par value, 250,000,000 shares authorized; 129,463,767 and 230,076,232 shares issued and outstanding on an actual and pro forma basis,
respectively |
129,463 | 230,076 | |||||||||
Additional
paid in capital |
43,593,417 | 57,497,556 | |||||||||
Accumulated
other comprehensive income |
518,813 | 518,813 | |||||||||
Accumulated
deficit |
(47,105,653 | ) | (47,105,653 | ) | |||||||
Total
stockholders equity (deficit) |
(2,863,960 | ) | 11,140,792 | ||||||||
Total
Capitalization |
$ | 4,683,740 | $ | 11,140,792 |
23
PRICE RANGE OF COMMON STOCK AND DIVIDEND
POLICY
Shares of our common stock are
quoted on the OTCQB under the symbol ESWW and the Frankfurt Stock Exchange under the symbol EOW.
On June 6 , 2011, the last
reported closing sale price of our common stock was $ 0.08 per share. The following table sets forth, for the quarters indicated, the range of
high and low closing sale prices for our common stock as reported on the OTCQB.
Period |
High |
Low |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Year Ended
December 31, 2009 |
||||||||||
First Quarter
|
$ | 0.25 | $ | 0.10 | ||||||
Second
Quarter |
0.79 | 0.24 | ||||||||
Third Quarter
|
0.78 | 0.51 | ||||||||
Fourth
Quarter |
0.51 | 0.35 | ||||||||
Year Ended
December 31, 2010 |
||||||||||
First Quarter
|
$ | 0.72 | $ | 0.46 | ||||||
Second
Quarter |
0.67 | 0.46 | ||||||||
Third Quarter
|
0.52 | 0.38 | ||||||||
Fourth
Quarter |
0.43 | 0.16 | ||||||||
Year Ending
December 31, 2011 |
||||||||||
First Quarter
|
$ | 0.29 | $ | 0.16 | ||||||
Second
Quarter (through June 6 , 2011) |
0.23 | 0.06 |
We have not declared or issued
any dividends in the past, and we intend to retain future earnings, if any, for general business purposes and to repay debt.
As of June 6 , 2011 there
were approximately 264 stockholders of record of our common stock. We estimate there are approximately 2,972 additional stockholders with stock held in
street name. On June 6 , 2011, there were 129,463,767 shares of common stock outstanding.
THE RIGHTS OFFERING
Background of the Rights Offering
The Bridge
Loans
Effective February 17, 2011 and
April 27, 2011, we became party to certain note subscription agreements and issued unsecured subordinated promissory notes to each of the Bridge
Lenders. Pursuant to these note subscription agreements and promissory notes, the Bridge Lenders agreed to make, and made, loans to us in the principal
aggregate amount of $4.0 million subject to the terms and conditions set forth therein. The Bridge Loans bear interest at a rate of 10% per annum,
payable in-kind on a monthly basis. The maturity date of the Bridge Loans is the earlier of: (i) the consummation of a Qualified Offering, or (ii) June
17, 2011, which we refer to as the Outside Date. The Bridge Lenders, at their sole discretion, may extend the maturity date beyond June
17, 2011. We expect to request that the Bridge Lenders extend the maturity date of the Bridge Loans until the closing date of the
transactions contemplated by the Investment Agreement, which is expected to occur within a few days after the closing of this rights offering.
We understand from the Bridge Lenders that they will comply with this request.
The Bridge Loans provide that,
if, prior to the payment of all principal or accrued interest, we close a Qualified Offering on or prior to the maturity date, then each Bridge Lender
shall either (i) exchange any outstanding Bridge Loans then held by him or it for the subscription price as payment by the Bridge Lender of the
subscription price therefor or (ii) purchase for cash an equivalent number of shares of common stock. The Bridge Loans also provide that, in the event
the Qualified Offering closes on or prior to the Outside Date and for any reason a Bridge Lender shall have failed to exchange in the Qualified
Offering any and all principal or accrued interest outstanding under its Bridge Loans and such Bridge Lender wishes to exchange its Bridge Loans for
common stock at the subscription price, then we have agreed to offer such Bridge Lender an immediate right to purchase additional shares of
our
24
common stock at such price (payable through the exchange of Bridge Loans for common stock), so that all principal and accrued interest outstanding under the Bridge Loans shall have been exchanged for shares of common stock at such price. In addition, the Bridge Loans provide that, in the event the Qualified Offering closes on or prior to the Maturity Date and, for any reason, the Orchard Investors collectively shall have failed to have invested at least $1.0 million in the Qualified Offering or pursuant to exchange of their Bridge Loans and the Orchard Investors wish to invest the balance of such $1.0 million aggregate amount to purchase common stock at the subscription price, then we will be required to offer to the Orchard Investors the immediate right to invest the balance of such investment amount to purchase additional shares of common stock at the subscription price, so that in the aggregate, the Orchard Investors shall collectively invested such $1.0 million amount.
If we do not consummate this
rights offering and the transactions contemplated by the Investment Agreement before June 17, 2011, then the Bridge Lenders at their sole discretion,
may require us to refrain from making any and all payments on any of the outstanding principal and accrued interest outstanding under the Bridge Loans;
however, we will not be prohibited from paying any accrued interest in-kind through the issuance of substantially similar Bridge Loans, at any time.
The Bridge Lenders at their sole discretion may extend the maturity date beyond June 17, 2011. Any Bridge Loans sent to us for payment of shares in
connection with this rights offering will continue to accrue interest in accordance with terms thereof while held by the subscription
agent.
Proceeds of the Bridge Loans,
along with available cash, was used to fund working capital, planned capital investments, repayment of our Demand Credit Agreement and other general
corporate purposes. With the proceeds of the Bridge Loans, we regained compliance with covenant obligations under the Demand Credit Agreement for which
we had previously obtained waivers of covenant obligations that expired February 15, 2011.
The Investment Agreement
The
Backstop Commitment
We have entered into the
Investment Agreement with the Bridge Lenders, which provides for the Backstop Commitment. Pursuant to the Backstop Commitment, the Bridge Lenders have
agreed to collectively backstop the rights offering by purchasing from us, at the subscription price, any shares of common stock not purchased by our
existing stockholders (after giving effect to any oversubscriptions), up to 29,166,667 shares of common stock, for a total purchase price of $3.5
million. We have also offered to the Bridge Lenders the Purchase Option, pursuant to which the Bridge Lenders have the option, in their sole
discretion, to purchase from us, at the subscription price, any other shares not purchased by our existing stockholders through this rights
offering.
In addition, if, after giving
effect to this rights offering, the Backstop Commitment and the Purchase Option, any of the Bridge Lenders shall have failed to exchange any portion of
his or its Bridge Loans, we have agreed to the Additional Subscription Offer, pursuant to which the Bridge Lenders have the right to purchase
additional shares of common stock at the subscription price (payable through the exchange of the Bridge Loans for common stock) such that each Bridge
Lender shall have exchanged all of his or its Bridge Loans for shares of common stock.
Further, in the event the Orchard
Investors collectively acquire shares having a value of less than $1.0 million based on the subscription price after giving effect to the (i) the
rights offering (including any over-subscription), (ii) the Backstop Commitment, (iii) the Purchase Option and (iv) purchases by the Orchard Investors
pursuant to the Additional Subscription Offer (such shortfall in the value of shares purchased below $1.0 million, the Shortfall Amount),
we have agreed to provide the Orchard Investors with the Special Additional Subscription Offer, pursuant to which the Orchard Investors have the right
to purchase an additional number of shares of common stock having a value equal to the Shortfall Amount (based on the subscription price) at the
subscription price.
If all the conditions to the
Investment Agreement are met, the Backstop Commitment will ensure that we raise net proceeds through the offering and the Backstop Commitment of $6.2
million in cash or by the delivery to us by the holder of an equivalent amount of principal and accrued and unpaid interest of indebtedness, or a
combination thereof. If the Bridge Lenders elect to exercise the Purchase Option, we will raise net proceeds of $7.8 million through this offering and
the transactions contemplated by the Investment Agreement.
25
Closing
Conditions
The closing of the Investment
Agreement is subject to satisfaction or waiver of customary conditions, including compliance with covenants and the accuracy of representations and
warranties provided in the Investment Agreement, consummation of the rights offering and the receipt of all requisite approvals and authorizations
under applicable law.
Termination
The Investment Agreement may be
terminated at any time prior to the closing of the Backstop Commitment and the Additional Subscription Rights, if any:
|
by mutual written agreement of the Bridge Lenders and us; |
|
by either party, in the event this rights offering does not close by June 29, 2011; and |
|
by either party, if any governmental entity shall have taken action prohibiting any of the contemplated transactions. |
Indemnification
We have agreed to indemnify the
Bridge Lenders and their affiliates and each of their respective officers, directors, partners, employees, agents and representatives for losses
arising out of (1) our breach of any representation or warranty set forth in the Investment Agreement, (2) this rights offering, or (3) claims, suits
or proceedings challenging the authorization, execution, delivery, performance or termination of this rights offering, the Investment Agreement, or any
of the transactions contemplated thereby (other than any such losses attributable to the acts, errors or omissions on the part of the Bridge Lenders in
violation of the Investment Agreement).
Registration
Rights
We have entered into a
registration rights agreement with the Bridge Lenders to provide certain customary registration rights. Specifically, the Bridge Lenders are entitled
to demand and piggyback registration rights under the Securities Act of 1933, as amended, with respect to the shares of common stock
purchased under the Investment Agreement and any other securities owned by the Bridge Lenders.
Subscription Rights
Basic
Subscription Rights
We will distribute to each holder
of our common stock who is a record holder of our common stock on the record date, which is June 9 , 2011, at no charge, one non-transferable
subscription right for each share of common stock owned as of the record date. As of the record date, an aggregate of 129,463,767 shares of our common
stock were outstanding.
The subscription rights will be
evidenced by non-transferable subscription rights certificates. Each subscription right will entitle the rights holder to purchase 0.51494 shares of
our common stock at a price of $0.12 per share, the subscription price, which shall be paid in cash or by the delivery to us by the holder of an
equivalent amount of principal and accrued and unpaid interest of indebtedness owed by us to such holder, or a combination thereof, upon timely
delivery of the required documents and payment of the subscription price. We will not issue fractional shares, but rather will round down the aggregate
number of shares you are entitled to receive to the nearest whole share. Any excess payment will be returned to you promptly without interest or
deduction. If rights holders wish to exercise their subscription rights, they must do so prior to 5:00 p.m., New York City time, on June 30 ,
2011, the expiration date for the rights offering, subject to extension. After the expiration date, the subscription rights will expire and will have
no value. See below Expiration of the Rights Offering and Extensions, Amendments and Termination. You are not required to exercise
any or all of your subscription rights.
The Bridge Lenders beneficially
own in the aggregate 47,045,374 shares of our common stock, representing approximately 36% of our outstanding common stock. As such, the Bridge Lenders
will receive subscription rights to purchase up to an aggregate of 24,225,760 shares of common stock (before giving effect to any
oversubscriptions)
26
in this rights offering. The Bridge Lenders have indicated to us that they intend to exercise their entire allocation of basic subscription rights, and we expect the total purchase price thereof to be approximately $2.9 million, payable by the delivery to us by the Bridge Lenders of an equivalent amount of principal and accrued and unpaid interest owed under the Bridge Loans. Any Bridge Loans sent to us for payment of shares in connection with this rights offering will continue to accrue interest in accordance with terms thereof while held by the subscription agent. The rights offering is being made to the Bridge Lenders in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended. Shares issued in respect of the Bridge Lenders participation in the rights offering are not covered by the registration statement of which this prospectus forms a part. The Bridge Lenders are not soliciting participation by the holders of rights in the rights offering or engaging in any other marketing or sales activity in connection therewith.
Oversubscription
Rights
Subject to the allocation
described below, each subscription right also grants the holder an oversubscription right to purchase additional shares of our common stock that are
not purchased by other rights holders pursuant to their basic subscription rights. You are entitled to exercise your oversubscription right only if you
exercise your basic subscription right in full.
If you wish to exercise your
oversubscription right, you should indicate the number of additional shares that you would like to purchase in the space provided on your rights
certificate, as well as the number of shares that you beneficially own without giving effect to any shares to be purchased in this offering. When you
send in your rights certificate, you must also send the full purchase price for the number of additional shares that you have requested to purchase (in
addition to the payment due for shares purchased through your basic subscription right). If an insufficient number of shares is available to fully
satisfy all oversubscription right requests, the available shares will be distributed proportionately among stockholders who exercised their
oversubscription rights based on the number of shares each stockholder subscribed for under their basic subscription rights. The subscription agent
will return any excess payments by mail without interest or deduction promptly after the expiration of the subscription period.
As soon as practicable after the
expiration date, the subscription agent will determine the number of shares of common stock that you may purchase pursuant to the oversubscription
right. We will issue certificates representing your shares of our common stock, or credit your account at your broker, custodian bank or other nominee
with shares of our common stock, electronically in registered, book-entry form only on our records or on the records of our transfer agent, Bay City
Transfer Agency & Registrar, that you purchased pursuant to your basic subscription and oversubscription rights as soon as practicable after the
rights offering has expired and all proration calculations, reductions, and additions contemplated by the terms of the rights offering have been
effected. We will not be able to calculate the number of shares to be issued to each exercising holder until 5:00 p.m., New York City time, on the
third business day after the expiration date of the rights offering, which is the latest time by which subscription rights certificates may be
delivered to the subscription agent under the guaranteed delivery procedures described under Guaranteed Delivery Procedures. If you
request and pay for more shares than are allocated to you, we will refund the overpayment, without interest or deduction. In connection with the
exercise of the oversubscription right, banks, brokers and other nominee holders of subscription rights who act on behalf of beneficial owners will be
required to certify to us and to the subscription agent as to the aggregate number of subscription rights exercised, and the number of shares of common
stock requested through the oversubscription right, by each beneficial owner on whose behalf the nominee holder is acting.
Expiration of the Rights Offering and Extensions, Amendments
and Termination
You may exercise your
subscription rights at any time prior to 5:00 p.m., New York City time, on June 30 , 2011, the expiration date for the rights offering. If you do
not exercise your subscription rights before the expiration date of the rights offering, your subscription rights will expire and will have no value.
We will not be required to issue shares of our common stock to you if the subscription agent receives your rights certificate or payment, after the
expiration date, regardless of when you sent the rights certificate and payment, unless you send the documents in compliance with the guaranteed
delivery procedures described below.
27
We may, in our sole discretion,
extend the time for exercising the subscription rights. We may extend the expiration date at any time after the record date. If the commencement of the
rights offering is delayed for a period of time, the expiration date of the rights offering may be similarly extended. We will extend the duration of
the rights offering as required by applicable law, and may choose to extend the duration of the rights offering for any reason. We may extend the
expiration date of the rights offering by giving oral or written notice to the subscription agent on or before the scheduled expiration date. If we
elect to extend the expiration date of the rights offering, we will publicly announce such extension no later than 9:00 a.m., New York City time, on
the next business day after the most recently announced expiration date.
We reserve the right, in our sole
discretion, to amend or modify the terms of the rights offering. We also reserve the right to terminate the rights offering at any time prior to the
expiration date for any reason, in which event all funds received in connection with the rights offering will be returned without interest or deduction
to those persons who exercised their subscription rights as soon as practicable.
Conditions to the Rights Offering
We may terminate the rights
offering, in whole or in part, if at any time before completion of the rights offering there is any judgment, order, decree, injunction, statute, law
or regulation entered, enacted, amended or held to be applicable to the rights offering that in the sole judgment of our board of directors would or
might make the rights offering or its completion, whether in whole or in part, illegal or otherwise restrict or prohibit completion of the rights
offering. We may waive any of these conditions and choose to proceed with the rights offering even if one or more of these events occur. If we
terminate the rights offering, in whole or in part, all affected subscription rights will expire without value and all subscription payments in the
form in which received by the subscription agent will be returned in the form in which paid, without interest or deduction, as soon as practicable. See
also Expiration of the Rights Offering and Extensions, Amendments and Termination.
Method of Exercising Subscription Rights
The exercise of subscription
rights is irrevocable and may not be cancelled or modified. Your subscription rights will not be considered exercised unless the subscription agent
receives from you, your broker, custodian or nominee, as the case may be, all of the required documents properly completed and executed and your full
subscription price payment in cash or the delivery to us by the holder of an equivalent amount of principal and unpaid interest of indebtedness owed by
us to such holder prior to 5:00 p.m., New York City time, on June 30 , 2011, the expiration date of the rights offering. Rights holders may
exercise their rights as follows:
Subscription by Registered
Holders
Rights holders who are registered
holders of our common stock may exercise their subscription privilege by properly completing and executing the rights certificate together with any
required signature guarantees and forwarding it, together with payment in full, of the subscription price for each share of the common stock for which
they subscribe, to the subscription agent at the address set forth under the subsection entitled Delivery of Subscription Materials and
Payment, on or prior to the expiration date.
Subscription by DTC
Participants
Banks, trust companies,
securities dealers and brokers that hold shares of our common stock on the rights offering record date as nominee for more than one beneficial owner
may, upon proper showing to the subscription agent, exercise their subscription privilege on the same basis as if the beneficial owners were record
holders on the rights offering record date through the Depository Trust Company, or DTC. Such holders may exercise these rights through
DTCs PSOP Function on the agents subscription over PTS procedure and instruct DTC to charge their applicable DTC account for the
subscription payment for the new shares or indicating to DTC that such holder intends to pay for such rights through the delivery to the Company by the
holder of an equivalent amount of principal and accrued and unpaid interest of indebtedness owed by the Company to such holder, or a combination
thereof, and deliver such amount to the subscription agent. DTC must receive the subscription instructions and payment for the new shares by the rights
expiration date. Except as described under the subsection titled Guaranteed
28
Delivery Procedures, subscriptions accepted by the subscription agent via a Notice of Guaranteed Delivery must be delivered to the subscription agent with payment before the expiration of the subscription period.
Subscription by Beneficial
Owners
Rights holders who are beneficial
owners of shares of our common stock and whose shares are registered in the name of a broker, custodian bank or other nominee, and rights holders who
hold common stock certificates and would prefer to have an institution conduct the transaction relating to the rights on their behalf, should instruct
their broker, custodian bank or other nominee or institution to exercise their rights and deliver all documents and payment on their behalf, prior to
the expiration date. A rights holders subscription rights will not be considered exercised unless the subscription agent receives from such
rights holder, its broker, custodian, nominee or institution, as the case may be, all of the required documents and such holders full
subscription price payment.
Method of Payment
Payments must be made in full
in:
|
U.S. currency by: |
|
check or bank draft drawn on a U.S. bank, or postal telegraphic or express, payable to Bay City Transfer Agency & Registrar, as Subscription Agent; |
|
U.S. Postal money order payable to Bay City Transfer Agency & Registrar, as Subscription Agent; |
|
wire transfer of immediately available funds directly to the account maintained by Bay City Transfer Agency & Registrar, as Subscription Agent, for purposes of accepting subscriptions in this Rights Offering at PNC Bank , ABA # 041000124 , Account # 4244442997 FBO Bay City Transfer Trust , with reference to the rights holders name; or |
|
the delivery to us by the holder of an equivalent amount of principal and unpaid interest of indebtedness owed by us to such holder. |
Rights certificates received
after 5:00 p.m., New York City time, on June 30 , 2011, the expiration date of the rights offering, will not be honored, and we will return your
payment to you in the form received as soon as practicable, without interest or deduction.
The subscription agent will be
deemed to receive payment upon:
|
clearance of any uncertified check deposited by the subject agent; |
|
receipt by the subscription agent of any certified bank check draft drawn upon a U.S. bank; |
|
receipt by the subscription agent of any U.S. Postal money order; or |
|
the receipt by the subscription agent of the original evidence of indebtedness owed by us to such holder. |
You should read the instruction
letter accompanying the rights certificate carefully and strictly follow it. DO NOT SEND RIGHTS CERTIFICATES OR PAYMENTS TO US. Except as described
below under Guaranteed Delivery Procedures, we will not consider your subscription received until the subscription agent has
received delivery of a properly completed and duly executed rights certificate and payment of the full subscription amount. The risk of delivery of all
documents and payments is on you or your nominee, not us or the subscription agent.
The method of delivery of rights
certificates and payment of the subscription amount to the subscription agent will be at the risk of the holders of rights, but, if sent by mail, we
recommend that you send those certificates and payments by overnight courier or by registered mail, properly insured, with return receipt requested,
and that a sufficient number of days be allowed to ensure delivery to the subscription agent and clearance of payment before the expiration of the
subscription period.
Unless a rights certificate
provides that the shares of common stock are to be delivered to the record holder of such rights or such certificate is submitted for the account of a
bank or a broker, signatures on such rights certificate must be guaranteed by an Eligible Guarantor Institution, as such term is defined in
Rule 17Ad-15 of the Exchange
29
Act, subject to any standards and procedures adopted by the subscription agent. See Medallion Guarantee May be Required.
Medallion Guarantee May Be Required
Your signature on each
subscription rights certificate must be guaranteed by an eligible institution, such as a member firm of a registered national securities exchange or a
member of the Financial Industry Regulatory Authority, Inc., or a commercial bank or trust company having an office or correspondent in the United
States, subject to standards and procedures adopted by the subscription agent, unless:
|
your subscription rights certificate provides that shares are to be delivered to you as record holder of those subscription rights; or |
|
you are an eligible institution. |
Subscription Agent
The subscription agent for this
rights offering is Bay City Transfer Agency & Registrar. We will pay all fees and expenses of the subscription agent related to the rights offering
and have also agreed to indemnify the subscription agent from certain liabilities that it may incur in connection with the rights
offering.
Delivery of Subscription Materials and
Payment
You should deliver your
subscription rights certificate and payment of the subscription price in cash or by the delivery to us by the holder of an equivalent amount of
principal and accrued and unpaid interest of indebtedness owed by us to such holder, or a combination thereof, or, if applicable, notice of guaranteed
delivery, to the subscription agent at the following address:
By Mail: |
By Overnight Delivery: |
|||||
---|---|---|---|---|---|---|
Bay City
Transfer Agency & Registrar Trust Account P.O. Box 874 Bay City, MI 48707 |
Bay City
Transfer Agency & Registrar 300 Center Avenue, Suite 202B Bay City, MI 48708 |
Your delivery to an address or by
any method other than as set forth above will not constitute valid delivery and we may not honor the exercise of your subscription
rights.
You should direct any questions
or requests for assistance concerning the method of subscribing for the shares of common stock or for additional copies of this prospectus to us at
Environmental Solutions Worldwide, Inc., 335 Connie Crescent, Concord, Ontario, Canada L4K 5R2 or by telephone at (905) 695-4142.
Guaranteed Delivery Procedures
The subscription agent will grant
you three business days after the expiration date to deliver the rights certificate if you follow the following instructions for providing the
subscription agent notice of guaranteed delivery. On or prior to the expiration date, the subscription agent must receive payment in full, as provided
herein, for all shares of common stock subscribed for through the exercise of the subscription privilege, together with a properly completed and duly
executed notice of guaranteed delivery substantially in the form accompanying this prospectus either by mail or overnight carrier, that specifies the
name of the holder of the rights and the number of shares of common stock subscribed for. If applicable, it must state separately the number of shares
of common stock subscribed for through the exercise of the subscription privilege and a member firm of a registered national securities exchange, a
member of the Financial Industry Regulatory Authority, Inc., or a commercial bank or trust company having an office or correspondent in the United
States must guarantee that the properly completed and executed rights certificate for all shares of common stock subscribed for will be delivered to
the subscription agent within three business days after the expiration date. The subscription agent will then conditionally accept the exercise of the
rights and will withhold the certificates for shares of common stock until it receives the properly completed and duly executed rights certificate
within that time period.
In the case of holders of rights
that are held of record through DTC, those rights may be exercised by instructing DTC to transfer rights from that holders DTC account to the
subscription agents DTC account, together with
30
payment of the full subscription price. The notice of guaranteed delivery must be guaranteed by a commercial bank, trust company or credit union having an office, branch or agency in the United States or by a member of a Stock Transfer Association approved medallion program such as STAMP, SEMP or MSP.
Notices of guaranteed delivery
and payments should be mailed or delivered to the appropriate addresses set forth under Delivery of Subscription Materials and
Payment.
Calculation of Subscription Rights
Exercised
If you do not indicate the number
of subscription rights being exercised, or do not forward full payment, as provided herein, of the total subscription price payment for the number of
subscription rights that you indicate are being exercised, then you will be deemed to have exercised your subscription right with respect to the
maximum number of subscription rights that may be exercised with the aggregate subscription price payment, as provided herein, that you delivered to
the subscription agent. If we do not apply your full subscription price payment to your purchase of shares of our common stock, we or the subscription
agent will return in cash (unless the holder paid for the rights through indebtedness owed by us) the excess amount to you by mail, without interest or
deduction, as soon as practicable after the expiration date of the rights offering.
Escrow Arrangements
The subscription agent will hold
funds received in payment of the subscription price or evidence of our indebtedness in a segregated account until the rights offering is completed or
withdrawn and terminated.
Notice to Beneficial Holders
If you are a broker, a trustee or
a depositary for securities who holds shares of our common stock for the account of others as of the record date, you should notify the respective
beneficial owners of such shares of the rights offering as soon as possible to find out their intentions with respect to exercising their subscription
rights. You should obtain instructions from the beneficial owners with respect to their subscription rights, as set forth in the instructions we have
provided to you for your distribution to beneficial owners. If a beneficial owner so instructs, you should complete the appropriate subscription rights
certificates and submit them to the subscription agent with the proper payment. If you hold shares of our common stock for the account(s) of more than
one beneficial owner, you may exercise the number of subscription rights to which all such beneficial owners in the aggregate otherwise would have been
entitled had they been direct record holders of our common stock on the record date, provided that you, as a nominee record holder, make a proper
showing to the subscription agent by submitting the form entitled Nominee Holder Certification that we will provide to you with your rights
offering materials. If you did not receive this form, you should contact the subscription agent to request a copy.
Beneficial Owners
If you are a beneficial owner of
shares of our common stock or will receive subscription rights through a broker, custodian bank or other nominee, we will ask your broker, custodian
bank or other nominee to notify you of the rights offering. If you wish to exercise your subscription rights, you will need to have your broker,
custodian bank or other nominee act for you. If you hold certificates of our common stock directly and would prefer to have your broker, custodian bank
or other nominee act for you, you should contact your nominee and request it to effect the transactions for you. To indicate your decision with respect
to your subscription rights, you should complete and return to your broker, custodian bank or other nominee the form entitled Beneficial Owners
Election Form. You should receive the Beneficial Owners Election Form from your broker, custodian bank or other nominee with the
other rights offering materials. If you wish to obtain a separate subscription rights certificate, you should contact the nominee as soon as possible
and request that a separate subscription rights certificate be issued to you. You should contact your broker, custodian bank or other nominee if you do
not receive this form but you believe you are entitled to participate in the rights offering. We are not responsible if you do not receive this form
from your broker, custodian bank or nominee or if you receive it without sufficient time to respond.
31
Determinations Regarding the Exercise of Your Subscription
Rights
We will decide all questions
concerning the timeliness, validity, form and eligibility of the exercise of your subscription rights and any such determinations by us will be final
and binding. We, in our sole discretion, may waive, in any particular instance, any defect or irregularity, or permit, in any particular instance, a
defect or irregularity to be corrected within such time as we may determine. We will not be required to make uniform determinations in all cases. We
may reject the exercise of any of your subscription rights because of any defect or irregularity. We will not accept any exercise of subscription
rights until all irregularities have been waived by us or cured by you within such time as we decide, in our sole discretion. Our interpretations of
the terms and conditions of the rights offering will be final and binding.
Neither we, nor the subscription
agent, will be under any duty to notify you of any defect or irregularity in connection with your submission of subscription rights certificates and we
will not be liable for failure to notify you of any defect or irregularity. We reserve the right to reject your exercise of subscription rights if your
exercise is not in accordance with the terms of the rights offering or in proper form. We will also not accept the exercise of your subscription rights
if our issuance of shares of our common stock to you could be deemed unlawful under applicable law.
No Revocation or Change
Once you submit the form of
rights certificate to exercise any subscription rights, you may not revoke or change your exercise or request a refund of monies paid. All exercises of
rights are irrevocable, even if you subsequently learn information about us that you consider to be unfavorable. You should not exercise your rights
unless you are certain that you wish to purchase additional shares of our common stock at the subscription price.
Non-Transferability of the Rights
The subscription rights granted
to you are non-transferable and, therefore, may not be assigned, gifted, purchased, sold or otherwise transferred to anyone else. Notwithstanding the
foregoing, you may transfer your rights to any affiliate of yours (i.e. entities which you control or are controlled by you or under common control
with you) and your rights also may be transferred by operation of law; for example, a transfer of rights to the estate of the recipient upon the death
of the recipient would be permitted. If the rights are transferred as permitted, evidence satisfactory to us that the transfer was proper must be
received by us prior to the expiration date.
Rights of Subscribers
You will have no rights as a
stockholder with respect to shares you subscribe for in the rights offering until certificates representing shares of common stock are issued to you.
You will have no right to revoke your subscriptions after you deliver your completed rights certificate, payment as provided herein, and any other
required documents to the subscription agent.
Foreign Stockholders and Stockholders with Army Post Office or
Fleet Post Office Addresses
The subscription agent will not
mail rights certificates to you if you are a stockholder whose address is outside the United States or if you have an Army Post Office or a Fleet Post
Office address. Instead, we will have the subscription agent hold the subscription rights certificates for your account. To exercise your rights, you
must notify the subscription agent prior to 11:00 a.m., New York City time, at least three business days prior to the expiration date, and establish to
the satisfaction of the subscription agent that it is permitted to exercise your subscription rights under applicable law. If you do not follow these
procedures by such time, your rights will expire and will have no value.
No Board Recommendation
An investment in shares of our
common stock must be made according to your evaluation of your own best interests and after considering all of the information herein, including the
Risk Factors section of this prospectus. Neither we nor our Board of Directors are making any recommendation regarding whether you should
exercise your subscription rights.
32
Shares of Common Stock Outstanding After the Rights
Offering
Based on 129,463,767 shares of
our common stock currently outstanding, and the potential that we may issue as many as 100,612,465 shares pursuant to this rights offering, the
Additional Subscription Offer, the Special Additional Subscription Offer and the Anti-Dilution Shares, 230,076,232 shares of our common stock may be
issued and outstanding following the rights offering, which represents an increase in the number of outstanding shares of our common stock of
approximately 78%.
Assuming full subscription in
this rights offering, the following tables illustrate the potential dilutive effect and impact on stockholders equity of the rights offering, the
Additional Subscription Offer, the Special Additional Subscription Offer and the Anti-Dilution Shares:
Number of Shares |
Percent of Beneficial Ownership Prior to Rights Offering and Investment Agreement |
Percent of Beneficial Ownership After Rights Offering and Investment Agreement |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares of
Common Stock issued and outstanding as of December 31, 2010 |
129,436,767 | 100 | % | 56 | % | |||||||||
Shares
issuable in conjunction with the Rights Offering |
66,666,667 | | 29 | % | ||||||||||
Shares
issuable in conjunction with the Additional Subscription Offer |
9,107,576 | | 4 | % | ||||||||||
Shares
issuable in conjunction with the Special Additional Subscription Offer |
2,338,222 | | 1 | % | ||||||||||
Estimated
number of shares issuable in conjunction with Anti-Dilution Shares |
22,500,000 | | 10 | % | ||||||||||
Shares of
Common Stock issued and outstanding after the Rights Offering and the Investment Agreement |
230,076,232 | | 100 | % |
Fees and Expenses
Neither we nor the subscription
agent will charge a brokerage commission or a fee to subscription rights holders for exercising their rights. However, if you exercise your
subscription rights through a broker, dealer or nominee, you will be responsible for any fees charged by your broker, dealer or
nominee.
Questions About Exercising Subscription
Rights
If you have any questions or
require assistance regarding the method of exercising your subscription rights or requests for additional copies of this document or any document
mentioned herein, you should contact the subscription agent at the address and telephone number set forth above under Delivery of
Subscription Materials and Payment.
Other Matters
We are not making the rights
offering in any state or other jurisdiction in which it is unlawful to do so, nor are we distributing or accepting any offers to purchase any shares of
our common stock from subscription rights holders who are residents of those states or of other jurisdictions or who are otherwise prohibited by
federal or state laws or regulations to accept or exercise the subscription rights. We may delay the commencement of the rights offering in those
states or other jurisdictions, or change the terms of the rights offering, in whole or in part, in order to comply with the securities law or other
legal requirements of those states or other jurisdictions. Subject to state securities laws and regulations, we also have the discretion to delay
allocation and distribution of any shares you may elect to purchase by exercise of your subscription rights in order to comply with state securities
laws. We may decline to make modifications to the terms of the rights offering requested by those states or other jurisdictions, in which case, if you
are a resident in one of those states or jurisdictions or if you are otherwise prohibited by federal or state laws or regulations from accepting or
exercising the subscription rights you will not be eligible to participate in the rights offering.
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PLAN OF DISTRIBUTION
On or about June 10 , 2011,
we will distribute the rights, rights certificates and copies of this prospectus to individuals who owned shares of common stock on the record date. We
have not employed any brokers, dealers or underwriters in connection with the solicitation or exercise of rights in the rights offering and no
commissions, fees or discounts will be paid in connection with the rights offering. While certain of our directors, officers and other employees may
solicit responses from you, those directors, officers and other employees will not receive any commissions or compensation for their services other
than their normal compensation. If you wish to exercise your subscription rights and purchase shares of common stock, you should complete the
subscription rights certificate and return it with payment as provided herein for the shares of common stock, to the subscription agent, Bay City
Transfer Agency & Registrar , as follows :
By Mail: |
By Overnight Delivery: |
|||||
---|---|---|---|---|---|---|
Bay City
Transfer Agency & Registrar Trust Account P.O. Box 874 Bay City, MI 48707 |
Bay City
Transfer Agency & Registrar 300 Center Avenue, Suite 202B Bay City, MI 48708 |
In the event that the rights
offering is not fully subscribed, holders of rights who exercise all of their rights pursuant to their basic subscription privilege will have the
opportunity to subscribe for unsubscribed rights pursuant to the over-subscription privilege. See further the section of this prospectus entitled
The Rights Offering.
We have not entered into any
agreements regarding stabilization activities with respect to our securities.
If you have any questions, you
should contact us at Environmental Solutions Worldwide, Inc., 335 Connie Crescent, Concord, Ontario, Canada L4K 5R2 or by telephone at (905) 695-4142.
We have agreed to pay the subscription agent a fee plus certain expenses, which we estimate will total approximately $7,500. We estimate that our total
expenses in connection with the rights offering will be approximately $230,000.
Other than as described herein,
we do not know of any existing agreements between any stockholder, broker, dealer, underwriter or agent relating to the sale or distribution of the
shares of common stock.
34
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are engaged through our wholly
owned subsidiaries, ESW Canada Inc. (ESW Canada), ESW America Inc. (ESW America) and ESW Technologies Inc. (ESW
Technologies) (collectively the ESW Group of Companies), in the design, development, manufacturing and sales of environmental
technology and emission testing service. We are 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. We also offer engine and after treatment emissions
verification testing and certification services.
Our focus is to be a leading
player in the environmental emissions market by providing leading-edge catalyst technology as well as best-in-class engine and vehicle emissions
testing services. Our strategy is centered on identifying and deploying resources against our sweet-spot products, where we have identified
our core competencies and differentiation in the marketplace. Our core geography focus is North America, and will opportunistically explore business
development opportunities in other markets if accretive to us in the short term. By focusing financial, human and intellectual capital on our core
competencies and markets, we are targeting profitable growth in the short term and value creation for our shareholders over the long
term.
Factors that are critical to our
success include winning new business, obtaining additional regulatory verifications for emission control products, managing and optimizing our
manufacturing capabilities to correspond with business needs, maintaining competitive wages and benefits, maximizing efficiencies in its manufacturing
processes, and reducing overall costs. In addition, our ability to adapt to key industry trends, such as increasing technologically sophisticated
products, changing aftermarket distribution partners, and increasing environmental standards, also plays a critical role in our success. Other factors
that are critical to our success include adjusting to environmental and economic challenges such as increases in the cost of raw materials and our
ability to offset such cost increases through material substitutions, cost reduction initiatives and other methods.
We have made significant efforts
to comply with new regulations which came into force in January of 2009. See Business Product Certification. Our Therma Cat(TM)
Active Level III Plus catalyst system has been verified by CARB for a variety of on- and off-road engine applications (particulate matter
(PM) reduction greater than 85%). The Therma Cat(TM) filter system is a combined technology comprised of a chemically coated wire mesh
substrate and Diesel Particulate Filter (DPF) combined with an electronically controlled external fuel injection component. The Therma Cat(TM)
regeneration process is an electronically controlled exothermic reaction and occurs automatically during normal vehicle operation, transparent to the
operator.
The EPAs Voluntary Diesel
Retrofit Program signed a Memorandum of Agreement with the State of California Air Resources Board for the coordination and reciprocity in diesel
retrofit device verification. The EPA recognizes and accepts those retrofit hardware strategies or device-based systems that have been verified by
CARB. This reciprocity agreement allows ESWs Therma Cat (TM) technology to be used in the remaining 49 states and it allows ESW to participate in
EPA funded programs worldwide.
Fiscal Year
2010
In 2010, we were focused
primarily on: (a) increasing revenues from our verified product line, (b) increasing our distribution network to target key markets segments such as
school bus retrofits and government regulated retrofit programs, (c) continuing verification of the Level III product, (d) ensuring our production
capabilities are adequate to deliver product to the target markets, and (e) further development of the Xtrm Cat (TM) product for the rail and marine
markets.
We have made significant
investments in research and development and obtaining regulatory approvals for our technologies. The products that we are pursuing for
verification/certification to cover the following primary technology levels established by CARB:
LEVEL II +
|
A high performance Diesel Oxidation Catalyst and filter PM reduction greater than 50% |
35
LEVEL III +
|
Expansion of On Road Active Diesel Particulate Filter verification to include Exhaust Gas Recirculation engines PM reduction greater than 85% |
In addition, we intend to verify
/ certify the Xtrm Cat(TM) product designed for Marine, 2-stroke, Tier 0 and Tier 1, turbocharged EMD 645 and 710 models with the EPA or
CARB.
We have decided not to further
pursue the verification of the LEVEL I technologies based on our 2011 business plan.
We believe that with the
additional certifications/verification of the above range of products, we will cover a significant portion of the market and give us the competitive
advantage to be the technology of first choice in retrofit and OEM applications. The regulatory approval process with EPA and CARB is complex and
requires a lengthy process of durability testing which must precede the final certification/ verification of our products. We do not control the
timeliness of the certification/verification process; however, we have taken steps to ensure the efficacy of our contribution to the
certification/verification process.
The cost of developing a complete
range of products to meet regulations is substantial. We believe that we possesses a competitive advantage in ensuring regulatory compliance by
leveraging our testing and research facility in Montgomeryville, Pennsylvania to support our certification and verification efforts. We have also
managed to offset some of these development costs through the application of research grants and tax refunds.
During 2010, we further developed
our active independent dealer and support distribution network that has positioned our products as the technology of choice for several key markets.
Dealers are fully trained by us for a timely distribution and deployment of our products. We also have an active field sales support team, customer
service, installation and training team to allow and support the growth and distribution of our products.
Our production, sales, technical
and design staff at ESW Canada have sought to ensure that products are able to meet the diverse applications found in on- and off-road vehicles while
maximizing product commonality to reduce manufacturing and support costs. Our manufacturing and design facility at ESW Canada has been capitalized to
streamline production of our new product line to maximize efficiency. ESW Canadas facilities are leased and the lease term expires on September
30, 2015.
Our tech center is based in
Montgomeryville, Pennsylvania. This facility provides our emission testing laboratories and testing capabilities. The 40,200 square foot facility
houses the state-of-the-art Air Testing Services(TM) (ATS) lab, recognized as capable of performing engine emissions verification test
protocols by the EPA, CARB and the Mine Safety and Health Administration (MSHA). ESW Americas facilities are leased and the lease
term expires on February 28, 2013.
We believe that the ATS group
will be available to better service our clientele for engine testing as well as EPA/CARB emissions testing and certification programs. ATS currently
provides testing support for ESWs internal research and development programs. The focus at this facility in 2011 is to continue supporting
internal research and development and expand its air testing services to external customers.
Both our facilities are in full
compliance with ISO 9001:2008. We currently hold a full registration certificate effective until March 2013 for ESW America and January 2013 for ESW
Canada.
The field of emission control is
very complex and requires a variety of different technologies to be employed. As such, we have entered into several strategic alliances to assure
access to leading edge technologies and address the needs of our potential customer base. The technology can be either in form of customized precious
metal solutions, critical system components or the complete transfer of the entire technology. This approach enables us to adapt quickly to an
ever-changing marketplace.
In effecting our business plan,
we achieved important goals in fiscal 2010:
|
On July 14, 2010, we announced through a shareholder letter that we had a substantial increase in our distributor network. We have a total of 36 independent contracted distributors with over 230 individual |
36
locations. All of the distributors have been trained and certified to install our products on vehicles and construction equipment. |
|
On October 12, 2010, we announced that the Therma Cat(TM) Active Level III Plus catalyst system verification has been expanded to include an updated sizing chart for On-Road applications. Therma Cat(TM) now meets all current retrofit installation sizing requirements for an even wider variety of 1993 through 2006 model year On-Road vehicles. The system is available up to 375 Horsepower and as per the Companys estimates increase the engine family universe by 21%. The expanded verification has additional end-user benefits and competitive benefits such as a Swapping Allowance, which provides for an alternate filter to be used in place of the one being cleaned during a scheduled maintenance procedure for the Therma Cat(TM), thereby maximizing the on road availability of a vehicle. In addition, a Redistribution Allowance gives customers the ability to move a system from a vehicle being removed from service to one being brought into service, saving money for the customer and minimizing fleet disruption. |
|
On November 11, 2010, we announced that we and E Global Solutions (EGS), our exclusive New York distributor, participated in an expert panel discussion to provide guidance on New York State and City emission control requirements covering mandated retrofit installation and compliance deadlines for diesel on-road and off-road engines. With deadlines for retrofit compliance in effect, for contractors regulated by New York State, New York City and surrounding counties for emission control requirements for diesel engines, we view this important market as a significant potential for the Therma Cat (TM) product. |
|
On November 15, 2010, we announced that our exclusive New York distributor, EGS, has been awarded a long-term contract with the Metropolitan Transit Authority (MTA) of New York City. The contract provides for EGS to supply the Therma Cat(TM) Level III Plus Active Diesel Particulate Filter (ADPF) retrofit technology to the MTA to satisfy New York State diesel engine emission control requirements. Under the supply and installation contract, EGS will also supply the market leading Therma Cat(TM) ADPF to the Long Island Rail Road, the Triboro Bridge and Tunnel Authority and the Staten Island Rapid Transit Operating Authority. The contract results from the New York State Diesel Emissions Reduction Act, Part 248/249 of 2006. This law mandates that any vehicles over 8500 lbs. powered by diesel engine which are State owned, operated, on behalf of or leased by these agencies must be retrofit with the best available technology for the reduction of particulate matter within a determined time period. State-wide, the legislation calls for the retrofit of over 30,000 registered heavy-duty diesel vehicles and engines. |
In 2010 ESW made significant
positive strides in obtaining wide ranging verifications for products and distribution network for sales. As a result, ESWs revenues in 2010
increased by 239% compared to 2009. However, during the last two quarters of 2010, we faced shortages in working capital. The main reasons for the
shortage in working capital were: (a) long purchase lead times for key materials and components which was mitigated by increasing levels of inventory;
(b) delays in receiving sales orders that we had anticipated in 2010 due to significantly longer than anticipated timelines for state, federal and
non-profit agencies to submit bids for funded projects, award projects, and release purchase orders; (c) delays in achieving verifications and
certifications for certain products; and (d) delays in enforcement of certain regulations in California (Off-road and private fleet rules) and the
economic downturn in the U.S. that affected the construction industry, large capital projects, and ultimately the retrofit market for private and
public fleets. The above factors have affected our expected revenue growth and in turn affected our liquidity position. We offset this by engaging in
various financing activities throughout 2010. See Liquidity and Capital Resources.
Fiscal Year
2011
For 2011, we are focused on
optimizing our operations around our sweet spots and capturing a greater market share in the catalytic converter and emissions testing
markets whilst ensuring profitable growth as compared to 2010. The key factors that are in our favor are: (a) continued regulatory push for emissions
reductions in the U.S, (b) additional funding being available from public agencies, (c) a market-leading Level III active catalytic converter
technology and an established distribution network in North America, and (d) opportunities to market to third parties its CARB and EPA recognized
emissions and durability testing services.
37
We believe that we can improve,
achieve and maintain profitability and grow our business by pursuing the following strategy:
|
focus on delivering controlled and profitable growth to our shareholders; |
|
center our sales strategy around identified sweet-spots that will allow manufacturing efficiency gains and optimized resource allocation; |
|
educate the end customers about the technology and ensure realistic delivery timeline expectations; |
|
enhance scheduling and customer service functions and importance; |
|
locate recurring revenue opportunities and focus sales efforts on such opportunities; |
|
work with vendors to optimize our material buys and lead times; and |
|
constantly review operations, processes and products under a continuous improvement/performance-based culture. |
To deliver against this strategic
intent, in February 2011, we secured $3,000,000 million in financing through the Bridge Loans. Proceeds from the Bridge Loans, along with available
cash, is being used to fund working capital, planned capital investments and other general corporate purposes. With the proceeds of the Bridge Loan, we
regained compliance with covenant obligations under the Demand Credit Agreement, for which we had previously obtained waivers of covenant obligations
that expired February 15, 2011. As at March 31, 2011, of the $3,000,000 in additional financing secured, $1,823,319 was used to repay a portion of the
outstanding amount due under the Demand Credit Agreement. Effective April 27, 2011, we secured $1,000,000 in additional financing through the Bridge
Loans, which is being used for working capital to secure and deliver the current sales opportunities.
We are seeking raise $7,770,000
of net proceeds through this rights offering, which will be used to repay our outstanding indebtedness and to provide working capital. See Use of
Proceeds.
Effective May 10, 2011, we
entered into the Investment Agreement with the Bridge Lenders, pursuant to which the Bridge Lenders agree d to the Backstop Commitment and we
agreed to the offer to the Bridge Lenders the Purchase Option, Additional Subscription Offer and Special Additional Subscription Offer. See The
Rights Offering The Investment Agreement.
The cost of developing a complete
range of products to meet regulations is substantial. We believe that we possess a competitive advantage in ensuring regulatory compliance by
leveraging our Testing and Research facility in Montgomeryville, Pennsylvania to support our certification and verification efforts. We have also
managed to offset some of these development costs through the application of research grants and tax refunds.
In effecting our current business
plan, we have made adjustments to our business in the first quarter of 2011:
|
We have reviewed and continue to review our costs for inefficiencies and have taken steps to reduce our operating expenses. Key cost reduction initiatives during the first quarter of 2011 included the restructuring of our management team, the termination of certain contracts and the re-negotiation of board and consulting obligations, amongst others. We will continuously revisit opportunities to further streamline the business. |
|
Since January 2010, there has been a significant increase in the cost of material and components that we use. We are revising the pricing to our dealers to ensure operating margins remain consistent despite lower margins in the first quarter of 2011. Price increases will be implemented in two phases in 2011. We have also revised our overall commercial policies, including our general terms and conditions and lead time expectations on our products. Changes have also been implemented to our costing and quoting processes, including frequent periodic review of our bill of materials and the proactive negotiation of raw material prices. |
|
We are focusing on increasing sales volumes on our core sweet spot products to reduce production complexities and improve inventory management. We are also focused on implementing new continuous improvement programs such as the cross-functional Product and Process Review stream led by our engineering team searching for product, product quality and product development process enhancements. |
38
|
We have revisited relationships with critical vendors, in addition to setting up favorable payment plans to reduce the outstanding balances with the vendors. We have also secured and continue to secure volume discounts on critical components. |
|
We are in the process of reviewing our warranty policies to ensure that warranty terms and conditions meet industry standards whilst mitigating warranty risks to the fullest extent possible. |
|
We are in the process of engaging our existing and new independent dealers in order for dealers to better understand our business and strengthen our partnership with our distribution base. |
|
We are focusing on increasing revenues from our Air Testing Facility in Montgomeryville, Pennsylvania. |
The results from this adjustment
to our business are expected to improve operational results in the second and third quarter of 2011. We have reduced inefficiencies in
personnel-related costs, manufacturing costs and other discretionary expenditures that are within our control. We are also seeking to lower our
overhead costs while increasing our focus on the sales, marketing and customer service efforts. The changes in the business are anticipated to lower
the overall operating costs and improve our overall results, without affecting the positioning of our existing products and testing services as well as
our efforts to develop and deliver to market the next generation of leading clean technology products and services.
Comparison of the Three Month Period Ended March 31, 2011 to
the Three Month Period Ended March 31, 2010
Results of
Operations
Revenues. Revenues for the
three month period ended March 31, 2011 decreased by $202,859 or 9.0 percent, to $2,045,737 from $2,248,596 for the three month period ended March 31,
2010. The decrease in revenue is mainly related to our customers facing delays in obtaining funding from public agencies to retrofit diesel
vehicles.
Cost of Sales. Cost of
sales as a percentage of revenues for the three month period ended March 31, 2011 was negative 6.3 percent compared to 67.2 percent for the three month
period ended March 31, 2010. Cost of Sales for the three month period ended March 31, 2011 increased by $581,591 or 38.5 percent. The primary reason
for negative gross margin for the three month period ended March 31, 2011 was the write-down and a reserve for write down of inventory in the amount of
$229,221. The increase in cost of sales in the current period is related to the following: (a) increases in the cost of materials of $190,534 mainly
driven by the increasing cost of precious metals, components and supplies used in production, (b) sales by us of slow moving inventory to recover cash
and the related write-down of $128,598 as a loss on sale of inventory and a reserve for obsolescence of $100,623, (c) an increase of $26,258 in labor
cost mostly related to production inefficiency, (d) an increase in overhead costs of $96,389 as we apply higher overheads to our cost of sales due to
improved visibility on the costs enabling better allocation of the overhead expenses, previously expensed as operating expenses, (e) increase in
service and warranty costs of $29,885 over the prior period, and (f) $9,304 related to discount provided to dealers to increase accounts receivable
collections. The increases in cost of sales were further affected by the decrease in revenue of $202,859. We have reviewed our production costing and
have a plan in place to review and update the pricing of our products and reduce materials and production costs to maintain future
margins.
Marketing, Office and General
Expenses. Marketing, office and general expenses for the three month period ended March 31, 2011 increased by $55,951, or 5.6 percent, to
$1,051,753 from $995,802 for the three month period ended March 31, 2010. The increase is primarily due to the following: (a) an $80,430 increase in
general administration costs mainly related to increased financing charges on our secured credit facility, (b) a marginal increase in administration
salaries and wages of $4,005, and (c) an increase in factory expense of $98,877 mostly related to inefficient labor. These increases were offset by
decreases in sales and marketing wages and selling expenses of $67,514, mainly resulting from reversal of bad debt provisions as of December 31, 2010,
for which receivables were collected, a decrease of $25,079 in facility costs, resulting from higher overheads applied to cost of sales, and a decrease
in investor relation costs of $34,769 as we terminated the services of an investor relations firm.
Restructuring Charges. We
incurred $518,809 as restructuring charges for the three month period ended March 31, 2011, relating to various severance payments, vacation payouts
and agreements. We incurred expenses
39
related to severance agreements with our former Chief Executive Officer, Vice President of Operations and Director of Sales in the amount of $432,377, of which $310,947 was included in accrued liabilities and will run-off during the balance of the period that severance payments are made.
Research and Development.
Research and development (R&D) expenses for the three month period ended March 31, 2011 increased by $58,312, or 46.5 percent, to
$183,626 from $125,314 for the three month period ended March 31, 2010, in each case net of grant money received. The primary driver of R&D
expenses for the first three months of fiscal year 2011 related to our pursuit of the certification/verification of our locomotive and marine product,
the Xtrm Cat(TM), including the final EPA certification testing at a recognized testing facility. To offset this increase during the three month period
ended March 31, 2011, we received grant money amounting to $229,999 compared to $101,526 for the three month period ended March 31,
2010.
Officers
Compensation. Officers compensation and directors fees for the three month period ended March 31, 2011, increased by $13,287, or 6.7
percent, to $211,644 from $198,357 for the three month period ended March 31, 2010. The increase in compensation is mainly due to changes in executive
management and our board of directors.
Consulting and Professional
Fees. Consulting and professional fees for the three month period ended March 31, 2011, decreased by $78,873, or 74.4 percent, to $27,102 from
$105,975 for the three month period ended March 31, 2010, the prior year period included legal fees in connection with the Demand Credit Agreement and
higher consulting fees and audit fees.
Foreign Exchange Loss.
Foreign exchange loss for the three month period ended March 31, 2011 was $60,126 as compared to a loss of $56,223 for the three month period ended
March 31, 2010. This is a result of the fluctuation in the exchange rate of the Canadian dollar, or CAD, to the U.S. dollar.
Depreciation and
Amortization. Depreciation and amortization expense for the three month period ended March 31, 2011 decreased by $142,495, or 54.2 percent, to
$120,350 from $262,845 for the three month period ended March 31, 2010. In the three month period ended March 31, 2011, we applied $34,680 of
additional depreciation to cost of sales, there was a reduction of $37,272 from patents being completely amortized and $ 70,543 from assets that have
been fully amortized.
Loss from Operations. Loss
from operations for the three month period ended March 31, 2011, increased by $1,213,344, or 120.6 percent, to $2,219,754 from $1,006,410 for the three
month period ended March 31, 2010.
Interest Expense. Interest
expense on long-term debt related to convertible debentures we issued was $0 for the three month period ended March 31, 2011 as compared to $183,858
for the three month period ended March 31, 2010. Amortization of deferred costs amounted to $0 for the three month period ended March 31, 2011 as
compared to $117,131 for the three month period ended March 31, 2010.
Financing Expenses. In
November 2008, we completed a transaction whereby we issued $6.0 million of 9% convertible debentures to six accredited investors (the 2008
Debentures). In August 2009, we issued $1.6 million of 9% convertible debentures to six accredited investors (the 2009 Debentures).
Effective March 25, 2010, the holders of the 2008 Debentures and 2009 Debentures agreed to convert all outstanding convertible debentures as per the
terms of the respective debenture agreements. The early conversion of the debentures was a condition precedent to ESW Canada entering into the Demand
Credit Agreement.
In March 2010, we issued $3.0
million of 9% convertible debentures to five accredited investors (the 2010 Debentures). The conversion of the 2008 Debentures and 2009
Debentures triggered the mandatory conversion feature on the 2010 Debentures. As part of the agreement to convert all existing convertible debentures,
we paid a premium as an inducement to convert all debentures. The premium was payable to all converting debenture holders and was subject to a positive
fairness opinion, approval by a Fairness Committee consisting of independent directors of our board of directors and an increase in our share capital.
The premium consisted of 4,375,665 shares of common stock. As we did not have sufficient authorised shares as of the date of conversion of the
debentures to fulfill the premium, the premium had been recorded as an advance share purchase agreement at fair market value of $2,909,872 at March 31,
2010 ($0 for March 31, 2011). The agreement was without interest, subordinated to the banks position and payable in a fixed number of shares of common
stock (4,375,665 shares) upon increase in our authorized share capital. In summary, the fair value of the advanced share subscription was dependent on
the market
40
price of our common stock, as we did not have sufficient available authorized common shares to fulfill this obligation as on March 31, 2010. The advanced share subscription was revalued based on the market price of our common stock at the end of each reporting period or until it was fulfilled by the issuance of authorized common shares. The resulting revaluation either caused gains or losses on the consolidated condensed statement of operations and comprehensive loss.
The Share Subscription Agreement
for the 2010 Debentures contains an exchange feature. The exchange feature provides that if within twelve months from March 19, 2010 we enter into or
closes another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the 2010 Debentures) on
terms and conditions more favorable to another purchaser, the terms and conditions of the 2010 Debentures shall be adjusted to reflect the more
favorable terms. On March 31, 2011, we re-evaluated the fair value of the exchange feature and determined that the probability of closing another
financing was 100% and the conversion price of the 2010 Debentures would be reset. On March 31, 2011, an additional liability of $578,739 was recorded
for the exchange feature in our consolidated financial statements with a $578,739 expense related to change in fair value of exchange feature liability
recorded in the consolidated condensed statements of operations and comprehensive loss.
Change in fair value of exchange
feature liability for the three month period ended March 31, 2011 amounted to $578,739 as compared to $0 for the three month period ended March 30,
2010.
We incurred $34,521 interest cost
on notes payable to a related party under the Bridge Loans for the three month period ended March 31, 2011 as compared to $11,342 for the three month
period ended March 31, 2010.
At March 31, 2011, we recorded
interest accretion expense of $1,050,000 ($0 for March 31, 2010), financing charge on embedded derivative liability of $485,101 ($0 for March 31, 2010)
and a gain on convertible derivative of $1,336,445 ($0 for March 31, 2010) related to the discount feature and the embedded derivative features in the
$3,000,000 notes payable to related party.
Comparison of Year Ended December 31, 2010 to Year Ended
December 31, 2009
Results of
Operations
Revenues. Revenues for the
year ended December 31, 2010 increased by $7,361,747, or 239.4 percent, to $10,437,145 from $3,075,398 for the year ended December 31, 2009. The
increase in revenue is mainly related to sales of our verified Therma Cat (TM) Level III products, further complemented by sales of the Xtrm Cat (TM)
product. In 2009, we focused our efforts on achieving verifications for our Therma Cat (TM) Level III product.
Cost of Sales. Cost of
sales as a percentage of revenues for year ended December 31, 2010 was 69.6 percent compared to 58.9 percent for the year ended December 31, 2009. The
gross profit for the year ended December 31, 2010 was 30.4 percent as compared to a gross margin of 41.1 percent for the year ended December 31, 2009.
The increase in cost of sales as a percentage of revenue in the current period is due to increased labor costs involved in ramping up of operations to
meet customer orders, our 2010 level of manufacturing labor could support a higher amount of orders than we received. The increase in cost of sales is
also related to a steady increase in cost of precious metals during the year. In addition, we also wrote down $195,293 of inventory in the fourth
quarter of 2010 due to discontinued product lines or product modifications.
Marketing, Office and General
Expenses. Marketing, office and general expenses for the year ended December 31, 2010 increased by $1,389,792, or 41.7 percent, to $4,719,362 from
$3,329,570 for the year ended December 31, 2009. Sales and marketing salaries and wages and selling expenses grew by $474,351 attributed to an
increased focus on business development and product marketing efforts, and the addition of a customer service and support department. Administration
salaries and wages were higher by $391,532, due to increased administration staff to support our transition and growth and our implementation of a
centralised enterprise resource planning system. Plant related expenses were higher by $151,891 as a result of increased manufacturing activity
increasing the cost of consumables, shop supplies, equipment repair and maintenance costs. Investor relations expense increased by $62,929 mainly
related to legal fees and fees related to an investor relations firm used by us. General and administration cost increased by $333,785 mainly due to
the increased finance and guarantee charges in connection with our Demand Credit Agreement with our secured lender and increased business
insurance
41
expenses. These increases were offset by a decrease in facility costs of $24,696 as a larger portion of overheads applied to the cost of sales.
Research & Development
(R&D). R&D expenses for the year ended December 31, 2010 decreased by $146,604, or 15.8 percent, to $783,944 from $930,548 for
the year ended December 31, 2009, in each case net of grants. We incurred R&D expenses associated with the verification and expansion of engine
family sizes of our Therma Cat (TM) Active Level III Plus Diesel Particulate Filter, as well as the verification of our locomotive and marine products
and the certification of our Level II product. During the year ended December 31, 2010, we received grant money for our R&D activities amounting to
$143,375 as compared to $168,753 for the year ended December 31, 2009.
Officers
Compensation. Officers compensation and directors fees for the year ended December 31, 2010 increased by $281,610, or 41.9 percent, to
$954,054 from $672,444 for the year ended December 31, 2009. The increase is mainly due to the addition of two outside directors in 2010, a wage
increase for one of our officers retroactive to January 2010, stock based compensation expense for the April 2010 stock options and the effect of
exchange rate differences on Canadian Dollar (CAD) contracts for our officers.
Consulting and Professional
Fees. Consulting and professional fees for the year ended December 31, 2010 increased by $235,361 to $451,345 from $215,984 for the year ended
December 31, 2009. The increase is mainly attributed to increased legal fees associated with the closing of the Demand Credit Agreement, legal fees
related to the renewal of our Canadian subsidiarys lease agreement, increased audit and other fees related to Sarbanes-Oxley 404, as well as
general consulting fees.
Foreign Exchange Loss.
Foreign exchange loss for the year ended December 31, 2010 amounted to $103,256. For the year ended December 31, 2009 foreign exchange gain amounted to
$10,035. This is a result of the fluctuation in the exchange rate of the Canadian Dollar relative to the U.S. Dollar.
Depreciation and
Amortization. Depreciation and amortization expense for the year ended December 31, 2010 decreased by $286,112, or 25.5 percent to $837,448 from
$1,123,560 for the year ended December 31, 2009.
Loss From Operations. Loss
from operations for the year ended December 31, 2010 decreased by $345,083, or 6.9 percent, to $4,673,760 from $5,018,843 for the year ended December
31, 2009. The decrease is mainly due to increased revenues in the current year offset by an increase in costs.
Interest Expense. Interest
expense on long-term debt was $183,858 for the year ended December 31, 2010 as compared to $870,632 for the year ended December 31, 2009. Amortization
of deferred costs amounted to $117,131 and long- term debt accretion amounted to $768,981 for the year ended December 31, 2010 as compared to $19,912
and $27,019 respectively for the year ended December 31, 2009. As of December 31, 2010, we has no debt outstanding related to the convertible
debentures.
Financing Expenses. As
discussed above, since we did not have sufficient authorized shares as of the date of conversion of the 2008 Debenture, 2009 Debentures and 2010
Debentures to fulfill the premium owed on such conversion, the premium was recorded as an advance share purchase agreement at fair market value
$2,909,872 at March 31, 2010. Subsequently, as of October 14, 2010, we revalued the advance share purchase agreement at fair market value $1,662,753
with a $1,247,119 gain recorded in the consolidated statements of operations and comprehensive loss. Effective November 30, 2010, we issued an
aggregate of 4,375,668 restricted shares of common stock to holders of the debentures in connection with the early conversion of the debentures and
settled the obligation.
On December 31, 2010, we
evaluated the fair value of the exchange feature of the 2010 Debentures based on the probability of closing another financing by March 18, 2011 and the
fair value of the number of incremental shares to be issued at a lower estimated issue price. The probability of closing another financing by March 18,
2011 was estimated to be 100% on December 31, 2010. The fair value of our common stock was determined by the closing price on the valuation date. At
December 31, 2010, an exchange feature liability of $1,680,000 was recorded for the 2010 Debentures with a $1,680,000 expense related to change in fair
value of exchange feature liability.
Effective November 9, 2010 and
December 8, 2010, we closed on our first tranche and second tranche of a unit offering in the amount of $300,000 per tranche for gross proceeds of
$600,000 whereby we issued 1,500,000
42
units (the unit offering). The Share Subscription Agreement for the units contains an exchange feature which provides that if within six months from effective date of closing, we enter into or close another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the securities) on terms and conditions more favorable to another purchaser, the terms and conditions of the unit offering shall be adjusted to reflect the more favorable terms. On November 9, 2010, December 8, 2010 and December 31, 2010, we evaluated the fair value of the exchange feature based on the probability of closing another financing within six months and the fair value of the number of incremental shares and warrants to be issued at a lower estimated issue price for units. The fair value of our common stock was determined by the closing price on the valuation date and the fair value of the warrants was determined using a binomial option valuation model. At December 31, 2010, an exchange feature liability of $453,861 was recorded for the unit offering, with $112,649 recorded as the fair value of exchange feature liability on the issuance dates of the unit offering (November 9, 2010 and December 8, 2010) and a $341,213 change in fair value of exchange feature liability.
Change in fair value of exchange
feature liability for the year ended December 31, 2010 amounted to $2,021,213 as compared to $0 for the year ended December 31, 2009.
Interest on note payable to
related party amounted to $11,342 for the year ended December 31, 2010 as compared to $0 for the year ended December 31, 2009. On March 31, 2010, we
repaid $500,000 principal and $11,342 in interest from the proceeds of the March 19, 2010 convertible debentures.
Loss on disposal of property and
equipment amounted to $8,828 for the year ended December 31, 2010 and $1,404 for the same period in the previous year.
Liquidity and Capital Resources
Cash
Flows
During the three month period
ended March 31, 2011, we used $227,567 of cash to sustain operating activities compared with $1,530,685 for the three month period ended March 31,
2010. As of March 31, 2011 and March 31, 2010, we had cash and cash equivalents of $956,337 and $949,021, respectively.
During the year ended December
31, 2010, we used $5,875,140 of cash to sustain operating activities compared with $4,353,576 for the year ended December 31, 2009. As of December 31,
2010 and December 31, 2009, we had cash and cash equivalents of $13,328 and $632,604, respectively.
Net cash used in operating
activities for the three month period ended March 31, 2011, amounted to $227,576. This amount was attributable to the net loss of $3,134,632, plus non
cash expenses such as depreciation, amortization, interest accretion expense, change in fair value of exchange feature liability and others of
$1,182,293, and an increase in net operating assets and liabilities of $1,724,763. Net cash used in operating activities for the three month period
ended March 31, 2010 amounted to $1,530,685. This amount was attributable to the net loss of $4,997,559, plus non cash expenses such as depreciation,
amortization, interest and accretion on long term debt, inducement premium on conversion of debentures and others of $4,237,365, and a decrease in net
operating assets and liabilities of $770,491.
Net cash used in operating
activities for the year ended December 31, 2010 amounted to $5,875,140. This amount was attributable to the net loss of $9,447,641, plus non cash
expenses such as depreciation, amortization, interest and accretion on long term debt, inducement premium on conversion of debentures, exchange feature
expense and others of $6,370,409, and a decrease in net operating assets and liabilities of $2,797,908. Net cash used in operating activities for the
year ended December 31, 2009 amounted to $4,353,576. This amount was attributable to the net loss of $5,936,952, plus non cash expenses such as
depreciation, amortization, interest on long term debt and others of $2,199,407, and a decrease in net operating assets and liabilities of
$616,031.
Net cash used in investing
activities was $15,729 for the three month period ended March 31, 2011 as compared to $100,998 provided by investing activities for the three month
period ended March 31, 2010.
Net cash used in investing
activities was $414,188 for the year ended December 31, 2010 as compared to $171,176 for the year ended December 31, 2009. The capital expenditures
during the year ended December 31, 2010 were primarily dedicated to production tooling.
43
Net cash provided by financing
activities totaled $1,174,725 for the three month period ended March 31, 2011, as compared to $1,775,822 for the three month period ended March 31,
2010. In the current period of 2011, $3,000,000 was provided through the issuance of the Bridge Loans, $1,823,319 was repaid under the Demand Credit
Agreement and $1,956 was repaid under capital lease obligation. In the prior year period of 2010, $3,000,000 was provided through issuance of
convertible debentures, $720,510 was repaid under our prior bank loan, $500,000 repaid promissory notes to a related party, and $3,668 repaid a capital
lease obligation.
Net cash provided by financing
activities totaled $5,570,429 for the year ended December 31, 2010, as compared to $3,086,915 provided by financing activities for the year ended
December 31, 2009. In the current period $2,919,375 (net of debt issuance costs of $80,625) was provided through issuance of convertible debentures,
$3,312,254 was borrowed under our senior credit facility and $723,431 was repaid to Royal Bank of Canada prior to closing the facility, $500,000
repayment of promissory note to a related party, $576,000 (net of $24,000 broker fees related to share subscription) was received through the issuance
of common stock and $13,769 repaid under capital lease obligation.
Liquidity and Capital
Requirements
The industry that we operate in
is capital intensive and there is a timing issue bringing product to market which is considered normal for this industry, there is a timing difference
between awards of funding and the final funding released by the regulatory agencies which also affect revenues. We continue to invest in research and
development to improve our technologies and bring them to the point where our customers have a high confidence level allowing them to place larger
orders The length of time a customer needs to build confidence in ESWs technologies cannot be predetermined and as a result, ESW has sustained
operating losses as a result of not generating sufficient sales to generate a profit from operations. In 2011 ESW plans to adjust it business to
correct for these issues.
During the first quarter of 2011
and the years ended 2010 and 2009, we did not produce sufficient cash from operations to support our expenditures. Prior financings as discussed below
under the Debt Structure along with continued borrowing on our Demand Credit Agreement supported our operations during the period. Our principal use of
liquidity relates to our working capital needs and to finance any further capital expenditures or tooling needed for production and/or our testing
facilities.
Effective March 31, 2010, our
subsidiary, ESW Canada, entered into the Demand Credit Agreement to meet working capital requirements. The facility has a credit limit of CAD
$ 1.5 million. Borrowings under the facility are limited to a percentage of accounts receivable plus a percentage of inventories (capped at CAD
$1.0 million or 50% of the accounts receivable portion) less any prior ranking claims.
We anticipate certain capital
expenditures in 2011 related to the general operation of our business as well as to upgrade the air testing facilities in Montgomeryville,
Pennsylvania. We do not expect that total capital expenditures for 2011 will amount to more than $1,400,000.
In February 2011, we secured
$3,000,000 in additional financing through the Bridge Loans. Proceeds of the Bridge Loans, along with available cash, was used to fund working capital,
planned capital investments and other general corporate purposes. As at March 31, 2011, of the $3.0 million in financing secured, $1,823,319 was used
to repay our credit facility. Effective April 27, 2011, we secured $1.0 million in additional financing through the Bridge Loans, which being used for
working capital to secure and deliver the current sales opportunities.
We are engaging in this rights
offering to raise capital. Through this rights offering, we plan to sell up to 66,666,667 shares of common stock, at a subscription price of $0.12 per
share, for net proceeds of $7.8 million. This capital will be used to repay indebtedness and fund working capital requirements. See Use of
Proceeds.
With our anticipated growth in
revenue, profitability and cash flow should improve to reflect our operating leverage. Enhanced profitability and cash flow will also result from our
initiatives to enhance our commercial policies, streamline our infrastructure and drive our operational efficiencies across our
operations.
Competition is expected to
intensify as the market for our products expands. Our ability to continue to gain significant market share will depend upon our ability to continue to
develop strong relationships with distributors, customers and develop new products. Increased competition in the market place could result in lower
average pricing which could adversely affect our market share and pricing for our products.
44
We have 700,000 Class A special
shares, authorized, issued and outstanding, recorded at $453,900 (based on the historical exchange rate at the time of issuance). The Class A special
shares are issued by our wholly-owned subsidiary BBL Technologies, Inc. (BBL) without par value, and are redeemable on demand by the holder
of the shares which is a private Ontario Corporation at $700,000 CAD (which translates to $721,980 U.S. Dollars and $703,801 U.S. Dollars at March 31,
2011 and December 31, 2010, respectively). As the redeemable Class A special shares were issued by our wholly owned subsidiary, BBL, the maximum value
upon which we are liable is the net book value of BBL. As of March 31, 2011 and December 31, 2010, BBL had an accumulated deficit of $1,192,858 U.S.
dollar ($1,845,375 CAD), and therefore, the holder would be unable to redeem the redeemable Class A special shares at their ascribed
value.
Debt
Structure
Effective March 19, 2010, we
issued the 2010 Debentures, which were $3,000,000 of 9% convertible debentures to 5 accredited investors under Rule 506 of Regulation D. The 2010
Debentures were for a term of 3 years and were convertible into shares of our common stock at the option of the holder by dividing the principal amount
of the 2010 Debentures to be converted by $0.50. The 2010 Debentures earned interest at a rate of 9% per annum payable in cash or in shares of our
common stock at the option of the holder. If the holder elected to receive interest in shares of common stock, the number of shares of common stock to
be issued for interest would be determined by dividing accrued interest by $0.50. The 2010 Debentures had a mandatory conversion feature that required
the holders to convert in the event a majority of our pre-existing outstanding 9% convertible debentures converted. Subject to the holders right
to convert and the mandatory conversion feature, we had the right to redeem the 2010 Debentures at a price equal to one hundred and ten percent (110%)
multiplied by the then outstanding principal amount plus unpaid interest to the date of redemption. Upon maturity, the 2010 Debentures and interest
were payable in cash or common stock at the option of the holder. We also had provided the holders of the 2010 Debentures registration rights. The 2010
Debentures contained customary price adjustment protections.
Effective March 25, 2010, the
holders of the 2008 Debentures and 2009 Debentures agreed to convert all outstanding convertible debentures as per the terms of the respective
debenture agreements. The early conversion of the 2008 Debentures and 2009 Debentures was a condition precedent to ESW Canada entering into the Demand
Credit Agreement. The conversion of the 2008 Debentures and 2009 Debentures triggered the mandatory conversion feature on the 2010 Debentures. As part
of the agreement to convert all existing convertible debentures, we paid a share-based premium as an inducement to convert all debentures. The premium
was payable to all converting debenture holders and was subject to a positive fairness opinion, provided by a Fairness Committee consisting of
independent directors of our board of directors and an increase in our share capital. The premium consisted of 4,375,665 shares of common stock. As we
did not have sufficient authorized shares as of the date of conversion of the debentures to fulfill the premium, the premium was recorded as an advance
share purchase agreement at a fair market value of $2,909,872 at March 31, 2010. The agreement was without interest, subordinated to the banks
position and payable in a fixed number of shares of common stock (4,375,665 shares) upon increase in our authorized share capital. In summary, the fair
value of the advanced share subscription was dependent on the market price of our common stock, as we did not have sufficient available authorized
common shares to fulfill this obligation as on March 31, 2010. The advanced share subscription was revalued based on the market price of our common
stock at the end of each reporting period until it was fulfilled by the issuance of authorized common shares. Gains and losses from the resulting
revaluations were recognized on the consolidated condensed statement of operations and comprehensive loss.
The Share Subscription Agreement
for the 2010 Debentures contains an exchange feature. The exchange feature provides that if within twelve months from March 19, 2010, we enter into or
close another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the securities) on terms
and conditions more favorable to another purchaser, the terms and conditions of the 2010 Debentures shall be adjusted to reflect the more favorable
terms. On March 31, 2011, we re-evaluated the fair value of the exchange feature and determined that the probability of closing another financing was
100% and the conversion price of the 2010 Debentures would be reset. On March 31, 2011 an additional liability of $578,739 was recorded for the
exchange feature in these consolidated condensed financial statements with a $578,739 expense related to change in fair value of exchange feature
liability recorded in the consolidated statements of operations and comprehensive loss.
45
Effective March 31, 2010, our
subsidiary, ESW Canada, entered into the Demand Credit Agreement to meet working capital requirements. The facility has a credit limit of CAD $4
million. Borrowings under the facility are limited to a percentage of accounts receivable plus a percentage of inventories (capped at CAD $1 million or
50% of the accounts receivable portion) less any prior ranking claims. The credit facility is guaranteed by us and our subsidiaries, ESW Canada, ESW
America, BBL, and ESW Technologies, through a general security agreement over all assets. The facility has been guaranteed to the bank under EDCs
Export Guarantee Program. Borrowings under the credit facility bear interest at 2.25% above the banks prime rate of interest. Obligations under
the revolving credit agreement are collateralized by a first-priority lien on our assets and the assets of our subsidiaries, including, accounts
receivable, inventory, equipment and other tangible and intangible property, including the capital stock of all direct subsidiaries.
The terms relating to the Demand
Credit Agreement require that we maintain a tangible net worth of at least $4.0 million. The credit agreement contains, among other things, covenants,
representations and warranties and events of default customary for a facility of this type for us and our subsidiaries. Such covenants include certain
restrictions on the incurrence of additional indebtedness, liens, acquisitions and other investments, mergers, consolidations, liquidations and
dissolutions, sales of assets, dividends and other repurchases in respect of capital stock, voluntary prepayments of certain other indebtedness,
capital expenditures and transactions with affiliates, subject to certain exceptions. Under certain conditions amounts outstanding under the credit
agreements may be accelerated. Such events include failure to comply with covenants, breach of representations or warranties in any material respect,
non-payment or acceleration of other material debt, entry of material judgments not covered by insurance, or a change of control of
us.
Effective May 31, 2011, we
entered into a sixth modification of the Demand Credit Agreement, whereby we received an extension on the term of the Demand Credit Agreement
through June 30, 2011. In addition, the Demand Credit Agreement was amended to provide that the credit limit for the facility be reduced from
CAD $4.0 million to CAD $1.5 million or, if less, the borrowing base established by the security margin. The sixth modification is
subject to all covenants and the security margin under the Demand Credit Agreement remaining in order at all times. The lender also advised
us that any reasonable request for an extension of the June 30, 2011 date will be considered in light of this rights offering. We paid a fee to
the lender for the extension, which included reimbursement of reasonable legal and advisory fees.
From November 8, 2010 through
February 14, 2011, our wholly owned subsidiary, ESW Canada, received waivers of certain financial covenants under the Demand Credit Agreement. Without
the waivers, ESW Canada would not have been in compliance with certain covenants in the credit agreement. On February 17, 2011, we raised a $3.0
million pursuant to the Bridge Loans, following which we were in compliance with covenant obligations under the Demand Credit Agreement. On May 3,
2011, we raised an addition $1.0 million pursuant to the Bridge Loans, which were effective as of April 27, 2011.
As at March 31, 2011, $1,636,444
was owed under the Demand Credit Agreement ($0 for March 31, 2010).
Effective February 17, 2011 and
April 27, 2011, we entered into the Bridge Loans. See The Rights Offering Background of the Rights Offering The Bridge Loans.
As of March 31, 2011, $3,000,000 of principal and $34,521 of interest was owed under the Bridge Loans, compared to $0 of principle and $0 of interest
as of March 31, 2010.
We are dependent upon the closing
of this rights offering and the transactions contemplated by the Investment Agreement to meet our debt service obligations under the Demand Credit
Agreement and the Bridge Loans. Our ability to service our indebtedness, other obligations and commitments in cash will depend on our future
performance and our ability to raise capital, which will be affected by prevailing economic conditions, financial, business, regulatory and other
factors. Certain of these factors are beyond our control. We may need additional financing after the completion of this rights offering to meet our
financial projections and obligations. Significant assumptions underlie our projections, including, among other things, that we will be successful in
implementing our business strategy, that some of our new products that have received verification from the appropriate regulatory authorities will
obtain customer and market acceptance, and that there will be no material adverse developments in our business, liquidity or capital
requirements.
46
Contractual Obligations
Leases
Effective November 24, 2004, our
wholly-owned subsidiary, ESW America, 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 our research and development facilities. The lease commenced on
January 15, 2005 and expired January 31, 2010. Effective October 16, 2009, ESW America 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 will now expire February 28, 2013. Effective March 31, 2011, ESW America entered into a
lease amendment agreement with Nappen & Associates for the leasehold property at Pennsylvania, whereby ESWA has the sole option to extend the
expiry of the lease agreement by an additional 3 years six months prior to February 28, 2013; there were no modifications to the original economic
terms of the lease.
Effective December 20, 2004, our
wholly-owned subsidiary, ESW Canada, entered into a lease agreement for approximately 50,000 square feet of leasehold space in Concord, Ontario,
Canada. The leasehold space houses our executive offices and a high volume manufacturing plant. The possession of the leasehold space took place on May
24, 2005 and the term of the lease was extended to September 30, 2010. ESW Canada renewed its lease agreement at the current property for an additional
five year term. The renewed lease period commenced on October 1, 2010 and ends on September 30, 2015.
The following is a summary of the
minimum annual lease payments, for both leases as of March 31, 2011:
YEAR |
2011 |
$ | 351,021 | ||||
2012 |
468,029 | |||||
2013 |
319,813 | |||||
2014 |
297,476 | |||||
2015 |
223,107 | |||||
$ | 1,659,447 |
Capital Lease
Obligation
We are committed to the following
lease payments in connection with the acquisition of equipment under capital leases as of March 31, 2011:
YEAR |
2011 |
$ | 2,124 | ||||
2012 |
1,180 | |||||
TOTAL
|
3,304 | |||||
Less imputed
interest |
(179 | ) | ||||
Total
obligation under capital lease |
3,125 | |||||
Less current
portion |
(1,806 | ) | ||||
TOTAL
LONG-TERM PORTION |
$ | 1,319 |
We incurred $80 and $515 of
interest expense on capital lease obligation for the periods ended March 31, 2011 and 2010, respectively.
Restructuring Expenses and
Severance Agreements
We accrued expenses related to
severance agreements with our former Chief Executive Officer, Vice President of Operations and Director of Sales. As of March 31, 2011, $310,947 was
included in accrued liabilities towards the balance of severance payments owing.
47
Critical Accounting Policies and
Estimates
General
Our discussion and analysis of
the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles in the U.S. (US GAAP).
A critical accounting policy is
defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex
judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates generally
require management to make assumptions about matters that are highly uncertain at the time of the estimate; and if different estimates or judgments
were used, the use of these estimates or judgments would have a material effect on our financial condition or results of operations.
The estimates and judgments we
make that affect the reported amount of assets, liabilities, revenues and expenses are based on historical experience and on various other factors,
which ESW believes to be reasonable in the circumstances under which they are made. Actual results may differ from these estimates under different
assumptions or conditions. We consider accounting policies related to revenue recognition, the valuation of inventories, research and development and
accounting for the value of long-lived assets and intangible assets to be critical accounting policies.
Basis of
Consolidation
The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries, ESW America, ESW Technologies, ESW Canada and BBL. All inter-company
transactions and balances have been eliminated on consolidation. Amounts in the consolidated financial statements are expressed in U.S.
dollars.
Estimates
The preparation of consolidated
financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense
during the reported period. Actual results could differ from those estimates. Significant estimates include amounts for impairment of property plant
and equipment, intangible assets, share based compensation, inventory, redeemable class A special shares, convertible debentures, valuation of
warrants, accrued liabilities and accounts receivable exposures.
Concentration of Credit
Risk
Our cash balances are maintained
in various banks in Canada and the U.S. Deposits held in banks in the U.S. 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 dollar 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: We perform on-going credit evaluations of our customers financial condition and generally do not require
collateral from our customers. Three of our customers accounted for 21%, 19%, and 13%, respectively, of our revenue in the fiscal year 2010 and 48%,
21%, and 13%, respectively, of its accounts receivable as of December 31, 2010. Three of our customers accounted for 45%, 20%, and 9%, respectively, of
our revenue in the fiscal year 2009 and 27%, 11%, and 25%, respectively, of our accounts receivable as of December 31, 2009.
As at December 31, 2010 and March
31, 2011, we believe that the allowance for uncollectible accounts sufficiently covers any credit risk related to past due accounts receivable
balances.
Allowance for Doubtful
Accounts
We extend unsecured credit to our
customers in the ordinary course of business but mitigate 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 managements assessment of the credit history with the customer
and current
48
relationships with them. On this basis management has determined that an allowance for doubtful accounts of $70,028 and $6,637 was appropriate as at December 31, 2010 and 2009, respectively.
Inventory
Inventory is stated at the lower
of cost or market determined using the first-in first-out method. Inventory is periodically reviewed for use and obsolescence, and adjusted as
necessary. Inventory consists of raw materials, work in progress and finished goods.
Property, Plant and Equipment
Under Construction
We capitalize 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. An impairment loss would be recognized when
the carrying amount of an asset exceeds the estimated discounted cash flow used in determining the fair value of the asset. We conducted a test for
impairment as of December 31, 2010 and 2009, and found no impairment.
Internal-Use
Software
We capitalize costs related to
computer software obtained or developed for internal use. Software obtained for internal use is an enterprise-level business and finance software that
we are customizing to meet specific operational needs. Costs incurred in the development phase are capitalized and amortized over the useful life of
the internal use software, which is generally from three to five years. Capitalized internal-use software development costs for a project which is not
yet complete is included as Internal-use Software under Development in the consolidated balance sheet. Capitalization of such costs ceases at the point
at which the project is substantially complete and ready for its intended purpose. Costs capitalized during for the years ended December 31, 2010 and
2009 were $126,340 and $0, respectively.
Patents and
Trademarks
Patents and trademarks consist
primarily of the costs incurred to acquire them from an independent third party. Accounting Standards Codification (ASC) Topic 350 requires
intangible assets with a finite life be tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (or asset
group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated discounted cash flow
used in determining the fair value of the asset. We conducted a test for impairment as of December 31, 2010 and 2009 and found no
impairment.
Patents and trademarks are being
amortized on a straight-line basis over their estimated life of ten years. Amortization expense for the year ended December 31, 2010 and 2009 was
$213,212 and $212,792 respectively.
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 us and must be estimated using assumptions
developed by us. We disclose 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. We use 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, notes payable to related party, bank loan, redeemable Class A special
shares and capital lease obligation approximate
49
fair value because of the short-term nature of these items. Per ASC Topic 820 framework these are considered Level 2 inputs where estimates are unobservable by market participants outside of us and must be estimated using assumptions developed by us.
The advance share subscription
was classified as a liability and periodically marked to market until October 14, 2010 (see Note 10 to the consolidated financial statements for the
year ended December 31, 2010). The fair value of the advance share subscription obligation was determined by the cash settlement value at the end of
each period based on the closing price of the Companys common stock and might be adversely affected by a change in the price of our common stock.
Per ASC Topic 820 framework this was considered a Level 1 input.
The exchange feature liability is
classified as a liability and periodically marked to market. The fair value of the exchange feature liability is determined by the cash settlement
value at the end of each period based on the closing price of our common stock and might be adversely affected by a change in the price of our common
stock. Per FAS 157 framework these are considered a Level 1 input.
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, we manage exposure through our normal operating and financing activities.
Revenue
Recognition
We derive revenue primarily from
the sale of our catalytic products. In accordance with ASC Topic 605, revenue is recognized when persuasive evidence of an arrangement exists, delivery
has occurred, the amount is fixed or determinable, risk of ownership has passed to the customer and collection is reasonably assured.
We also derive revenue (less than
1.5% in 2010 and 3.0% in 2009 of total revenue) from providing air testing and environmental certification services. Revenues from these services are
recognized upon performance.
Research and
Development
We are engaged in research and
development work. Research and development costs, are charged as operating expense as incurred. Any grant money received for research and development
work is used to offset these expenditures. For the years ended December 31, 2010 and 2009, we expensed $783,944 and $930,548 net of grant revenues,
respectively, towards research and development costs. The expense excluding grant revenues used to offset research and development costs for the years
ended December 31, 2010 and 2009 amounted to $927,319 and $1,099,301. In 2010 and 2009, grant money amounted to $143,375 and $168,753,
respectively.
Comprehensive
Income
ASC Topic 830 establishes
standards for reporting and display of comprehensive income and its components. As of December 31, 2010 and 2009, accumulated other comprehensive
income is reported as a component of stockholders equity (deficit). Other comprehensive income includes only foreign currency translation
adjustments.
Product
Warranties
We provide 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. We estimate warranty
costs using standard quantitative measures based on industry warranty claim experience and evaluation of specific customer warranty issues. We
currently record warranty costs as 2% of revenue. As of December 31, 2010 and 2009, $102,793 and $40,290, respectively, was accrued against warranty
provision and included in accrued liabilities. For the years ended December 31, 2010 and 2009, the total warranty, service, service travel and
installation costs included in cost of sales was $224,766 and $38,209, respectively.
Segmented
Reporting
ASC Topic 280 changed the way
public companies report information about segments of their business in their quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major
customers.
We also derive revenue (less than
1.5% in 2010 and 3.0% in 2009 of total revenue) from providing air testing and environmental certification services. For the years ended December 31,
2010 and 2009, all revenues were
50
generated from the U.S. As of December 31, 2010 and 2009, $1,182,263 and $1,662,243, respectively, of property, plant and equipment is located at the air testing facility in Pennsylvania and all remaining long lived assets are located in Concord, Ontario.
Recently Adopted Accounting
Pronouncements
In January 2010, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU or Update) No. 2010-06, Improving
Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 improves disclosures originally required under SFAS No. 157. ASU
2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and
settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2009, and for interim periods within those years. The adoption of the guidance did not have a material effect on our consolidated
condensed financial position, results of operations, cash flows or related disclosures.
In December 2009, the FASB issued
ASU 2009-16, Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets (ASU 2009-16). ASU 2009-16 amends the
accounting for transfers of financials assets and will require more information about transfers of financial assets, including securitizations, and
where entities have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 is effective at the start of a reporting
entitys first fiscal year beginning after November 15, 2009, with early adoption not permitted. The adoption of the guidance did not have a
material effect on our consolidated condensed financial position, results of operations, cash flows or related disclosures.
In October 2009, the FASB issued
ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing (ASU 2009-15).
ASU 2009-15 amends the accounting and reporting guidance for debt (and certain preferred stock) with specific conversion features or other options. ASU
2009-15 is effective for fiscal years beginning on or after December 15, 2009. The adoption of the guidance did not have a material effect on our
consolidated condensed financial position, results of operations, cash flows or related disclosures.
In August 2010, the FASB issued
ASU No. 2010-22, Accounting for Various Topics Technical Corrections to SEC Paragraphs this update amends various SEC paragraphs based on
external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics. The adoption of this ASU had no effect
on our consolidated condensed financial statements.
In August 2010, the FASB issued
ASU No. 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This updates various SEC paragraphs pursuant to the issuance
of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The adoption of this ASU had
no effect on our consolidated condensed financial statements.
In April 2010, the FASB issued
ASU No. 2010-17, Revenue Recognition Milestone Method. The objective of this Update is to provide guidance on defining a milestone and
determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The amendments in
this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after
June 15, 2010. The adoption of this ASU had no effect on our consolidated condensed financial statements.
In April 2010, the FASB issued
ASU No. 2010-013, Compensation Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades a consensus of the FASB Emerging Issues Task Force. ASU 2010-13 addresses the
classification of an employee share-based award with an exercise price denominated in the currency of a market in which the underlying equity security
trades. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The
adoption of this ASU had no effect on our consolidated condensed financial statements.
In October 2009, the FASB issued
ASU No. 2009-13, Multiple Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force (ASU 2009-13)
(codified within ASC Topic 605). ASU 2009-
51
13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of this ASU had no effect on our consolidated condensed financial statements.
Foreign Currency Transactions
The results of operations and the
financial position of our operations in Canada is principally measured in Canadian currency and translated into U.S. dollars. The future effects of
foreign currency fluctuations between U.S. dollars and Canadian dollars will be somewhat mitigated by the fact that certain expenses will be generally
incurred in the same currency in which revenues will be generated. The future reported income of our Canadian subsidiary would be higher or lower
depending on a weakening or strengthening of the U.S. dollar against the Canadian dollar. During the first quarter of 2011, we experienced a net loss
on foreign exchange due the fluctuation of the U.S. dollar against the Canadian dollar.
A portion of our assets are based
in our foreign operations and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each period. Accordingly,
our consolidated investment will fluctuate depending upon the weakening or strengthening of the Canadian dollar against the U.S.
dollar.
Adjustments resulting from our
foreign subsidiaries financial statements are included as a component of other comprehensive income within stockholders equity/(deficit) because
the functional currency of subsidiaries is not the U.S. dollar.
52
BUSINESS
General
We were formed in 1987 in the
State of Florida as BBC Stock Market, Inc. (BBC), a development stage enterprise. We subsequently changed our name to Environmental
Solutions Worldwide, Inc.
We are engaged through our wholly
owned subsidiaries in the design, development, manufacturing and sale of environmental technologies and emission testing service. We are 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. We also offer engine and after treatment emissions verification testing and certification
services.
The ESW Group trade
name is being used to identify our potential participation in business opportunities outside our traditional focus of engine emissions
controls.
We operate through three wholly
owned subsidiaries:
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ESW America Inc. (a Delaware corporation) is our technical, research and development division. ESW America houses our engine emissions testing laboratory and certification services known under the trade name Air Testing Services (ATS) recognized by the Environmental Protection Agency (EPA), California Air Resources Board (CARB) and Mine Safety and Health Administration (MSHA) as capable of performing engine emissions verification test protocols. ESW Americas capabilities include certification and verification of internal combustion and compression engines ranging from 5 to 600 horsepower as well as vehicle chassis testing capabilities up to 1000 horsepower. ESW America is a fully compliant ISO 9001:2008 certified manufacturing and laboratory testing facility. |
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ESW Canada Inc. (an Ontario corporation) serves as a fabrication and substrate manufacturing facility, as well as houses ESW Groups sales division, managing all sales and marketing as well as the research and development activities for our catalytic product lines. ESW Canada is a fully compliant ISO 9001:2008 certified manufacturing facility. |
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ESW Technologies Inc. (a Delaware corporation) holds our intellectual property and/or rights to the same. |
We are a developer of diesel
emissions technology solutions, advancing emissions reduction technology by commercializing leading edge proprietary catalytic emission conversion,
control and support products and technologies. Our key technologies and products are detailed below and are believed to be responsive to more stringent
global emissions regulations being implemented. Among the key products are our Therma Cat, Xtrm Cat and Clean Cat diesel emissions
control technologies. We also manufacture a line of military technologies including the Stlth Cat and Scat-IR-Shield exhaust shielding
technology currently employed on US Marine Light Armored Vehicles.
We are currently focused on the
retrofit opportunities available in North America. We have successfully expanded coverage of the North American market by growing our distributor
network from 18 distributors in 2009 to 36 by year end 2010. Our current distributor base allows us to position our technologies in key markets
spanning from California to New York. We continue to focus on growing our share of wallet within our existing distributor base, as well as
expanding our distributor network across North America, and we will opportunistically expand into markets outside of North America if deemed to be
financially accretive in the short term.
Industry Trends
Emissions regulations for mobile
diesel engines in the major markets of North America, Europe and Asia have continued to tighten and are now 40% to 90% lower than previous regulations.
Regulations in effect in the U.S., Europe and in Asia are expected to reduce the emissions level for new mobile diesel engines from 85% to 99% of the
levels mandated in the mid-1980s. While much of the regulatory pressure and resulting action from engine manufacturers has focused on reducing
emissions from new engines, there is increasing focus and concern over pollution from existing diesel engines, many of which have 20- to 30-year life
cycles. The EPA has estimated that in the U.S. alone there are approximately 11 million diesel powered vehicles which need to be retrofitted over
the
53
next ten years. Our future performance and growth at the present time is directly related to this trend within the global market.
In the U.S., the EPA, CARB and
MSHA continue to place great emphasis on compliance with emission reduction standards. The identification of diesel particulate matter (PM)
as a toxic air contaminant in 1998 led the CARB to adopt the Risk Reduction Plan to Reduce Particulate Matter Emissions from Diesel-fueled Engines and
Vehicles (Plan) in September 2000.
The cost of meeting emission
regulations, retrofit and replacement projects in the U.S. is estimated to be approximately $7.0 billion dollars as published in the National Clean
Diesel Campaign Fact Sheet (Source EPAs National Clean Diesel Campaign Fact Sheet). CARB estimates retrofits and engine replacements for
approximately 420,000 trucks and buses registered in California as well as those transiting California roadways from other states and countries. As of
today, sixteen U.S. states have committed to voluntarily adopt Californias stricter regulations to control greenhouse gas
emissions.
Over the last five years, the EPA
has brought forward a number of very successful innovative programs all designed to reduce emissions from diesel fleets. In conjunction with state and
local governments, public interest groups and industry partners, the EPA has established a goal of reducing emissions from the over 11 million diesel
engines in the existing fleets by 2014. The EPA offers numerous programs in order to provide technical and financial assistance to stakeholders
interested in reducing their fleets emissions effectively and efficiently.
The Diesel Emissions Reduction
Program (known as DERA) was created under the Energy Policy Act of 2005. This gave the EPA new grant and loan authority for promoting
diesel emission reductions and authorized appropriations to the EPA of up to $200 million per year for fiscal years 2007 through 2011. In addition,
$300 million was appropriated under the American Reinvestment and Recovery Act of 2009 and $120 million was appropriated for 2009-2010. In January
2011, the U.S. government successfully reauthorized the DERA for five more years. This will continue the legislations important environmental and
economic benefits for the U.S. Passage of the DERA reauthorization will play a major role in the U.S.s effort to expand clean air initiatives. In
its first five years, DERA has proven to be one of the nations most successful clean air programs. In addition, DERA has provided an average of
$20 worth of environmental and health benefits for every $1 spent.
The EPA and CARB programs are
accelerating the activities toward creation of active markets for diesel emissions reduction technologies and products in the U.S. These markets
include retrofit applications in on- and off-road segments, as well as for stationary power generation and marine and rail applications. Thus, the
market for diesel emissions reduction technologies and products is still emerging. We expect growing demand for diesel emissions reduction technologies
and products for the diesel engine market, owners of existing fleets of diesel-powered vehicles, and expanding requirements from the off-road, marine
and railroad sectors. It is an essential requirement of the U.S. retrofit market that emissions control products and systems are verified under the EPA
and/or CARB protocols to qualify for credits within the EPA and/or CARB programs. Funding for these emissions control products and systems is generally
limited to those products and technologies that have already been verified. ESW has CARB Level III + product verifications which provide an advantage
in attracting customers with access to governmental funding for retrofit programs.
Business Strategy
Our focus is to be a leading
player in the environmental emissions market by providing leading-edge catalyst technology as well as best-in-class engine and vehicle emissions
testing services. Our strategy is centered on identifying and deploying resources against our sweet-spot products, where we have identified
our core competencies and differentiation in the marketplace. Our core geography focus is North America, and we will opportunistically explore business
development opportunities in other markets if accretive in the short term. By focusing financial, human and intellectual capital on our core
competencies and markets, we are targeting profitable growth in the short term and value creation for our shareholders over the long
term.
We believe that we can improve
and maintain profitability and grow our business by pursuing the following strategy:
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focus on delivering controlled and profitable growth to our shareholders; |
54
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center our sales strategy around identified sweet-spots that will allow manufacturing efficiency gains and optimized resource allocation; |
|
educate the end customers about the technology and ensure realistic delivery timeline expectations; |
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enhance scheduling and customer service functions and importance; |
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locate recurring revenue opportunities and focus sales efforts on such opportunities; |
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work with vendors to optimize our material buys and lead times; and |
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constantly review operations, processes and products under a continuous improvement/performance-based culture. |
Principal Products and Their Markets
Our woven stainless steel wire
mesh catalytic converter substrate forms the basis of our product lines. This key component can be produced in almost any size and shape. The wire mesh
substrate creates a turbulent environment, which increases catalytic activity, and when manufactured for diesel applications, is designed to serve as a
partial filter of PM, an important factor in diesel emission control. Our manufacturing process and chemical wash coat formula is
proprietary.
XTRM CAT is an innovative
proprietary diesel oxidation catalyst designed for Electro Motive Diesel (EMD) turbocharged and roots blown engine systems. The outstanding durability
and flexible characteristics enable the Xtrm Cat to perform within the extreme operating conditions of locomotive and marine two stroke diesel
engine applications. The XTRM CAT is in the process of being verified / certified with the US EPA or CARB. Xtrm Cat provides significant
reductions of PM, hydro carbons (HC), and carbon monoxide (CO), which may allow EMD engines to be rebuilt to the stringent EPA
standards of today and to meet the evolving standards of the future.
THERMA CAT Active Diesel
Particulate Filter is an advanced Level III+ technology that provides the flexibility and pre-retrofit usability that makes the Therma Cat a
seamless retrofit device for its end users. Other competing retrofit technologies either limit the vehicles use or require driver interaction and
limit the vehicles availability during regular or multi-shift operations. These competing solutions increase costs in manpower and vehicle
management that add to the retrofit devices initial purchase price. The Therma Cat is designed to address these issues with the introduction of
an exothermic based (flameless technology) that utilizes the vehicles existing fuel supply to supplement and raise the exhaust heat so that the
Diesel Particulate Filter can regenerate and continue normal operations. The system operates in the background, transparent to the vehicle operator and
does not impact the vehicles normal operations. We took comprehensive steps to ensure the safe operation of the Therma Cat that included
meeting Federal Motor Vehicle Safety Standards 301S for fuel system integrity for School Buses through school bus crash tests that ensures the
integrity of the fuel system incorporated in the Therma Cat system. We also completed a 1,000 hour vibration test that simulated a typical
100,000 mile life cycle on rural roads. Our Therma Cat Active Level III+ catalyst system has obtained CARB verification for a variety of on- and
off-road engine applications.
CLEAN CAT XP is proven to
be effective in achieving significant reductions in particulate matter emissions, while simultaneously reducing CO and HC. The unit is designed to be
installed as a muffler replacement after the turbocharger. The unit has broad engine coverage on four-stroke diesel engines for on-road applications
with engine horsepower ranges of 150-600 hp and meet EPA Level II emissions requirements. The Clean Cat XP is designed to be maintenance free,
does not require ash cleaning and is designed to be taken apart in event of engine malfunction. We are in the process of certifying/verifying this
product.
STLTH CAT unit construction
incorporates our proprietary catalyzed wire mesh substrate integrated into an advanced sound abatement system. The units were specifically engineered
to decrease military vehicles and equipments overall tactical signature by reducing the diesel engines black smoke (soot), eye and throat
irritating noxious diesel engine emissions, temperature and sound. The Stlth Cat is currently employed on US Military vehicles.
SCAT-IR-SHIELD is an
innovative technology and operates in combination with our proprietary Stlth Cat. The complete system is engineered to reduce the overall
heat/infrared, sound and exhaust signature of tactical military vehicles and equipment.
55
AIR TESTING SERVICES
(ATS) is ESW Americas Emissions and Durability Testing Facility. ATS performs engine emissions verification test protocols according
to established EPA, CARB and MSHA standards, while providing vehicle and engine manufacturers with a wide range engine and chassis dynamometer-based
durability testing. ATS has capabilities for providing testing protocols with a broad range of fuels, including diesel, gasoline, and alternative
fuels. ATS Engine Dynamometer-based Durability Testing protocols can also help develop custom accelerated aging test schedules for emissions control
technologies, or support customer-designed tests for component stress. A full range of services is offered including emissions testing, compilation and
submission of applications, final issuance of the certifications, production line, and audit testing. ATS offers customers complete testing and
validation services that includes complete project management and verification management.
Our objective is the development
and commercialization of technologies to reduce the overall emissions from diesel applications. Central to the emissions reduction market is the
certification, verification and registration process established by regulatory bodies in the U.S. The industry is substantially driven by higher
emissions reductions targets set by Federal and state-level regulations, which led us to focus on the development of the Therma Cat Level III
Active Diesel Particulate Filter for on/off-road, medium and heavy duty diesel engines and the Xtrm Cat Diesel Oxidation Catalyst for marine and
rail applications. We achieved the Therma Cat Level III Active Diesel Particulate Filter development through verifications from CARB with product
development and testing conducted at ESWs Air Testing Services division.
Our target markets include the
following seven areas regulated in North America by EPA, CARB and other state and local standards:
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on-road vehicle sector generally comprised of on-road trucks and school buses employed with private and municipal fleets; |
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off-road engine/vehicle sector defined as construction equipment, tractors, power generators, irrigation pumps, stationary power and others; |
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marine sector comprising of solutions for workboat applications such as tows, ferries, dredges, tugs, and yachts, to generator sets on blue water vessels; |
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rail sector comprising of solutions for line haul and switching, as well as passenger rail locomotive and head end power systems; |
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mining industry, including all equipment and vehicles operating in and around a mine; |
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military sector, including catalyst products and support technologies; and |
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engine and vehicle emissions testing services. |
Distribution
We distribute our catalyst
technologies through:
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a comprehensive network of established independent distributors that actively service the retrofit market; |
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strategic partnerships that provide a unique competitive advantage into specific markets; and |
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direct sales leveraging our sales personnel, local trade magazines and trade shows to complement distribution of our products into key markets. |
Within the ATS business, we are
currently focused on a direct sales program targeting Original Equipment Manufacturers (OEMs) and other companies demanding engine and
vehicle emissions testing services.
Competition
We sell into a competitive market
focused on providing retrofit solutions for diesel powered engines, with the number of competitors varying by market segment. We compete primarily on
the basis of technology, performance, price, quality, reliability, distribution, customer service, and support. Our competitors include companies that
have deeper financial, technological, manufacturing and personnel resources. Other than other Level III+, marine and
56
rail products that are available in the marketplace, we face competition from substitute products that offer lower emissions reduction benefits but are also more competitively priced and are deemed by the ultimate users as acceptable alternatives to our products and services.
Our direct competitors in the
North American on-road, off-road, and mining markets include Engine Control Systems, Donaldson, DCL International, Huss and Cleaire.
Our marine and rail products
compete in the engine rebuild sector with low oil consumption kits provided by manufacturers such as EMD Marine and other DOC technology providers such
as Miratech.
ESW America faces competition
from established emissions and durability testing facilities such as South West Research Institute and TRC Inc. and smaller facilities such as
Olson-Eco Logic and California Environmental Engineering.
We believe that we can address
the competitive landscape within the catalyst emissions market by providing:
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Unique Substrate Technology Our proprietary wire mesh substrate is very flexible in design, size, performance and overall product configuration. The high mechanical and thermally durable wire mesh technology is suitable for Diesel Oxidation Catalyst applications. The technology is cost effective and can be applied to almost any application. Traditional ceramic or metal based flow-through type technologies are typically less efficient, larger in size, and are only available in pre-configured sizes and designs. |
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Leading edge products that are designed to have operational and technical advantages over the competition and are priced aggressively in the market. The Therma Cat is an example of a product that offers technical and operational advantages over competing products. |
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Solution driven services We do not only offer an emission control technology, but also provide a variety of tailored engineering solutions, extensive on-site and remote installation training programs, as well as project management services. |
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Air Testing Services ESW Americas CARB and EPA recognized facility provides us with the unique ability to develop and verify new catalyst technologies developed by us. ESW America allows us to quickly react to changing regulatory requirements, as well as offer the trusted emissions results to us and external clients that comply with strict CARB and EPA testing standards. |
ESW America differentiates itself
from the competition in the air and durability testing market by continually updating its testing facilities and equipment in response to changing
regulatory mandates and vehicle technology. ATS also provides a broad set of capabilities for advanced research, engineering and testing for various
aftermarket products and new technologies. In addition, ESW America is one of a small number of CARB and EPA recognized testing facilities located on
the east coast of the U.S., which provides a logistical advantage for clients focused on this geographical coverage.
Raw Materials
The primary raw materials used to
manufacture our catalyst products include, among others, stainless steel, stainless steel wire, stainless steel tubing, precious metals such as
platinum and palladium, particulate filters and other electronic and mechanical components. In 2010, we built up inventories of raw materials that are
subject to long lead times.
Overall, raw steel, steel mesh,
particulate filters and precious metal coated components accounted for the most significant component of our raw materials costs in 2010. We do
spot-buys of steel products from suppliers to meet customer demand. We are exposed to fluctuating raw material prices, and we are particularly exposed
to certain precious metal such as platinum which has had a run-up in prices in 2010. We seek to offset raw material price fluctuations on our result of
operations by passing through certain price increases, negotiating volume discounts from raw material suppliers; purchasing high-value inventory
components based on committed orders; scrapping and selling steel cut-offs at the highest possible price; and implementing continuous cost reduction
programs. We do not currently pursue a financial hedging strategy for any of our raw materials; however, this approach could be reviewed in the future
subject to precious metals pricing volatility. Our results of operations could be adversely
57
affected if steel and precious metal prices increase substantially, unless we are successful in passing along these price increases to customers or otherwise offset these in material and/or operating costs.
Other raw materials or components
purchased by us include electronic components, tools, fasteners, other steel and components for the Level III plus Therma Cat product, as well as
a variety of custom alloy materials and chemicals, all of which are available from numerous suppliers. For Air Testing Services, key raw
materials include fuels, rollers and other consumables.
Customers
Our customers consist of
established distributors focused in the emissions space. We recorded sales from 30 distributors in 2010 as compared to 26 customers in fiscal year
2009. Three distributor/customers accounted for 21%, 19%, and 13% of revenues in 2010. In 2009, one customer accounted for 45% and two other customers
accounted for 20% and 9% of our revenue.
We will continue to establish
long-term relationships with new customers and foster greater opportunities with existing distributors. The loss of, or major reduction in business
from, one or more of the major distributors could have a material adverse effect on our liquidity, financial position, or results of
operations.
Patent and Trademarks
We develop new technologies or
further the development of existing technologies through internal research and development. Where necessary, we will seek access to third-party patents
and/or licenses to develop new products and services aimed at the emissions and air testing markets.
Through our wholly owned
subsidiary, ESW Technologies, we hold both Canadian and U.S. patents and pending applications covering the catalytic converter and related technology.
Our issued and pending patents are important to us and we will pursue our legal rights to the fullest extent of the law to ensure non-infringement of
our established patents. However, there can be no assurance that these patents, combined with pending patent applications or existing or future trade
secret protections that we pursue, will survive legal challenge or provide meaningful levels of protection.
Additionally, we possess certain
registered, pending and common law trademarks. We consider the goodwill associated with the trademarks to be an important part of developing product
identity.
Product Certification
Our customers have acquired,
where necessary, engine certifications and catalyst verifications using our products from such authorities as the EPA, CARB, MSHA and ETV Canada for
gasoline and diesel products. We were the first catalytic substrate manufacturer and catalyst coating company in North America to verify a metallic
wire mesh substrate based catalytic converter system as a gasoline retrofit replacement devices. We were the first catalytic substrate manufacturer and
catalyst coating company in the world to verify a metallic wire mesh substrate based catalytic converter system as a passive stand alone Level II
diesel retrofit replacement device. This verification status was removed by CARB effective January 2009 in light of EPAs 2009 regulated nitrogen
dioxide (NO2) limits.
CARB has established three
primary technology levels for diesel catalyst verifications:
|
LEVEL I: PM reduction greater than 25% |
|
LEVEL II: PM reduction greater than 50% |
|
LEVEL III: PM reduction greater than 85% |
Effective January 1, 2009, the
EPA has established a NO2 limit for diesel retrofit technologies verified under the EPAs National Clean Diesel Campaign (NCDC)
Retrofit Technology Verification Program. The EPA implemented a NO2 increase limit that is harmonized with the requirements for retrofit technologies
by CARB. This requirement limits the increase in NO2 emissions associated with retrofit technologies to levels no greater than 20% above baseline
engine levels.
58
We have completed an extensive
research and development program to upgrade our existing Level II diesel retrofit replacement device to meet the aforementioned new regulations. We are
pursuing the verification of a Level II device through EPA or CARB. We have also completed the development for Level I technologies; however, at the
present time we have decided not to pursue the verification of this technology.
In 2009, our Therma Cat
Active Level III Plus catalyst system was verified by CARB for a variety of on-road and off-road engine applications (PM reduction greater than 85%).
The Therma Cat filter system is a combined technology comprised of a chemically coated wire mesh substrate and Diesel Particulate Filter (DPF)
combined with an electronically controlled external fuel injection component. The Therma Cat regeneration process is an electronically controlled
exothermic reaction and occurs automatically during normal vehicle operation, transparent to the operator.
In October 2008, our Xtrm
Cat product designed for Marine, 2-stroke, Tier 0 and Tier 1, turbocharged EMD 645 and 710 models was listed as an emerging technology on the
EPAs Emerging Technology List. In October 2009, the Emerging Technology listing was extended for an additional year. In October 2010, this
listing expired. The Xtrm Cat product is ready for certification/verification, and we intend to complete this process in 2011.
Our products are generally sold
according to appropriate government application regulations; however, we do not necessarily need government approval to sell our products into
unregulated markets.
Warranty Matters
We may face an inherent business
risk of exposure to product liability and warranty claims in the event that our products fail to perform as expected. We cannot assure you that we will
not experience any material warranty or product liability losses in the future or that we will not incur significant costs to defend such claims. In
addition, if any of the products are or are alleged to be defective, we may be required to participate in a recall involving such products. Each of our
customers has its own policy regarding product recalls and other product liability actions relating to its suppliers. CARB verified products require us
to provide specific warranties and warranty reporting on products depending upon engine applications. A successful claim brought against us or a
requirement to participate in a product recall may have a material adverse effect on our business.
Our Therma Cat Active Level
III Plus on-road catalyst system which has been verified as a Level III technology is typically required to meet CARB limited warranty standard of 5
years or 100,000 miles or 5 years or 150,000 miles, or 2 years unlimited miles depending on engine application.
Our Therma Cat Active Level
III Plus off-road catalyst system which has been verified as a Level III technology is typically required to meet CARB limited warranty standard of 5
years or 4,200 hours.
To date, we have not had any
major product warranty recalls.
Manufacture and Testing Services
We have made capital investments
in manufacturing capability to support our products. Our substrate manufacturing plant located in Concord, Ontario, Canada enables us to control the
complete fabrication and manufacturing process of catalyzed substrates and catalytic converter systems. Catalyzed substrates are the integral part of
all catalytic converter systems sold worldwide. This facility has the capability to design, develop and manufacture complete catalytic converter
systems based on specific customer requirements.
We have made significant capital
investments in our Tech Center based in Montgomeryville, Pennsylvania, where our emission testing laboratories and testing capabilities are located.
The 40,200 square foot facility houses a state-of-the-art emissions testing lab that is recognized as capable of performing engine emissions
verification test protocols by the EPA, CARB and MSHA. ATS incorporates eight dedicated engine and vehicle dynamometer test cells.
ATSs capabilities
include:
|
engine dynamometer capacity from 5hp to 600hp, including both transient and steady state testing; |
|
chassis dynamometer testing, including light duty (up to 10,000lbs) and medium/heavy duty (up to 50,000lbs); |
59
|
full flow Constant Volume Sampling emission measurement system capability across all test cells; |
|
all emission systems have dual Nitrogen Oxide Chemiluminescence detector and non-methane hydrocarbon measurement capability; |
|
engine dynamometer test cells comply with 40 Code of Federal Regulations (CFR) Part 60, 86, 89, 90, 92, 1042, 1048 and CARB testing protocols; and |
|
Test Cells are currently in transition to 40 CFR Part 1065. |
Our manufacturing and testing
facilities are subject to continuous investment to ensure best-in-class capabilities to meet the challenges of a dynamic marketplace, as well as the
need for greater efficiencies, to improve quality systems, and to meet the demands placed by changing regulations.
Research and Development
Research and development costs
amounted to $ 783,944 in 2010 and $930,548 in 2009. We aggressively pursue testing as well as research and development for new products to serve
potential customers and meet new regulations that are regularly being imposed on the industry. Through proprietary methods for improving our catalyzed
substrates, there are prospects for the development of innovative applications outside of our current verified product line. We continue to spend
further resources on new research and development projects.
Environmental Matters
We are presently engaged in a
business that does not generate significant hazardous waste. Our facilities may have tanks for storage of diesel fuel and other petroleum products that
are subject to laws regulating such storage tanks. Federal, state, and local provisions relating to the protection of the environment have not had, and
are not expected to have, a material adverse effect on our liquidity, financial position, and results of operations. However, like all manufacturers,
if a release of hazardous substances occurs, we may be held liable for the contamination, and the amount of such liability could be material. While we
devote resources designed to maintaining compliance with these requirements, there can be no assurance that we operate at all times in complete
compliance with all such requirements.
Employees
We and our subsidiaries presently
employ 53 full-time employees. We do not have any collective bargaining agreements and consider our relationship with our employees to be
good.
Properties
We do not own real property.
Through our subsidiary, ESW Canada, we lease our executive, sales and marketing offices as well as our production center which totals approximately
50,000 square feet located at 335 Connie Crescent, Concord, Ontario, Canada. The lease expires September 30, 2015. Additionally, our wholly owned
subsidiary, ESW America, leases approximately 40,220 square feet at 200 Progress Drive, Montgomery Township, Pennsylvania. The leasehold space houses
our research and development facilities. The lease expires February 28, 2013.
Legal Proceedings
From time to time, we may be
involved in a variety of claims, suits, investigations and proceedings arising from the ordinary course of our business, breach of contract claims,
labor and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and their results
cannot be predicted with certainty, we believe that the resolution of current pending matters will not have a material adverse effect on our business,
consolidated financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on us because of
legal costs, diversion of management resources and other factors. In addition, it is possible that an unfavorable resolution of one or more such
proceedings could in the future materially and adversely affect our financial position, results of operations or cash flows in a particular
period.
60
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
ON ACCOUNTING AND FINANCIAL DISCLOSURE
In 2010, there were no changes or
disagreements.
Effective May 15, 2009, we
dismissed the firm of Deloitte & Touche LLP (Deloitte) who was previously engaged as our principal auditor. Deloittes audit
report on our consolidated financial statements for the fiscal year ended December 31, 2008 and December 31, 2007, did not contain any adverse opinion
or disclaimer of opinion, and was not qualified or modified as to audit scope or accounting principles, except that the aforementioned report for the
year ended December 31, 2008 included was modified for an uncertainty relating to our ability to continue as a going concern. The decision to dismiss
Deloitte was approved by our audit committee and board of directors.
Effective May 15, 2009, we, upon
approval of our audit committee and board of directors, elected to retain the firm of MSCM LLP (MSCM) as our principal independent
accountants. During the two most recent fiscal years prior to May 15, 2009 and through May 15, 2009, we did not consult with MSCM regarding either (i)
the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered
on our financial statements, and neither a written report nor oral advice was provided that was an important factor considered by us in reaching a
decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement, as that term is
defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K.
MANAGEMENT
Certain information concerning
our directors and executive officers is set forth in the following table and in the paragraphs following. Information regarding each such
directors and executive officers ownership of our voting securities appears under Securities Ownership of Certain Beneficial Owners
and Management below.
FISCAL YEAR 2010
Name |
Position |
Date Elected/ Appointed |
Footnote |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Elbert O.
Hand |
Chairman |
January 2010 |
(1) |
|||||||||||
David J.
Johnson |
Director, President and Chief Executive Officer |
September 2000 |
(2) |
|||||||||||
Nitin
Amersey |
Director |
January 2003 |
||||||||||||
Michael F.
Albanese |
Director |
February 2006 |
(3) |
|||||||||||
John D.
Dunlap III |
Director |
February 2007 |
||||||||||||
Bengt G.
Odner |
Director |
September 2000 |
(4) |
|||||||||||
Joey
Schwartz |
Director |
June 2005 |
(5) |
|||||||||||
Peter
Bloch |
Director |
November 2010 |
(6) |
|||||||||||
Mark
Yung |
Director |
December 17, 2010 |
||||||||||||
Stefan
Boekamp |
Vice President Of Operations |
February 2008 |
(7) |
|||||||||||
Praveen
Nair |
Chief Accounting Officer |
February 2008 |
(1) |
Mr. Elbert O. Hand voluntarily resigned from our board of directors on February 7, 2011. |
(2) |
Mr. David J. Johnson resigned as our President and Chief Executive Officer as well as all of our subsidiaries wherein he served as an executive officer on March 9, 2011. Additionally, Mr. Johnson resigned from our board of directors as well from the board of directors of each of our wholly owned subsidiaries wherein he served. Mr. Johnson resigned without any disputes or disagreements with us or any of our subsidiaries. |
(3) |
Mr. Michael F. Albanese was not nominated and did not stand for re-election as a director effective October 14, 2010. Mr. Albanese had no disputes or disagreements with us. |
(4) |
Mr. Bengt G. Odner resigned from our board of directors on December 17, 2010. |
(5) |
Mr. Joey Schwartz was not nominated and did not stand for re-election as a director effective October 14, 2010. Mr. Schwartz had no disputes or disagreements with us. |
(6) |
Mr. Peter Bloch voluntarily resigned from our board of directors on March 4, 2011. Mr. Bloch had no disputes or disagreements with us. |
61
(7) |
Mr. Stefan Boekamp resigned on mutually agreeable terms from his position as Vice President of Operations on March 11, 2011. Mr. Boekamp resigned without any disputes or disagreements with us or any of our subsidiaries. |
Name |
Current Executive Officers and Board Position |
Date Elected/ Appointed |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Mark
Yung |
Executive Chairman |
February 7, 2011 |
||||||||
Nitin
Amersey |
Director |
January 2003 |
||||||||
John D.
Dunlap III |
Director |
February 2007 |
||||||||
John J
Suydam |
Director |
January 25, 2011 |
||||||||
John J
Hannan |
Director |
January 25, 2011 |
||||||||
Benjamin
Black |
Director |
January 25, 2011 |
||||||||
Joshua
Black |
Director |
January 25, 2011 |
||||||||
Zohar
Loshitzer |
Director |
January 25, 2011 |
||||||||
Frank
Haas |
Chief Technology Officer and Chief Regulatory Officer |
March 9, 2011 |
||||||||
Praveen
Nair |
Chief Financial Officer |
March 9, 2011 |
||||||||
Virendra
Kumar |
Vice President of Operations |
March 9, 2011 |
Set forth below is information
relating to the business experience of each of the directors and executive officers of the Company.
ELBERT O. HAND, age 70, has
extensive experience in corporate management. Mr. Hand became President of Hartmarx Corporation in 1985 and Chairman and Chief Executive Officer from
1992 through 2004 and thereafter retired as Chairman and remained as a director though 2009. Mr. Hand has also served on the Main Board of Austin Reed
PLC, London from 1993 to 2002 and currently serves on the Board of Arthur J. Gallagher Inc. and has been a director from 2002 through the present. Mr.
Hand also serves on the advisory board of Terlato Wines International and is a board member of the Savannah Music Festival, Savannah Georgia and
Chicagos Music of the Baroque Chorus and Orchestra of which he was Chairman from 1995 to 2004. Mr. Hand attended The Kellog School of
Managements Executive Development Program at Northwestern University and received a bachelors degree from Hamilton College, Clinton, New
York State. Effective January 25, 2010, ESWs Board of Directors elected Elbert O. Hand to serve as a member of the Board of Directors and
appointed Mr. Hand to serve as Chairman. Mr. Hand voluntarily resigned from ESWs Board on February 7, 2011.
DAVID J. JOHNSON, age 49, has 28
years of experience in the automotive industry in various aspects of advanced engineering, systems development, manufacturing of components, and as an
entrepreneur. Mr. Johnson served as the Companys Chief Operating Officer from August 2000 through November 2001 and was elected to the Board of
Directors in September 2000. In addition to serving as a director of the Company, Mr. Johnson has served as Senior Vice President of Sales and
Marketing from November 2001 until May 2004 and served as acting Chief Financial Officer from December 2004 through May 2005. Mr. Johnson was appointed
as the Interim Chief Executive Officer and President on May 1, 2004 and was subsequently appointed President and Chief Executive Officer in June 2005.
Mr. Johnson attended Tollgate Tech. Secondary, Mohawk College, Devry Institute of Technologies and is an active member of the Society of Automotive
Engineers (SAE). Effective March 8, 2011, the Company and David J. Johnson, entered into an Employment Separation and General Release Agreement (the
Agreement), whereby Mr. Johnson resigned as President and Chief Executive Officer of the Company as well as all of its subsidiaries wherein
he served as an executive officer. Additionally, Mr. Johnson resigned from the Companys Board of Directors as well from the Board of Directors of
each of the Companys wholly owned subsidiaries wherein he served. Mr. Johnson resigned without any disputes or disagreements with the Company or
any of its subsidiaries.
NITIN M. AMERSEY, age 59, has
over 36 years of experience in international trade, marketing and corporate management. Mr. Amersey was elected as a director of ESW and has served as
a member of the board since January 2003. Mr. Amersey was appointed Interim Chairman of the Board in May 2004 and subsequently was appointed Chairman
of the Board in December 2004 and served as Chairman on ESWs board through to January 2010. In addition to his service as a board member of ESW,
Mr. Amersey has been Chairman of Scothalls Limited, a private trading firm since 1978. Mr. Amersey has also served as President of Circletex Corp., a
financial consulting management firm since 2001, has been the Managing Member in Amersey Investments, LLC, a financial consulting
62
management firm since 2006, and has served as chairman of Midas Touch Global Media Corp from 2005 to the present. He is also Chairman of Hudson Engineering Industries Pvt. Ltd. and of Trueskill Technologies Pvt. Ltd., private companies domiciled in India. He is a director and Chief Financial Officer of the Trim Holding Group, director and Chief Executive Officer of New World Brands, Inc., and director and Chief Executive Officer of Azaz Capital Corp., formerly ABC Acquisition Corp. Mr. Amersey served as director and Chief Executive Officer of ABC Acquisition Corp. 1502 from June 2010 to February 2011. From 2003 to 2006 Mr. Amersey was Chairman of RMD Entertainment Group and also served during the same period as chairman of Wide E-Convergence Technology America Corp. Mr. Amersey is also the owner of Langford Business Services LLC. Mr. Amersey has a Masters of Business Administration Degree from the University of Rochester, Rochester, New York, and a Bachelor of Science in Business from Miami University, Oxford, Ohio. He graduated from Miami University as a member of Phi Beta Kappa and Phi Kappa Phi. He is the sole member manager of Amersey Investments LLC. Mr. Amersey also holds a Certificate of Director Education from the NACD Corporate Directors Institute. Mr. Amersey continues to serve on ESWs board.
MICHAEL F. ALBANESE, age 57, has
over 34 years of financial experience including roles as Chief Financial Officer and Chief Operating Officer. Mr. Albanese was president of Cost
Reduction Solutions, a CPA consulting firm providing services to both private and public companies as well as to the banking industry. Mr. Albanese
received a Bachelors degree in Accounting and is a licensed CPA practicing in New Jersey. He is a member of the AICPA and NJSCPA, The Garden
State Credit Association and is a registered accountant with the SECs Public Company Accounting Oversight Board (PCAOB). Mr. Albanese was not
nominated and did not stand for re-election as a director effective October 14, 2010. Mr. Albanese had no disputes or disagreements with the
Company.
JOHN DUNLAP, III, 52, served as
Chairman of the Board of Directors of the California Air Resources Board from 1994 to 1999. In this post, Mr. Dunlap promoted advanced technological
solutions to achieve air quality and public health protection gains. During his tenure as Chairman, Mr. Dunlap oversaw the development and
implementation of the most far-reaching air quality regulations in the world aimed at fuels, engines and over 200 consumer products. Prior to Mr.
Dunlaps tenure at CARB, he served as the Chief Deputy Director of the California Department of Toxics Substances Control where his
responsibilities included crafting the states technology advancement program, serving as the lead administration official in securing
congressional and U.S. Department of Defence/Executive Branch support and funding for military base closure environmental clean-up and in creating a
network of ombudsman staff to assist the regulated businesses in demystifying the regulatory process. In addition, Mr. Dunlap spent more than a decade
at the South Coast Air Quality Management District in a host of regulatory, public affairs and advisory positions where he distinguished himself as the
principal liaison with the business and regulatory community. Mr. Dunlap is currently the owner of a California-based advocacy and consulting firm
called the Dunlap Group. He has served on the Board of Directors of ESW since 2007. Mr. Dunlap has a BA degree in Political Science and Business
from the University of Redlands (California) and a Masters degree in Public Policy from Claremont Graduate University (California). Mr. Dunlap
continues to serve on ESWs board.
BENGT G. ODNER, age 58, has
served as a director since September 2000. He served as the Companys Chairman from September 2000 through October 2002. Mr. Odner has also served
as our Chief Executive Officer from August 1999 through September 2000 and as Interim Chief Executive Officer from February 2002 to July 2002. Mr.
Odner was a director of Crystal Fund Ltd., a Bermuda mutual fund, and was a director of Crystal Fund Managers, Ltd. from 1996 until January 2003. From
1990 through 1995, Mr. Odner was the Chairman of Altus Nord AB, a property holding company specializing in Scandinavian properties and a wholly owned
subsidiary of Credit Lyonais Bank Paris. Mr. Odner holds a masters degree in Business Administration from Babson College. Mr. Odner resigned from
ESWs Board on December 17, 2010.
JOEY SCHWARTZ, age 49, has over
26 years of experience in financial management, business strategy development and marketing. During various periods from February 2001 to September
2004, Mr. Schwartz served in various consulting positions involving organizational development, corporate compliance, legal affairs and finance for ESW
and its wholly owned subsidiary ESW Canada Inc. In May 2005 he was appointed as Chief Financial Officer (CFO) and served as CFO through February 2008.
He served as a consultant to the Company on special projects and provided advice on compliance, due diligence, regulatory and business matters from
February 2008 through to December 2008. Prior to his association with the Company, Mr. Schwartz consulted for several companies in different industries
including Identicam Systems Canada Ltd., which was acquired under the
63
GE Infrastructure security group of companies. He was President of Empereau Manufacturing, for over 18 years, a manufacturing company supplying products to the commercial specification and construction industry as well as government procurement. He is currently president of JMC Emerald Corp. a consulting company. Mr. Schwartz graduated on the deans honour roll from York University where he received a Bachelor of Arts Degree in Economics and Mathematics. Mr. Schwartz was not nominated and did not stand for re-election as a Director effective October 14, 2010. Mr. Schwartz had no disputes or disagreements with the Company.
PETER BLOCH, age 52, is the
co-founder and partner of Guarden Capital, a private company which invests in clean technology companies and assists their management with strategy and
planning. From 2008 to 2009, Mr. Bloch served as Chief Financial Officer of Just Energy a gas and electricity marketing income trust which is listed on
the TSX. From 2005 to 2008, Mr. Bloch was also a co-founder and served as a Partner of Tribute Pharmaceuticals, a specialty pharmaceutical company
engaged in the acquisition, licensing and management of mature prescription pharmaceutical products in the United States and Canada. From 2000 to 2005,
he served as Chief Financial Officer, Vice President Finance and Administration of Gennum Corporation, an international semiconductor company listed on
the Toronto Stock Exchange. Mr. Bloch holds a Bachelors of Commerce degree with Honours from the University of Cape Town, South Africa and is a
Chartered Accountant in South Africa and Canada. Mr. Bloch voluntarily resigned from ESWs Board on March 4, 2011. Mr. Bloch had no disputes or
disagreements with the Company.
MARK YUNG, age 37, is a Senior
Investment Executive at Orchard Capital, an investment firm located in Los Angeles, California. Mr. Yung currently acts as Executive Chairman of ESW
and as a board member of Polymer Plainfield. Prior to joining Orchard, Mr. Yung was a Senior Vice President in the Corporate Strategy and Merger and
Acquisitions groups of Citigroup and ABN AMRO. Prior to his corporate strategy roles, Mr. Yung was an investment professional at JPMorgan Partners
(JPMP). At JPMP, Mr. Yung focused on venture capital, growth equity and buyout transactions in Latin America and acted as board member for
various emerging companies in the region. Mr. Yung holds a B.A. from Cornell University and a M.B.A. from INSEAD. Effective February 10, 2011, Mr. Mark
Yung was elected to serve as Executive Chairman of the Companys Board of Directors. Mr. Yung has been serving as an elected member of the Board
of Directors of the Company since December 17, 2010. Mr. Mark Yung is also employed by Orchard Capital Corporation, which is controlled by Mr. Richard
Ressler. Affiliated entities of Orchard Capital Corporation as well as Mr. Richard Ressler are shareholders of the Company.
STEFAN BOEKAMP, age 62, joined
the Company in July 2005 as the Plant Manager of the Companys wholly owned subsidiary, ESW Canada Inc. In February 2008 he was appointed as the
Companys Vice President of Operations. Prior to joining the Company, Mr. Boekamp ran several machine building companies in Europe engaged in
tooling and specialized equipment design and building between 1971 and 1983. From 1983 to 1992 he served as a General Manager and Vice President of
Operations for Magna International. He was the President and Chief Executive Officer of Evermore Automation, an industrial magnet and automated
equipment manufacturer between 1992 and 2005. Mr. Boekamp has a Masters Degree in Tool and Die Making, equivalent to a Professional Engineer Degree and
a Masters in Business Administration from Handwerskammer Ostwetfalen-Lippe Zu Bielefeld, Bielefeld, Germany. Mr. Boekamp resigned on mutually agreeable
terms from his position as Vice President of Operations of the Company on March 11, 2011. Mr. Boekamp resigned without any disputes or disagreements
with the Company or any of its subsidiaries.
PRAVEEN NAIR, age 35, was
appointed Chief Accounting Officer in February 2008. He joined the Company in May 2005 and served in the position of Assistant to the Chief Financial
Officer supporting the Companys Chief Financial Officer in day-to-day operations. In May 2006 he was promoted to Controller for the
Companys wholly owned subsidiaries, ESW America Inc. and ESW Canada Inc. Prior to joining the Company, Mr. Nair was with e-Serve International
Ltd, a Citigroup company from December 2000 through January 2005 where he served as a Deputy Manager in the Business Development and Migrations Unit
and subsequently as Manager and Senior Manager. He was responsible for feasibility studies and regionalizing operations from countries in Europe, North
America and Africa into processing centers in Mumbai and Chennai in India. Mr. Nair has a Bachelors Degree in Commerce with specialization in
Accounting and a Masters Degree in Finance from Faculty of Management Studies, College of Materials Management, Jabalpur, India. Effective March 9,
2011 Mr. Nair was promoted to the position of Chief Financial Officer of the Company.
64
New Board and Executive Officer Appointments as at March
31, 2011:
ZOHAR LOSHITZER, age 53, Chief
Executive Officer of Presbia an ophthalmic-device firm. Mr. Loshitzer possesses a varied background guiding commercialization of emerging technologies
in fields including aerospace, telecommunications and medical devices. Mr. Loshitzer has held leadership positions in several portfolio companies
affiliated to Orchard Capital, including Presbia. Previously, Mr. Loshitzer served as the President, CEO and founder of Universal Telecom Services
(UTS), which provides high-quality, competitively priced voice and data telecommunications solutions to emerging markets. Mr. Loshitzer oversaw the
companys operations and its critical relationships with key foreign entities, mainly in the Indochina region. He is one of the founders of J2
Global Communications (NASDAQ: JCOM), and a co-founder and former managing director of Life Alert Emergency Response, Inc., currently serves as a
managing director of Orchard Telecom, Inc., and has served as a board member to MAI Systems Corporation, an AMEX-listed company and j2 Global
communications (NASDAQ: JCOM) from 19982001 . Earlier in his career, Mr. Loshitzer worked in the aerospace industry at the R&D lab of
Precision Instruments, a division of IAI (Israel Aircraft Industries). Mr. Loshitzer focuses on helping grow companies from start-ups to global
enterprises. Mr. Loshitzer holds a degree in Electrical & Electronic Engineering from Ort Syngalowski College in Israel.
JOSHUA BLACK, age 24, is employed
by the Leveraged Finance Group within the Investment Banking Division at Goldman, Sachs & Co. From 2008 to 2010, he was employed in the Financial
Institutions Group within the Investment Banking Division also at Goldman, Sachs & Co. He graduated cum laude and with departmental distinction
from Princeton University in 2008 with a major in Religion.
JOHN J SUYDAM, age 51, Mr. Suydam
joined Apollo Investment Corporation in 2006 and serves as the Chief Legal and Administrative Officer at the firm. From 2002 through 2006, Mr. Suydam
was a partner at OMelveny & Myers, where he served as head of Mergers & Acquisitions and co-head of the Corporate Department. Prior to
that, Mr. Suydam served as Chairman of the law firm OSullivan, LLP which specialized in representing private equity investors. Mr. Suydam serves
on the Board of the Big Apple Circus and is a member of Mount Sinai Hospital Department of Medicine Advisory Board . Mr. Suydam received his JD from
New York University in 1985 and graduated magna cum laude with a BA in history from the State University of New York at Albany.
JOHN J HANNAN, age 58, is
Chairman of the Board of Directors of Apollo Investment Corporation, a public investment company. He served as Chief Executive Officer of Apollo
Investment Corporation from 2006 to 2008. Mr. Hannan, a senior partner of Apollo Management, L.P., co-founded Apollo Management, L.P. in 1990. He
received a BBA from Adelphi University and an MBA from the Harvard Business School.
BENJAMIN BLACK, age 26, is a 2013
joint degree candidate for a Juris Doctor/Master of Business Administration from Harvard University. From 2007 to 2009, he was employed in the
Technology, Media & Telecoms Group within the Investment Banking Division at Goldman, Sachs & Co. He graduated cum laude from the University of
Pennsylvania in 2007 with a major in History.
FRANK HAAS, age 47, was appointed
the Companys Chief Technology Officer and Chief Regulatory Officer. Mr. Haas has been the Vice President of Special Projects for the Company
since 2007. He joined the Company in 2001 and served in several capacities, such as technical Sales Engineer and Director of Sales. Prior to joining
the Company Mr. Haas was employed by Nett Technologies and Husky Injection Moulding, where he served in the roles of technical Sales and Project
Engineer. Mr. Haas holds a Bachelors degree in Mechanical Engineering with specialization in Production Engineering from the University of Applied
Sciences in Cologne, Germany.
VIRENDRA KUMAR, age 36, was
appointed Vice President of Operations of the Company. Mr. Kumar has been General Manager of ESW America, Inc. (ESWA) since 2010 and is
responsible for the overall operations related to Air Testing Services. Prior to joining ESWA in 2009, Mr. Kumar was employed by Cummins Inc. as an
Emission Operations Leader from 2004 through 2009, prior to that by Escort JCB as a design and production engineer, and by the Indian Institute of
Technology Delhi as a project manager. Mr. Kumar holds a Masters degree in Mechanical Engineering from the Indian Institute of Technology Delhi and a
Bachelors degree in Mechanical Engineering from the University of Rajasthan. Mr. Kumar was also a PhD candidate at University of California,
Riverside.
65
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth
the compensation for each of the last two fiscal years earned by the Chief Executive Officer and each of the most highly compensated executive officers
(the Named Executives).
SUMMARY COMPENSATION TABLE
Name/ Principal Position |
Year |
Salary |
Bonus |
Stock Awards |
Option Awards (6) |
Non-Equity Incentive Plan Compensation |
Non-Qualified Deferred Compensation Earnings |
All Other Compensation |
Total |
|||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
David J. Johnson
(1) |
2010 |
$ | 360,000 | | | $ | 62,127 | | | $ | 34,732 | $ | 456,859 | |||||||||||||||||||||||||
Director, Chief
Executive Officer And President |
2009 |
$ | 240,000 | | | | | $ | 34,998 | $ | 274,998 | |||||||||||||||||||||||||||
Stefan Boekamp
(2) |
2010 |
$ | 111,662 | | | | | $ | 8,840 | $ | 120,502 | |||||||||||||||||||||||||||
Vice President
Of Operations |
2009 |
$ | 100,709 | | | | | $ | 10,421 | $ | 111,130 | |||||||||||||||||||||||||||
Praveen Nair (3)
|
2010 |
$ | 116,516 | | | | | $ | 7,636 | $ | 124,152 | |||||||||||||||||||||||||||
Chief Accounting
Officer |
2009 |
$ | 105,088 | | | | | $ | 8,282 | $ | 113,370 | |||||||||||||||||||||||||||
EFFECTIVE MARCH
9, 2011 |
||||||||||||||||||||||||||||||||||||||
Frank Haas
(4) |
2010 |
$ | 87,387 | | | | | $ | 5,073 | $ | 92,460 | |||||||||||||||||||||||||||
Chief Technology
Officer & Chief Regulatory Officer |
2009 |
$ | 78,809 | | | | | $ | 4,998 | $ | 83,807 | |||||||||||||||||||||||||||
Virendra Kumar
(5) |
2010 |
$ | 112,000 | $ | 6,900 | $ | 118,900 | |||||||||||||||||||||||||||||||
Vice President
Of Operations |
2009 |
$ | 112,000 | $ | 6,900 | $ | 118,900 |
(1) |
Mr. David J. Johnson was paid at the annual rate of $360,000. In 2010, Mr. Johnson received $360,000 as salary, $18,358 pay in lieu of vacation, a car allowance of $12,000 per annum and standard medical and dental benefits provided by the Company totaling $4,374. Mr. Johnson also received 600,000 stock options. The options vest over a period of three years with an exercise price of $0.65 (fair market value of the Companys common stock as of the date of grant) with expiry five years from the date of award. In 2009 Mr. Johnson received $240,000 as salary and fees, $18,000 pay in lieu of vacation, a car allowance of $12,000 per annum and standard medical and dental benefits provided by the Company totaling $4,998. Effective March 9, 2011, the Company and David J. Johnson, entered into an Employment Separation and General Release Agreement (the Agreement), whereby Mr. Johnson resigned as President and Chief Executive Officer of the Company as well as all of its subsidiaries wherein he served as an executive officer. Mr. Johnson will receive severance payments based upon his regular salary of $360,000 per annum as prorated. The severance payments will be made on a quarterly basis for the remainder of the calendar year. Mr. Johnson will also continue to receive customary medical benefits and a car allowance of 1,000 a month for the remainder of the calendar year. |
(2) |
Mr. Stefan Boekamp was paid at the annual rate of CAD $115,000 (which translates to $111,662 in U.S. dollars for the year ended December 31, 2010). In 2010 Mr. Boekamp received $111,662 as salary, $4,466 pay in lieu of vacation, and standard medical and dental benefits provided by the Company totaling $4,374. In 2009 Mr. Boekamp received $100,709 as salary, $5,423 pay in lieu of vacation, and standard medical and dental benefits provided by the Company totaling $4,998. Effective March 11, 2011, Mr. Boekamp, resigned on mutually agreeable terms from his position as Vice President of Operations of the Company. |
(3) |
Mr. Praveen Nair was paid at the annual rate of CAD$120,000 (which translates to USD $116,516 for the year ended December 31, 2010). In 2010 Mr. Nair received $116,516 as salary, $3,262 pay in lieu of vacation, and standard medical and dental benefits provided by the Company totaling $4,374.In 2009 Mr. Nair received $105,088 as salary, $3,284 pay in lieu of vacation, and standard medical and dental benefits provided by the Company totaling $4,998. Effective March 9, 2011, Mr. Praveen Nair the Companys Chief Accounting Officer |
66
was promoted to the position of Chief Financial Officer of the Company. Mr. Nair will receive an annual salary of CAD $150,000. |
(4) |
Effective March 9, 2011, Mr. Frank Haas was appointed the Companys Chief Technology Officer and Chief Regulatory Officer. Mr. Haas will receive an annual salary of CAD $160,000 and will receive an incentive compensation for each of the first two achieved verification/certifications of certain of the Companys products within the first year of his appointment. In 2010 Frank Hass was paid at the rate of CAD $90,000 (which translates to USD $87,387 for the year ended December 31, 2010). In 2010 Mr. Haas received $87,387 as salary, $699 pay in lieu of vacation, and standard medical and dental benefits provided by the Company totaling $4,374. In 2009 Mr. Haas received $87,387 as salary, $0 pay in lieu of vacation, and standard medical and dental benefits provided by the Company totaling $4,998. |
(5) |
Effective March 9, 2011, Mr. Virendra Kumar was appointed the Companys Vice President of Operations. Mr. Kumar will receive an annual salary of $150,000. In 2010 Virendra Kumar was paid at the rate of $112,000 annually. In 2010 Mr. Kumar received $112,000 as salary and standard medical and dental benefits provided by the Company totalling $6,900. In 2009 Mr. Kumar received the following compensation, $112,000 as salary and standard medical and dental benefits provided by the Company totalling $6,000. |
(6) |
Represents the cost of the compensation expense recorded by the Company for option grants in 2010. |
Employment Agreements
In February 2007, we entered into
an employment agreement with Mr. David J. Johnson as President and Chief Executive Officer. The agreement provided, among other things, for an annual
salary of $240,000, as well as an award of 600,000 options exercisable for a term of five years at an exercise price of $0.71 per share (fair market
value of our stock as of the date of grant). The agreement also provided that, other than in connection with Mr. Johnsons employment being
terminated other than for death, disability, conviction of a felony or non-performance of duties, he will be paid the balance of his contract. The
employment agreement provided for participation in benefit plans we offer to our employees, and a car allowance of $1,000 per month. Effective May 13,
2010, our board of directors approved the recommendation of the Compensation Committee whereby the base salary for Mr. Johnson was increased to
$360,000 per annum. The increase in Mr. Johnsons salary was retroactive to January 1, 2010. On April 15, 2010, the Board of Directors granted an
aggregate award of 600,000 stock options to Mr. Johnson. The options vest over a period of three years with exercise prices of $0.65 (fair market value
of the Companys common stock as of the date of grant) with expiry of five years from the date of award.
Effective March 9, 2011, we and
David J. Johnson, entered into an Employment Separation and General Release Agreement (the Agreement), whereby Mr. Johnson resigned as
President and Chief Executive Officer. Mr. Johnson will receive a severance payments based upon his regular salary of $360,000 per annum as prorated.
The severance payments will be made on a quarterly basis for the remainder of the calendar year. Mr. Johnson will also continue to receive customary
medical benefits and a car allowance of 1,000 a month for the remainder of the calendar year.
Outstanding Equity Awards at Fiscal Year
End
The following table shows certain
information regarding the outstanding equity awards held by the Named Executives at the end of 2010.
No stock options were granted in
2009.
Name |
Number of Securities Underlying Unexercised Options (#) |
Option Exercise Price |
Date of Grant |
Option Expiry Date |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
David J.
Johnson |
600,000 700,000 150,000 |
$ 0.65 $ 0.71 $ 0.27 |
04/15/2010 02/16/2007 06/08/2003 |
02/16/2012 02/16/2012 08/06/2013 |
||||||||||||||
Stefan
Boekamp |
50,000 | $ 0.71 | 02/07/2008 | 02/06/2011 | ||||||||||||||
Praveen
Nair |
50,000 | $ 0.71 | 02/07/2008 | 02/06/2011 | ||||||||||||||
Frank
Haas |
50,000 | $ 1.00 | 02/07/2008 | 02/06/2011 | ||||||||||||||
Virendra
Kumar |
| | | |
67
Stock Option Plan
On June 23, 2005, the Company,
with shareholder approval, amended its 2002 Stock Option Plan to increase the underlying shares of common stock available under the plan to 5,000,000
shares. The 2002 Stock Option Plan is the successor plan to the 2000 Nonqualified Stock Option Plan. All stock options outstanding under the 2000
Nonqualified Stock Option Plan remain in effect according to their terms and conditions (including vesting requirements). Under the Companys 2002
Stock Option Plan, the compensation committee may grant equity incentive awards to directors, officers, employees and service providers of the Company,
in the form of incentive stock options, non-qualified stock options, and other performance-related or non-restricted stock awards. The selection of
participants in the 2002 Stock Option Plan, the determination of the award vehicles to be utilized and the number of stock options or shares subject to
an award are determined by the Company compensation committee, in its sole discretion, within the approved allocation of shares. The committee shall
determine any service requirements and/or performance requirements pertaining to any stock awards under the 2002 Stock Option Plan. The 2002 Stock
Option Plan permits the Company to provide its employees with incentive compensation opportunities which are motivational and which afford the most
favourable tax and accounting treatments to the Company. The exercise price of any option granted under the 2002 Stock Option Plan shall not be less
than the fair market value of the common stock of the Company on the date of grant.
In October 2010, the 2002 Stock
Option Plan was replaced by the 2010 Stock Incentive Plan (the Stock Incentive Plan). While previously granted options under the
Companys 2002 Stock Option Plan will remain in effect in accordance with the terms of the individual options, the 2010 Stock Incentive Plan will
replace the Companys 2002 Plan for future grants. The Stock Incentive Plan authorizes the granting of awards to employees (including officers) of
the Company and certain related companies in the form of any combination of (1) options to purchase shares of common stock, (2) stock appreciation
rights (SARs), (3) shares of restricted common stock (restricted stock), (4) shares of deferred common stock (deferred
stock), (5) bonus stock, and (6) tax-offset payments with respect to any of such awards. The Stock Incentive Plan also authorizes the granting of
awards to directors who are not employees or officers of the Company (Outside Directors) to purchase shares of common stock and related
limited SARs and tax-offset payments. The Stock Incentive Plan is administered by a committee of the Companys Board of Directors, which consists
of at least two Outside Directors. The Committee has authority to interpret the Stock Incentive Plan, adopt administrative regulations, and determine
and amend the terms of awards to employees. The Board of Directors has similar authority with respect to Outside Directors (although the Stock
Incentive Plan may also provide for certain automatic grants to Outside Directors). The aggregate number of shares of common stock which may be issued
under the Stock Incentive Plan is 5,000,000. Such shares may consist of authorized but unissued shares or treasury shares. The exercise of a SAR for
cash or for the settlement of any other award in cash will not count against this share limit. Shares subject to lapsed, forfeited or cancelled awards,
including options cancelled upon the exercise of tandem SARs for cash, will not count against this limit and can be re-granted under the Stock
Incentive Plan. If the exercise price of an option is paid in common stock or if shares are withheld from payment of an award to satisfy tax
obligations with respect to the award, such shares also will not count against the above limit. Under the 2002 Stock Option Plan, SARs, restricted
stock, deferred stock, or bonus stock can be granted with a limitation of no more than 1,500,000 shares or derivatives granted in the aggregate in any
fiscal year. No employee or Outside Director may be granted tax-offset payments with respect to more than the number of shares of common stock covered
by awards held by such employee. The Stock Incentive Plan does not limit awards which may be made under other plans of the Company.
The following table sets forth as
at December 31, 2010 securities authorized for issuance under equity compensation plans.
68
EQUITY COMPENSATION PLAN INFORMATION
(A) | (B) | (C) | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Plan Category |
Number of Securities to be Issued Upon Exercise of Outstanding Options |
Weighted-average exercise price of outstanding options |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities in column A) |
|||||||||||
2002 Stock
Option Plan (Shareholder Approved. Authorized 5,000,000 shares) |
3,600,000 | $ | 0.68 | 0 | ||||||||||
2010 Stock
Option Plan (Shareholder Approved. Authorized 5,000,000 shares) |
| | 5,000,000 |
As reflected in the aggregate
numbers above, no options were awarded under the Companys 2002 stock plan in fiscal 2009.
On April 15, 2010, the Board of
Directors granted an aggregate award of 900,000 stock options to one executive officer and 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 Companys common stock as of the date of grant) with expiry of five years
from the date of award.
Compensation of Non-Management Directors
Name of Outside Director |
Year |
Fees Earned or Paid in Cash |
Options Awards (1) $ |
Total |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Elbert O.
Hand (2) |
2010 | $ | 18,000 | $ | 31,063 | $ | 49,063 | |||||||||||
2009 | $ | | $ | | $ | | ||||||||||||
Nitin M.
Amersey |
2010 | $ | 19,000 | $ | | $ | 19,000 | |||||||||||
2009 | $ | 49,500 | $ | | $ | 49,500 | ||||||||||||
Michael F.
Albanese |
2010 | $ | 21,000 | $ | | $ | 21,000 | |||||||||||
2009 | $ | 38,500 | $ | | $ | 38,500 | ||||||||||||
John D.
Dunlap III |
2010 | $ | 15,000 | $ | | $ | 15,000 | |||||||||||
2009 | $ | 27,500 | $ | | $ | 27,500 | ||||||||||||
Bengt G.
Odner |
2010 | $ | 15,000 | $ | | $ | 15,000 | |||||||||||
2009 | $ | 27,500 | $ | | $ | 27,500 | ||||||||||||
Joey
Schwartz |
2010 | $ | 15,000 | $ | | $ | 15,000 | |||||||||||
2009 | $ | 27,500 | $ | | $ | 27,500 | ||||||||||||
Peter Bloch
(3) |
2010 | $ | | $ | | $ | | |||||||||||
2009 | $ | | $ | | $ | | ||||||||||||
Mark Yung (4)
|
2010 | $ | | $ | | $ | | |||||||||||
2009 | $ | | $ | | $ | | ||||||||||||
Zohar
Loshitzer (5) |
2010 | $ | | $ | | $ | | |||||||||||
2009 | $ | | $ | | $ | | ||||||||||||
Benjamin
Black (6) |
2010 | $ | | $ | | $ | | |||||||||||
2009 | $ | | $ | | $ | | ||||||||||||
Joshua Black
(7) |
2010 | $ | | $ | | $ | | |||||||||||
2009 | $ | | $ | | $ | | ||||||||||||
John J Hannan
(8) |
2010 | $ | | $ | | $ | | |||||||||||
2009 | $ | | $ | | $ | | ||||||||||||
John Suydam
(9) |
2010 | $ | | $ | | $ | | |||||||||||
2009 | $ | | $ | | $ | |
69
During the fiscal year 2010 and
2009, outside directors were compensated at the rate of $2,500 a month. The Chairman of the Board of Directors received an additional $2,000 per month
and the Chair of the Audit Committee received an additional $1,000 per month.
(1) |
Represents the cost of the compensation expense recorded by the Company in accordance with FAS123R (ASC 718-10-10). In 2009 no stock option awards were issued to Outside Directors. |
(2) |
Effective January 25, 2010, ESWs Board of Directors unanimously elected Elbert O. Hand to serve as a member of the Board of Directors and appointed Mr. Hand as Interim Chairman. Mr. Hand did not receive any compensation from the Company in 2009. |
(3) |
Effective November 1, 2010, ESWs Board of Directors unanimously elected Peter Bloch to serve as a member of the Board of Directors. Mr. Bloch did not receive any compensation from the Company in 2010 and 2009. |
(4) |
Effective December 17, 2010, Mark Yung was appointed to serve as a member of the Board of Directors by written action and vote of majority shareholders of ESW. Mr. Yung did not receive any compensation from the Company in 2010 and 2009. |
(5) |
Effective January 25, 2011, Zohar Loshitzer was appointed to serve as a member of the Board of Directors by written action and vote of majority shareholders of ESW. Mr. Loshitzer did not receive any compensation from the Company in 2010 and 2009. |
(6) |
Effective January 25, 2011, Benjamin Black was appointed to serve as a member of the Board of Directors by written action and vote of majority shareholders of ESW. Mr. Benjamin Black did not receive any compensation from the Company in 2010 and 2009. |
(7) |
Effective January 25, 2011, Joshua Black was appointed to serve as a member of the Board of Directors by written action and vote of majority shareholders of ESW. Mr. Joshua Black did not receive any compensation from the Company in 2010 and 2009. |
(8) |
Effective January 25, 2011, John J. Hannan was appointed to serve as a member of the Board of Directors by written action and vote of majority shareholders of ESW. Mr. Hannan did not receive any compensation from the Company in 2010 and 2009. |
(9) |
Effective January 25, 2011, John Suydam was appointed to serve as a member of the Board of Directors by written action and vote of majority shareholders of ESW. Mr. Suydam did not receive any compensation from the Company in 2010 and 2009. |
The following table shows certain
information regarding the outstanding equity awards held by the outside directors at the end of 2010.
On April 15, 2010, the Board of
Directors granted an aggregate award of 300,000 stock options Mr. Elbert O. Hand. The options vest over a period of three years with exercise prices of
$0.65 (fair market value of the Companys common stock as of the date of grant) with expiry five years from the date of award.
No stock awards or stock options
were granted to the outside directors in 2009.
Name |
Number of Options (#) Outstanding |
Option Exercise Price ($) |
Option Expiration Date |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Nitin M.
Amersey |
50,000 | $ | 0.27 | 08/06/2013 | ||||||||||
300,000 | $ | 0.71 | 02/16/2012 | |||||||||||
Michael F. Albanese |
450,000 | $ | 0.71 | 02/16/2012 | ||||||||||
John D. Dunlap III |
300,000 | $ | 0.71 | 02/16/2012 | ||||||||||
Bengt G.
Odner |
50,000 | $ | 0.27 | 08/06/2013 | ||||||||||
300,000 | $ | 0.71 | 02/16/2012 |
70
Name |
Number of Options (#) Outstanding |
Option Exercise Price ($) |
Option Expiration Date | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Joey Schwartz
(1) |
100,000 | $ | 0.71 | 02/16/2012 | ||||||||||
100,000 | $ | 1.00 | 02/08/2013 | |||||||||||
Elbert O. Hand |
300,000 | $ | 0.65 | 04/15/2015 |
(1) |
Mr. Joey Schwartzs status changed to an outside director in December 2008. As an outside director, Mr. Schwartz has not received any stock option awards. The option awards show in the table above reflect Mr. Schwartzs prior awards as an executive officer of ESW which are still effective until their expiration date. |
Compensation Committee Interlocks and Insider
Participation
During fiscal 2010, none of our
executive officers served on the board of directors or compensation committee of any other entity any of whose executive officers served on our board
of directors or Compensation Committee.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
During the year ended December
31, 2010, transactions with related parties included $6,134,024 related to conversion of convertible debentures including interest of $634,024 thereon
into common stock; $1,032,849 related to inducement on early conversion of convertible debentures; the repayment of $511,342 principal and interest on
promissory note and $144,967 for various services in addition to salaries and reimbursement of business expenses. During the year ended December 31,
2009, we paid shareholders and their affiliates $238,750 for various services, principal and interest on promissory notes and fees rendered in addition
to salaries and reimbursement of business expenses. All transactions are recorded at the exchange amounts. Any one transaction or combination
attributed to one individual or entity exceeding $120,000 on an annual basis are as follows:
Note Payable to Related Party
On December 29, 2009, we issued a
$500,000 unsecured subordinated promissory note, with interest accruing at the annual rate of 9%, to Begnt G. Odner, a shareholder who was also one of
our directors. In accordance with the terms of the note, upon our completing a financing for the gross sum of $2.0 million dollars or more, or in the
event we did not complete a financing by March 31, 2010, the note would have been payable upon demand of the holder. Effective March 31, 2010, we
repaid $500,000 principal and $11,342 in interest from the proceeds of the March 19, 2010 convertible debentures issuance.
Convertible Debenture Issued to Related
Party
On August 28, 2009, we issued the
2009 Debentures whereby we issued $1.6 million of 9% convertible debentures to six accredited investors. Begnt G. Odner, a shareholder who was also one
of our directors, participated in the 2009 Debentures offering with a principal investment of $500,000, which consisted of an exchange of a $300,000
unsecured 9% subordinated demand short term loan previously provided to us on August 11, 2009 and an additional $200,000 investment.
Effective March 25, 2010, the
holders of the 2008 Debentures and the 2009 Debenture agreed to convert all outstanding convertible debentures as per the terms of the respective
debenture agreements. The early conversion of the debentures was a condition precedent to ESW Canada entering into the Demand Credit Agreement. A total
of $5,500,000 in principal and $634,024 of accrued interest due to related parties was converted into 23,489,494 shares of restricted common stock. As
part of the agreement to convert all existing convertible debentures, we were committed to pay a premium as an inducement to convert all debentures.
The premium was payable to all converting debenture holders and was subject to a positive fairness opinion, approval by a Fairness Committee consisting
of independent directors of our board of directors and an increase in our share capital. The premium consisted of 4,375,668 shares of common stock. As
we did not have sufficient authorized shares as of the date of conversion of the debentures to fulfill the premium, the premium was recorded as an
advance share purchase agreement at a fair market value of $2,909,872 as at March 31, 2010. The agreement was without interest, subordinated to
the
71
banks position and payable in a fixed number of shares of common stock upon increase in our authorized share capital.
Up to October 14, 2010, we did
not have sufficient authorized and unissued shares to fulfill the advance share subscription. Under these conditions, FASB ASC Subtopic 815-40,
Contracts in Entitys Own Equity, precludes equity classification of this obligation. As such, the advance share subscription was classified as a
liability and periodically marked to market. The fair value of the obligation was determined to be $1,662,753 and $2,909,872 at October 14, 2010 and
March 31, 2010, respectively. The fair value of the obligation was determined by the cash settlement value at the end of each period based on the
closing price of our common stock. The decrease in fair value of this liability of $1,247,119 was recorded as a mark to market adjustment on advance
share subscription in the consolidated statement of operations and comprehensive loss. Of the total amount $784,965 (fair market value of 2,065,697
shares of common stock) was attributed to related parties.
Effective November 30, 2010, we
issued an aggregate of 4,375,668 restricted shares of common stock to thirteen prior debenture holders in connection with the early conversion of their
debentures. Of these shares of common stock, an aggregate of 2,065,697 shares were issued to Begnt Odner, who was director at the time of the issuance,
and Leon D. Black, Black Family 1997 Trust, Leon D. Black Trust UAD 11/30/92 FBO Victoria Black, Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black,
Leon D. Black Trust UAD 11/30/92 FBO Joshua Black, and Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, each of whom were shareholders of the
Company.
As of December 31, 2010,
principal and interest on total convertible debentures due to related parties was $0. As of December 31, 2009, the principal amount of convertible
debentures, net of accretion, due to Begnt Odner, who was director at the time of the issuance, and Leon D. Black, Black Family 1997 Trust, Leon D.
Black Trust UAD 11/30/92 FBO Victoria Black, Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black, Leon D. Black Trust UAD 11/30/92 FBO Joshua Black,
and Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, each of whom were shareholders of the Company, amounted to $5,428,443 with a corresponding
accrued interest of $540,128, and debt discount of $71,557.
Contracts and Agreements
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.,
our transfer agent and subscription agent for this rights offering. Mr. Amersey has no ownership equity in Bay City Transfer Agency & Registrar
Inc. nor is he an officer or a director thereof. For the years ended December 31, 2010 and 2009, we paid Bay City Transfer Agency & Registrar Inc.
$7,363 and $1,683, respectively.
For the year ended December 31,
2010, Mr. Nitin Amersey received $25,500 for consulting services to the Company. In 2009, Mr. Amersey did not provide any services to
us.
Mr. Peter Bloch, who was a
director of the Company, provided consulting services to the Company. For the year ended December 31, 2010, we paid Mr. Bloch $112,104 for consulting
services. In 2009 Mr. Bloch did not provide any services to the Company.
Services Agreement
On April 19, 2011, our board of
directors ratified a Services Agreement (the Agreement) between us and Orchard Capital Corporation (Orchard) which was approved
by our compensation committee. Under the Agreement, which is effective retroactively to January 30, 2011, Orchard will provide services that may be
mutually agreed to by and between Orchard and us, including those duties customarily performed by the Chairman of the Board and an executive officer of
the Company as well as providing advice and consultation on general corporate matters and other projects as may be assigned by our board of directors
as needed. Orchard has agreed to appoint Mark Yung, who is also employed by Orchard, as our Executive Chairman to act on Orchards behalf and
provide the services to us under the Agreement. Orchard reserves the right to replace Mr. Yung as the provider of services under the Agreement at its
sole option. The Agreement may be terminated by either party upon thirty (30) days written notice unless otherwise provided for under the Agreement.
Compensation under the agreement is the sum of $300,000 per annum plus reimbursement for out-of-pocket expenses incurred by Orchard. The
agreement
72
includes other standard terms including indemnification and limitation on liability provisions. Orchard is controlled by Richard Ressler; affiliated entities of Orchard as well as Richard Ressler own shares of the Company.
The Investment Agreement
Effective May 10, 2011, we
entered in to the Investment Agreement with the Bridge Lenders. See The Rights Offering The Investment Agreement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth,
to the best knowledge of the Company, as of June 6, 2011, certain information with respect to (1) beneficial owners of more than five percent
(5%) of the outstanding Common Stock of the Company, (2) beneficial ownership of shares of the Companys Common Stock by each director and named
executive, (3) beneficial ownership of shares of Common Stock of the Company by all directors and officers as a group.
Unless otherwise noted, all
shares are beneficially owned and the sole voting and investment power is held by the persons/entities indicated.
Calculations are based upon the
aggregate of all shares of Common Stock issued and outstanding as of June 6, 2011 in addition to shares issuable upon exercise of options
currently exercisable or becoming exercisable within 60 days and which are held by the individuals named on the table.
Name and Address of Beneficial Owner |
Total Beneficial Ownership |
(1) |
Percent of Class |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mark Yung,
Executive Chairman c/o 335 Connie Crescent Concord, ON L4K 5R2 |
0 | 0.00 | % | |||||||||||
Elbert O. Hand,
Former Chairman c/o 335 Connie Crescent Concord, ON L4K 5R2 |
500,000 | (2 | ) | 0.39 | % | |||||||||
Nitin M.
Amersey, Director c/o 335 Connie Crescent Concord, ON L4K 5R2 |
350,000 | (3 | ) | 0.27 | % | |||||||||
David J.
Johnson Former Chief Executive Officer, President and Director c/o 335 Connie Crescent Concord, ON L4K 5R2 |
1,700,000 | (4 | ) | 1.30 | % | |||||||||
Bengt G. Odner,
Former Director c/o 335 Connie Crescent Concord, ON L4K 5R2 |
25,462,900 | (5 | ) | 19.61 | % | |||||||||
Sedam Ltd 15 Rue Du Cendrier, 6TH Floor Geneva V8 1211 |
25,462,900 | (5 | ) | 19.61 | % | |||||||||
Joey Schwartz,
Former Director c/o 335 Connie Crescent Concord, ON L4K 5R2 |
210,000 | (6 | ) | 0.16 | % | |||||||||
Michael F.
Albanese, Former Director c/o 335 Connie Crescent Concord, ON L4K 5R2 |
450,000 | (7 | ) | 0.35 | % | |||||||||
John D. Dunlap,
III, Director c/o 335 Connie Crescent Concord, ON L4K 5R2 |
300,000 | (8 | ) | 0.23 | % |
73
Name and Address of Beneficial Owner |
Total Beneficial Ownership |
(1) |
Percent of Class | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Stefan
Boekamp, Former Vice President of Operations c/o 335 Connie Crescent Concord, ON L4K 5R2 |
0 | 0.00 | % | |||||||||||
Praveen Nair,
Chief Financial Officer c/o 335 Connie Crescent Concord, ON L4K 5R2 |
900 | (9 | ) | 0.00 | % | |||||||||
Zohar Loshitzer,
Director c/o 335 Connie Crescent Concord, ON L4K 5R20 |
0 | 0.00 | % | |||||||||||
Benjamin Black,
Director c/o 335 Connie Crescent Concord, ON L4K 5R2 |
0 | (10 | ) | 0.00 | % | |||||||||
Joshua Black,
Director c/o 335 Connie Crescent Concord, ON L4K 5R2 |
0 | (11 | ) | 0.00 | % | |||||||||
John J Suydam,
Director c/o 335 Connie Crescent Concord, ON L4K 5R2 |
0 | 0.00 | % | |||||||||||
John J Hannan,
Director c/o 335 Connie Crescent Concord, ON L4K 5R2 |
1,088,095 | (12 | ) | 0.83 | % | |||||||||
Frank Haas,
Chief Technology Officer and Chief Regulatory Officer c/o 335 Connie Crescent Concord, ON L4K 5R2 |
246,050 | (13 | ) | 0.19 | % | |||||||||
Virendra
Kumar, Vice President of Operations c/o 335 Connie Crescent Concord, ON L4K 5R2 |
0 | 0.00 | % | |||||||||||
John J. Hannan
as Trustee of the Black Family 1997 Trust c/o 9 West 57TH Street, Suite 4300 New York NY 10019 |
15,624,615 | (14 | ) | 12.07 | % | |||||||||
Leon D.
Black c/o 9 West 57TH Street, Suite 4300 New York NY 10019 |
6,724,211 | (15 | ) | 5.19 | % | |||||||||
John J. Hannan
as Trustee of the Leon D. Black Trust UAD 11/30/92 FBO Alexander Black c/o 9 West 57TH Street, Suite 4300 New York NY 10019 |
5,085,379 | (16 | ) | 3.93 | % | |||||||||
John J. Hannan
as Trustee of the Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black c/o 9 West 57TH Street, Suite 4300 New York NY 10019 |
5,085,379 | (17 | ) | 3.93 | % | |||||||||
John J. Hannan
as Trustee of the Leon D. Black Trust UAD 11/30/92 FBO Joshua Black c/o 9 West 57TH Street, Suite 4300 New York NY 10019 |
5,085,379 | (18 | ) | 3.93 | % |
74
Name and Address of Beneficial Owner |
Total Beneficial Ownership |
(1) |
Percent of Class | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
John J. Hannan
as Trustee of the Leon D. Black Trust UAD 11/30/92 FBO Victoria Black c/o 9 West 57TH Street, Suite 4300 New York NY 10019 |
5,085,379 | (19 | ) | 3.93 | % | |||||||||
Richard R.
Ressler C/O CIM GROUP 6922 Hollywood Boulevard Los Angeles CA 90028 |
1,088,095 | (20 | ) | 0.84 | % | |||||||||
Orchard
Investments, LLC C/O CIM GROUP 6922 Hollywood Boulevard Los Angeles CA 90028 |
2,178,842 | (21 | ) | 1.68 | % | |||||||||
All current
directors and executive officers as a group (Eleven persons) |
37,951,176 | 29.17 | % |
(1) |
On the basis of 129,463,767 shares of common stock outstanding, plus, in the case of any person deemed to own shares of common stock as a result of owning options or rights to purchase common stock exercisable within 60 days of June 6 , 2011. |
(2) |
Includes 200,000 shares of common stock. Includes options to purchase 300,000 shares of common stock at $0.65 per share, expiring April 15, 2015. |
(3) |
Includes options to purchase 50,000 shares of common stock at $0.27 per share expiring August 6, 2013, and options to purchase 300,000 shares of common stock at $0.71 per share expiring February 16, 2012. |
(4) |
Includes options to purchase 150,000 shares of common stock at $0.27 per share expiring August 6, 2013, options to purchase 700,000 shares of common stock at $0.71 per share expiring February 16, 2012, options to purchase 600,000 shares of common stock at $0.65 per share expiring April 15, 2015 and options to purchase 250,000 shares of common stock at $0.12 per share expiring September 09, 2012. |
(5) |
Mr. Bengt George Odner is a past director of ESW. The aggregate amount of common stock beneficially owned by Mr. Bengt Odner, a former director of ESW, is represented by 1,275,780 shares of common stock and 350,000 shares of common stock underlying stock options that may be exercised. In addition to the direct ownership listed herein, Mr. Odner has indirect beneficial ownership by way of Sedam Limited. Sedam Limited, a corporation organized under the laws of Cyprus, is controlled by a trust, of which Mr. Bengt Odner is the sole beneficiary. Sedam Limited includes 23,837,120 shares. |
(6) |
Includes 10,000 shares of common stock and options to purchase 100,000 shares of common stock at $0.71 per share expiring February 16, 2012, and options to purchase 100,000 shares of common stock at $1.00 per share expiring February 8, 2013. |
(7) |
Includes 450,000 options to purchase 450,000 shares of common stock at $0.71 per share expiring February 16, 2012. |
(8) |
Includes 300,000 options to purchase 300,000 shares of common stock at $0.71 per share expiring February 16, 2012. |
(9) |
Includes 900 shares of common stock. |
(10) |
Mr. Benjamin Black is a beneficiary of the Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black (the Benjamin Trust) and the Black Family 1997 Trust (the 1997 Trust). John J. Hannan is the trustee of the Benjamin Trust and the 1997 Trust and has the sole voting, investment and dispositive power with respect to the shares held by the Benjamin Trust and the 1997 Trust. Mr. Benjamin Black disclaims any beneficial ownership of the shares of common stock of the Company held by the Benjamin Trust and the 1997 Trust. |
(11) |
Mr. Joshua Black is a beneficiary of the Leon D. Black Trust UAD 11/30/92 FBO Joshua Black (the Joshua Trust) and the 1997 Trust. John J. Hannan is the trustee of the Joshua Trust and the 1997 Trust and has the sole voting, investment and dispositive power with respect to the shares held by the Joshua Trust and the 1997 |
75
Trust. Mr. Joshua Black disclaims any beneficial ownership of the shares of common stock of the Company held by the Joshua Trust and the 1997 Trust. |
(12) |
Includes 1,088,095 shares of common stock directly owned by John J. Hannan. As the trustee of each of the 1997 Trust, the Leon D. Black Trust UAD 11/30/92 FBO Alexander Black (the Alexander Trust), the Leon D. Black Trust UAD 11/30/92 FBO Victoria Black (the Victoria Trust), the Benjamin Trust and the Joshua Trust, Mr. Hannan is the beneficial owner of an additional 35,966,131 shares of common stock. |
(13) |
Includes 246,050 shares of common stock. |
(14) |
Includes 15,624,615 shares of common stock directly beneficially owned by the 1997 Trust. John J. Hannan is the trustee of the 1997 Trust and has the sole voting, investment and dispositive power with respect to the common stock shares of the Company held by the 1997 Trust. |
(15) |
Includes 6,724,211 shares of common stock directly owned by Mr. Leon Black. |
(16) |
Includes 5,085,379 shares of common stock directly beneficially owned by the Alexander Trust. John J. Hannan is the trustee of the Alexander Trust and has the sole voting, investment and dispositive power with respect to the common stock shares of the Company held by the Alexander Trust. |
(17) |
Includes 5,085,379 shares of common stock directly beneficially owned by the Benjamin Trust. John J. Hannan is the trustee of the Benjamin Trust and has the sole voting, investment and dispositive power with respect to the common stock shares of the Company held by the Benjamin Trust. |
(18) |
Includes 5,085,379 shares of common stock directly beneficially owned by the Joshua Trust. John J. Hannan is the trustee of the Joshua Trust and has the sole voting, investment and dispositive power with respect to the common stock shares of the Company held by the Joshua Trust. |
(19) |
Includes 5,085,379 shares of common stock directly beneficially owned by the Victoria Trust. John J. Hannan is the trustee of the Victoria Trust and has the sole voting, investment and dispositive power with respect to the common stock shares of the Company held by the Victoria Trust. |
(20) |
Includes 1,088,095 shares of common stock directly owned by Richard S. Ressler. Richard Ressler is the President of Orchard Capital Corporation, the Manager of Orchard Investments LLC. |
(21) |
Includes 2,178,842 shares of common stock directly owned by Orchard Investments, LLC (Orchard). |
DESCRIPTION OF COMMON STOCK
Common Stock
We have 250,000,000 shares of
common stock $0.001 par value authorized. Each holder of common stock is entitled to one vote for each share held of record on all matters submitted to
a vote of the stockholders. The holders of common stock are not entitled to cumulative voting rights with respect to the election of directors, and, as
a consequence, minority stockholders will not be able to elect directors on the basis of their votes alone. Holders of common stock are entitled to
receive ratably such dividends as may be declared by the board of directors out of funds legally available therefore.
In the event of a liquidation,
dissolution or winding up of the company, holders of our common stock would be entitled to share ratably in all assets remaining after payment of
liabilities and the satisfaction of any liquidation preference of any then outstanding series of preferred stock. Holders of common stock have no
preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable
to the common stock. All outstanding shares of common stock are fully paid and nonassessable.
As of the record date, there were
129,463,767 shares of common stock outstanding held of record by approximately 264 stockholders.
CERTAIN MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES
The following discussion is a
summary of certain material U.S. Federal income tax consequences of the rights offering to holders of our common stock. This discussion assumes that
the holders of our common stock hold such common stock as a capital asset for U.S. Federal income tax purposes. This discussion is based on the
Internal Revenue Code of 1986, as amended, Treasury Regulations promulgated thereunder, Internal Revenue Service
76
rulings and pronouncements and judicial decisions in effect on the date hereof, all of which are subject to change (possibly with retroactive effect) and to differing interpretations. The following summary does not purport to be a complete analysis of all of the potential U.S. Federal income tax considerations, applies only to holders that are United States persons and does not address all aspects of U.S. Federal income taxation that may be relevant to holders in light of their particular circumstances or to holders who may be subject to special tax treatment under the Internal Revenue Code, including, without limitation, holders who are dealers in securities or foreign currency, insurance companies, tax-exempt organizations, banks, financial institutions, broker-dealers, holders who hold our common stock as part of a hedge, straddle, conversion or other risk reduction transaction, or who acquired our common stock pursuant to the exercise of compensatory stock options or otherwise as compensation.
This summary is of a general
nature only and is not intended to constitute a complete analysis of all tax consequences relating to the receipt, exercise, disposition and expiration
of the subscription rights and the ownership and disposition of our common shares. It is not intended to constitute, and should not be construed to
constitute, legal or tax advice to any particular holder. Holders should consult their own tax advisors as to the tax consequences in their particular
circumstances.
We intend to treat the
distribution of subscription rights pursuant to the rights offering as a non-taxable transaction for U.S. Federal income tax purposes and the remaining
portion of this summary describes the U.S. Federal income tax consequences of such treatment. However, there can be no assurance that the Internal
Revenue Service will take a similar view or would agree with the tax consequences described below. We have not sought, and will not seek, an opinion of
counsel or a ruling from the Internal Revenue Service regarding the U.S. Federal income tax consequences of the rights offering or the related share
issuance. The following summary does not address the tax consequences of the rights offering or the related share issuance under foreign, state, or
local tax laws. Accordingly, each holder of our common stock should consult its tax advisor with respect to the particular tax consequences of the
rights offering and the related share issuance to such holder.
The U.S. Federal income tax
consequences to a holder of our common stock of the receipt and exercise of subscription rights under the rights offering will be as
follows:
|
A holder will not recognize taxable income for U.S. Federal income tax purposes in connection with the receipt of subscription rights in the rights offering. |
|
A holders tax basis in its subscription rights will depend on the relative fair market value of the subscription rights received by such holder and the common stock owned by such holder at the time the subscription rights are distributed. If either (i) the fair market value of the subscription rights on the date such subscription rights are distributed is equal to at least 15% of the fair market value on such date of the common stock with respect to which the subscription rights are received or (ii) the holder elects, in a statement attached to its U.S. Federal income tax return for the taxable year in which the subscription rights are received, to allocate part of its tax basis in such common stock to the subscription rights, then upon exercise of the subscription rights, the holders tax basis in the common stock will be allocated between the common stock and the subscription rights in proportion to their respective fair market values on the date the subscription rights are distributed. If the subscription rights received by a holder have a fair market value that is less than 15% of the fair market value of the common stock owned by such holder at the time the subscription rights are distributed, the holders tax basis in its subscription rights will be zero unless the holder elects to allocate its adjusted tax basis in the common stock owned by such holder in the manner described in the previous sentence. A holders tax basis in the common stock will be reduced to the extent any such tax basis is allocated to the subscription rights. |
|
A holder which allows the subscription rights received in the rights offering to expire will not recognize any gain or loss, and no portion of the tax basis in the common stock owned by such holder with respect to which such subscription rights were distributed will be allocated to the unexercised subscription rights. |
|
A holder will not recognize any gain or loss upon the exercise of the subscription rights received in the rights offering. The tax basis in the common stock acquired through exercise of the subscription rights will equal the sum of the subscription price for the common stock and the holders tax basis, if any, in the rights as described above. The holding period for the common stock acquired through exercise of the subscription |
77
rights will begin on the date the subscription rights are exercised. A gain or loss recognized upon a sale of such common stock will be a capital gain or loss if the common stock is held as a capital asset at the time of sale. Such capital gain or loss will be long-term capital gain or loss if the holding period for the common stock exceeds one year at the time of sale. |
|
If you exercise the subscription rights received in this rights offering after disposing of the shares of the common stock with respect to which the subscription rights were received, then certain aspects of the tax treatment of the exercise of the subscription rights are unclear, including (1) the allocation of tax basis between the common stock previously sold and the subscription rights, (2) the effect of such allocation on the amount and timing of gain or loss recognized with respect to the common stock previously sold, and (3) the effect of such allocation on the tax basis of common stock acquired through exercise of the subscription rights. A holder that exercises subscription rights received in this rights offering after disposing of the common stock with respect to which the subscription rights were received should consult its tax advisor. |
LEGAL MATTERS
The validity of the rights and
shares of common stock offered by this prospectus have been passed upon for us by Chepenik Trushin LLP, Miami, Florida .
EXPERTS
The financial statements and
managements assessment of the effectiveness of internal control over financial reporting (which is included in Managements Report on
Internal Control over Financial Reporting) incorporated in this prospectus by reference to the Annual Report on Form 10-K for the year ended December
31, 2010, have been so incorporated in reliance on the report of MSCM LLP, an independent registered public accounting firm, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL
INFORMATION
We file reports, proxy statements
and other information with the SEC. Information filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC
at Headquarters Office, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, Headquarters Office, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. Further information on
the operation of the SECs public reference room in Washington, D.C. can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains
a website that contains reports, proxy statements and other information about issuers, such as us, who file electronically with the SEC. The address of
that website is http://www.sec.gov.
We filed a registration statement
on Form S-1 to register with the SEC the securities offered by this prospectus. This prospectus is a part of that registration statement. As allowed by
the rules of the SEC, this prospectus does not contain all of the information you can find in our registration statement or the exhibits to the
registration statement.
Our common stock is traded on the
OTCQB under the symbol ESWW and the Frankfurt Stock Exchange under the symbol EOW.
Our website is located at
www.cleanerfuture.com. The information on our website, however, is not, and should not be deemed to be, a part of this prospectus.
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In addition, indemnification may be limited by state securities laws.
78
INDEX TO FINANCIAL STATEMENTS
Environmental
Solutions Worldwide, Inc. Annual Consolidated Financial Statements: |
||||||
Report of MSCM
LLP, Independent Registered Public Accounting Firm |
F-2 | |||||
Consolidated
Balance Sheets as of December 31, 2010 and 2009 |
F-3 | |||||
Consolidated
Statements of Operations and Comprehensive Loss for the years ended December 31, 2010 and 2009 |
F-4 | |||||
Consolidated
Statements of Changes in Stockholders Equity (Deficit) and Comprehensive Income for the years ended December 31, 2010 and 2009 |
F-5 | |||||
Consolidated
Statements of Cash Flows for the years ended December 31, 2010 and 2009 |
F-6 | |||||
Notes to
Consolidated Financial Statements |
F-7 | |||||
Interim
Unaudited Consolidated Financial Statements: |
||||||
Consolidated
Condensed Balance Sheets as of March 31, 2011 and December 31, 2010 |
F-28 | |||||
Consolidated
Condensed Statements of Operations and Comprehensive Loss for the three months ended March 31, 2011 and 2010 |
F-29 | |||||
Consolidated
Condensed Statement of Changes in Stockholders Equity (Deficit) and Comprehensive Income for the three months ended March 31, 2011
|
F-30 | |||||
Consolidated
Condensed Statements of Cash Flows for the three months ended March 31, 2011 and 2010 |
F-31 | |||||
Notes to
Consolidated Condensed Financial Statements |
F-32 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of Environmental Solutions Worldwide, Inc.
We have audited the accompanying
consolidated balance sheets of Environmental Solutions Worldwide, Inc. (the Company) as of December 31, 2010 and 2009, and the related
consolidated statements of operations and comprehensive loss, changes in stockholders equity (deficit) and comprehensive income and cash flows
for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and
2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated
financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Companys experience of negative cash flows from operations and its dependency upon future financing raise substantial doubt about
its ability to continue as a going concern. Managements plans regarding these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ MSCM LLP
Toronto, Canada
March 31, 2011
Toronto, Canada
March 31, 2011
701 Evans Avenue, 8th Floor,
Toronto, Ontario,
M9C 1A3, Canada
T (416) 626-6000
F (416) 626-8650
MSCM.CA
Toronto, Ontario,
M9C 1A3, Canada
T (416) 626-6000
F (416) 626-8650
MSCM.CA
F-2
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
December 31, 2010 |
December 31, 2009 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||
Current
Assets |
||||||||||
Cash and cash
equivalents (Note 4) |
$ | 13,328 | $ | 632,604 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $70,028 (2009 $6,637) (Note 2) |
2,279,149 | 1,118,929 | ||||||||
Inventory
(Note 5) |
4,414,518 | 1,508,414 | ||||||||
Prepaid
expenses and sundry assets |
261,176 | 213,484 | ||||||||
Total current
assets |
6,968,171 | 3,473,431 | ||||||||
Property,
plant and equipment under construction (Note 6) |
185,542 | 138,800 | ||||||||
Property,
plant and equipment, net of accumulated depreciation of $5,765,164 (2009 $4,663,281) (Note 6) |
1,931,373 | 2,687,105 | ||||||||
Internal use
software under development (Note 2) |
126,340 | | ||||||||
Patents and
trademarks, net of accumulated amortization of $2,115,091 (2009 $1,901,501) (Note 2) |
16,145 | 229,347 | ||||||||
$ | 9,227,571 | $ | 6,528,683 | |||||||
LIABILITIES
AND STOCKHOLDERS EQUITY / (DEFICIT) |
||||||||||
Current
Liabilities |
||||||||||
Bank loans
(Note 8) |
$ | 3,424,889 | $ | 713,037 | ||||||
Accounts
payable |
2,495,070 | 1,126,680 | ||||||||
Accrued
liabilities |
512,964 | 1,311,518 | ||||||||
Exchange
feature liability (Note 10 and 12) |
2,133,862 | | ||||||||
Notes payable
to related party (Note 7) |
| 500,000 | ||||||||
Customer
deposits |
29,322 | 9,857 | ||||||||
Redeemable
class A special shares (Note 9) |
453,900 | 453,900 | ||||||||
Current
portion of capital lease obligation (Note 15) |
3,552 | 8,857 | ||||||||
Total current
liabilities |
9,053,559 | 4,123,849 | ||||||||
Long-term
Liabilities |
||||||||||
Convertible
debentures, net of deferred costs of $0 (2009 $36,506) and debt discount of $0 (2009 $228,981) (Note 10) |
| 10,334,513 | ||||||||
Capital lease
obligation (Note 15) |
1,490 | 10,861 | ||||||||
Total
long-term liabilities |
1,490 | 10,345,374 | ||||||||
Total
liabilities |
9,055,049 | 14,469,223 | ||||||||
Commitments
and Contingencies (Note 15) |
||||||||||
Stockholders Equity / (Deficit) (Notes 12 and 13) |
||||||||||
Common stock,
$0.001 par value, 250,000,000 (2009 125,000,000) shares authorized; 129,463,767 shares issued and outstanding (2009 73,823,851)
|
129,463 | 73,822 | ||||||||
Additional
paid-in capital |
43,567,531 | 26,083,635 | ||||||||
Accumulated
other comprehensive income |
446,549 | 425,383 | ||||||||
Accumulated
deficit |
(43,971,021 | ) | (34,523,380 | ) | ||||||
Total
stockholders equity / (deficit) |
172,522 | (7,940,540 | ) | |||||||
$ | 9,227,571 | $ | 6,528,683 |
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31,
2010 |
2009 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Revenue |
||||||||||
Net sales
|
$ | 10,437,145 | $ | 3,075,398 | ||||||
Cost of sales
|
7,261,496 | 1,812,100 | ||||||||
Gross profit
|
3,175,649 | 1,263,298 | ||||||||
Operating
expenses |
||||||||||
Marketing,
office and general costs |
4,719,362 | 3,329,570 | ||||||||
Research and
development costs |
783,944 | 930,548 | ||||||||
Officers compensation and directors fees |
954,054 | 672,444 | ||||||||
Consulting
and professional fees |
451,345 | 215,984 | ||||||||
Foreign
exchange loss |
103,256 | 10,035 | ||||||||
Depreciation
and amortization |
837,448 | 1,123,560 | ||||||||
7,849,409 | 6,282,141 | |||||||||
Loss from
operations |
(4,673,760 | ) | (5,018,843 | ) | ||||||
Interest on
long-term debt |
(183,858 | ) | (870,632 | ) | ||||||
Amortization
of deferred costs |
(117,131 | ) | (19,912 | ) | ||||||
Long-term
debt accretion |
(768,981 | ) | (27,019 | ) | ||||||
Inducement
premium |
(2,909,872 | ) | | |||||||
Mark to
market adjustment on advance share subscription |
1,247,119 | | ||||||||
Change in
fair value of exchange feature liability |
(2,021,213 | ) | | |||||||
Interest on
notes payable to related party |
(11,342 | ) | | |||||||
Loss on
disposal of property and equipment |
(8,828 | ) | (1,404 | ) | ||||||
Interest
income |
225 | 858 | ||||||||
Net
loss |
||||||||||
Foreign
currency translation of Canadian subsidiaries |
(9,447,641 | ) | (5,936,952 | ) | ||||||
Other
comprehensive income: |
21,166 | 173,857 | ||||||||
Net
comprehensive loss |
$ | (9,426,475 | ) | $ | (5,763,095 | ) | ||||
Net loss per
share (basic and diluted) (Note 16) |
$ | (0.08 | ) | $ | (0.08 | ) | ||||
Weighted
average number of shares outstanding (basic and diluted) (Note 16) |
112,793,477 | 73,416,317 |
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIT) AND COMPREHENSIVE INCOME FOR THE YEARS ENDED
DECEMBER 31, 2010 AND 2009
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIT) AND COMPREHENSIVE INCOME FOR THE YEARS ENDED
DECEMBER 31, 2010 AND 2009
Common Stock |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares |
Amount |
Additional Paid-in Capital |
Accumulated Other Comprehensive Income |
Accumulated Deficit |
Total |
|||||||||||||||||||||
Balance,
January 1, 2009 |
72,973,851 | $ | 72,972 | $ | 25,403,485 | $ | 251,526 | $ | (28,586,428 | ) | $ | (2,858,445 | ) | |||||||||||||
Net loss
|
| | | | (5,936,952 | ) | (5,936,952 | ) | ||||||||||||||||||
Common stock
issued from exercise of options |
850,000 | 850 | 424,150 | | | 425,000 | ||||||||||||||||||||
Intrinsic value
of beneficial conversion feature of convertible debentures |
| | 256,000 | | | 256,000 | ||||||||||||||||||||
Foreign
currency translation of Canadian subsidiaries |
| | | 173,857 | | 173,857 | ||||||||||||||||||||
Balance,
January 1, 2010 |
73,823,851 | 73,822 | 26,083,635 | 425,383 | (34,523,380 | ) | (7,940,540 | ) | ||||||||||||||||||
Net loss
|
| | | | (9,447,641 | ) | (9,447,641 | ) | ||||||||||||||||||
Stock-based
compensation |
| | 93,189 | | | 93,189 | ||||||||||||||||||||
Common stock
issued from share subscription |
1,500,000 | 1,500 | 598,500 | | | 600,000 | ||||||||||||||||||||
Broker fees
related to share subscription |
| | (24,000 | ) | | | (24,000 | ) | ||||||||||||||||||
Fair value of
exchange feature liability |
| | (112,649 | ) | | | (112,649 | ) | ||||||||||||||||||
Inducement on
conversion of debentures with related party |
4,375,668 | 4,376 | 1,658,377 | | | 1,662,753 | ||||||||||||||||||||
Common stock
issued on conversion of debentures |
49,764,248 | 49,765 | 14,730,479 | | | 14,780,244 | ||||||||||||||||||||
Intrinsic value
of beneficial conversion feature of convertible debentures |
| | 540,000 | | | 540,000 | ||||||||||||||||||||
Foreign
currency translation of Canadian subsidiaries |
| | | 21,166 | | 21,166 | ||||||||||||||||||||
Balance,
December 31, 2010 |
129,463,767 | $ | 129,463 | $ | 43,567,531 | $ | 446,549 | $ | (43,971,021 | ) | $ | 172,522 |
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010
2010 |
2009 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Net loss
|
$ | (9,447,641 | ) | $ | (5,936,952 | ) | ||||
Adjustments
to reconcile net loss to net cash used in operating activities: |
||||||||||
Inducement
premium |
2,909,872 | | ||||||||
Change in
fair value of exchange feature liability |
2,021,213 | | ||||||||
Mark to
market adjustment on advance share subscription |
(1,247,119 | ) | | |||||||
Depreciation
of property, plant and equipment |
1,045,096 | 1,061,439 | ||||||||
Long-term
debt accretion |
768,981 | 27,019 | ||||||||
Amortization
of patents and trademarks |
213,212 | 212,792 | ||||||||
Write-down of
inventory |
195,293 | | ||||||||
Interest on
long-term debt |
183,858 | 870,632 | ||||||||
Amortization
of deferred costs |
117,131 | 19,912 | ||||||||
Stock-based
compensation |
93,189 | | ||||||||
Provision for
doubtful accounts |
60,855 | 6,209 | ||||||||
Loss on
disposal of property, plant and equipment |
8,828 | 1,404 | ||||||||
6,370,409 | 2,199,407 | |||||||||
Increase
(decrease) in cash flows from operating activities resulting from changes in: |
||||||||||
Accounts
receivable |
(1,195,868 | ) | (954,177 | ) | ||||||
Inventory
|
(3,066,562 | ) | (591,108 | ) | ||||||
Prepaid
expenses and sundry assets |
(14,163 | ) | 151,036 | |||||||
Accounts
payable and accrued liabilities |
1,459,220 | 780,901 | ||||||||
Customer
deposits |
19,465 | (2,683 | ) | |||||||
(2,797,908 | ) | (616,031 | ) | |||||||
Net cash used
in operating activities |
(5,875,140 | ) | (4,353,576 | ) | ||||||
Investing
activities: |
||||||||||
Proceeds from
sale of property and equipment |
703 | 951 | ||||||||
Acquisition
of property, plant and equipment |
(254,581 | ) | (225,134 | ) | ||||||
Addition to
internal use software under development |
(121,133 | ) | | |||||||
Addition to
property, plant and equipment under construction |
(39,177 | ) | 54,115 | |||||||
Increase in
patents and trademarks |
| (1,108 | ) | |||||||
Net cash used
in investing activities |
(414,188 | ) | (171,176 | ) | ||||||
Financing
activities: |
||||||||||
Proceeds from
convertible debentures placement |
3,000,000 | 1,300,000 | ||||||||
Debt issuance
cost |
(80,625 | ) | | |||||||
Proceeds from
bank loans |
3,312,254 | 846,140 | ||||||||
Repayment of
bank loan |
(723,431 | ) | (272,224 | ) | ||||||
Repayment of
notes payable to related party |
(500,000 | ) | 800,000 | |||||||
Proceeds from
issuance of common stock |
600,000 | 425,000 | ||||||||
Broker fees
related to share subscription |
(24,000 | ) | | |||||||
Repayment of
capital lease obligation |
(13,769 | ) | (12,001 | ) | ||||||
Net cash
provided by financing activities |
5,570,429 | 3,086,915 | ||||||||
Net decrease
in cash and equivalents |
(718,899 | ) | (1,437,837 | ) | ||||||
Foreign
exchange loss (gain) on foreign operations |
99,623 | (177,182 | ) | |||||||
Cash and cash
equivalents, beginning of year |
632,604 | 2,247,623 | ||||||||
Cash and cash
equivalents, end of year |
$ | 13,328 | $ | 632,604 | ||||||
Supplemental
disclosures: |
||||||||||
Cash interest
paid |
$ | 13,157 | $ | 858 | ||||||
Cash paid
(received) as income taxes |
$ | | $ | (10,838 | ) | |||||
Other
non-cash conversion of debentures and related interest |
$ | 14,780,243 | $ | |
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
NOTE 1 NATURE OF BUSINESS AND BASIS OF
PRESENTATION
Environmental Solutions
Worldwide, Inc. (the Company or ESW) through its wholly owned subsidiaries is engaged in the design, development, manufacturing
and sales of environmental technologies and testing services with its primary focus on the international on-road and off-road diesel retrofit market.
ESW currently manufactures and markets a line of catalytic emission control and enabling technologies for a number of applications.
The audited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US
GAAP), which contemplates continuation of the Company as a going concern.
The Company has sustained
recurring operating losses. As of December 31, 2010, the Company had an accumulated deficit of $43,971,021 and cash and cash equivalents of $13,328 and
was in violation of certain financial covenants with its secured lender for which a waiver was obtained (see Note 8). There is no assurance that the
Company will be successful in achieving sufficient cash flow from operations in the near future and there can be no assurance that it will either
achieve or maintain profitability in the future. As a result, there is substantial doubt regarding the Companys ability to continue as a going
concern. The Company will require additional financing to fund its continuing operations. The Company is seeking additional funds by way of equity and
debt financing. The Companys ability to continue as a going concern is dependent on obtaining additional financing and achieving and maintaining
a profitable level of operations. The outcome of these matters cannot be predicted at this time.
Effective November 9, 2010 and
December 8, 2010 the Company completed two tranches of a unit offering, each unit was offered at a price of $0.40 and is comprised of one share of the
Companys common stock and one, warrant exercisable within two years, for one share of common stock, the exercise price will be $0.55; if a
warrant is exercised between the first and second years from issuance, the exercise price will be $0.65. The Company raised gross proceeds of $600,000
and issued 1,500,000 shares of the Companys common stock and 1,500,000 warrants to purchase 1,500,000 shares of the Companys common stock.
(See Note 12 for further details).
On February 17, 2011, the Company
raised a further $3 million through the issuance of unsecured subordinated promissory notes (together the Notes) to current shareholders
and deemed affiliates of certain members of the board of directors of the Company. Proceeds of the Notes and earlier financing will be used to fund
working capital, planned capital investments and other general corporate purposes. With the proceeds of the Notes, the Company and its subsidiaries are
in compliance with covenant obligations under the Demand Credit Agreement with the Canadian Imperial Bank of Commerce (CIBC) dated March
10, 2010 for which the Company and its subsidiaries had previously obtained waivers of covenant obligations through to February 15,
2011.
The Company has also proposed
plans for a rights offering of the Companys common stock, at a price of $0.12 per share pursuant to which the Company plans to offer rights to
existing shareholders on the offering date to purchase approximately $6.5 million in shares of Common Stock, the offering is expected to raise at least
an incremental $3.5 million of cash for the Company and will also permit all Subordinated Lenders to exchange their Notes (and the other Notes paid
in-kind for the payment of interest under the Notes) for shares of Common Stock under the offering. The offering is expected to be completed by June
17, 2011.
These consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern for a reasonable period of time. All adjustments
considered necessary for fair presentation and of a normal recurring nature have been included in these consolidated financial
statements.
NOTE 2 SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF
CONSOLIDATION
The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries, ESW America Inc. (ESWA), ESW Technologies Inc.
(ESWT), ESW Canada Inc. (ESWC) and BBL Technologies Inc. (BBL). All inter-company transactions and balances have
been eliminated on consolidation. Amounts in the consolidated financial statements are expressed in US dollars.
F-7
ESTIMATES
The preparation of consolidated
financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense
during the reported period. Actual results could differ from those estimates. Significant estimates include amounts for impairment of property plant
and equipment, intangible assets, share based compensation, inventory, redeemable class A special shares, convertible debentures, valuation of
warrants, accrued liabilities and accounts receivable exposures.
CONCENTRATIONS OF CREDIT
RISK
The Companys 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 21%, 19%, and 13%, respectively, of the Companys revenue in the
fiscal year 2010 and 48%, 21%, and 13%, respectively, of its accounts receivable as of December 31, 2010. Three of its customers accounted for 45%,
20%, and 9%, respectively, of the Companys revenue in the fiscal year 2009 and 27%, 11%, and 25%, respectively, of its accounts receivable as of
December 31, 2009.
As at December 31, 2010, the
Company believes that the allowance for uncollectible accounts sufficiently covers any credit risk related to past due accounts receivable
balances.
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 managements 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 $70,028 and $6,637 was
appropriate as at December 31, 2010 and 2009, respectively.
INVENTORY
Inventory is stated at the lower
of cost or market determined using the first-in first-out method. Inventory is periodically reviewed for use and obsolescence, and adjusted as
necessary. Inventory consists of raw materials, work in progress 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. An impairment loss would be recognized when
the carrying amount of an asset exceeds the estimated discounted cash flow used in determining the fair value of the asset. ESW conducted a test for
impairment as of December 31, 2010 and 2009, and found no impairment.
F-8
INTERNAL-USE
SOFTWARE
ESW capitalizes costs related to
computer software obtained or developed for internal use. Software obtained for internal use is an enterprise-level business and finance software that
ESW is customizing to meet specific operational needs. Costs incurred in the development phase are capitalized and amortized over the useful life of
the internal use software, which is generally from three to five years. Capitalized internal-use software development costs for a project which is not
yet complete is included as Internal-use Software under Development in the consolidated balance sheet. Capitalization of such costs ceases at the point
at which the project is substantially complete and ready for its intended purpose. Costs capitalized during for the years ended December 31, 2010 and
2009 were $126,340 and $0, respectively.
PATENTS AND
TRADEMARKS
Patents and trademarks consist
primarily of the costs incurred to acquire them from an independent third party. Accounting Standards Codification (ASC) Topic 350 requires
intangible assets with a finite life be tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (or asset
group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated discounted cash flow
used in determining the fair value of the asset. ESW conducted a test for impairment as of December 31, 2010 and 2009 and found no
impairment.
Patents and trademarks are being
amortized on a straight-line basis over their estimated life of ten years. Amortization expense for the year ended December 31, 2010 and 2009 was
$213,212 and $212,792 respectively.
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, notes payable to related party, bank loan, redeemable Class A special
shares and capital lease obligation approximate fair value because of the short-term nature of these items. Per ASC Topic 820 framework these are
considered Level 2 inputs where estimates are unobservable by market participants outside of the Company and must be estimated using assumptions
developed by the Company.
The advance share subscription
was classified as a liability and periodically marked to market until October 14, 2010 (see Note 10). The fair value of the advance share subscription
obligation was determined by the cash settlement value at the end of each period based on the closing price of the Companys common stock and
might be adversely affected by a change in the price of the Companys common stock. Per ASC Topic 820 framework this was considered a Level 1
input.
The exchange feature liability is
classified as a liability and periodically marked to market. The fair value of the exchange feature liability is determined by the cash settlement
value at the end of each period based on the closing price of the Companys common stock and might be adversely affected by a change in the price
of the Companys common stock. Per FAS 157 framework these are considered a Level 1 input.
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.
F-9
REVENUE
RECOGNITION
The Company derives revenue
primarily from the sale of its catalytic products. In accordance with ASC Topic 605, revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the amount is fixed or determinable, risk of ownership has passed to the customer and collection is reasonably
assured.
The Company also derives revenue
(less than 1.5% in 2010 and 3.0% in 2009 of total revenue) from providing air testing and environmental certification services. Revenues from these
services are recognized upon performance.
LOSS PER COMMON
SHARE
Loss per common share is computed
by dividing the net loss by the weighted average number of common shares outstanding during the year. Common stock equivalents are excluded from the
computation of diluted loss per share when their effect is anti-dilutive.
Therefore diluted loss per share
has not been calculated for 2010 and 2009 (see Note 16).
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. SFAS
109 requires a company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in
a companys 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 basis of assets and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. The guidance requires the Company 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
Companys 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 ESWs income tax provision and results of operations. Note 11 to the consolidated financial statements describes the guidance
and the effects on results of operations and financial position arising from its adoption.
IMPAIRMENT OF LONG-LIVED
ASSETS
The Company follows 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. Management reviewed the related assets for impairment in the fourth quarter and found no
impairment.
RESEARCH AND
DEVELOPMENT
The Company is engaged in
research and development work. Research and development costs, are charged as operating expense of the Company as incurred. Any grant money received
for research and development work is used to offset these expenditures. For the years ended December 31, 2010 and 2009, the Company expensed $783,944
and $930,548 net of grant revenues, respectively, towards research and development costs. The expense excluding grant revenues used to offset research
and development costs for the years ended December 31, 2010 and 2009 amounted to $927,319 and $1,099,301. In 2010 and 2009, grant money amounted to
$143,375 and $168,753, respectively.
FOREIGN CURRENCY
TRANSLATION
The consolidated financial
statements have been translated into U.S. dollars in accordance with ASC Topic 830. All monetary items have been translated using the exchange rates in
effect at the balance sheet date. All
F-10
non-monetary items have been translated using the historical exchange rates at the time of transactions. Income statement amounts have been translated using the average exchange rate for the year. Translation adjustments that arise from translating the financial statements of the Companys foreign subsidiaries from local currency to U.S. dollars are recorded in other comprehensive income component of stockholders equity (deficit).
COMPREHENSIVE
INCOME
ASC Topic 830 establishes
standards for reporting and display of comprehensive income and its components. As of December 31, 2010 and 2009, accumulated other comprehensive
income is reported as a component of stockholders equity (deficit). Other comprehensive income includes only foreign currency translation
adjustments.
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 records warranty costs as 2% of revenue. As of December 31, 2010 and 2009, $102,793 and $40,290, respectively,
was accrued against warranty provision and included in accrued liabilities. For the years ended December 31, 2010 and 2009, the total warranty,
service, service travel and installation costs included in cost of sales was $224,766 and $38,209, respectively.
SEGMENTED
REPORTING
ASC Topic 280 changed the way
public companies report information about segments of their business in their quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major
customers.
The Company also derives revenue
(less than 1.5% in 2010 and 3.0% in 2009 of total revenue) from providing air testing and environmental certification services. For the years ended
December 31, 2010 and 2009, all revenues were generated from the United States. As of December 31, 2010 and 2009, $1,182,263 and $1,662,243,
respectively, of property, plant and equipment is located at the air testing facility in Pennsylvania and all remaining long lived assets are located
in Concord, Ontario.
NOTE 3 RECENTLY ISSUED ACCOUNTING
STANDARDS
RECENTLY ADOPTED ACCOUNTING
PRONOUNCEMENTS
In January 2010, the FASB issued
Accounting Standards Update (ASU or Update) No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU
2010-06) (codified within ASC Topic 820, Fair Value Measurements and Disclosures). ASU 2010-06 improves disclosures originally required under
SFAS No. 157. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2009, and for interim periods within those years. The adoption of the guidance did not have a material effect on the
Companys consolidated financial position, results of operations, cash flows or related disclosures.
In December 2009, the FASB issued
ASU 2009-16, Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets (ASU 2009-16). ASU 2009-16 amends the
accounting for transfers of financials assets and will require more information about transfers of financial assets, including securitizations, and
where entities have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 is effective at the start of a reporting
entitys first fiscal year beginning after November 15, 2009, with early adoption not permitted. The adoption of the guidance did not have a
material effect on the Companys consolidated financial position, results of operations, cash flows or related disclosures.
In October 2009, the FASB issued
ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing (ASU 2009-15).
ASU 2009-15 amends the accounting and reporting guidance for debt (and certain preferred stock) with specific conversion features or
other
F-11
options. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009. The adoption of the guidance did not have a material effect on the Companys consolidated financial position, results of operations, cash flows or related disclosures.
RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In August 2010, the FASB issued
ASU No. 2010-22, Accounting for Various Topics Technical Corrections to SEC Paragraphs this update amends various SEC paragraphs based on
external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics. The Company is assessing the potential
effect this guidance will have on its consolidated financial statements.
In August 2010, the FASB issued
ASU No. 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This updates various SEC paragraphs pursuant to the issuance
of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The Company is assessing the
potential effect this guidance will have on its consolidated financial statements.
In April 2010, the FASB issued
ASU No. 2010-17, Revenue Recognition Milestone Method. The objective of this Update is to provide guidance on defining a milestone and
determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The amendments in
this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after
June 15, 2010. Early adoption is permitted. The Company does not anticipate that the adoption of this pronouncement will have a significant effect on
its consolidated financial statements.
In April 2010, the FASB issued
ASU No. 2010-013, Compensation Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades a consensus of the FASB Emerging Issues Task Force. ASU 2010-13 addresses the
classification of an employee share-based award with an exercise price denominated in the currency of a market in which the underlying equity security
trades. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The
Company will comply with the additional disclosures required by this guidance upon its adoption in January 2011.
In October 2009, the FASB issued
ASU No. 2009-13, Multiple Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force (ASU 2009-13)
(codified within ASC Topic 605). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company is currently assessing the impact
of ASU 2009-13 on its consolidated financial position, results of operations and cash flows.
NOTE 4 CASH AND CASH EQUIVALENTS
Cash and cash equivalents include
cash and highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase. At December 31, 2010
and 2009 all of the Companys cash and cash equivalents consisted of cash.
NOTE 5 INVENTORY
Inventory consists
of:
December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
INVENTORY |
2010 |
2009 |
|||||||||
Raw
materials |
$ | 1,669,481 | $ | 844,649 | |||||||
Work-in-process |
2,737,545 | 640,286 | |||||||||
Finished
goods |
7,492 | 23,479 | |||||||||
TOTAL
|
$ | 4,414,518 | $ | 1,508,414 |
F-12
NOTE 6 PROPERTY, PLANT AND
EQUIPMENT
Property, plant and equipment
consist of the following:
December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
CLASSIFICATION |
2010 |
2009 |
|||||||||
Plant,
machinery and equipment |
$ | 5,790,507 | $ | 5,539,017 | |||||||
Office
equipment |
384,902 | 325,626 | |||||||||
Furniture
and fixtures |
461,817 | 451,281 | |||||||||
Vehicles
|
18,288 | 17,951 | |||||||||
Leasehold
improvements |
1,041,023 | 1,016,511 | |||||||||
7,696,537 | 7,350,386 | ||||||||||
Less:
accumulated depreciation |
(5,765,164 | ) | (4,663,281 | ) | |||||||
$ | 1,931,373 | $ | 2,687,105 |
December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Depreciation Expense |
2010 |
2009 |
|||||||||
Depreciation
expense included in cost of sales |
$ | 174,013 | $ | 56,436 | |||||||
Depreciation
expense included in operating expenses |
624,233 | 910,713 | |||||||||
Depreciation
expense included in research and development costs |
246,849 | 139,109 | |||||||||
Total
depreciation expense |
$ | 1,045,096 | $ | 1,106,258 |
At December 31, 2010 and 2009,
the Company had $185,542 and $138,800, respectively, of customized equipment under construction.
The office equipment above
includes $0 and $19,121 in assets under capital lease with a corresponding accumulated depreciation of $0 and $15,493 as of December 31, 2010 and 2009,
respectively.
The plant, machinery and
equipment above include $37,939 and $36,294 in assets under capital lease with a corresponding accumulated depreciation of $25,723 and $18,592 as of
December 31, 2010 and 2009, respectively.
NOTE 7 NOTE PAYABLE TO RELATED
PARTY
On December 29, 2009, the Company
issued a $500,000 unsecured subordinated promissory note to a shareholder and a member of the Companys Board of Directors with interest accruing
at the annual rate of 9%. In accordance with the terms of the note, upon the Company completing a financing for the gross sum of $2 million dollars or
more, or in the event the Company did not complete a financing by March 31, 2010, this note would have been payable upon demand of the
holder.
Effective March 31, 2010 the
Company repaid $500,000 principal and $11,342 in interest from the proceeds of the March 19, 2010 convertible debentures issuance. (see Note
10).
As of December 31, 2010,
principal and corresponding accrued interest outstanding on note payable to related party was $0 and $0, respectively. As of December 31, 2009,
principal and interest outstanding on note payable to related party was $500,000 and $0, respectively.
NOTE 8 BANK LOANS
In 2007, ESWs subsidiary,
ESWC entered into a $2.5 million revolving credit facility with Royal Bank of Canada (RBC), to finance orders on hand. Effective September
2, 2008, the agreement was amended to extend the term of the agreement through to June 30, 2009 and effective August 21, 2009, the term of the secured
commercial loan agreement with RBC was extended through to April 30, 2010. The amended arrangement provided for a revolving facility available by way
of a series of term loans of up to $750,000 to finance future production orders. The credit facility was guaranteed by the Company and its subsidiary
ESWC, through the pledge of their assets to RBC. The facility had been guaranteed to the bank under Export Development Canada (EDC)
pre-shipment financing program. Borrowings under the revolving credit agreement bore interest at 1.5% above the
F-13
banks prime rate of interest. Repayments of any loans were required no later than one year from the date of the advancement of that loan. Obligations under the revolving credit agreement were collateralized by a first-priority lien on the assets of the Company and its subsidiary ESWC, including, accounts receivable, inventory, equipment and other tangible and intangible property, including the capital stock of all direct subsidiaries.
Effective March 31, 2010, all
borrowings under the RBC facility were repaid and the facility with RBC was closed.
Effective March 31, 2010,
ESWs subsidiary, ESWC, entered into the Credit Agreement with a Canadian chartered bank, CIBC, to meet working capital requirements. The facility
has a credit limit of $4 million Canadian. Borrowings under the facility are limited to a percentage of accounts receivable plus a percentage of
inventories (capped at $1 million Canadian or 50% of the accounts receivable portion) less any prior ranking claims. The credit facility is guaranteed
by the Company and its subsidiaries, ESWC, ESWA, BBL, and ESWT, through a general security agreement over all assets to CIBC. The facility has been
guaranteed to CIBC under EDCs Export Guarantee Program. Borrowings under the credit facility bear interest at 2.25% above CIBCs prime rate
of interest. Obligations under the revolving credit agreement are collateralized by a first-priority lien on the assets of the Company and its
subsidiaries, including accounts receivable, inventory, equipment and other tangible and intangible property, including the capital stock of all direct
subsidiaries.
The terms relating to the Credit
Agreement specifically note that the Company maintain a tangible net worth of at least $4.0 million Canadian. The credit agreement contains, among
other things, covenants, representations and warranties and events of default customary for a facility of this type for the Company and its
subsidiaries. Such covenants include certain restrictions on the incurrence of additional indebtedness, liens, acquisitions and other investments,
mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other repurchases in respect of capital stock, voluntary
prepayments of certain other indebtedness, capital expenditures and transactions with affiliates, subject to certain exceptions. Under certain
conditions amounts outstanding under the credit agreements may be accelerated. Such events include failure to comply with covenants, breach of
representations or warranties in any material respect, non-payment or acceleration of other material debt, entry of material judgments not covered by
insurance, or a change of control of the Company.
On November 8, 2010, November 26,
2010, and December 23, 2010, the Companys wholly owned subsidiary, ESWC, received the first, second and third waivers, respectively, of certain
financial covenants under its Credit Agreement with CIBC. Without the waiver, the Companys subsidiary would not be in compliance with the current
ratio and effective tangible net worth covenants as set forth in the Credit Agreement. In the event the Company and its subsidiary, ESWC, fail to
comply with the terms of the waiver and meet the current ratio and effective tangible net worth covenants prior to the end of the waiver period, same
would constitute an event of default and the bank loan may need to be repaid unless a further waiver or modification to the Credit Agreement can be
obtained.
The third waiver provided by CIBC
was through January 31, 2011 and also provides for a fee payable to the lender for the extension, as well as a reduction in the maximum security margin
deficit as defined under the Credit Agreement (by either reducing borrowing or increasing the borrowing base) and an increase in the annual interest
rate to CIBCs prime rate plus 4.50% from CIBCs prime rate plus 2.25% effective January 1, 2011.
As at December 31, 2010,
$3,424,889 was owed under the credit facility to CIBC. As at December 31, 2009, $713,037 was owed under a former credit facility with
RBC.
NOTE 9 REDEEMABLE CLASS A SPECIAL
SHARES
700,000 Class A
special shares authorized, issued, and outstanding. |
453,900
(based on the historical exchange rate at the time of issuance.) |
The redeemable Class A special
shares were issued by the Companys wholly owned subsidiary, BBL, without par value, and are redeemable on demand by the holder of the shares,
which is a private Ontario Corporation, at $700,000 Canadian (which translates to $703,801 US and $660,032 US at December 31, 2010 and 2009,
respectively). As the redeemable Class A special shares were issued by the Companys wholly owned subsidiary, BBL, the maximum value upon which
the Company is liable is the net book value of BBL. As of December 31,
F-14
2010 and 2009, BBL had an accumulated deficit of $1,192,858 US ($1,845,375 Canadian) and $1,187,506 US ($1,839,864 Canadian) as of December 31, 2010 and 2009, respectively, and therefore, the holder would be unable to redeem the redeemable Class A special shares at their ascribed value.
NOTE 10 CONVERTIBLE DEBENTURES
Convertible debentures issued by
the Company are summarized as follows:
2008 Debentures |
2009 Debentures |
2010 Debentures |
Total March 31, 2010 |
Total December 31, 2009 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Face value of
convertible debenture |
$ | 9,000,000 | $ | 1,600,000 | $ | 3,000,000 | $ | 13,600,000 | $ | 10,600,000 | ||||||||||||
Less:
Beneficial conversion feature |
| (256,000 | ) | (540,000 | ) | (796,000 | ) | (256,000 | ) | |||||||||||||
Deferred
costs |
(59,738 | ) | | (80,625 | ) | (140,363 | ) | (59,738 | ) | |||||||||||||
Book value
upon issuance |
8,940,262 | 1,344,000 | 2,379,375 | 12,663,637 | 10,284,262 | |||||||||||||||||
Accretion of
the debt discount |
| 256,000 | 540,000 | 796,000 | 27,019 | |||||||||||||||||
Amortization
of deferred costs |
59,738 | | 80,625 | 140,363 | 23,232 | |||||||||||||||||
Carrying
Value |
9,000,000 | 1,600,000 | 3,000,000 | 13,600,000 | $ | 10,334,513 | ||||||||||||||||
Conversion
(March 25,2010) |
(9,000,000 | ) | (1,600,000 | ) | (3,000,000 | ) | (13,600,000 | ) | ||||||||||||||
Carrying
Value (December 31,2010) |
$ | | $ | | $ | | $ | |
Effective March
19, 2010, the Company issued $3,000,000 of its 9% convertible debentures (the 2010 Debentures) to five (5) accredited investors under Rule
506 of Regulation D of Section 4(2) of the Securities Act. The 2010 Debentures were for a term of three (3) years and were convertible into shares of
the Companys common stock at the option of the holder by dividing the principal amount of the 2010 Debenture to be converted by $0.50. The 2010
Debentures earned interest at a rate of 9% per annum payable in cash or in shares of the Companys common stock at the option of the holder. If
the holder elected to receive interest in shares of common stock, the number of shares of common stock to be issued for interest would be determined by
dividing accrued interest by $0.50. The 2010 Debentures had a mandatory conversion feature that required the holders to convert in the event a majority
of the Companys pre-existing outstanding 9% convertible debentures converted. Subject to the holders right to convert and the mandatory
conversion feature, the Company had the right to redeem the 2010 Debentures at a price equal to one hundred and ten percent (110%) multiplied by the
then outstanding principal amount plus unpaid interest to the date of redemption. Upon maturity, the debenture and interest was payable in cash or
common stock at the option of the Holder. The Company also had provided the holders of the Debentures registration rights. The 2010 Debentures
contained customary price adjustment protections.
At the time the 2010 Debentures
were issued, the Company recorded a debt discount for a beneficial conversion feature in the amount of $540,000. The debt discount being the aggregate
intrinsic value calculated as the difference between the market price of the Companys share of stock on March 19, 2010 and the conversion price
of the 2010 Debentures. The debt discount was being accreted over the three (3) year life of the debentures using the effective yield method. The
effective yield on the debentures was 16.36%.
On August 28, 2009, the Company
completed a transaction whereby it issued $1.6 million of 9% convertible debentures (the 2009 Debentures) to six (6) accredited investors.
Of the $1.6 million received by the Company, $500,000 was received from a director of the Company through the exchange of a $300,000 unsecured 9%
subordinated demand short term loan previously provided to the Company on August 11, 2009 and an additional $200,000 investment made by the director in
the offering. The 2009 Debentures were for a term of three (3) years and were convertible into shares of the Companys common stock at the option
of the holder by dividing the principal amount of the 2009 Debenture to be converted by $0.50. The 2009 Debentures earned interest at a rate of 9% per
annum payable in cash or in shares of the Companys common stock at the option of the holder. If the holder elected to receive interest in shares
of common stock, the number of shares of common stock to be issued for interest would be determined by dividing accrued interest by $0.50. Subject to
the holders right to convert, the Company had the right to redeem the 2009 Debentures at a price equal to one hundred and ten percent (110%)
multiplied by the then outstanding principal amount plus unpaid interest to the date of redemption. Upon maturity, the debenture and interest was
payable in cash or common stock at the option of the holder. The 2009 Debentures contained customary price adjustment protections.
F-15
At the time the 2009 Debentures
were issued, the Company recorded a debt discount for a beneficial conversion feature in the amount of $256,000. The debt discount being the aggregate
intrinsic value calculated as the difference between the market price of the Companys share of stock on August 28, 2009 and the conversion price
of the 2009 Debentures. The debt discount was being accreted over the three (3) year life of the debentures using the effective yield method. The
effective yield on the debentures was 15.52%.
On November 3, 2008, the Company
completed a transaction whereby it issued $6.0 million of 9% convertible debentures (the 2008 Debentures) to six accredited investors. The
2008 Debentures were for a term of three (3) years and were convertible into shares of the Companys common stock at the option of the holder at
any time six (6) months after the date of issuance of the 2008 Debentures by dividing the principal amount of the 2008 Debentures to be converted by
$0.25. The 2008 Debentures earned interest at a rate of 9% per annum payable in cash or in shares of the Companys common stock at the option of
the holder. If the holder elected to receive interest in shares of common stock, the number of shares of common stock to be issued for interest would
be determined by dividing accrued interest by $0.25. Subject to the holders right to convert, the Company had the right to redeem the 2008
Debentures at a price equal to one hundred and ten percent (110%) multiplied by the then outstanding principal amount plus unpaid interest to the date
of redemption. Upon maturity, the debenture and interest was payable in cash or common stock at the option of the holder. The Debentures contained
customary price adjustment protections. The effective yield on the 2008 Debentures was 9%.
From the proceeds of the 2008
Debentures, the Company repaid $2,200,000, the principal portion only of a previously issued Consolidated Note in the amount of $2,308,148 to a company
controlled by a trust to which a director and shareholder of the Company is the beneficiary. The debt holder agreed to have the remaining amount of
$433,923, due under the Consolidated Note, applied to a subscription of a Debenture under the November 3, 2008 offering. Concurrently, the Company
repaid a Consolidated Subordinated Note that it had previously issued to a debt holder who is a director and shareholder of the Company, in the
principal amount of $1,002,589. The debt holder agreed to have the full amount of principal and accumulated interest, in the amount of $1,158,024 due
under the Consolidated Subordinated Note, applied to a subscription of a Debenture under the offering. Additionally the Companys $1.5 million
credit facility also provided by the same debt holder, from which the Company had drawn down the sum of $1,103,000 as of November 3, 2008, was also
satisfied by way of issuance of debentures under the November 3, 2008 offering. With the agreement to settle all the notes previously issued the debt
holder subscribed to an aggregate of $2,566,077 of debentures under the offering.
Effective March 25, 2010, the
November 2008 and the August 2009 debenture holders agreed to convert all outstanding convertible debentures as per the terms of the respective
debenture agreements. The early conversion of the debentures was a condition precedent to the Companys wholly owned subsidiary, ESWC, entering
into a new credit facility with CIBC (see Note 8). A total of $10,600,000 in principal and $1,176,445 of accrued interest was converted into 43,756,653
shares of restricted common stock. The conversion of the November 2008 and the August 2009 debentures also triggered the mandatory conversion feature
on the March 19, 2010 debentures. A total of $3,000,000 in principal and $3,797 in accrued interest was converted into 6,007,595 shares of restricted
common stock. With these transactions effective March 25, 2010, the Company has $0 of convertible debentures and accrued interest on convertible
debenture.
As part of the agreement to
convert all existing convertible debentures, the Company was committed to pay a premium as an inducement to convert all debentures. The premium was
payable to all converting debenture holders and was subject to a positive fairness opinion, approval by a Fairness Committee consisting of independent
Directors of the Companys Board of Directors and an increase in the share capital of the Company. The premium consists of 4,375,668 shares of
common stock. As the Company did not have sufficient authorised shares as of the date of conversion of the debentures to fulfill the premium, the
premium had been recorded as an advance share purchase agreement at a fair market value of $2,909,872 as of March 31, 2010. The agreement is without
interest, subordinated to the banks position and payable in a fixed number of common shares (4,375,668 shares) of the Company upon increase in
the authorized share capital of the Company.
Up to October 14, 2010, the
Company did not have sufficient authorized and unissued shares to fulfill the advance share subscription. Under these conditions, FASB ASC Subtopic
815-40, Contracts in Entity Own Equity, precludes equity classification of this obligation. As such, the advance share subscription was
classified as a liability and periodically marked to market. The fair value of the obligation was determined to be $1,662,753 at October
14,
F-16
2010. The fair value of the obligation was determined by the cash settlement value at the end of each period based on the closing price of the Companys common stock. The decrease in fair value of this liability of $1,247,119 was recorded as a mark to market adjustment on advance share subscription in the consolidated statement of operations and comprehensive loss.
Effective October 14, 2010, the
Companys Board of Directors ratified certain corporate action approved by the written consent of a majority of the Companys shareholders
pursuant to a Definitive Information Statement on Schedule 14C that the Company filed with the Securities and Exchange Commission on September 3, 2010
(the Definitive Information Statement) and distributed to shareholders of record. The Board of Directors ratified an amendment to the
Companys articles of incorporation whereby the Company proceeded to file an amendment to its articles of incorporation increasing its authorized
shares of common stock from 125,000,000 to 250,000,000 shares.
Effective November 30, 2010 the
Company issued an aggregate of 4,375,668 restricted shares of common stock to thirteen (13) prior debenture holders in connection with the early
conversion of their debentures.
Included in the consolidated
financial statements of the Company at December 31, 2010 is 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. The exchange feature provides that if within twelve months from March 19, 2010, the Company enters into or
closes another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the Securities) on
terms and conditions more favourable to another purchaser, the terms and conditions of the 2010 Debentures shall be adjusted to reflect the more
favourable terms. The exchange feature was determined by the Company to be freestanding financial instrument and also to be a liability within the
scope of ASC 480 Distinguishing Liabilities from Equity since there is an inverse relationship between the stock price of the Company and the
Companys obligation. On December 31, 2010, the Company evaluated the fair value of the exchange feature based on the probability of closing
another financing by March 18, 2011 and the fair value of the number of incremental shares to be issued at a lower estimated issue price. The
probability of closing another financing by March 18, 2011 was estimated to be 100% on December 31, 2010. The fair value of the Companys common
stock is determined by the closing price on the valuation date. On December 31, 2010, an exchange feature liability of $1,680,000 is recorded for the
2010 Debentures in these consolidated financial statements (see also note 12).
As of December 31, 2010, total
convertible debentures and corresponding accrued interest amounted to $0 and $0, respectively. As of December 31, 2009, total convertible debentures
amounted to $10,334,513 net of deferred costs of $36,506 and debt discount of $228,981, with corresponding accrued interest of
$996,385.
As of December 31, 2010, the debt
discount of $768,981 and deferred cost of $117,131 were fully amortized and expensed due to the conversion of the debentures effective March 25,
2010.
LEGAL FEES RELATED TO 2008 AND
2010 CONVERTIBLE DEBENTURES
The Company had recorded a
deferred cost asset of $59,738 for legal fees paid in relation to the issuance of the 2008 Debentures. The deferred costs were being amortized over the
term of the 2008 Debentures using the straight line method. The Company had also recorded a deferred cost asset of $80,625 for legal fees paid in
relation to the issuance of the 2010 Debentures. The deferred costs were being amortized over the term of the 2010 Debentures using the straight line
method.
At December 31, 2010, the
deferred cost assets were fully amortized due to the conversion of the debentures effective March 25, 2010. As at December 31, 2010 and 2009, the
deferred cost assets were $0 and $36,506, respectively, and related amortization expense for the years then ended was $117,131 and $19,912,
respectively. As of December 31, 2009, deferred cost assets have been presented net against the related convertible debentures.
F-17
NOTE 11 INCOME TAXES
As at December 31, 2010, there
are tax loss carry forwards for Federal income tax purposes of approximately $25,718,074 available to offset future taxable income in the United
States. The tax loss carry forwards expire in various years through 2030. 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 $9,001,326 has been
established until realizations of the tax benefit from the loss carry forwards meet the more likely than not criteria.
YEAR |
Loss Carry Forward |
|||||
---|---|---|---|---|---|---|
1999
|
$ | 407,067 | ||||
2000
|
2,109,716 | |||||
2001
|
2,368,368 | |||||
2002
|
917,626 | |||||
2003
|
637,458 | |||||
2004
|
1,621,175 | |||||
2005
|
2,276,330 | |||||
2006
|
3,336,964 | |||||
2007
|
3,378,355 | |||||
2008
|
3,348,694 | |||||
2009
|
2,927,096 | |||||
2010
|
2,389,225 | |||||
Total
|
$ | 25,718,074 |
Additionally, as at December 31,
2010, the Companys two wholly owned Canadian subsidiaries had non-capital tax loss carry forwards of approximately $10,197,881 be used, in future
periods, to offset taxable income. The loss carry forwards expire in various years through 2030. The deferred tax asset of approximately $2,549,470 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.
YEAR |
Loss Carry Forward Foreign Operations |
|||||
---|---|---|---|---|---|---|
2006
|
$ | 573,271 | ||||
2007
|
7,211 | |||||
2008
|
4,049,972 | |||||
2009
|
2,774,833 | |||||
2010
|
2,792,594 | |||||
Total
|
$ | 10,197,881 |
F-18
For the year ended December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2010 |
2009 |
||||||||||
Statutory tax
rate: |
|||||||||||
U.S.
|
35.00 | % | 35.00 | % | |||||||
Foreign
|
31.00 | % | 33.00 | % | |||||||
Loss before
income taxes: |
|||||||||||
U.S.
|
$ | (6,603,329 | ) | $ | (3,260,449 | ) | |||||
Foreign
|
(2,844,312 | ) | (2,676,503 | ) | |||||||
$ | (9,447,641 | ) | $ | (5,936,952 | ) | ||||||
Expected
income tax recovery |
$ | (3,192,617 | ) | $ | (2,024,403 | ) | |||||
Differences
in income tax resulting from: |
|||||||||||
Depreciation
(Foreign operations) |
44,330 | 31,936 | |||||||||
Change in
fair value of exchange feature liability |
707,424 | | |||||||||
Inducement
premium on conversion of Debentures |
1,018,455 | | |||||||||
Stock based
compensation |
32,616 | | |||||||||
Market to
market adjustment on advance share subscription |
(436,492 | ) | | ||||||||
Long-term
debt accretion |
269,143 | | |||||||||
Accrued
interest on loans |
(116,212 | ) | 304,721 | ||||||||
(1,673,353 | ) | (1,687,746 | ) | ||||||||
Benefit of
losses not recognized |
1,673,353 | 1,687,746 | |||||||||
Income tax
provision (recovery) per financial statements |
$ | | $ | |
Components of deferred income tax
assets are as follows:
As at December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2010 |
2009 |
||||||||||
Property,
plant and equipment |
$ | 119,226 | $ | 102,872 | |||||||
Tax loss
carry forwards |
11,550,796 | 10,147,984 | |||||||||
Total
|
11,670,022 | 10,250,856 | |||||||||
Valuation
allowance |
(11,670,022 | ) | (10,250,856 | ) | |||||||
Carrying
Value |
$ | | $ | |
Effective January 1, 2007, the
Company adopted FASBs guidance on accounting for uncertainty in income taxes. This guidance prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return. For those
benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. There was no material
impact on the Companys consolidated financial position and results of operations as a result of the adoption of this guidance. The Company does
not believe there will be any material changes in its unrecognized tax positions over the next twelve months.
The Company will recognize
interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statement of operations and
comprehensive loss. Accrued interest and penalties will be included within the related tax liability line in the consolidated balance
sheet.
In many cases the Companys
uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by
major tax jurisdiction, as of December 31, 2010:
United States
Federal |
2006present | |||||
United States
State |
2006present | |||||
Canada
Federal |
2007present | |||||
Canada
Provincial |
2007present |
Valuation allowances reflect the
deferred tax benefits that management is uncertain of the Companys ability to utilize in the future.
F-19
NOTE 12 STOCKHOLDERS EQUITY /
(DEFICIT)
On June 24, 2009, the Company
received $425,000 from the exercise of options at $0.50 per share and issued 850,000 shares of restricted common stock.
On March 25, 2010, the Company
issued 43,756,653 shares of common stock in connection with the conversion of 2008 Debentures and 2009 Debentures into equity (see Note
10).
On March 25, 2010, the Company
issued 6,007,595 shares of restricted common stock in connection with the conversion of 2010 Debentures into equity (see Note 10).
On November 30, 2010, the Company
issued 4,375,668 shares as an inducement premium to the holders to convert all convertible debentures outstanding as of March 25, 2010 (see Note 10).
As fully disclosed in Note 10 to the consolidated financial statements, the Companys Board of Directors approved the increase in the authorized
share capital effective October 14, 2010.
Effective November 9, 2010 and
December 8, 2010, the Company closed on its first tranche and second tranche of 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 is for up to $5 million. The units are in the form of shares of the
Companys common stock, par value $0.001 at $0.40 per share plus for each share of Common Stock subscribed to under the unit offer the investor
will receive one warrant, the exercise price will be $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 will be subject to adjustment in all respects in the event of a stock split or similar
adjustment by the Company. A commission of 4% of the gross proceeds was paid from the proceeds of the unit offering and 7.5 units for every $100 of the
gross proceeds raised are payable for brokers fees are treated as a cost of capital and no income statement recognition is required.
The Share Subscription Agreement
for the units contains an exchange feature which provides that if within six months from effective date of closing, the Company enters into or closes
another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the Securities) on terms and
conditions more favourable to another purchaser, the terms and conditions of the unit offering shall be adjusted to reflect the more favourable terms.
The exchange feature was determined by the Company to be freestanding financial instrument and also to be a liability within the scope of ASC 480
Distinguishing Liabilities from Equity since there is an inverse relationship between the stock price of the Company and the Companys obligation.
On November 9, 2010, December 8, 2010 and December 31, 2010, the Company evaluated the fair value of the exchange feature based on the probability of
closing another financing within six months and the fair value of the number of incremental shares and warrants to be issued at a lower estimated issue
price for units. The probability of closing another financing in the next six months on November 9, 2010 and December 8, 2010 was estimated to be 50%
and on December 31, 2010 was estimated to be 100%.
The fair value of the
Companys common stock is determined by the closing price on the valuation date and the fair value of the warrants is determined using a binomial
option valuation model. Key assumptions for the binomial option valuation were as follows:
November 9, 2010 Offering |
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Valuation Date |
Nov. 9, 2010 |
Nov. 9, 2010 lower estimated strike price |
Dec. 31, 2010 |
Dec. 31, 2010 lower estimated strike price |
||||||||||||||||
Strike Price
second year |
$ | 0.65 | $ | 0.63 | $ | 0.65 | $ | 0.36 | ||||||||||||
Strike Price
first year |
$ | 0.55 | $ | 0.54 | $ | 0.55 | $ | 0.30 | ||||||||||||
Closing
market price |
$ | 0.39 | $ | 0.39 | $ | 0.22 | $ | 0.22 | ||||||||||||
Volatility
|
135.72 | % | 135.72 | % | 113.47 | % | 113.47 | % | ||||||||||||
Time to
expiration |
2 years | 2 years | 1.83 years | 1.83 years | ||||||||||||||||
Risk free
rate |
0.46 | % | 0.46 | % | 0.61 | % | 0.61 | % | ||||||||||||
Dividend
yield |
0 | % | 0 | % | 0 | % | 0 | % |
F-20
December 8, 2010 Offering |
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Valuation Date |
Dec. 8, 2010 |
Dec. 8, 2010 lower estimated strike price |
Dec. 31, 2010 |
Dec. 31, 2010 lower estimated strike price |
||||||||||||||||
Strike Price
second year |
$ | 0.65 | $ | 0.39 | $ | 0.65 | $ | 0.36 | ||||||||||||
Strike Price
first year |
$ | 0.55 | $ | 0.33 | $ | 0.55 | $ | 0.30 | ||||||||||||
Closing
market price |
$ | 0.24 | $ | 0.24 | $ | 0.22 | $ | 0.22 | ||||||||||||
Volatility
|
132.07 | % | 132.07 | % | 117.03 | % | 117.03 | % | ||||||||||||
Time to
expiration |
2 years | 2 years | 1.92 years | 1.92 years | ||||||||||||||||
Risk free
rate |
0.63 | % | 0.63 | % | 0.61 | % | 0.61 | % | ||||||||||||
Dividend
yield |
0 | % | 0 | % | 0 | % | 0 | % |
On December 31, 2010, an exchange
feature liability of $453,861 is recorded for the unit offering in these consolidated financial statements.
NOTE 13 STOCK OPTIONS AND WARRANT
GRANTS
On April 15, 2010 the Board of
Directors granted an aggregate award of 900,000 stock options to one executive officer and 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 Companys common stock as of the date of grant) with expiry five years from
the date of award. The total stock option expense for the April 15, 2010 grant is $372,761 and will be expensed on a straight line basis over the
vesting term of the award, as per the terms of the option agreements, as follows:
DATE |
Stock Option Expense |
|||||
---|---|---|---|---|---|---|
April 15, 2011
|
$ | 124,254 | ||||
April 15, 2012
|
$ | 124,254 | ||||
April 15, 2013
|
$ | 124,253 |
A total of $93,189 for stock
based compensation has been recorded for the year ended December 31, 2010. During fiscal year 2009 no stock options or warrants were
granted.
A summary of option transactions,
including those granted pursuant to the terms of certain employment and other agreements is as follows:
DETAILS |
Stock Purchase Options |
Weighted Average Exercise Price |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
OUTSTANDING,
JANUARY 1, 2009 |
6,120,000 | $ | 0.65 | |||||||
Expired
|
(1,600,000 | ) | ($0.50 | ) | ||||||
Exercised
|
(850,000 | ) | ($0.50 | ) | ||||||
OUTSTANDING,
JANUARY 1, 2010 |
3,670,000 | $ | 0.76 | |||||||
Granted
|
900,000 | $ | 0.65 | |||||||
Expired
|
(1,765,000 | ) | ($0.97 | ) | ||||||
OUTSTANDING,
DECEMBER 31, 2010 |
3,600,000 | $ | 0.68 |
At December 31, 2010, the
outstanding options have a weighted average remaining life of 23 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.
The weighted average fair value
of options granted during 2010 was $0.41 and was estimated using the Black-Scholes option-pricing model, using the following
assumptions:
2010 |
||||||
---|---|---|---|---|---|---|
Expected
volatility |
117 | % | ||||
Risk-free
interest Rate |
1.08 | % | ||||
Expected life
|
4 | yrs |
F-21
2010 | ||||||
---|---|---|---|---|---|---|
Dividend yield
|
0.00 | % | ||||
Forfeiture rate
|
0.00 | % |
The Black-Scholes options-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 Companys stock purchase options and warrants. The model also requires
highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values.
Accordingly, management believes that this model does not necessarily provide a reliable single measure of the fair value of the Companys stock
options and warrants.
At December 31, 2010, the Company
had outstanding options as follows:
Number Of Options |
Exercise Price |
Expiration Date |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
100,000 | $0.71 |
February 6,2011 | ||||||||||||
100,000 | $1.00 |
February 6,2011 | ||||||||||||
2,150,000 | $0.71 |
February 16, 2012 | ||||||||||||
100,000 | $1.00 |
February 8, 2013 | ||||||||||||
250,000 | $0.27 |
August 6, 2013 | ||||||||||||
900,000 | $0.65 |
April 15, 2015 | ||||||||||||
3,600,000 |
Warrants issued in connection
with various private placements of equity securities, are treated as a cost of capital and no income statement recognition is required. A summary of
warrant transactions is as follows:
DETAILS |
Warrant Shares |
Weighted Average Exercise Price |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
OUTSTANDING,
JANUARY 1, 2010 |
| $ | | |||||||
Granted
|
1,545,000 | $ | 0.65 | |||||||
Exercised
|
| $ | | |||||||
Expired
|
| $ | | |||||||
OUTSTANDING,
DECEMBER 31, 2010 |
1,545,000 | $ | 0.65 |
Effective November 9, 2010 and
December 8, 2010, the Company closed on its first tranche and second tranche of 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 is for up to $5 million. The units are in the form of shares of the
Companys common stock, par value $0.001 at $0.40 per share plus for each share of Common Stock subscribed to under the unit offer the investor
will receive one warrant exercisable for of issuance, the exercise price will be $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 will be subject to adjustment in all respects 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 are payable for brokers fees.
NOTE 14 RELATED PARTY TRANSACTIONS
During the year ended December
31, 2010 transactions with related parties included $6,134,024 related to conversion of convertible debentures including interest of $634,024 thereon
into common stock; $1,032,849 related to inducement on early conversion of convertible debentures; the repayment of $511,342 principal and interest on
promissory note and $144,967 for various services in addition to salaries and reimbursement of business expenses. During the year ended December 31,
2009 the Company paid shareholders and their affiliates $238,750 for various services, principal and interest on promissory notes and fees rendered in
addition to salaries and reimbursement of business expenses. All transactions are recorded at the exchange amounts. Any one transaction or combination
attributed to one individual or entity exceeding $120,000 on an annual basis has been disclosed as follows:
F-22
NOTE PAYABLE TO RELATED
PARTY
The information required by this
item is included in Note 7 to the consolidated financial statements.
CONVERTIBLE DEBENTURE ISSUED
TO RELATED PARTY
On August 28, 2009, the Company
completed a transaction whereby it issued $1.6 million of 9% convertible debentures to six accredited investors. A shareholder who was also a director
of the Company participated in the August convertible debenture offering with a principal investment of $500,000.
Effective March 25, 2010, the
November 2008 and the August 2009 debenture holders agreed to convert all outstanding convertible debentures as per the terms of the respective
debenture agreements. The early conversion of the debentures was a condition precedent to the Companys wholly-owned subsidiary ESWC entering into
a new credit facility with a chartered commercial bank. A total of $5,500,000 in principal and $634,024 of accrued interest due to related parties was
converted into 23,489,494 shares of restricted common stock.
As part of the agreement to
convert all existing convertible debentures, the Company was committed to pay a premium as an inducement to convert all debentures. The premium is
payable to all converting debenture holders and was subject to a positive fairness opinion, approval by a Fairness Committee consisting of independent
Directors of the Companys Board of Directors and an increase in the share capital of the Company. The premium consists of 4,375,668 shares of
common stock. As the Company did not have sufficient authorised shares as of the date of conversion of the debentures to fulfill the premium, the
premium has been recorded as an advance share purchase agreement at a fair market value of $2,909,872 as at March 31, 2010. The agreement is without
interest, subordinated to the banks position and payable in a fixed number of common shares of the Company upon increase in the authorized share
capital of the Company.
Up to October 14, 2010, the
Company did not have sufficient authorized and unissued shares to fulfill the advance share subscription. Under these conditions, FASB ASC Subtopic
815-40, Contracts in Entitys Own Equity, precludes equity classification of this obligation. As such, the advance share subscription was
classified as a liability and periodically marked to market. The fair value of the obligation was determined to be $1,662,753 and $2,909,872 at October
14, 2010 and March 31, 2010, respectively. The fair value of the obligation was determined by the cash settlement value at the end of each period based
on the closing price of the Companys common stock. The decrease in fair value of this liability of $1,247,119 was recorded as a mark to market
adjustment on advance share subscription in the consolidated statement of operations and comprehensive loss. Of the total amount $784,965 (fair market
value of 2,065,697 shares of common stock) was attributed to related parties.
Effective November 30, 2010, the
Company issued an aggregate of 4,375,668 restricted shares of common stock to thirteen (13) prior debenture holders in connection with the early
conversion of their debentures. Of these shares of common stock, 2,065,697 shares were issued to related parties.
As of December 31, 2010,
principal and interest on total convertible debentures due to related parties was $0. As of December 31, 2009, the principal amount of convertible
debentures, net of accretion, due to related party amounted to $5,428,443 with a corresponding accrued interest of $540,128, and debt discount of
$71,557.
CONTRACTS AND
AGREEMENTS
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
Companys transfer agent. He has no ownership equity in Bay City Transfer Agency Registrar Inc. nor is he an officer or a director of Bay City
Transfer Agency Registrar Inc. For the years ended December 31, 2010 and 2009, the Company paid Bay City Transfer Agency Registrar Inc. $7,363 and
$1,683, respectively.
For the year ended December 31,
2010, Mr. Nitin Amersey received $25,500 for consulting services to the Company. In 2009 Mr. Amersey did not provide any services to the
Company.
Mr. Peter Bloch who is a director
of the Company provided consulting services to the Company. For the year ended December 31, 2010, the Company paid Mr. Bloch $112,104 for consulting
services. In 2009 Mr. Bloch did not provide any services to the Company.
F-23
NOTE 15 COMMITMENTS AND
CONTINGENCIES
LEASES
Effective November 24, 2004, the
Companys 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 Companys research and development facilities. The lease
commenced on January 15, 2005 and expired January 31, 2010. Effective October 16, 2009, the Companys wholly-owned subsidiary ESW America, Inc.
entered into a lease renewal agreement with Nappen & Associates for the leasehold property at 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 will now expire February
28, 2013.
Effective December 20, 2004, the
Companys wholly-owned subsidiary, ESWC, entered into an offer to lease agreement for approximately 50,000 square feet of leasehold space in
Concord, Ontario, Canada. The leasehold space houses the Companys executive offices and a high volume manufacturing plant. The possession of the
leasehold space took place on May 24, 2005 and the term of the lease was extended to September 30, 2010. ESWC renewed its lease agreement at the
current property for an additional five year term. The renewed lease period commenced on October 1, 2010 and ends on September 30,
2015.
The following is a summary of the
minimum annual lease payments, for both leases.
YEAR |
||||||
---|---|---|---|---|---|---|
2011
|
$ | 460,801 | ||||
2012
|
460,801 | |||||
2013
|
312,520 | |||||
2014
|
289,986 | |||||
2015
|
217,489 | |||||
$ | 1,741,597 |
LEGAL
MATTERS
From time to time, the Company
may be involved in a variety of claims, suits, investigations and proceedings arising from the ordinary course of our business, breach of contract
claims, labor and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and their
results cannot be predicted with certainty, ESW believes that the resolution of current pending matters will not have a material adverse effect on its
business, consolidated financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on ESW
because of legal costs, diversion of management resources and other factors. In addition, it is possible that an unfavourable resolution of one or more
such proceedings could in the future materially and adversely affect ESWs financial position, results of operations or cash flows in a particular
period.
CAPITAL LEASE
OBLIGATION
The Company is committed to the
following lease payments in connection with the acquisition of equipment under capital leases:
YEAR |
||||||
---|---|---|---|---|---|---|
2011
|
$ | 4,385 | ||||
2012
|
1,047 | |||||
TOTAL
|
5,432 | |||||
Less imputed
interest |
(390 | ) | ||||
Total obligation
under capital lease |
5,042 | |||||
Less current
portion |
(3,552 | ) | ||||
TOTAL LONG-TERM
PORTION |
$ | 1,490 |
F-24
The Company incurred $2,374 and
$6,354 of interest expense on capital lease obligation for the years ended December 31, 2010 and 2009, respectively.
NOTE 16 LOSS PER SHARE
Potential common shares of
3,600,000 related to ESWs outstanding stock options and 1,500,000 shares related to ESWs outstanding warrants were excluded from the
computation of diluted loss per share for the year ended December 31, 2010. Potential common shares of 3,670,000 related to ESWs outstanding
stock options and potential common shares of 42,583,901 related to the 2008 and 2009 convertible debentures were excluded from the computation of
diluted loss per share for the year ended December 31, 2009.
The reconciliation of the number
of shares used to calculate the diluted loss per share is calculated as follows:
For the Year ended December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2010 |
2009 |
||||||||||
NUMERATOR |
|||||||||||
Net loss for
the year |
$ | (9,447,641 | ) | $ | (5,936,952 | ) | |||||
Interest on
long term debt |
183,858 | 870,632 | |||||||||
Amortization
of deferred costs |
117,131 | 19,912 | |||||||||
Long term
debt accretion |
768,981 | 27,019 | |||||||||
Inducement
premium |
2,909,872 | | |||||||||
Mark to
market adjustment on advance share subscription |
(1,247,119 | ) | | ||||||||
Change in
fair value of exchange feature liability |
2,021,213 | | |||||||||
Interest on
note payable to related party |
11,342 | | |||||||||
$ | (4,664,363 | ) | $ | (5,019,389 | ) | ||||||
DENOMINATOR |
|||||||||||
Weighted
average number of shares outstanding |
112,793,477 | 73,416,317 | |||||||||
Dilutive
effect of : |
|||||||||||
Stock options
|
| | |||||||||
Warrants
|
| | |||||||||
Convertible
debentures |
| | |||||||||
DILUTED
WEIGHTED AVERAGE SHARES OUTSTANDING |
112,793,477 | 73,416,317 |
NOTE 17 COMPARATIVE FIGURES
Certain 2009 figures have been
reclassified to conform to the current financial statement presentation.
NOTE 18 SUBSEQUENT EVENTS
AMENDED
BYLAWS
Effective January 25, 2011 by
written action and vote of Sedam Limited, Bengt Odner, Black Family 1997 Trust, Leon D. Black, Leon D. Black Trust UAD 11/30/92 FBO Joshua Black, Leon
D. Black Trust UAD 11/30/92 FBO Benjamin Black, Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, Leon D. Black Trust UAD 11/30/92 FBO Victoria
Black, John Hannan, Orchard Investments LLC and Richard Ressler (the Majority Shareholders) representing 66,134,887 shares of the
Companys common stock, a majority or 51.08% of the outstanding shares based upon the Companys certified list of shareholders, pursuant to
Title XXXVI, Chapter 607, Section 607.0704 of the Florida Statutes and the Companys Bylaws, Article II Section 5 of the Companys Bylaws was
amended so that the Company shall have a minimum of one (1) director but no more than eleven (11) directors. The amendment to the Bylaws increases the
maximum number of directors the Company is permitted from seven (7) to eleven (11).
F-25
WAIVER OF LOAN
COVENANTS
Effective February 4, 2011, the
Companys wholly owned subsidiary, ESWC, received a fourth waiver of certain financial covenants under its Credit Agreement with CIBC. Without the
waiver, the Companys subsidiary would not be in compliance with the current ratio and effective tangible net worth covenants as set forth in the
Credit Agreement. The fourth waiver provided by CIBC extends the waiver period from January 31, 2011 through February 14, 2011 and also provides for a
fee payable to CIBC for the extension as well as requiring the elimination of any margin deficit by February 14, 2011. In the event the Company and its
subsidiary, ESWC, fail to comply with the terms of the waiver and meet the current ratio and effective tangible net worth covenants prior to the end of
the waiver period, same will constitute an event of default as set forth in the Credit Agreement unless a further waiver or modification to the Credit
Agreement can be obtained.
LOAN
AGREEMENTS
On February 17, 2011, the Company
entered into certain note subscription agreements and issued unsecured subordinated promissory notes (collectively, the Loan Agreements)
with Orchard Investments, LLC; Black Family 1997 Trust; Leon D. Black Trust UAD 11/30/92 FBO Alexander Black; Leon D. Black Trust UAD 11/30/92 FBO
Benjamin Black; Leon D. Black Trust UAD 11/30/92 FBO Joshua Black; Leon D. Black Trust UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan
and Richard Ressler (each individually a Subordinated Lender or Holder and collectively the Subordinated Lenders or
Holders) who are current shareholders and may be deemed affiliates of certain members of the Board of Directors of the Company. The Loan
Agreements were approved by the independent directors of the Company. Pursuant to the Loan Agreements, the Subordinated Lenders agreed to make, and
made, loans to the Company in the principal aggregate amount of $3 million (the Loan), subject to the terms and conditions set forth in the
Loan Agreements and represented by unsecured subordinated promissory notes (the Notes), dated February 17, 2011.
Proceeds of the Loan, along with
available cash, will be used to fund working capital, planned capital investments and other general corporate purposes. With the proceeds of the Loan,
the Company and its subsidiaries will be in compliance with covenant obligations under the Credit Agreement with CIBC for which the Company and its
subsidiaries had previously obtained waivers of covenant obligations that expired February 14, 2011.
The Notes provide that the Loan
bears interest at a rate of 10% per annum, payable in-kind on a monthly basis commencing March 17, 2011, up to the date on which the Note has been paid
in full. The maturity date of the Loan is the earlier of: (i) the consummation of a rights offering of the Companys common stock, par value $.001
per share (the Common Stock) registered under the Securities Act of 1933, as Amended (the Act), at a sale price of $0.12 per
share (as adjusted for any stock split, stock dividend or other similar adjustment) pursuant to which the Company plans to offer rights to purchase
approximately $6.5 million in shares of Common Stock, which is expected to raise at least an incremental $3.5 million of cash for the Company and will
also permit all Subordinated Lenders to exchange their Notes (and the other Notes paid in-kind for the payment of interest under the Notes) for shares
of Common Stock at such price per share (with such offering referred to as the Qualified Offering) or (ii) June 17, 2011 (the Outside
Date). The Qualified Offering has also been approved by the independent directors of the Company. There can be no assurance, however, that the
Company will successfully complete the Qualified Offering on or prior to the Outside Date or thereafter.
In the event the Qualified
Offering does not take place on or before the Outside Date, then the Subordinated Lenders at their sole option may require the Company to refrain from
making any and all payments on any of the outstanding principal and accrued interest outstanding under the Notes. However the Company will not be
prohibited from paying any accrued interest in-kind through the issuance of substantially similar notes, at any time. The Holders at their sole option
may extend the Outside Date.
In the event the Qualified
Offering closes on or prior to the Outside Date and for any reason a Holder shall have failed to have exchanged in the Qualified Offering any and all
principal or accrued interest outstanding under its Notes and such Holder wishes to exchange his or her Note for Common Stock at a price of $0.12 per
share (as adjusted for any stock split, stock dividend or other similar adjustment), then the Company has agreed to offer such Holder the immediate
right to purchase additional shares of Common Stock at such price, so that all principal and accrued interest outstanding under the Notes shall have
been exchanged for shares of Common Stock at such price.
F-26
In the event the Qualified
Offering closes on or prior to the Maturity Date and, for any reason, certain Holders (the Qualified Holders) collectively shall have
failed to have invested at least $1 million in the Qualified Offering or pursuant to exchange of their Notes and the Qualified Holders wish to invest
the balance of such $1 million aggregate amount to purchase Common Stock at a price of $0.12 per share (as adjusted for any stock split, stock dividend
or other similar adjustment), then the Company will be required to offer to the Qualified Holders the immediate right to invest the balance of such
investment amount to purchase additional shares of Common Stock at such price, so that in the aggregate, the Qualified Holders shall collectively
invested such $1 million amount.
Concurrent with entering into the
Loan Agreements and issuance of the Notes, CIBC, the Company and its subsidiaries; and the Subordinated Lenders entered into a Postponement and
Subordination Agreement (the Subordination Agreement) whereby the Subordinated Lenders agreed that the obligations of the Company and its
subsidiaries under the Notes as issued would be subordinate to the obligations of the Company and its subsidiaries under the Credit
Agreement.
As previously reported, pursuant
to securities subscription agreements entered into by the Company on or about March 23, 2010, the Company issued $3 million of 9% convertible
debentures to five (5) accredited investors which have since been converted into 6 million shares of the Companys Common Stock. Additionally, on
November 9, 2010 and December 8, 2010, the Company completed an offering in the aggregate gross proceeds of $600,000 to one (1) accredited investor
whereby it issued units comprised of 1.5 million shares of common stock and a like number of warrants to purchase 1 share of Common Stock (collectively
the Prior Subscription Agreements). The investors under the Prior Subscription Agreements will receive an approximate aggregate of
22,500,000 additional shares of Common Stock in conjunction with certain rights under the Prior Subscription Agreements in the event the Qualified
Offering closes.
CHANGES IN EXECUTIVE
OFFICERS
Effective March 9, 2011, the
Company and David J. Johnson, entered into an Employment Separation and General Release Agreement (the Agreement), whereby Mr. Johnson
resigned as President and Chief Executive Officer of the Company as well as all of its subsidiaries wherein he served as an executive officer.
Additionally, Mr. Johnson resigned from the Companys Board of Directors as well from the Board of Directors of each of the Companys wholly
owned subsidiaries wherein he served. Mr. Johnson resigned without any disputes or disagreements with the Company or any of its subsidiaries. Under the
terms of the Agreement, Mr. Johnson will receive a severance payment based upon his regular salary of $360,000 per annum as prorated. The severance
payments will be made on a quarterly basis for the remainder of the calendar year. Mr. Johnson will also continue to receive customary medical benefits
and a car allowance of $1,000 a month for the remainder of the calendar year.
Concurrent to entering into the
Agreement, the Company and Mr. Johnson entered into a Consultancy Agreement for the remainder of the calendar year whereby Mr. Johnson will receive
compensation on a per diem basis when engaged by the Company per the agreement. Additionally, Mr. Johnson was also awarded options as part of the
Consultancy Agreement.
Effective March 11, 2011, Mr.
Stefan Boekamp, resigned on mutually agreeable terms from his position as Vice President of Operations of the Company. Mr. Boekamp resigned without any
disputes or disagreements with the Company or any of its subsidiaries.
Effective March 9, 2011, Mr.
Praveen Nair, the Companys Chief Accounting Officer was promoted to the position of Chief Financial Officer of the Company. Mr. Nair will receive
an annual salary of $150,000 Canadian. The Company and Mr. Nair intend to enter into a new employment agreement in the near future with terms similar
to those set forth in Mr. Nairs prior employment agreement with the Company.
Effective March 9, 2011, Mr.
Frank Haas was appointed the Companys Chief Technology Officer and Chief Regulatory Officer. Mr. Haas will receive an annual salary of $160,000
Canadian and will receive an incentive compensation for each of the first two achieved verification/certifications of certain of the Companys
products within the first year of his appointment.
Effective March 9, 2011, Mr.
Virendra Kumar was appointed Vice President of Operations of the Company. Mr. Kumar will receive an annual salary of $150,000. Mr. Kumar has been
General Manager of ESWA, Inc. since 2010 and is responsible for the overall operations related to Air Testing Services.
F-27
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited) March 31, 2011 |
December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||
Current
Assets |
||||||||||
Cash and cash
equivalents (Note 4) |
$ | 956,337 | $ | 13,328 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $0 (2010 $70,028) (Note 2) |
1,241,213 | 2,279,149 | ||||||||
Inventory,
net of reserve of $100,623 (2010 0) (Note 5) |
3,514,465 | 4,414,518 | ||||||||
Prepaid
expenses and sundry assets |
307,630 | 261,176 | ||||||||
Total current
assets |
6,019,645 | 6,968,171 | ||||||||
Property,
plant and equipment under construction (Note 6) |
78,807 | 185,542 | ||||||||
Property,
plant and equipment, net of accumulated depreciation of $6,044,872 (2010 $5,765,164) (Note 6) |
1,836,992 | 1,931,373 | ||||||||
Internal use
software under development (Note 2) |
129,603 | 126,340 | ||||||||
Patents and
trademarks, net of accumulated amortization of $2,131,423 (2010 $2,115,091) (Note 2) |
| 16,145 | ||||||||
$ | 8,065,047 | $ | 9,227,571 | |||||||
LIABILITIES
AND STOCKHOLDERS EQUITY / (DEFICIT) |
||||||||||
Current
Liabilities |
||||||||||
Bank loan
(Note 8) |
$ | 1,636,444 | $ | 3,424,889 | ||||||
Accounts
payable |
2,040,120 | 2,495,070 | ||||||||
Accrued
liabilities (Note 15) |
880,369 | 512,964 | ||||||||
Exchange
feature liability (Note 10 and 12) |
2,712,600 | 2,133,862 | ||||||||
Notes payable
to related party, net of debt discount (Note 7) of $1,950,000 (2010 $0) |
1,050,00 | | ||||||||
Convertible
derivative liability (Note 7) |
2,148,656 | | ||||||||
Customer
deposits |
3,794 | 29,322 | ||||||||
Redeemable
class A special shares (Note 9) |
453,900 | 453,900 | ||||||||
Current
portion of capital lease obligation (Note 15) |
1,806 | 3,552 | ||||||||
Total current
liabilities |
10,927,689 | 9,053,559 | ||||||||
Long-term
liabilities |
||||||||||
Capital lease
obligation (Note 15) |
1,319 | 1,490 | ||||||||
Total
long-term liabilities |
1,319 | 1,490 | ||||||||
Total
liabilities |
10,929,008 | 9,055,049 | ||||||||
Commitments
and Contingencies (Note 15) |
||||||||||
Stockholders Equity / (Deficit) (Notes 12 and 13) |
||||||||||
Common stock,
$0.001 par value, 250,000,000 (2010 250,000,000) shares authorized; 129,463,767 shares issued and outstanding (2010 129,463,767) |
129,463 | 129,463 | ||||||||
Additional
paid-in capital |
43,593,417 | 43,567,531 | ||||||||
Accumulated
other comprehensive income |
518,813 | 446,549 | ||||||||
Accumulated
deficit |
(47,105,653 | ) | (43,971,021 | ) | ||||||
Total
stockholders equity / (deficit) |
(2,863,960 | ) | 172,522 | |||||||
$ | 8,065,047 | $ | 9,227,571 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-28
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(UNAUDITED)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(UNAUDITED)
2011 |
2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Revenue |
||||||||||
Net sales
|
$ | 2,045,737 | $ | 2,248,596 | ||||||
Cost of sales
|
2,092,081 | 1,510,490 | ||||||||
Gross (loss)
/ profit |
(46,344 | ) | 738,106 | |||||||
Operating
expenses |
||||||||||
Marketing,
office and general costs |
1,051,753 | 995,802 | ||||||||
Restructuring
charges (Note 15) |
518,809 | | ||||||||
Research and
development costs |
183,626 | 125,314 | ||||||||
Officers compensation and directors fees |
211,644 | 198,357 | ||||||||
Consulting
and professional fees |
27,102 | 105,975 | ||||||||
Foreign
exchange loss |
60,126 | 56,223 | ||||||||
Depreciation
and amortization |
120,350 | 262,845 | ||||||||
2,173,410 | 1,744,516 | |||||||||
Loss from
operations |
(2,219,754 | ) | (1,006,410 | ) | ||||||
Interest on
long-term debt |
| (183,858 | ) | |||||||
Amortization
of deferred costs |
| (117,131 | ) | |||||||
Long-term
debt accretion |
| (768,981 | ) | |||||||
Inducement
premium |
| (2,909,872 | ) | |||||||
Change in
fair value of exchange feature liability |
(578,739 | ) | | |||||||
Interest on
notes payable to related party |
(34,521 | ) | (11,342 | ) | ||||||
Interest
accretion expense |
(1,050,000 | ) | | |||||||
Financing
charge on embedded derivative liability |
(485,101 | ) | | |||||||
Gain on
convertible derivative |
1,336,445 | | ||||||||
Bank fees
related to credit facility covenant waivers |
(106,512 | ) | | |||||||
Gain on
disposal of property and equipment |
3,550 | | ||||||||
Interest
income |
| 35 | ||||||||
Net loss
|
(3,134,632 | ) | (4,997,559 | ) | ||||||
Other
comprehensive income: |
||||||||||
Foreign
currency translation of Canadian subsidiaries |
72,264 | 103,865 | ||||||||
Net
comprehensive loss |
$ | (3,062,368 | ) | $ | (4,893,694 | ) | ||||
Net loss per
share (basic and diluted) (Note 16) |
$ | (0.02 | ) | $ | (0.06 | ) | ||||
Weighted
average number of shares outstanding (basic and diluted) (Note 16) |
129,463,767 | 77,694,404 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-29
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIT)
AND COMPREHENSIVE INCOME FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2011
(UNAUDITED)
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIT)
AND COMPREHENSIVE INCOME FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2011
(UNAUDITED)
Common Stock |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares |
Amount |
Additional Paid-in Capital |
Accumulated Other Comprehensive Income |
Accumulated Deficit |
Total |
|||||||||||||||||||||
Balance,
January 1, 2010 |
73,823,851 | 73,822 | 26,083,635 | 425,383 | (34,523,380 | ) | (7,940,540 | ) | ||||||||||||||||||
Net loss
|
| | | | (9,447,641 | ) | (9,447,641 | ) | ||||||||||||||||||
Stock-based
compensation |
| | 93,189 | | | 93,189 | ||||||||||||||||||||
Common stock
issued from share subscription |
1,500,000 | 1,500 | 598,500 | | | 600,000 | ||||||||||||||||||||
Broker fees
related to share subscription |
| | (24,000 | ) | | | (24,000 | ) | ||||||||||||||||||
Fair value of
exchange feature liability |
| | (112,649 | ) | | | (112,649 | ) | ||||||||||||||||||
Inducement on
conversion of debentures with related party |
4,375,668 | 4,376 | 1,658,377 | | | 1,662,753 | ||||||||||||||||||||
Common stock
issued on conversion of debentures |
49,764,248 | 49,765 | 14,730,479 | | | 14,780,244 | ||||||||||||||||||||
Intrinsic
value of beneficial conversion feature of convertible debentures |
| | 540,000 | | | 540,000 | ||||||||||||||||||||
Foreign
currency translation of Canadian subsidiaries |
| | | 21,166 | | 21,166 | ||||||||||||||||||||
Balance,
January 1, 2011 |
129,463,767 | $ | 129,463 | $ | 43,567,531 | $ | 446,549 | $ | (43,971,021 | ) | $ | 172,522 | ||||||||||||||
Net loss
|
| | | | (3,134,632 | ) | (3,134,632 | ) | ||||||||||||||||||
Stock-based
compensation |
| | 25,886 | | | 25,886 | ||||||||||||||||||||
Foreign
currency translation of Canadian subsidiaries |
| | | 72,264 | | 72,264 | ||||||||||||||||||||
Balance,
March 31, 2011 |
129,463,767 | $ | 129,463 | $ | 43,593,417 | $ | 518,813 | $ | (47,105,653 | ) | $ | (2,863,960 | ) |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-30
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(UNAUDITED)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(UNAUDITED)
2011 |
2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Net loss
|
$ | (3,134,632 | ) | $ | (4,997,559 | ) | ||||
Adjustments
to reconcile net loss to net cash used in operating activities: |
||||||||||
Interest
accretion expense |
1,050,000 | | ||||||||
Change in
fair value of exchange feature liability |
578,739 | | ||||||||
Financing
charge on embedded derivative liability |
485,101 | | ||||||||
Depreciation
of property, plant and equipment |
206,824 | 281,492 | ||||||||
Loss on
disposal of inventory |
124,972 | | ||||||||
Interest on
notes payable to related party |
34,521 | | ||||||||
Stock-based
compensation |
25,886 | | ||||||||
Amortization
of patents and trademarks |
16,145 | 53,414 | ||||||||
Inducement
premium |
| 2,909,872 | ||||||||
Long-term
debt accretion |
| 768,981 | ||||||||
Interest on
long-term debt |
| 183,858 | ||||||||
Amortization
of deferred costs |
| 36,506 | ||||||||
Provision for
doubtful accounts |
| 3,242 | ||||||||
Gain on
disposal of property, plant and equipment |
(3,450 | ) | | |||||||
Gain on
convertible derivative |
(1,336,445 | ) | | |||||||
1,182,293 | 4,237,365 | |||||||||
Increase
(decrease) in cash flows from operating activities resulting from changes in: |
||||||||||
Accounts
receivable |
1,101,029 | (464,671 | ) | |||||||
Inventory
|
839,762 | (910,526 | ) | |||||||
Prepaid
expenses and sundry assets |
(91,199 | ) | (15,322 | ) | ||||||
Accounts
payable and accrued liabilities |
(99,301 | ) | 615,258 | |||||||
Customer
deposits |
(25,528 | ) | 4,770 | |||||||
1,724,763 | (770,491 | ) | ||||||||
Net cash used
in operating activities |
(227,576 | ) | (1,530,685 | ) | ||||||
Investing
activities: |
||||||||||
Proceeds from
sale of property and equipment |
3,450 | | ||||||||
Acquisition
of property, plant and equipment |
(93,144 | ) | (81,096 | ) | ||||||
Reduction in
property, plant and equipment under construction |
105,423 | | ||||||||
Addition to
property, plant and equipment under construction |
| (19,902 | ) | |||||||
Net cash used
in investing activities |
15,729 | (100,998 | ) | |||||||
Financing
activities: |
||||||||||
Proceeds from
convertible debentures placement |
| 3,000,000 | ||||||||
Repayment of
bank loan |
(1,823,319 | ) | (720,510 | ) | ||||||
Notes payable
to related party |
3,000,000 | | ||||||||
Repayment of
notes payable to related party |
| (500,000 | ) | |||||||
Repayment of
capital lease obligation |
(1,956 | ) | (3,668 | ) | ||||||
Net cash
provided by financing activities |
1,174,725 | 1,775,822 | ||||||||
Net decrease
in cash and equivalents |
962,878 | 144,139 | ||||||||
Foreign
exchange loss (gain) on foreign operations |
(19,869 | ) | 172,277 | |||||||
Cash and cash
equivalents, beginning of year |
13,328 | 632,604 | ||||||||
Cash and cash
equivalents, end of year |
$ | 956,337 | $ | 949,021 | ||||||
Supplemental
disclosures: |
||||||||||
Cash interest
paid |
$ | | $ | 11,844 | ||||||
Other
non-cash conversion of debentures and related interest |
$ | | $ | 14,780,243 |
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-31
NOTE 1 NATURE OF BUSINESS AND BASIS OF
PRESENTATION
Environmental Solutions
Worldwide, Inc. (the Company or ESW) through its wholly owned subsidiaries is engaged in the design, development, manufacturing
and sales of environmental technologies and testing services with its primary focus on the international on-road and off-road diesel retrofit market.
ESW currently manufactures and markets a line of catalytic emission control and enabling technologies for a number of applications.
The unaudited consolidated
condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US
GAAP), which contemplates continuation of the Company as a going concern.
The Company has sustained
recurring operating losses. As of March 31, 2011, the Company had an accumulated deficit of $47,105,653 and cash and cash equivalents of $956,337. Net
cash used in operating activities for the three month period ended March 31, 2011 amounted to $227,576 as compared to $1,530,685 for the three month
period ended March 31, 2010. There is no assurance that the Company will be successful in achieving sufficient cash flow from operations in the near
future and there can be no assurance that it will either achieve or maintain profitability in the future. As a result, there is substantial doubt
regarding the Companys ability to continue as a going concern. The Company will require additional financing to fund its continuing operations.
The Company is seeking additional funds by way of equity and debt financing. The Companys ability to continue as a going concern is dependent on
obtaining additional financing and achieving and maintaining a profitable level of operations. The outcome of these matters cannot be predicted at this
time.
On February 17, 2011, the Company
raised $3 million through the issuance of unsecured subordinated promissory notes (the Notes) to current shareholders and deemed affiliates
of certain members of the board of directors of the Company. Proceeds of the Notes were targeted at funding working capital, planned capital
investments and other general corporate purposes. With the proceeds of the Notes, the Company and its subsidiaries are in compliance with covenant
obligations under the Demand Credit Agreement with the Canadian Imperial Bank of Commerce (CIBC) dated March 10, 2010 for which the Company
and its subsidiaries had previously obtained waivers of covenant obligations through to February 15, 2011.
On May 3, 2011, the Company
raised an additional $1 million through the issuance of unsecured subordinated promissory notes (Bridge Loan), which were effective as
April 27, 2011, to current shareholders and deemed affiliates of certain members of the board of directors of the Company. Proceeds of the Bridge Loan,
along with available cash, are targeted at funding the Companys working capital.
Effective May 10, 2011, the
Company entered into an Investment Agreement with current shareholders and subordinated lenders under unsecured promissory notes (the Bridge
Lenders) in the aggregate amount of $4.0 million. As per the Investment Agreement, the Bridge Lenders have agreed to provide a backstop
commitment (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 agree to purchase any shares offered in the Qualified Offering that are not
purchased by the Companys shareholders of record, who are entitled to participate in the rights offering, after giving effect to any
oversubscriptions. The Backstop Commitment will result in the Bridge Lenders purchasing up to 29,166,667 shares of Common Stock from the Company at a
subscription price of $0.12 per share of Common Stock for a total purchase price of $3.5 million. The Company will also permit all Subordinated Lenders
to exchange their Notes or Bridge Loan and any accrued interest thereon for shares of Common Stock under the Qualified Offering. The offering is
expected to be completed by June 17, 2011.
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
considered necessary for fair presentation and of a normal recurring nature have been included in these consolidated condensed financial
statements.
These statements have not been
audited and should be read in conjunction with the consolidated financial statements and the notes thereto included in ESWs Annual Report on Form
10-K, as filed with the United States Securities and Exchange Commission for the year ended December 31, 2010. The methods and policies set forth in
the year-end audited consolidated financial statements are followed in these interim consolidated condensed financial statements.
F-32
All adjustments considered
necessary for fair presentation and of a normal recurring nature have been included in these interim consolidated condensed financial statements.
Revenues and operating results for the three month period ended March 31, 201 1 are not necessarily indicative of the results to be expected for
the full year.
NOTE 2 SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF
CONSOLIDATION
The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries, ESW America Inc. (ESWA), ESW Technologies Inc.
(ESWT), ESW Canada Inc. (ESWC) and BBL Technologies Inc. (BBL). All inter-company transactions and balances have
been eliminated on consolidation. Amounts in the consolidated financial statements are expressed in US dollars.
ESTIMATES
The preparation of consolidated
financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense
during the reported period. Actual results could differ from those estimates. Significant estimates include amounts for inventory valuation, impairment
of property plant and equipment and intangible assets, share based compensation, redeemable class A special shares, valuation of the warrants, the
exchange feature liability, and the convertible derivative liability, accrued liabilities and accounts receivable exposures.
CONCENTRATIONS OF CREDIT
RISK
The Companys 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. Four of its customers accounted for 29%, 23%, 17% and 16%, respectively, of the Companys revenue during
the three month period ended March 31, 2011 and 28%, 21%, and 19%, respectively, of its accounts receivable as of March 31, 2011. Three of its
customers accounted for 21%, 19%, and 13% respectively, of the Companys revenue in the fiscal year 2010 and 48%, 21%, and 13% respectively, of
its accounts receivable as of December 31, 2010.
As at March 31, 2011, the Company
believes that there are no uncollectible accounts and accordingly has not recorded an allowance.
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 managements 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 $0 and $70,028 was
appropriate as of March 31, 2011 and 2010, respectively.
INVENTORY
Inventory is stated at the lower
of cost or market determined using the first-in first-out method. Inventory is periodically reviewed for use and obsolescence, and adjusted as
necessary. Inventory consists of raw materials, work in progress and finished goods.
F-33
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. An impairment loss would be recognized when
the carrying amount of an asset exceeds the estimated discounted cash flow used in determining the fair value of the asset. ESW conducted a test for
impairment as of December 31, 2010 and found no impairment.
INTERNAL-USE
SOFTWARE
ESW capitalizes costs related to
computer software obtained or developed for internal use. Software obtained for internal use is enterprise-level business and finance software that ESW
is customizing to meet specific operational needs. Costs incurred in the development phase are capitalized and amortized over the useful life of the
internal use software, which is generally from three to five years. Capitalized internal-use software development costs for a project which is not yet
complete is included as Internal-use Software under Development in the consolidated balance sheet. Capitalization of such costs ceases at the point at
which the project is substantially complete and ready for its intended purpose. Costs capitalized for the period ended March 31, 2011 and year ended
December 31, 2010 were $129,603 and $126,340, respectively.
PATENTS AND
TRADEMARKS
Patents and trademarks consist
primarily of the costs incurred to acquire them from an independent third party. Accounting Standards Codification (ASC) Topic 350 requires
intangible assets with a finite life be tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (or asset
group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated discounted cash flow
used in determining the fair value of the asset. ESW conducted a test for impairment as of December 31, 2010 and found no impairment.
Patents and trademarks are being
amortized on a straight-line basis over their estimated life of ten years. Amortization expense for the period ended March 31, 2011 and 2010 was
$16,145 and $53,414 respectively.
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, notes payable to related party, bank loan, redeemable Class A special
shares and capital lease obligation approximate fair value because of the short-term nature of these items. Per ASC Topic 820 framework these are
considered Level 2 inputs where estimates are unobservable by market participants outside of the Company and must be estimated using assumptions
developed by the Company.
F-34
The advance share subscription
was classified as a liability and periodically marked to market until October 14, 2010 (see Note 10). The fair value of the advance share subscription
obligation was determined by the cash settlement value at the end of each period based on the closing price of the Companys common stock and
might be adversely affected by a change in the price of the Companys common stock. Per ASC Topic 820 framework this was considered a Level 2
input.
The exchange feature liability
and convertible derivative liability are classified as a liability and periodically marked to market. The fair value of the exchange feature liability
and convertible derivative liability are determined by the cash settlement value at the end of each period based on the closing price of the
Companys common stock and might be adversely affected by a change in the price of the Companys common stock. Per FAS 157 framework these
are considered a Level 1 input.
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 ASC Topic 605, revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the amount is fixed or determinable, risk of ownership has passed to the customer and collection is reasonably
assured.
The Company also derives revenue
(less than 2.7% of total revenue during the three month period ended March 31, 2011 and 1.3% during the three month period ended March 31, 2010.) from
providing air testing and environmental certification services. Revenues from these services are recognized upon performance.
RESEARCH AND
DEVELOPMENT
The Company is engaged in
research and development work. Research and development costs, are charged as operating expense of the Company as incurred. Any grant money received
for research and development work is used to offset these expenditures. For the three month periods ended March 31, 2011 and 2010, the Company expensed
$183,626 and $125,314 net of grant revenues, respectively, towards research and development costs. The expense excluding grant revenues used to offset
research and development costs for the three month periods ended March 31, 2011 and 2010 amounted to $413,625 and $226,840 and grant money amounted to
$229,999 and $101,526, respectively.
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 records warranty costs as 2% of revenue. As of March 31, 2011 and year ended December 31, 2010, $122,590 and
$91,336, respectively, was accrued against warranty provision and included in accrued liabilities. For the three month periods ended March 31, 2011 and
2010, the total warranty, service, service travel and installation costs included in cost of sales was $78,886 and $49,001,
respectively.
SEGMENTED
REPORTING
ASC Topic 280 changed the way
public companies report information about segments of their business in their quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major
customers.
The Company also derives revenue
(less than 2.7% of total revenue during the three month period ended March 31, 2011 and 1.3% during the three month period ended March 31, 2010) from
providing air testing and environmental certification services. For the three month periods ended March 31, 2011 and 2010, all revenues were generated
from the United States. During the three month periods ended March 31, 2011 and 2010, expenses incurred in the United States were cost of sales of
$28,359 and $10,639, officers compensation and directors fees
F-35
of $30,871 and $26,958, marketing, office and general costs of $228,677 and $241,584, consulting and professional fees of $5,538 and $16,717, depreciation and amortization of $82,360 and $96,116 and research and development of $129,422 and $136,444, respectively.
As of the period ended March 31,
2011 and the year ended 2010, $1,069,699 and $1,182,263, respectively, of property, plant and equipment, net of depreciation, is located at the air
testing facility in Pennsylvania and all remaining long lived assets are located in Concord, Ontario.
NOTE 3 RECENTLY ISSUED ACCOUNTING
STANDARDS
RECENTLY ADOPTED ACCOUNTING
PRONOUNCEMENTS
In January 2010, the FASB issued
Accounting Standards Update (ASU or Update) No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU
2010-06). ASU 2010-06 improves disclosures originally required under SFAS No. 157. ASU 2010-06 is effective for interim and annual periods
beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2009, and for interim periods within
those years. The adoption of the guidance did not have a material effect on the Companys consolidated condensed financial position, results of
operations, cash flows or related disclosures.
In December 2009, the FASB issued
ASU 2009-16, Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets (ASU 2009-16). ASU 2009-16 amends the
accounting for transfers of financials assets and will require more information about transfers of financial assets, including securitizations, and
where entities have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 is effective at the start of a reporting
entitys first fiscal year beginning after November 15, 2009, with early adoption not permitted. The adoption of the guidance did not have a
material effect on the Companys consolidated condensed financial position, results of operations, cash flows or related
disclosures.
In October 2009, the FASB issued
ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing (ASU 2009-15).
ASU 2009-15 amends the accounting and reporting guidance for debt (and certain preferred stock) with specific conversion features or other options. ASU
2009-15 is effective for fiscal years beginning on or after December 15, 2009. The adoption of the guidance did not have a material effect on the
Companys consolidated condensed financial position, results of operations, cash flows or related disclosures.
In August 2010, the FASB issued
ASU No. 2010-22, Accounting for Various Topics Technical Corrections to SEC Paragraphs this update amends various SEC paragraphs based on
external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics. The adoption of this ASU had no effect
on the Companys consolidated condensed financial statements.
In August 2010, the FASB issued
ASU No. 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This updates various SEC paragraphs pursuant to the issuance
of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The adoption of this ASU had
no effect on the Companys consolidated condensed financial statements.
In April 2010, the FASB issued
ASU No. 2010-17, Revenue Recognition Milestone Method. The objective of this Update is to provide guidance on defining a milestone and
determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The amendments in
this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after
June 15, 2010. The adoption of this ASU had no effect on the Companys consolidated condensed financial statements.
In April 2010, the FASB issued
ASU No. 2010-013, Compensation Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades a consensus of the FASB Emerging Issues Task Force. ASU 2010-13 addresses the
classification of an employee share-based award with an exercise price denominated in the currency of a market
F-36
in which the underlying equity security trades. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of this ASU had no effect on the Companys consolidated condensed financial statements.
In October 2009, the FASB issued
ASU No. 2009-13, Multiple Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force (ASU 2009-13)
(codified within ASC Topic 605). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of this ASU had no effect on the
Companys consolidated condensed financial statements.
NOTE 4 CASH AND CASH EQUIVALENTS
Cash and cash equivalents include
cash and highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase. At March 31, 2011 and
December 31, 2010 all of the Companys cash and cash equivalents consisted of cash.
NOTE 5 INVENTORY
Inventory consists
of:
Inventory |
March 31, 2011 |
December 31, 2010 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Raw
materials |
$ | 1,516,848 | $ | 1,669,481 | ||||||
Work-in-process |
2,070,702 | 2,737,545 | ||||||||
Finished
goods |
27,538 | 7,492 | ||||||||
Less: |
||||||||||
Reserve
for Obsolescence |
100,623 | | ||||||||
TOTAL
|
$ | 3,514,465 | $ | 4,414,518 |
As of March 31, 2011, the Company
recorded a $100,623 (March 31, 2010, $0) reserve for obsolescence related to contemplated sale of inventory that has been earmarked for sale at
an amount lower than cost in order to recover cash.
NOTE 6 PROPERTY, PLANT AND
EQUIPMENT
Property, plant and equipment
consist of the following:
Classification |
March 31, 2011 |
December 31, 2010 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Plant,
machinery and equipment |
$ | 5,954,815 | $ | 5,790,507 | ||||||
Office
equipment |
392,896 | 384,902 | ||||||||
Furniture
and fixtures |
467,493 | 461,817 | ||||||||
Vehicles |
18,450 | 18,288 | ||||||||
Leasehold
improvements |
1,048,210 | 1,041,023 | ||||||||
7,881,864 | 7,696,537 | |||||||||
Less:
accumulated depreciation |
(6,044,872 | ) | (5,765,164 | ) | ||||||
$ | 1,836,992 | $ | 1,931,373 |
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March 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Depreciation Expense |
2011 |
2010 |
|||||||||
Depreciation
expense included in cost of sales |
$ | 76,191 | $ | 41,511 | |||||||
Depreciation
expense included in operating expenses |
104,204 | 209,427 | |||||||||
Depreciation
expense included in research and development costs |
29,163 | 34,109 | |||||||||
Total
depreciation expense |
$ | 209,558 | $ | 285,047 |
At March 31, 2011 and December
31, 2010, the Company had $78,807 and $185,542, respectively, of customized equipment under construction.
The office equipment above
includes $0 in assets under capital lease with a corresponding accumulated depreciation of $0 as of March 31, 2011. The office equipment above includes
$19,784 in assets under capital lease with a corresponding accumulated depreciation of $16,615 for the three month period ended March 31,
2010.
The plant, machinery and
equipment above include $39,343 and $37,939 in assets under capital lease with a corresponding accumulated depreciation of $30,165 and $25,723 as of
March 31, 2011 and December 31, 2010, respectively.
NOTE 7 NOTES PAYABLE TO RELATED
PARTIES
On February 17, 2011, the Company
entered into note subscription agreements (collectively, the Loan Agreements) with, and issued unsecured subordinated promissory notes to,
Orchard Investments, LLC; Black Family 1997 Trust; Leon D. Black Trust UAD 11/30/92 FBO Alexander Black; Leon D. Black Trust UAD 11/30/92 FBO Benjamin
Black; Leon D. Black Trust UAD 11/30/92 FBO Joshua Black; Leon D. Black Trust UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan and
Richard Ressler (each individually a Subordinated Lender or Holder and collectively the (Subordinated Lenders or
Holders) who are current shareholders and deemed affiliates of certain members of the board of directors of the Company. The Loan
Agreements were approved by the independent directors of the Company.
As per the Loan Agreements, the
Subordinated Lenders made loans to the Company in the principal aggregate amount of $3 million, represented by unsecured subordinated promissory notes
(the Notes), dated February 17, 2011. Proceeds of the Loan, along with available cash, will be used to fund working capital, planned
capital investments and other general corporate purposes. With the proceeds of the Loan, the Company and its subsidiaries will be in compliance with
covenant obligations under the Demand Credit Agreement (the Credit Agreement) with the Canadian Imperial Bank of Commerce
(CIBC) dated March 10, 2010 for which the Company and subsidiaries had previously obtained waivers of covenant obligations that expired
February 15, 2011.
The Notes bear interest at a rate
of 10% per annum, payable in-kind on a monthly basis commencing March 17, 2011, up to the date on which the Note has been paid in full. The maturity
date of the Loan is the earlier of: (i) the closing of a rights offering of the Companys common stock, par value $.001 per share, at a sale price
of $0.12 per share (adjusted for any stock split, stock dividend or other similar adjustment) pursuant to which the Company plans to offer rights to
purchase approximately $8 million in shares of Common Stock (the Qualified Offering), and will also permit all Subordinated Lenders to
exchange their Notes, accrued interest (and the any Notes that may be issued for payment of interest) for shares of Common Stock at $0.12 per share or
(ii) June 17, 2011 (the Outside Date). The Qualified Offering has also been approved by the independent directors of the
Company.
In the event the Qualified
Offering does not take place on or before the Outside Date, then the Subordinated Lenders at their sole option, may require the Company to refrain from
making any payments on any of the outstanding principal and accrued interest outstanding under the Notes; however, the Company will not be prohibited
from paying any accrued interest in-kind through the issuance of substantially similar Notes, at any time. The Holders at their sole option may extend
the Outside Date.
In the event the Qualified
Offering closes on or prior to the Outside Date and for any reason a Holder shall have failed to have exchanged in the Qualified Offering the principal
or accrued interest outstanding under its Notes and the Holder wishes to exchange his or her Note(s) for Common Stock at a price of $0.12 per share
(adjusted
F-38
for any stock split, stock dividend or other similar adjustment), then the Company has agreed to offer such Holder the immediate right to purchase additional shares of Common Stock at the $0.12 price, so that all principal and accrued interest outstanding under the Notes shall have been exchanged for shares of Common Stock.
In the event the Qualified
Offering closes on or prior to the Maturity Date and, for any reason, certain Holders (the Qualified Holders) collectively shall have
failed to have invested at least $1 million in the Qualified Offering or pursuant to exchange of their Notes and the Qualified Holders wish to invest
the balance of such $1 million aggregate amount to purchase Common Stock at a price of $0.12 per share (adjusted for any stock split, stock dividend or
other similar adjustment), then the Company will be required to offer to the Qualified Holders the immediate right to invest the balance of such
investment amount to purchase additional shares of Common Stock at such price, so that in the aggregate, the Qualified Holders shall collectively
invested such $1 million amount.
If after the Maturity Date, any
principal or interest is outstanding, the Holder may exchange at their option any or all outstanding interest or principal in any offering or other
sale made by the Company for any shares in Common Stock.
Concurrent with entering into the
Loan Agreements and issuance of the Notes, CIBC, the Company and its subsidiaries; and the Subordinated Lenders entered into a Postponement and
Subordination Agreement (the Subordination Agreement) whereby the Subordinated Lenders agreed that the obligations of the Company and its
subsidiaries under the Notes as issued would be subordinate to the obligations of the Company and its subsidiaries under the Credit
Agreement.
The terms of the Loan Agreements
were analyzed in accordance with ASC 815 Derivatives and Hedging. The Loan Agreements allows for the price for Notes exchanged for Common Stock to be
adjusted in certain circumstances. The potential adjustment in the exchange price precludes the Company from being qualified for the exemption from
being considered to be a derivative instrument. As such, the option of the Holders to exchange Notes for Common Stock and the option of the Qualified
Holders to invest the balance of $1 million aggregate amount to purchase Common Stock were determined to be derivatives embedded in the Notes. These
embedded derivatives are bundled together as a single, compound embedded derivative and recorded and valued as a liability at the time of issuance on
February 17, 2011 and on March 31, 2011.
The fair value of the embedded
derivatives issued under the Loan Agreements on February 17, 2011 and March 31, 2011 was determined to be $3,485,101 and $2,148,656, respectively with
the following assumptions: (1) risk free interest rate of 0.15% and 0.17%, (2) remaining contractual life of 4 and 2.5 months, (3) expected stock price
volatility of 194% and 201%, and (4) expected dividend yield of zero. Since the fair value of the embedded derivatives was in excess of the proceeds,
the Company recorded an immediate expense of $485,101 to the condensed consolidated statement of operations as a financing charge on embedded
derivative liability. The embedded derivatives liability was recorded as a discount to the Notes at the time of issuance. The discount is recorded as
interest accretion expense in the consolidated condensed statements of operations using the effective-interest method. The change in the fair value of
$1,336,445 of the embedded derivatives is recorded as gain in the consolidated condensed statements of operations.
At March 31, 2011 and December
31, 2010, the $1,050,000 and $0 net outstanding balance of notes payable to related parties comprises $3,000,000 and $0 of debt, net of unamortized
debt discount of $1,950,000 and $0, respectively.
NOTE 8 BANK LOAN
Effective March 31, 2010,
ESWs subsidiary, ESW Canada, entered into a demand revolving credit facility agreement with a Canadian chartered bank, Canadian Imperial Bank of
Commerce (CIBC) to meet working capital requirements (the Demand Credit Agreement). The Demand Credit Agreement has a credit
limit of $4 million Canadian. Borrowings under the facility are limited to a percentage of accounts receivable plus a percentage of inventories (capped
at $1 million Canadian or 50% of the accounts receivable portion) less any prior ranking claims. The Demand Credit Agreement is guaranteed by the
Company and its subsidiaries, ESWC, ESWA, BBL, and ESWT, through a general security agreement over all assets to CIBC. The facility has been guaranteed
to CIBC under EDCs Export Guarantee Program. Borrowings under the Demand Credit Agreement bear interest at 2.25%
F-39
above CIBCs prime rate of interest. Obligations under the Demand Credit Agreement are collateralized by a first-priority lien on the assets of the Company and its subsidiaries, including accounts receivable, inventory, equipment and other tangible and intangible property, including the capital stock of all direct subsidiaries.
The terms relating to the Demand
Credit Agreement specifically note that the Company maintain a tangible net worth of at least $4.0 million Canadian. The Demand Credit Agreement
contains, among other things, covenants, representations and warranties and events of default customary for a facility of this type for the Company and
its subsidiaries. Such covenants include certain restrictions on the incurrence of additional indebtedness, liens, acquisitions and other investments,
mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other repurchases in respect of capital stock, voluntary
prepayments of certain other indebtedness, capital expenditures and transactions with affiliates, subject to certain exceptions. Under certain
conditions amounts outstanding under the Demand Credit Agreement may be accelerated. Such events include failure to comply with covenants, breach of
representations or warranties in any material respect, non-payment or acceleration of other material debt, entry of material judgments not covered by
insurance, or a change of control of the Company.
On November 8, 2010, November 26,
2010, and December 23, 2010, the Companys wholly owned subsidiary, ESWC, received the first, second and third waivers, respectively, of certain
financial covenants under its Demand Credit Agreement with CIBC. Without the waiver, the Companys subsidiary would not be in compliance with the
current ratio and effective tangible net worth covenants as set forth in the Demand Credit Agreement. In the event the Company and its subsidiary,
ESWC, fail to comply with the terms of the waiver and meet the current ratio and effective tangible net worth covenants prior to the end of the waiver
period, same would constitute an event of default and the bank loan may need to be repaid unless a further waiver or modification to the Demand Credit
Agreement can be obtained.
The third waiver provided by CIBC
was through January 31, 2011 and also provides for a fee payable to the lender for the extension, as well as a reduction in the maximum security margin
deficit as defined under the Demand Credit Agreement (by either reducing borrowing or increasing the borrowing base) and an increase in the annual
interest rate to CIBCs prime rate plus 4.50% from CIBCs prime rate plus 2.25% effective January 1, 2011.
Effective February 4, 2011, the
Companys wholly owned subsidiary, ESWC, received a fourth waiver of certain financial covenants under its Demand Credit Agreement with CIBC.
Without the waiver, the Companys subsidiary would not be in compliance with the current ratio and effective tangible net worth covenants as set
forth in the Demand Credit Agreement. The fourth waiver provided by CIBC extends the waiver period from January 31, 2011 through February 14, 2011 and
also provides for a fee payable to CIBC for the extension as well as requiring the elimination of any margin deficit by February 14, 2011. In the event
the Company and its subsidiary, ESWC, failed to comply with the terms of the waiver and meet the current ratio and effective tangible net worth
covenants prior to the end of the waiver period, same will constitute an event of default as set forth in the Demand Credit Agreement unless a further
waiver or modification to the Demand Credit Agreement could be obtained.
The closing of the $3 million
unsecured subordinated promissory notes effective February 17, 2011 allowed the Company and its subsidiaries to comply with covenants and obligations
under the Demand Credit Agreement with CIBC dated March 10, 2010. ESW is working on upgrading or renewing the Demand Credit Agreement and reviewing
options with other senior lenders. The Company has obtained an extension to the Demand Credit Agreement to May 31, 2011 from its current senior lender
and is working to extend this date.
As of March 31, 2011 and December
31, 2010, $1,636,444 and $3,424,889, respectively, was owed under the credit facility to CIBC.
NOTE 9 REDEEMABLE CLASS A SPECIAL
SHARES
700,000 Class A
special shares authorized, issued, and outstanding. |
$453,900
(based on the historical exchange rate at the time of issuance.) |
The redeemable Class A special
shares were issued by the Companys wholly owned subsidiary, BBL, without par value, and are redeemable on demand by the holder of the shares,
which is a private Ontario Corporation, at $700,000 Canadian (which translates to $721,980 US and $703,801 US at March 31, 2011 and December 31,
2010,
F-40
respectively). As the redeemable Class A special shares were issued by the Companys wholly owned subsidiary, BBL, the maximum value upon which the Company is liable is the net book value of BBL. As of March 31, 2011 and December 31, 2010, BBL had an accumulated deficit of $1,192,858 US ($1,845,375 Canadian), and therefore, the holder would be unable to redeem the redeemable Class A special shares at their ascribed value.
NOTE 10 CONVERTIBLE DEBENTURES
Convertible debentures issued by
the Company are summarized as follows:
2008 Debentures |
2009 Debentures |
2010 Debentures |
Total March 31, 2010 |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Face value of
convertible debenture |
$ | 9,000,000 | $ | 1,600,000 | $ | 3,000,000 | $ | 13,600,000 | ||||||||||
Less: Beneficial conversion feature |
| (256,000 | ) | (540,000 | ) | (796,000 | ) | |||||||||||
Deferred
costs |
(59,738 | ) | | (80,625 | ) | (140,363 | ) | |||||||||||
Book value
upon issuance |
8,940,262 | 1,344,000 | 2,379,375 | 12,663,637 | ||||||||||||||
Accretion of
the debt discount |
| 256,000 | 540,000 | 796,000 | ||||||||||||||
Amortization
of deferred costs |
59,738 | | 80,625 | 140,363 | ||||||||||||||
Carrying
Value |
9,000,000 | 1,600,000 | 3,000,000 | 13,600,000 | ||||||||||||||
Conversion
(March 25,2010) |
(9,000,000 | ) | (1,600,000 | ) | (3,000,000 | ) | (13,600,000 | ) | ||||||||||
Carrying
Value (March 32, 2011) |
$ | | $ | | $ | | $ | |
Effective March 19, 2010, the
Company issued $3,000,000 of its 9% convertible debentures (the 2010 Debentures) to five (5) accredited investors under Rule 506 of
Regulation D of Section 4(2) of the Securities Act. The 2010 Debentures were for a term of three (3) years and were convertible into shares of the
Companys common stock at the option of the holder by dividing the principal amount of the 2010 Debenture to be converted by $0.50. The 2010
Debentures earned interest at a rate of 9% per annum payable in cash or in shares of the Companys common stock at the option of the holder. If
the holder elected to receive interest in shares of common stock, the number of shares of common stock to be issued for interest would be determined by
dividing accrued interest by $0.50. The 2010 Debentures had a mandatory conversion feature that required the holders to convert in the event a majority
of the Companys pre-existing outstanding 9% convertible debentures converted. Subject to the holders right to convert and the mandatory
conversion feature, the Company had the right to redeem the 2010 Debentures at a price equal to one hundred and ten percent (110%) multiplied by the
then outstanding principal amount plus unpaid interest to the date of redemption. Upon maturity, the debenture and interest was payable in cash or
common stock at the option of the Holder. The Company also had provided the holders of the Debentures registration rights. The 2010 Debentures
contained customary price adjustment protections.
At the time the 2010 Debentures
were issued, the Company recorded a debt discount for a beneficial conversion feature in the amount of $540,000. The debt discount being the aggregate
intrinsic value calculated as the difference between the market price of the Companys share of stock on March 19, 2010 and the conversion price
of the 2010 Debentures. The debt discount was being accreted over the three (3) year life of the debentures using the effective yield method. The
effective yield on the debentures was 16.36%.
Effective March 25, 2010, the
November 2008 and the August 2009 debenture holders agreed to convert all outstanding convertible debentures as per the terms of the respective
debenture agreements. The early conversion of the debentures was a condition precedent to the Companys wholly owned subsidiary, ESWC, entering
into a new credit facility with CIBC (see Note 8). A total of $10,600,000 in principal and $1,176,445 of accrued interest was converted into 43,756,653
shares of restricted common stock. The conversion of the November 2008 and the August 2009 debentures also triggered the mandatory conversion feature
on the March 19, 2010 debentures. A total of $3,000,000 in principal and $3,797 in accrued interest was converted into 6,007,595 shares of restricted
common stock. With these transactions effective March 25, 2010, the Company has $0 of convertible debentures and accrued interest on convertible
debenture.
As part of the agreement to
convert all existing convertible debentures, the Company was committed to pay a premium as an inducement to convert all debentures. The premium was
payable to all converting debenture holders and was subject to a positive fairness opinion, approval by a Fairness Committee consisting of independent
Directors
F-41
of the Companys Board of Directors and an increase in the share capital of the Company. The premium consists of 4,375,668 shares of common stock. As the Company did not have sufficient authorised shares as of the date of conversion of the debentures to fulfill the premium, the premium had been recorded as an advance share purchase agreement at a fair market value of $2,909,872 as of March 31, 2010. The agreement is without interest, subordinated to the banks position and payable in a fixed number of common shares (4,375,668 shares) of the Company upon increase in the authorized share capital of the Company.
Up to October 14, 2010, the
Company did not have sufficient authorized and unissued shares to fulfill the advance share subscription. Under these conditions, FASB ASC Subtopic
815-40, Contracts in Entity Own Equity, precludes equity classification of this obligation. As such, the advance share subscription was
classified as a liability and periodically marked to market. The fair value of the obligation was determined to be $1,662,753 at October 14, 2010. The
fair value of the obligation was determined by the cash settlement value at the end of each period based on the closing price of the Companys
common stock. The decrease in fair value of this liability of $1,247,119 was recorded as a mark to market adjustment on advance share subscription in
the consolidated statement of operations and comprehensive loss.
Effective October 14, 2010, the
Companys Board of Directors ratified certain corporate action approved by the written consent of a majority of the Companys shareholders
pursuant to a Definitive Information Statement on Schedule 14C that the Company filed with the Securities and Exchange Commission on September 3, 2010
(the Definitive Information Statement) and distributed to shareholders of record. The Board of Directors ratified an amendment to the
Companys articles of incorporation whereby the Company proceeded to file an amendment to its articles of incorporation increasing its authorized
shares of common stock from 125,000,000 to 250,000,000 shares.
Effective November 30, 2010, the
Company issued an aggregate of 4,375,668 restricted shares of common stock to thirteen (13) prior debenture holders in connection with the early
conversion of their debentures.
Included in the condensed
consolidated financial statements of the Company at March 31, 2011 is 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. The exchange feature provides that if within twelve months from March 19, 2010, the Company enters
into or closes another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the Securities)
on terms and conditions more favorable to another purchaser, the terms and conditions of the 2010 Debentures shall be adjusted to reflect the more
favorable terms. The exchange feature was determined by the Company to be freestanding financial instrument and also to be a liability within the scope
of ASC 480 Distinguishing Liabilities from Equity since there is an inverse relationship between the stock price of the Company and the Companys
obligation. On December 31, 2010, the Company evaluated the fair value of the exchange feature based on the probability of closing another financing by
March 18, 2011 and the fair value of the number of incremental shares to be issued at a lower estimated issue price. The probability of closing another
financing by March 18, 2011 was estimated to be 100% on December 31, 2010. The fair value of the Companys common stock is determined by the
closing price on the valuation date. On December 31, 2010, an exchange feature liability of $1,680,000 was recorded for the 2010 Debentures (see also
note 12).
Effective February 17, 2011, the
Company and the 2010 Debenture investors reached an agreement whereby the investors will receive an approximate aggregate of 19,000,000 additional
shares of Common Stock at an estimated price of $0.12 in conjunction with certain rights under the Prior Subscription Agreements in the event the
Company closes a Qualified Offering (see note 7 for details). At March 31, 2011 the exchange feature liability related to the 2010 Debenture was
recorded at a fair value of $2,280,000 with the change in fair value of exchange feature liability of $600,000 recorded as an expense in the
consolidated condensed statements of operations and comprehensive loss.
F-42
Transaction Detail |
|
Original Instrument |
|
Additional Shares |
|
Exchange Feature Liability December 31, 2010 |
|
Change in fair value of exchange feature liability March 31, 2011 |
|
Exchange Feature Liability March 31, 2011 |
|
Comments |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 2010
Offering |
Convertible Debenture |
19,000,000 | $ | 1,680,000 | $ | 600,000 | $ | 2,280,000 | See Note 10 | |||||||||||||||||
November
2010 Offering |
Common Stock and Warrants |
1,750,000 | 219,168 | (9,299 | ) | 209,869 | See Note 12 | |||||||||||||||||||
December 2010 Offering |
Common Stock and Warrants |
1,750,000 | 228,262 | (11,962 | ) | 216,300 | See Note 12 | |||||||||||||||||||
Totals |
22,500,000 | $ | 2,127,430 | $ | 578,739 | $ | 2,706,169 |
As of March 31, 2011 and December
31, 2010, total convertible debentures and corresponding accrued interest amounted to $0 and $0, respectively. As of December 31, 2010, the debt
discount of $768,981 and deferred cost of $117,131 were fully amortized and expensed due to the conversion of the debentures effective March 25,
2010.
LEGAL FEES RELATED TO 2008 AND
2010 CONVERTIBLE DEBENTURES
The Company had also recorded a
deferred cost asset of $80,625 for legal fees paid in relation to the issuance of the 2010 Debentures. The deferred costs were being amortized over the
term of the 2010 Debentures using the straight line method.
At December 31, 2010, the
deferred cost assets were fully amortized due to the conversion of the debentures effective March 25, 2010. As of December 31, 2010, deferred cost
assets have been presented net against the related convertible debentures.
NOTE 11 INCOME TAXES
As of March 31, 2011, there are
tax loss carry forwards for Federal income tax purposes of approximately $26,375,614 available to offset future taxable income in the United States.
The tax loss carry forwards expire in various years through 2031. 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 $9,231,465 has been
established until realizations of the tax benefit from the loss carry forwards meet the more likely than not criteria.
Year |
Loss Carry Forward |
|||||
---|---|---|---|---|---|---|
1999
|
$ | 407,067 | ||||
2000
|
2,109,716 | |||||
2001
|
2,368,368 | |||||
2002
|
917,626 | |||||
2003
|
637,458 | |||||
2004
|
1,621,175 | |||||
2005
|
2,276,330 | |||||
2006
|
3,336,964 | |||||
2007
|
3,378,355 | |||||
2008
|
3,348,694 | |||||
2009
|
2,927,096 | |||||
2010
|
2,389,225 | |||||
2011
|
657,540 | |||||
Total
|
$ | 26,375,614 |
Additionally, as of March 31,
2011, the Companys two wholly owned Canadian subsidiaries had non-capital tax loss carry forwards of approximately $12,182,415 be used, in future
periods, to offset taxable income. The loss carry forwards expire in various years through 2031. The deferred tax asset of approximately $3,775,331 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.
F-43
Year |
Loss Carry Forward Foreign Operations |
|||||
---|---|---|---|---|---|---|
2006
|
$ | 588,051 | ||||
2007
|
7,397 | |||||
2008
|
4,154,396 | |||||
2009
|
2,846,379 | |||||
2010
|
2,900,652 | |||||
2011
|
1,685,540 | |||||
Total
|
$ | 12,182,415 |
For the period ended March 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 |
2010 |
||||||||||
Statutory tax
rate: |
|||||||||||
U.S.
|
35.00 | % | 35.00 | % | |||||||
Foreign
|
31.00 | % | 33.00 | % | |||||||
Loss before
income taxes: |
|||||||||||
U.S.
|
$ | (1,460,821 | ) | $ | (4,653,428 | ) | |||||
Foreign
|
(1,673,811 | ) | (344,131 | ) | |||||||
$ | (3,134,632 | ) | $ | (4,997,559 | ) | ||||||
Expected
income tax recovery |
$ | (1,030,001 | ) | $ | (1,742,263 | ) | |||||
Differences
in income tax resulting from: |
|||||||||||
Depreciation
(Foreign operations) |
3,311 | 17,876 | |||||||||
Change in
fair value of exchange feature liability |
202,559 | | |||||||||
Financing
charge on embedded derivative liability |
169,785 | | |||||||||
Inducement
premium on conversion of Debentures |
| 1,018,455 | |||||||||
Stock based
compensation |
9,060 | | |||||||||
Gain on
convertible derivative |
(467,756 | ) | | ||||||||
Long-term
debt accretion |
367,500 | 269,143 | |||||||||
Accrued
interest on loans |
| 64,350 | |||||||||
(745,542 | ) | (372,439 | ) | ||||||||
Benefit of
losses not recognized |
745,542 | 372,439 | |||||||||
Income tax
provision (recovery) per financial statements |
$ | | $ | |
Components of deferred income tax
assets are as follows:
As at March 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 |
2010 |
||||||||||
Property,
plant and equipment |
$ | 110,255 | $ | 94,203 | |||||||
Tax loss
carry forwards |
13,006,796 | 10,757,068 | |||||||||
Total
|
13,117,051 | 10,851,271 | |||||||||
Valuation
allowance |
(13,117,051 | ) | (10,851,271 | ) | |||||||
Carrying
Value |
$ | | $ | |
Effective January 1, 2007, the
Company adopted FASBs guidance on accounting for uncertainty in income taxes. This guidance prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return. For those
benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. There was no material
impact on the Companys consolidated financial position and results of operations as a result of the adoption of this guidance. The Company does
not believe there will be any material changes in its unrecognized tax positions over the next twelve months.
F-44
The Company will recognize
interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statement of operations and
comprehensive loss. Accrued interest and penalties will be included within the related tax liability line in the consolidated balance
sheet.
In many cases the Companys
uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by
major tax jurisdiction, as of March 31, 2011:
United States
Federal |
2007present | |||||
United States
State |
2007present | |||||
Canada
Federal |
2008present | |||||
Canada
Provincial |
2008present |
Valuation allowances reflect the
deferred tax benefits that management is uncertain of the Companys ability to utilize in the future.
NOTE 12 STOCKHOLDERS EQUITY /
(DEFICIT)
On March 25, 2010, the Company
issued 43,756,653 shares of common stock in connection with the conversion of 2008 Debentures and 2009 Debentures into equity (see Note
10).
On March 25, 2010, the Company
issued 6,007,595 shares of restricted common stock in connection with the conversion of 2010 Debentures into equity (see Note 10).
On November 30, 2010, the Company
issued 4,375,668 shares as an inducement premium to the holders to convert all convertible debentures outstanding as of March 25, 2010 (see Note 10).
As fully disclosed in Note 10 to the consolidated financial statements, the Companys Board of Directors approved the increase in the authorized
share capital effective October 14, 2010.
Effective November 9, 2010 and
December 8, 2010, the Company closed on its first tranche and second tranche of a unit offering in the amount of $300,000 per tranche for gross
proceeds of $600,000 whereby the Company issued 1,500,000 (Unit Offering) units. The unit offering is for up to $5 million. The units are
in the form of shares of the Companys common stock, par value $0.001 at $0.40 per share plus for each share of Common Stock subscribed to under
the unit offer the investor will receive one warrant, the exercise price will be $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 will be subject to adjustment in all respects in the
event of a stock split or similar adjustment by the Company. A commission of 4% of the gross proceeds was paid from the proceeds of the unit offering
and 7.5 units for every $100 of the gross proceeds raised are payable for brokers fees are treated as a cost of capital and no income statement
recognition is required.
The Share Subscription Agreement
for the units contains an exchange feature which provides that if within six months from effective date of closing, the Company enters into or closes
another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the Securities) on terms and
conditions more favorable to another purchaser, the terms and conditions of the unit offering shall be adjusted to reflect the more favorable terms.
The exchange feature was determined by the Company to be freestanding financial instrument and also to be a liability within the scope of ASC 480
Distinguishing Liabilities from Equity since there is an inverse relationship between the stock price of the Company and the Companys obligation.
On November 9, 2010, December 8, 2010 and December 31, 2010, the Company evaluated the fair value of the exchange feature based on the probability of
closing another financing within six months and the fair value of the number of incremental shares and warrants to be issued at a lower estimated issue
price for units. The probability of closing another financing in the next six months on November 9, 2010 and December 8, 2010 was estimated to be 50%
and on December 31, 2010 was estimated to be 100%.
F-45
The fair value of the
Companys common stock is determined by the closing price on the valuation date and the fair value of the warrants is determined using a binomial
option valuation model. Key assumptions for the binomial option valuation were as follows:
November 9, 2010 Offering |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Valuation Date |
Nov. 9, 2010 |
Nov. 9, 2010 lower estimated strike price |
Dec. 31, 2010 |
Dec. 31, 2010 lower estimated strike price |
||||||||||||||
Strike Price
second year |
$ | 0.65 | $ | 0.63 | $ | 0.65 | $ | 0.36 | ||||||||||
Strike Price
first year |
$ | 0.55 | $ | 0.54 | $ | 0.55 | $ | 0.30 | ||||||||||
Closing
market price |
$ | 0.39 | $ | 0.39 | $ | 0.22 | $ | 0.22 | ||||||||||
Volatility
|
135.72 | % | 135.72 | % | 113.47 | % | 113.47 | % | ||||||||||
Time to
expiration |
2 years | 2 years | 1.83 years | 1.83 years | ||||||||||||||
Risk free
rate |
0.46 | % | 0.46 | % | 0.61 | % | 0.61 | % | ||||||||||
Dividend
yield |
0 | % | 0 | % | 0 | % | 0 | % |
December 8, 2010 Offering |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Valuation Date |
Dec. 8, 2010 |
Dec. 8, 2010 lower estimated strike price |
Dec. 31, 2010 |
Dec. 31, 2010 lower estimated strike price |
||||||||||||||
Strike Price
second year |
$ | 0.65 | $ | 0.39 | $ | 0.65 | $ | 0.36 | ||||||||||
Strike Price
first year |
$ | 0.55 | $ | 0.33 | $ | 0.55 | $ | 0.30 | ||||||||||
Closing
market price |
$ | 0.24 | $ | 0.24 | $ | 0.22 | $ | 0.22 | ||||||||||
Volatility
|
132.07 | % | 132.07 | % | 117.03 | % | 117.03 | % | ||||||||||
Time to
expiration |
2 years |
2 years |
1.92 years |
1.92 years |
||||||||||||||
Risk free
rate |
0.63 | % | 0.63 | % | 0.61 | % | 0.61 | % | ||||||||||
Dividend
yield |
0 | % | 0 | % | 0 | % | 0 | % |
On December 31, 2010, an exchange
feature liability of $453,861 was recorded for the unit offering.
Effective February 17, 2011, the
Company and the Unit Offering investors reached an agreement whereby the investors will receive an approximate aggregate of 3,500,000 additional shares
of Common Stock at an estimated price of $0.12 in conjunction with certain rights under the Share Subscription Agreements in the event the Company
closes a Qualified Offering (see note 7 for details). At March 31, 2011 the exchange feature liability related to the shares in the Unit Offering was
recorded at a fair value of $432,600. At March 31, 2011 the exchange feature liability related to the warrants in the Unit Offering was recorded at a
fair value of $0 since the probability of Company exchanging warrants with a lower strike price is estimated to be 0%. The change in fair value of
exchange feature liability related to the Unit Offering of $(21,261) is recorded as a reduction of the loss on fair value of exchange feature liability
related to the 2010 Debentures.
Transaction Detail |
|
Original Instrument |
|
Additional Shares |
|
Exchange Feature Liability December 31, 2010 |
|
Change in fair value of exchange feature liability March 31, 2011 |
|
Exchange Feature Liability March 31, 2011 |
|
Comments |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 2010
Offering |
Convertible Debenture |
19,000,000 | $ | 1,680,000 | $ | 600,000 | $ | 2,280,000 | See Note 10 | |||||||||||||||||
November
2010 Offering |
Common Stock and Warrants |
1,750,000 | 219,168 | (9,299 | ) | 209,869 | See Note 12 | |||||||||||||||||||
December 2010 Offering |
Common Stock and Warrants |
1,750,000 | 228,262 | (11,962 | ) | 216,300 | See Note 12 | |||||||||||||||||||
Totals |
22,500,000 | $ | 2,127,430 | $ | 578,739 | $ | 2,706,169 |
NOTE 13 STOCK OPTIONS AND WARRANT
GRANTS
On April 15, 2010 the Board of
Directors 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 Companys common stock as of the date of grant) with expiry five
years from the date of award. Effective February 7, 2011, with the resignation of a director, the unvested portion of the
F-46
stock options has lapsed, and ceases to vest. The balance of the stock option expense of the April 15, 2010 award is as follows:
Date |
Stock Option Expense |
|||||
---|---|---|---|---|---|---|
April 15,
2011 |
$ | 62,127 | ||||
April 15,
2012 |
$ | 82,836 | ||||
April 15,
2013 |
$ | 20,709 |
As of March 31, 2011 and 2010,
$25,886 and $0, respectively, has been recorded in the consolidated condensed statements of operations and comprehensive loss for stock based
compensation.
During the three month period
ended March 31, 2011, no stock options or warrants were issued.
A summary of option transactions,
including those granted pursuant to the terms of certain employment and other agreements is as follows:
Details |
Stock Purchase Options |
Weighted Average Exercise Price |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
OUTSTANDING,
JANUARY 1, 2010 |
3,670,000 | $ | 0.76 | |||||||
Granted
|
900,000 | ($0.65 | ) | |||||||
Expired
|
(1,765,000 | ) | ($0.97 | ) | ||||||
OUTSTANDING,
DECEMBER 31, 2010 |
3,600,000 | ($0.68 | ) | |||||||
Expired
|
(200,000 | ) | ($0.65 | ) | ||||||
OUTSTANDING,
DECEMBER 31, 2010 |
3,400,000 | $ | 0.67 | ) |
At December 31, 2010, the
outstanding options have a weighted average remaining life of 20 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.
The weighted average fair value
of options granted during 2010 was $0.41 and was estimated using the Black-Scholes option-pricing model, using the following
assumptions:
2010 |
||||||
---|---|---|---|---|---|---|
Expected
volatility |
117% |
|||||
Risk-free
interest Rate |
1.08% |
|||||
Expected life
|
4
yrs |
|||||
Dividend yield
|
0.00% |
|||||
Forfeiture rate
|
0.00% |
The Black-Scholes options-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 Companys stock purchase options and warrants. The model also requires
highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values.
Accordingly, management believes that this model does not necessarily provide a reliable single measure of the fair value of the Companys stock
options and warrants.
At March 31, 2011, the Company
had outstanding options as follows:
Number of Options |
Exercise Price |
Expiration Date |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
2,150,000 | $ | 0.71 | February 16, 2012 | |||||||
100,000 | $ | 1.00 | February 8, 2013 | |||||||
250,000 | $ | 0.27 | August 6 ,2013 | |||||||
900,000 | $ | 0.65 | April 15, 2015 | |||||||
3,400,000 |
F-47
Warrants issued in connection
with various private placements of equity securities, are treated as a cost of capital and no income statement recognition is required. A summary of
warrant transactions is as follows:
Details |
Warrant Shares |
Weighted Average Exercise Price |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
OUTSTANDING,
JANUARY 1, 2010 |
| $ | | |||||||
Granted
|
1,545,000 | $ | 0.65 | |||||||
Exercised
|
| $ | | |||||||
Expired
|
| $ | | |||||||
OUTSTANDING,
DECEMBER 31, 2010 & MARCH 31, 2011 |
1,545,000 | $ | 0.65 |
Effective November 9, 2010 and
December 8, 2010, the Company closed on its first tranche and second tranche of 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 is for up to $5 million. The units are in the form of shares of the
Companys common stock, par value $0.001 at $0.40 per share plus for each share of Common Stock subscribed to under the unit offer the investor
will receive one warrant exercisable for 1 share of common stock, the exercise price will be $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 will be subject to adjustment in all respects
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 are payable for brokers fees.
No warrants were issued during
the three month period ended March 31, 2011.
NOTE 14 RELATED PARTY TRANSACTIONS
In addition to fees and salaries
and reimbursement of business expenses, during the three month period ended March 31, 2011 transactions with related parties include:
|
$3,000,000 issuance of unsecured subordinated promissory notes (the information required by this item is included in Note 7 to the consolidated financial statements). |
|
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. The exchange feature provides that if within twelve months from March 19, 2010, the Company enters into or closes another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the Securities) on terms and conditions more favorable to another purchaser, the terms and conditions of the 2010 Debentures shall be adjusted to reflect the more favorable terms. The exchange feature was determined by the Company to be freestanding financial instrument and also to be a liability within the scope of ASC 480 Distinguishing Liabilities from Equity since there is an inverse relationship between the stock price of the Company and the Companys obligation. On December 31, 2010, the Company evaluated the fair value of the exchange feature based on the probability of closing another financing by March 18, 2011 and the fair value of the number of incremental shares to be issued at a lower estimated issue price. The probability of closing another financing by March 18, 2011 was estimated to be 100% on December 31, 2010. The fair value of the Companys common stock is determined by the closing price on the valuation date. On December 31, 2010, an exchange feature liability of $1,680,000 was recorded for the 2010 Debentures (see also note 12). Effective February 17, 2011, the Company and the 2010 Debenture investors reached an agreement whereby the investors will receive an approximate aggregate of 19,000,000 additional shares of Common Stock in conjunction with certain rights under the Prior Subscription Agreements in the event the Company closes a qualified offering (see note 7 for details). At March 31, 2011 the exchange feature liability related to the convertible debentures was re-valued to $2,258,739 with the change in fair value of exchange feature liability of $578,739 expense recorded in the consolidated condensed statements of operations and comprehensive loss. In March 2010, Orchard Investments, LLC invested $1 million in the $3 million convertible debentures offering; of the exchange feature liability $752,913 is attributed to the investment made by Orchard Investments, LLC (Orchard) based on their relative contribution to the March 2010 |
F-48
subscription. Orchard will receive 6,333,333 additional shares of Common Stock in conjunction with certain rights under the Prior Subscription Agreements in the event the Company closes the Qualified Offering (see note 7 for details of the Qualified Offering) |
|
$50,000 related to services provided by Orchard Capital Corporation under a services agreement effective January 30, 2011 as further disclosed in Note 18. |
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
Companys transfer agent. He has no ownership equity in Bay City Transfer Agency Registrar Inc. nor is he an officer or a director of Bay City
Transfer Agency Registrar Inc. For the three month period ended March 31, 2011 and 2010, the Company paid Bay City Transfer Agency Registrar Inc.
$1,325 and $0, respectively.
During the three month period
ended March 31, 2010 transactions with related parties included $6,134,024 related to conversion of convertible debentures including interest of
$634,024 thereon into common stock; $1,292,894 related to inducement on early conversion of convertible debentures; and the repayment of $511,342
principal and interest on promissory note in addition to salaries and reimbursement of business expenses.
NOTE 15 COMMITMENTS AND
CONTINGENCIES
LEASES
Effective November 24, 2004, the
Companys 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 Companys research and development facilities. The lease
commenced on January 15, 2005 and expired January 31, 2010. Effective October 16, 2009, the Companys wholly-owned subsidiary ESW America, Inc.
entered into a lease renewal agreement with Nappen & Associates for the leasehold property at 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 will now expire February
28, 2013. Effective March 31, 2011, ESW America, Inc. entered into a lease amendment agreement with Nappen & Associates for the leasehold property
at Pennsylvania, whereby ESWA has the sole option to extend the expiry of the lease agreement by an additional 3 years six months prior to February 28,
2013; there were no modifications to the original economic terms of the lease.
Effective December 20, 2004, the
Companys wholly-owned subsidiary, ESWC, entered into an offer to lease agreement for approximately 50,000 square feet of leasehold space in
Concord, Ontario, Canada. The leasehold space houses the Companys executive offices and a high volume manufacturing plant. The possession of the
leasehold space took place on May 24, 2005 and the term of the lease was extended to September 30, 2010. ESWC renewed its lease agreement at the
current property for an additional five year term. The renewed lease period commenced on October 1, 2010 and ends on September 30,
2015.
The following is a summary of the
minimum annual lease payments, for both leases.
Year |
||||||
---|---|---|---|---|---|---|
2011
|
$ | 351,021 | ||||
2012
|
468,029 | |||||
2013
|
319,813 | |||||
2014
|
297,476 | |||||
2015
|
223,107 | |||||
$ | 1,659,446 |
LEGAL
MATTERS
From time to time, the Company
may be involved in a variety of claims, suits, investigations and proceedings arising from the ordinary course of our business, breach of contract
claims, labor and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and their
results cannot be predicted with certainty, ESW believes that the resolution of current pending matters will not have a
F-49
material adverse effect on its business, consolidated financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on ESW because of legal costs, diversion of management resources and other factors. In addition, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect ESWs financial position, results of operations or cash flows in a particular period.
CAPITAL LEASE
OBLIGATION
The Company is committed to the
following lease payments in connection with the acquisition of equipment under capital leases:
Year |
||||||
---|---|---|---|---|---|---|
2011
|
$ | 2,124 | ||||
2012
|
1,180 | |||||
TOTAL
|
3,304 | |||||
Less imputed
interest |
(179 | ) | ||||
Total obligation
under capital lease |
3,125 | |||||
Less current
portion |
(1,806 | ) | ||||
TOTAL LONG-TERM
PORTION |
$ | 1,319 |
The Company incurred $80 and $515
of interest expense on capital lease obligation for the periods ended March 31, 2011 and 2010, respectively.
RESTRUCTURING EXPENSES AND
SEVERANCE AGREEMENTS
Restructuring charges relate to
changes in the management and reductions in work force of the Companys subsidiary ESW Canada Inc., and consist of mainly of severance agreements
amounting to $478,274, travel costs of $24,127 and legal fees of $16,408 associated with restructuring activities. The Company accrued a portion of the
expenses related to severance agreements with a former Chief Executive Officer, Vice President of Operations and Director of Sales. As of March 31,
2011, $310,947 (March 31, 2010 $0) was included in accrued liabilities towards the balance of severance payments owing.
NOTE 16 LOSS PER SHARE
Potential common shares of
3,400,000 related to ESWs outstanding stock options, 1,500,000 shares related to ESWs outstanding warrants, potential common shares of
33,333,333 from the exchange of unsecured subordinated promissory notes and 22,500,000 shares of common stock under the exchange feature liability were
excluded from the computation of diluted loss per share for the three month period ended March 31, 2011.
Potential common shares of
3,495,000 related to ESWs outstanding stock options were excluded from the computation of diluted loss per share for the period ended March 31,
2010.
The reconciliation of the number
of shares used to calculate the diluted loss per share is calculated as follows:
For the three month period ended March 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 |
2010 |
||||||||||
NUMERATOR |
|||||||||||
Net loss for
the period |
$ | (3,134,632 | ) | $ | (4,997,559 | ) | |||||
Interest on
long term debt |
| 183,858 | |||||||||
Amortization
of deferred costs |
| 117,131 | |||||||||
Long term debt
accretion |
| 768,981 | |||||||||
Inducement
premium |
| 2,909,872 | |||||||||
Change in fair
value of exchange feature liability |
578,739 | | |||||||||
Interest
accretion expense |
1,050,000 | | |||||||||
Financing
charge on embedded derivative liability |
485,101 | |
F-50
For the three month period ended March 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2011 |
2010 | ||||||||||
Gain on
convertible derivative |
$ | (1,336,445 | ) | $ | | ||||||
Bank fees
related to credit facility covenant waivers |
106,512 | | |||||||||
Interest on
note payable to related party |
34,521 | 11,307 | |||||||||
$ | (2,219,754 | ) | $ | (1,006,410 | ) | ||||||
DENOMINATOR |
|||||||||||
Weighted
average number of shares outstanding |
129,463,767 | 77,694,404 | |||||||||
Dilutive
effect of : |
|||||||||||
Stock
options |
| | |||||||||
Warrants |
| | |||||||||
Exchange of
unsecured subordinated promissory notes |
| | |||||||||
Exchange
feature liability shares |
| | |||||||||
DILUTED
WEIGHTED AVERAGE SHARES OUTSTANDING |
129,463,767 | 77,694,404 |
NOTE 17 COMPARATIVE FIGURES
Certain 2010 figures have been
reclassified to conform to the current financial statement presentation.
NOTE 18 SUBSEQUENT EVENTS
CONTRACTS AND
AGREEMENTS
On April 19, 2011, the
Companys board of directors ratified a Services Agreement (Agreement) between the Company and Orchard Capital Corporation
(Orchard) which was approved by the Companys Compensation Committee. Under the Agreement, which will be effective as of January 30,
2011, Orchard will 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 Companys Board of Directors as needed. Orchard has agreed to appoint Mark Yung, who is also employed by Orchard, as the
Companys Executive Chairman to act on Orchards behalf and provide the services to the Company under the Agreement. Orchard reserves the
right to replace Mr. Yung as the provider of services under the Agreement at its sole option. The Agreement may be terminated by either party upon
thirty (30) days written notice unless otherwise provided for under the Agreement. Compensation under the agreement is the sum of $300,000 per annum
plus reimbursement for out-of-pocket expenses incurred by Orchard. The agreement includes other standard terms including indemnification and limitation
liability provisions. Orchard is controlled by Richard Ressler; affiliated entities of Orchard as well as Richard Ressler own shares of the
Company.
COMPENSATION
On April 19, 2011, the
Companys board of directors ratified a modification of the board compensation structure as approved by the Companys Compensation Committee.
As a part of the modified compensation policy the board of directors ratified and approved a reduction and change in the composition in the fees paid
to the chairpersons of the various board committees and other board members, as well as an amendment to the Companys 2010 Stock Incentive Plan
(the Plan) so as to permit the issuance of restricted shares of the Companys Common Stock to directors in addition to executive
officers and employees as previously provided for under the Plan. The amendment to the Plan permits for board fees to be paid in the form of the
Companys restricted common stock for all non-executive board members, with a cash component for the chairpersons of the various board committees.
Previously, the board fee policy consisted of cash and options for all board members.
Previously, the board fee policy
consisted of cash of $2,500 per month and an additional $1,000 per month for audit committee chairperson and additional $2,000 per month for Chairman
of the board.
F-51
The revised board compensation
structure is as follows:
|
Chairperson for the Companys Audit and Compensation Committees each receive cash compensation of two thousand five hundred ($2,500) dollars per month effective April 1, 2011 as well as 200,000 shares of the Companys restricted common stock annually (prorated for the current fiscal year so that said amount would be 150,000 shares) under the Companys 2010 Incentive Stock Option Plan (the Plan). |
|
For outside directors who do not serve as a Chairperson of the Companys Audit or Compensation Committee, there would be no cash compensation for previously accrued Board fees through March 31, 2011, said fees would be converted into shares of the Companys restricted common stock issued under the Plan in addition, the outside directors not serving as Chairpersons of either the Audit or Compensation Committees would receive the Companys restricted common stock in the amount of 200,000 shares annually (prorated for the current fiscal year so that said amount would be 150,000 shares) under the Plan. |
|
For inside Board members and the Companys current Executive Chairman, there would be no cash compensation for previously accrued Board fees through February 28, 2011, said fees would be converted into shares of the Companys restricted common stock issued under the Plan if permitted under the Plan. |
UNSECURED SUBORDINATED
PROMISSORY NOTES
On May 3, 2011, the Company
entered into certain note subscription agreements and issued unsecured subordinated promissory notes (collectively the Loan Agreements)
with Orchard Investments, LLC (Orchard); Black Family 1997 Trust; Leon D. Black, UAD 11/30/92 FBO Alexander Black; Leon D. Black, UAD
11/30/92 FBO Benjamin Black; Leon D. Black, UAD 11/30/92 FBO Joshua Black; Leon D. Black, UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J.
Hannan and Richard Ressler (Ressler)(each individually a Subordinated Lender or Holder and collectively the
Subordinated Lenders or Holders) who are current shareholders and subordinated lenders under prior loan agreements in the
aggregate amount of $3 million with the Company entered into February 17, 2011 and may be deemed affiliates of the Company. The Loan Agreements were
approved by the Companys independent directors. Pursuant to the Loan Agreements, the Subordinated Lenders agreed to make, and made, loans to the
Company in the principal aggregate amount of $1 million (the Loan), subject to the terms and conditions set forth in the Loan Agreements
and represented by unsecured subordinated convertible promissory notes (the Notes), effective as of April 27, 2011.
Proceeds of the Loan, along with
available cash, will be used by the Company to fund working capital.
The Loan bears interest at a rate
of 10% per annum, payable in-kind on a monthly basis commencing May 27, 2011, up to the date on which the Notes have been paid in full. The maturity
date of the Loan is the earlier of: (i) the consummation of a rights offering of the Companys Common Stock, par value $.001 (the Common
Stock) registered under the Securities Act of 1933, as Amended (the Act), at a sale price of $0.12 per share (as adjusted for any
stock split, stock dividend or other similar adjustment) pursuant to a rights offering targeted at $8 million by the Company that raises at least an
incremental $2.5 million of cash for the Company and also permits all Subordinated Lenders to exchange their Notes (and the other notes paid in-kind
for the payment of interest under the Notes) for shares of Common Stock at such price (with such offering referred to as the Qualified
Offering) or (ii) June 14, 2011 (the Outside Date). The Qualified Offering has also been approved by the independent directors of the
Company. There can be no assurance, however, that the Company will successfully complete the Qualified Offering on or prior to the Outside Date or
thereafter.
In the event the Qualified
Offering does not take place on or before the Outside Date, then the Subordinated Lenders at their sole option, may require the Company to refrain from
making any and all payments on any of the outstanding principal and accrued interest outstanding under the Notes, however the Company will not be
prohibited from paying any accrued interest in-kind through the issuance of substantially similar Notes, at any time. The Holders of the Note at their
sole option may extend the Outside Date.
In the event the Qualified
Offering closes on or prior to the Outside Date and for any reason Ressler or Orchard as Holders collectively shall have failed to have invested at
least $1 million in the Qualified Offering or pursuant to the Investment Agreement, and Ressler or Orchard wish to invest the balance of such $1
million aggregate amount to purchase Common Stock at a price of $0.12 per share (as adjusted for any stock split, stock dividend or
other
F-52
similar adjustment), then the Company will be required to offer Ressler or Orchard the immediate right to invest the balance of such investment amount to purchase additional shares of Common Stock at such price, so that in the aggregate, Ressler and Orchard shall have collectively invested such $1 million amount.
Concurrent with entering into the
Loan Agreements and issuance of the Notes, the commercial lender of the Company and its subsidiaries; the Company and its subsidiaries; and the
Subordinated Lenders entered into an Amendment to the Postponement and Subordination Agreement (the Subordination Agreement) whereby the
Subordinated Lenders agreed that the Notes as issued, in addition to the notes issued on February 17, 2011 by the Company to the Subordinated Lenders,
would be subordinate to the obligations of the Company and its subsidiaries under the Credit Agreement with the Companys commercial
lender.
INVESTMENT
AGREEMENT
Effective May 10, 2011, the
Company entered into an Investment Agreement (the Investment Agreement) with Orchard Investments, LLC (Orchard); Black Family
1997 Trust; Leon D. Black, UAD 11/30/92 FBO Alexander Black; Leon D. Black, UAD 11/30/92 FBO Benjamin Black; Leon D. Black, UAD 11/30/92 FBO Joshua
Black; Leon D. Black, UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan and Richard Ressler (Ressler) (each individually a
Bridge Lender and collectively the Bridge Lenders), who are current shareholders and subordinated lenders under unsecured
promissory notes in the aggregate amount of $4.0 million with the Company effective February 17, 2011 and April 27, 2011 (the
Notes).
Pursuant to the Investment
Agreement, the Bridge Lenders have agreed to provide a backstop commitment to the Qualified Offering and have agreed to collectively backstop the
Qualified Offering by purchasing from the Company at a subscription price of $0.12 per share of Common Stock any shares not purchased by the
Companys shareholders of record who are entitled to participate in the rights offering (after giving effect to any oversubscriptions) up to
29,166,667 shares of Common Stock for a total purchase price of $3.5 million (the Backstop Commitment). In addition to their rights to
purchase shares pursuant to the Qualified Offering and the Backstop Commitment, the Bridge Lenders have the option, in their sole discretion, to
purchase from the Company, at the subscription price, any other shares not purchased by the Companys stockholders through the Qualified Offering
(the Purchase Option). If, after giving effect to the Qualified Offering, the Backstop Commitment and the Purchase Option, any of the
Bridge Lenders shall have been unable to exchange any portion of his or its Notes, the Company will also offer each Bridge Lender the right to purchase
additional shares of Common Stock at the subscription price (payable through the exchange of Bridge Loans for Common Stock) such that each Bridge
Lender shall have exchanged all of his or its notes for shares of Common Stock (the Additional Subscription Offer). In addition, if Ressler
and Orchard collectively acquire less than $1.0 million worth of shares of Common Stock as part of the Qualified Offering, the Backstop Commitment, the
Purchase Option and the Additional Subscription Offer, the Company has agreed to offer to Ressler and Orchard an additional number of shares of Common
Stock equal to the shortfall amount at the subscription price.
The transactions with the Bridge
Lenders under the Investment Agreement are being made in reliance on an exemption from the registration requirements of the Act, and any shares issued
pursuant to the Investment Agreement will not be covered by a registration statement filed pursuant to the Act.
The closing of the Investment
Agreement is subject to satisfaction or waiver of customary conditions, including compliance with covenants and the accuracy of representations and
warranties provided in the Investment Agreement, consummation of the Qualified Offering and the receipt of all requisite approvals and authorizations
under applicable law. In addition, a condition to the closing the Investment Agreement provides that the Company will enter into a registration rights
agreement with the Bridge Lenders to provide certain customary registration rights, which include demand and piggyback registration rights
under the Act with respect to the shares of Common Stock purchased under the Investment Agreement and any other securities owned by the Bridge
Lenders.
The Investment Agreement may be
terminated at any time prior to the closing of the Backstop Commitment and the Additional Subscription Rights, if any: (1) by mutual written agreement
of the Bridge Lenders and the Company; (2) by either party, in the event the rights offering does not close; and (3) by either party, if any
governmental entity shall have taken action prohibiting any of the contemplated transactions.
F-53
The Company has agreed to
indemnify the Bridge Lenders and their affiliates and each of their respective officers, directors, partners, employees, agents and representatives for
losses arising out of (1) the Companys breach of any representation or warranty set forth in the Investment Agreement, (2) the Qualified
Offering, or (3) claims, suits or proceedings challenging the authorization, execution, delivery, performance or termination of the Qualified Offering,
the Investment Agreement, or any of the transactions contemplated thereby (other than any such losses attributable to the acts, errors or omissions on
the part of the Bridge Lenders in violation of the Investment agreement).
F-54
INFORMATION NOT REQUIRED IN
PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution.
The following table sets forth
the costs and expenses payable by the registrant in connection with the sale of the common stock being registered. All of the amounts shown are
estimates except the SEC registration fee.
SEC
Registration Fee |
$ | 591 | ||||
Subscription
Agent Fees and Expenses |
7,500 | |||||
Legal Fees
and Expenses |
155,000 | |||||
Costs of
Printing |
30,000 | |||||
Accounting
Fees and Expenses |
10,000 | |||||
Miscellaneous
Expenses |
25,000 | |||||
Total |
$ | 228,091 |
Item 14. Indemnification of Directors and
Officers.
In accordance with the Florida
Corporation Act, which we refer to as the Act, our Articles of Incorporation, which we refer to as the Articles, contain
provisions which state that, to the fullest extent permitted by law, no director or officer shall be personally liable to us or our shareholders for
damages for breach of any duty owned to us or our shareholders. We also have the power, by a by-law provision or a resolution of our stockholders or
directors, to indemnify our officers and directors against any contingency or peril as may be determined to be in our best interests and in connection
therewith to secure policies of insurance.
We have entered into Director
Indemnification Agreements with the members of our board of directors. Each Director Indemnification Agreement provides that, to the fullest extent
permitted by law and subject to exceptions specified in the Director Indemnification Agreement, we shall hold harmless and indemnify the director, and
advance expenses incurred by the director, including reasonable attorney fees and court costs, in connection with any proceeding covered by the
Director Indemnification Agreement. Our obligations under each Director Indemnification Agreement shall continue following the time that the director
ceases to be a director of the Company, so long as the director is subject to any proceeding covered by the Director Indemnification
Agreement.
The rights of indemnification
provided by the Director Indemnification Agreement are not exclusive and specifically supplement the rights to indemnification provided to the
directors in our Articles of Incorporation and By-laws and applicable law.
We maintain a policy of
directors and officers liability insurance that insures our directors and officers against the costs of defense, settlement or payment of a
judgment under certain circumstances.
Pursuant to the Investment
Agreement, we have agreed to indemnify the Bridge Lenders against certain civil liabilities that may be incurred in connection with this offering,
including certain liabilities under the Securities Act of 1933.
Item 15. Recent Sales of Unregistered
Securities.
On November 3, 2008, we completed
a transaction whereby we issued $6.0 million of 9% convertible debentures to six accredited investors.
Effective August 28, 2009, we
issued $1.6 million of 9% convertible debentures to six accredited investors. Of the $1.6 million received by us, $500,000 was received from one our
directors through the exchange of a $300,000, unsecured 9% subordinated demand short term loan previously provided to us on August 11, 2009 and an
additional $200,000 investment made by the director in the offering.
Effective March 19, 2010, we
issued $3.0 million of 9% convertible debentures to five accredited investors.
Effective March 25, 2010, holders
of all debentures issued by us in November 2008 and August 2009 agreed to convert their outstanding debentures in accordance with the terms of the
respective debenture agreements earlier than otherwise required. A total of $10,600,000 in principal and $1,176,445 of accrued interest was converted
into
II-1
43,756,653 shares of restricted common stock. The conversion of the November 2008 and the August 2009 debentures also triggered the mandatory conversion feature in our debentures issued in March 2010. A total of $3,000,000 in principal and $3,797 in accrued interest was converted into 6,007,595 shares of restricted common stock. As part of the agreement to convert all existing convertible debentures the Company had proposed an inducement premium on the conversion transaction payable to all converting debenture holders subject to a positive Fairness Opinion, approval by a Fairness Committee consisting of independent Directors of the Companys Board of Directors and an increase in the share capital of the Company all of which have subsequently occurred. The premium consisted of 4,375,668 shares of restricted common stock. As the Company did not have sufficient authorized shares as of the date of conversion of the debentures to fulfill the premium, the premium was recorded as an advance share purchase agreement at fair market value; the agreement was without interest, subordinated to the banks position and payable in a fixed number of common shares of the Company. Effective November 30, 2010 the Company issued an aggregate of 4,375,668 restricted shares of common stock to thirteen prior debenture holders in connection with the early conversion of their debentures.
Effective November 9, 2010, we
completed the first traunch of a unit offering. The unit offering was for up to $5 million. Each unit was offered at a price of $0.40 and was comprised
of one (1) share of our common stock and one (1) two year warrant exercisable for one (1) share of common stock (the Unit Offering or
Offering). Each warrant is exercisable in the first year following issuance at an exercise price of $0.55 per share and thereafter if the
warrant has not been exercised in the first year the warrant may be exercisable in the second year following issuance for $0.65 per share (the
Warrant). In connection with the first traunch under the Offering, we received a gross amount before fees and expenses of $300,000 and
issued a total of 750,000 restricted shares of its common stock and a Warrant to acquire an additional 750,000 shares of common stock to an accredited
investor.
Effective December 8, 2010, we
completed the second traunch of the Unit Offering in which we received a gross amount before fees and expenses of $300,000 and issued a total of
750,000 restricted shares of our common stock and a Warrant to acquire an additional 750,000 shares of common stock to an accredited
investor.
Effective February 17, 2011 and
April 27, 2011, we entered in the Bridge Loans with the Bridge Lenders and issued to the Bridge Lenders unsecured promissory notes which bear interest
at a rate of 10% per annum, payable in-kind on a monthly basis, up to the date on which the notes have been paid in full.
The sales of the securities
described above were not registered under the Securities Act because they were made in transactions exempt from registration under Section 4(2) of the
Securities Act and the provisions of Regulation D promulgated thereunder.
Item 16. Exhibits.
The following exhibits are filed
herewith or incorporated by reference herein:
Exhibit Number |
Description |
|||||
---|---|---|---|---|---|---|
3.1 |
Articles of Incorporation of the Company. (1) |
|||||
3.2 |
Bylaws of the Company. (1) |
|||||
3.3 |
Articles of Incorporation of the Company, as amended as of November 29, 2001. (Originally filed as exhibit 3.2) (5) |
|||||
3.4 |
Articles of Incorporation of the Company as amended July 20, 2005 (Originally filed as exhibit 3.3)(13) |
|||||
3.5 |
Bylaws of the Company as amended January 3, 2006 (15) |
|||||
3.6 |
Articles of Incorporation of the Company, as amended as of October 13, 2010. (34) |
|||||
3.7 |
Bylaws of the Company as amended January 25, 2011 (Originally filed as exhibit 3.1) (35) |
|||||
4.1 |
Form
of Warrant Certificate issued April, 1999. (1) |
|||||
4.2 |
Form
of Warrant Certificate for 2002 Unit Private Placement (7) |
|||||
4.3 |
Form
of three (3) year Warrant Certificate exercisable at $0.90 per share issued on April and July 2005. (13) |
II-2
Exhibit Number |
Description | |||||
---|---|---|---|---|---|---|
4.4 |
Form
of three (3) year Warrant Certificate exercisable at $2.00 per share issued on April and July 2005. (13) |
|||||
4.5 |
Form
of three (3) year Warrant Certificate exercisable at $3.00 per share issued on April and July 2005. (13) |
|||||
4.6 |
Form
of Specimen of Common Stock Certificate. (Originally filed as exhibit 4.1) |
|||||
5.1 |
Opinion of Chepenik Trushin LLP |
|||||
10.1 |
Form
of Agreement dated January 29, 1999 by and between the shareholders BBL Technologies, Inc. and the Company. (1) |
|||||
10.2 |
Form
of Consulting Agreement dated March 31, 1999 by and between May Davis Group and the Company. (1) |
|||||
10.3 |
Form
of Commission Agreement dated March 31, 1999 by and between May Davis Group and the Company. (1) |
|||||
10.4 |
Form
of Option Agreement dated June 21, 1999, between David Coates o/a Fifth Business and the Company. (1) |
|||||
10.5 |
Form
of Option Agreement dated June 21 1999 between Zoya Financial Corp. and the Company. (1) |
|||||
10.6 |
Form
of Consulting Agreement with Bruno Liber dated January 29, 2000. (2) |
|||||
10.7 |
Form
of Office Offer to Lease for Environmental Solutions Worldwide Inc. dated October 6, 1999. (2) |
|||||
10.8 |
Form
of Financial relations agreement with Continental Capital & Equity Corporation dated December 5, 2000. (4) |
|||||
10.9 |
Form
of Employment Agreement between John A. Donohoe, Jr. and the Company dated as of September 10, 2003. (6) |
|||||
10.10 |
Form
of Employment Agreement between Robert R. Marino and the Company dated as of September 10, 2003. (6) |
|||||
10.11 |
Form
of Employment Agreement between David J. Johnson and the Company dated as of September 10, 2003. (6) |
|||||
10.12 |
Form
of Subscription Agreement for 2001 Common Stock Placement. (7) |
|||||
10.13 |
Form
of Subscription Agreement for 2002 Unit Private Placement and related representation letters. (7) |
|||||
10.14 |
Form
of unsecured subordinated promissory note issued by the Company to AB Odinia, dated August 27, 2004. (Originally filed as exhibit 10.1)
(8) |
|||||
10.15 |
Form
of Securities Subscription Agreement between the Company and Investor for the purchase of 4% Convertible Debentures and three (3) year warrant
exercisable at $1.00 per share dated September, 2004. (Originally filed as exhibit 10.1) (9) |
|||||
10.16 |
Form
of 4% Three (3) Year Debenture issued by the Company dated September, 2004. (Originally filed as exhibit 10.2) (9) |
|||||
10.17 |
Form
of Three (3) Year Warrant to purchase the Companys Common Stock at $1.00 a share dated September, 2004. (Originally filed as exhibit 10.3)
(9) |
|||||
10.18 |
Form
of Registration Rights Agreement dated September, 2004. (Originally filed as exhibit 10.4) (9) |
|||||
10.19 |
Form
of Lease agreement and amended lease agreement between the Companys wholly owned subsidiary ESW America Inc. and Nappen & Associates dated on
November 16, 2004. (12)** |
|||||
10.20 |
Form
of Subscription Agreement dated April and July 2005 for Common Stock at $0.85 and Warrants exercisable at $0.90, $2.00 and $3.00 per share.
(13) |
|||||
10.21 |
Form
of Registration rights Agreement dated April and July 2005. (13) |
II-3
Exhibit Number |
Description | |||||
---|---|---|---|---|---|---|
10.22 |
Form
of $1.2 Million Unsecured Subordinated Promissory Note dated June 30, 2006. (16) |
|||||
10.23 |
Form
of $1 Million Unsecured Subordinated Promissory Note dated September 7, 2006. (17) |
|||||
10.24 |
Form
of Separation Agreement and Release of Claims by and between the Company and Stan Kolaric dated October 12, 2006. (20) |
|||||
10.25 |
Form
of $500,000 Unsecured Subordinated Promissory Note dated November 17, 2006. (18) |
|||||
10.26 |
Form
of Contract for Investor Relations Service by and between the Company and Delta 2005 AG dated December 12, 2006. (20) |
|||||
10.27 |
Form
of Consolidated $2.3 Million Unsecured Subordinated Demand Promissory Note dated February 9, 2007. (20)\ |
|||||
10.28 |
Form
of $500,000 Unsecured Subordinated Demand Promissory Note by and between the Company and Mr. Bengt Odner, dated February 15, 2007.
(20) |
|||||
10.29 |
Form
of Employment Agreement between David J. Johnson and the Company dated as of January 1, 2007. (20) 10.30 Form of Assignment by Inventor by and between
the Company and David Johnson dated February 16, 2007. (20) |
|||||
10.30 |
Form
of Consolidated 1.002 Million Note by and between the Company and Mr. Bengt Odner dated March 13, 2007. (20) |
|||||
10.31 |
Form
of $2.5 Million Financing Loan Agreement by and between ESW Canada Inc and Royal Bank of Canada dated March 5, 2007. (20) |
|||||
10.32 |
Letter Agreement dated October 11, 2007 and effective November 2, 2007 by and between the Companys wholly owned subsidiary ESW Canada
Inc and Royal Bank of Canada amending the terms of the Credit Facility Agreement dated as of March 2, 2007. (21) |
|||||
10.33 |
Form
of Employment Agreement between Stefan Boekamp and the Company dated as of February 4, 2008. (23) |
|||||
10.34 |
Form
of Employment Agreement between Praveen Nair and the Company dated as of February 4, 2008. (23) |
|||||
10.35 |
Form
of Credit Facility Agreement between the Company and Mr. Bengt Odner Dated June 2, 2008 (24) |
|||||
10.36 |
Form
of $500,000 Unsecured Subordinated Demand Promissory Note by and between the Company and Mr. Bengt Odner, dated June 2, 2008 (24) |
|||||
10.37 |
Form
of Securities Subscription Agreement between the Company and Investor for the purchase of 9% three (3) year Convertible Debentures.
(25) |
|||||
10.38 |
Form
of 9% Three (3) Year Debenture issued by the Company dated November 3, 2008. (25) |
|||||
10.39 |
Form
of Registration Rights Agreement dated November 3, 2008. (25) |
|||||
10.40 |
Form
of Consulting Agreement between Joey Schwartz and the Company dated as of February 4, 2008 (26) |
|||||
10.41 |
Form
of Securities Subscription Agreement between the Company and Investor Ledelle Holdings Ltd. for the purchase of 9% three (3) year Convertible
Debentures dated November 7, 2008. (26) |
|||||
10.42 |
Form
of 9% Three (3) Year Debenture issued by the Company to Investor Ledelle Holdings Ltd. dated November 7, 2008. (26) |
|||||
10.43 |
Form
of Registration Rights Agreement between the Company and Investor Ledelle Holdings Ltd. for the purchase of 9% three (3) year Convertible Debentures
(25) |
|||||
10.44 |
Form
of Securities Subscription Agreement between the Company and Investor Mr. Bengt Odner. for the purchase of 9% three (3) year Convertible Debentures
Dated November 7, 2008. (26) |
|||||
10.45 |
Form
of 9% Three (3) Year Debenture issued by the Company to Investor Mr. Bengt George Odner dated November 7, 2008. (26) |
II-4
Exhibit Number |
Description | |||||
---|---|---|---|---|---|---|
10.46 |
Form
of Registration Rights Agreement between the Company and Investor Ledelle Holdings Ltd. for the purchase of 9% three (3) year Convertible Debentures
(25) |
|||||
10.47 |
Form
of Amendment to Employment Agreement between Praveen Nair and the Company effective as of January 1, 2009 (26) |
|||||
10.48 |
Form
of 9% Unsecured Promissory Note (27) |
|||||
10.49 |
Form
of Letter Agreement Amendment to Secured Commercial Loan Agreement by and between ESW Canada Inc and Royal Bank of Canada dated as of August 24, 2009
(28) 10.51 Form of Securities Subscription Agreement for 9% Convertible Debentures dated as of August 28, 2009 (29) |
|||||
10.50 |
Form
of 9% Three (3) year debentures (29) |
|||||
10.51 |
Lease
Renewal Agreement by and between the Companys wholly owned subsidiary ESW America, Inc. and Nappen Associates effective October 16,
2009 |
|||||
10.52 |
Form
of 9% Unsecured Promissory Note effective December 29, 2009 (30) |
|||||
10.53 |
Form
of Securitas Subscription Agreement for 9% Convertible Debentures dated as of March 19, 2010 (31) |
|||||
10.54 |
Form
of 9% three year Convertible Debenture dated as of March 19, 2010 (31) |
|||||
10.55 |
Form
of Registration Rights Agreement dated as of March 19, 2010 (31) |
|||||
10.56 |
Form
of Loan Agreement by and between the Companys wholly subsidiary ESW Canada, Inc and Canadian Imperial Bank of Commerce effective March 31,
2010. |
|||||
10.57 |
Form
of Guarantee of Loan Guarantee of Loan Agreement by and between Canadian Imperial Bank of Commerce and the Company, and the Companys wholly owned
subsidiaries ESW America, Inc and ESW Technologies, Inc. |
|||||
10.58 |
Form
of Patent and Trademark Security Agreement by and between the Companys wholly owned subsidiary ESW Technologies, Inc. and Canadian Imperial Bank
of Commerce |
|||||
10.59 |
Environmental Solutions Worldwide Inc. Nominating and Governance Committee Charter as of August 10, 2010 (33) |
|||||
10.60 |
Environmental Solutions Worldwide, Inc. Audit Committee Charter as of August 10, 2010 (33) |
|||||
10.61 |
Environmental Solutions Worldwide Inc. Compensation Committee Charter as of August 10, 2010 (33) |
|||||
10.62 |
Form
of Subordinated Note Subscription Agreement as of February 17, 2011 (36) |
|||||
10.63 |
Form
of Unsecured Subordinated Promissory Note as of February 17, 2011 (36) |
|||||
10.64 |
Form
of Subordinated Note Subscription Agreement as of April 27, 2011 (37) |
|||||
10.65 |
Form
of Unsecured Subordinated Promissory Note as of April 27, 2011 (37) |
|||||
10.67 |
Investment Agreement, dated May 10, 2011, by and between the Company and the Bridge Lenders (38) |
|||||
10.68 |
Form
of Services Agreement by and between the Company and Orchard Capital Corporation dated as of January 30, 2011. (39) |
|||||
10.69 |
Environmental Solutions Worldwide amended 2010 stock incentive plan as of April 19, 2011. (39) |
|||||
16.1 |
Letter from James E. Scheifley & Associates, P. C. (1) |
|||||
16.2 |
Letter from Daren, Martenfeld, Carr, Testa and Company LLP dated February 2001. (3) |
|||||
16.3 |
Letter of resignation from Goldstein and Morris Certified Public Account P.C. dated October 20, 2004 (10) |
|||||
16.4 |
Letter from Goldstein and Morris Certified Public Account P.C. dated November 23, 2004 (11) |
|||||
16.5 |
Letter from Deloitte & Touche LLP dated May 29, 2009 (32) |
|||||
21.1 |
List
of subsidiaries. (1) |
II-5
Exhibit Number |
Description | |||||
---|---|---|---|---|---|---|
23.1 |
Consent of MSCM LLP, Independent Registered Public Accounting Firm. |
|||||
23.2 |
Consent of Chepenik Trushin LLP (contained in Exhibit 5.1) |
|||||
24.1 |
Powers of Attorney (contained on signature page)*** |
|||||
99.1 |
Form
of Subscription Rights Certificate*** |
|||||
99.2 |
Form
of Instruction for Use of Registrants Subscription Rights Certificates*** |
|||||
99.3 |
Form
of Letter to Stockholders*** |
|||||
99.4 |
Form
of Letter to Brokers, Dealers, Trust Companies and Other Nominees*** |
|||||
99.5 |
Form
of Letter to Clients*** |
|||||
99.6 |
Form
of Nominee Holder Certification*** |
|||||
99.7 |
Form
of Notice of Guaranteed Delivery*** |
|||||
99.8 |
Form
of Beneficial Owner Election*** |
* |
To be filed by amendment. |
** |
Confidential treatment requested for a portion of this exhibit |
*** |
Previously filed. |
(1) |
Incorporated herein by reference from the Registrants Form 10 Registration Statement (SEC File No. 000-30392) filed with the Securities and Exchange Commission of November 18, 1999 |
(2) |
Incorporated herein by reference from the Registrants 10-K filed with the Securities and Exchange Commission on March 30, 2000. |
(3) |
Incorporated herein by reference from the Registrants Form 8-K/A filed with the Securities and Exchange Commission on March 14, 2001. |
(4) |
Incorporated herein by reference from the Registrants 10-KSB filed with the Securities and Exchange Commission on April 16, 2001. |
(5) |
Incorporated herein by reference from the Registrants Form 10-KSB filed with the Securities and Exchange Commission on April 01, 2002. |
(6) |
Incorporated herein by reference from the Registrants Form 10-QSB/A filed with the Securities and Exchange Commission on November 26, 2003. |
(7) |
Incorporated by reference from an exhibit filed with the Registrants Registration Statement on Form S-2 (File No. 333-112125) filed on January 22, 2004. |
(8) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on September 2, 2004. |
(9) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on September 17, 2004. |
(10) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on October 22, 2004. |
(11) |
Incorporated herein by reference from the Registrants Form 8-K/A filed with the Securities and Exchange Commission on December 2, 2004. |
(12) |
Incorporated by reference to the Registrants Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005. |
(13) |
Incorporated herein by reference from the Registrants Form 10-QSB filed with the Securities and Exchange Commission on August 15, 2005. |
(14) |
Incorporated herein by reference from the Registrants Form S-8 Registration Statement SEC File No. 333-127549) filed on August 15, 2005. |
(15) |
Incorporated herein by reference from the Registrants Form 10-KSB filed with the Securities and Exchange Commission on April 3, 2006. |
II-6
(16) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on June 30, 2006. |
(17) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on September 7, 2006. |
(18) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on November 17, 2006. |
(19) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on February 14, 2007. |
(20) |
Incorporated herein by reference from the Registrants Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2007. |
(21) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on November 8, 2007. |
(22) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on February 1, 2008. |
(23) |
Incorporated herein by reference from the Registrants Form 10-KSB/A filed with the Securities and Exchange Commission on April 29, 2008. |
(24) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on June 2, 2008. |
(25) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on November 7, 2008. |
(26) |
Incorporated herein by reference from the Registrants Form 10-K filed with the Securities and Exchange Commission on April 9, 2009. |
(27) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on January 05, 2010. |
(28) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on August 26, 2009. |
(29) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on September 2, 2009. |
(30) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on January 5, 2010. |
(31) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on March 23, 2010. |
(32) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on June 2, 2010. |
(33) |
Incorporated herein by reference from the Registrants Form 10Q filed with the Securities and Exchange Commission on August 13, 2010. |
(34) |
Incorporated herein by reference from the Registrants Form 10Q filed with the Securities and Exchange Commission on September 09, 2010. |
(35) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on January 28, 2011. |
(36) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on February 22, 2011. |
(37) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on May 6, 2011. |
(38) |
Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on May 10, 2011. |
(39) |
Incorporated herein by reference from the Registrants Form 10-Q filed with the Securities and Exchange Commission on May 16, 2011. |
II-7
Item 17. Undertakings
(a) |
The undersigned registrant hereby undertakes: |
(1) |
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
(i) |
To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the Act); |
(ii) |
To reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement; and |
(iii) |
To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement. |
(2) |
That, for the purpose of determining any liability under the Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(3) |
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
(4) |
That, for the purpose of determining liability under the Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is a part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, superseded or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
(5) |
That, for the purpose of determining liability of the registrant under the Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
(i) |
Any preliminary prospectus or prospectus of an undersigned registrant relating to this offering required to be filed pursuant to Rule 424; |
(ii) |
Any free writing prospectus relating to this offering prepared by, or on behalf of, the undersigned registrant or used or referred to by the undersigned registrant; |
(iii) |
The portion of any other free writing prospectus relating to this offering containing material information about an undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
II-8
(iv) |
Any other communication that is an offer in this offering made by the undersigned registrant to the purchaser. |
(c) |
The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer and the amount of unsubscribed securities to be offered to the public. If any public offering of the securities is to be made on terms differing from those set forth on the cover page of the prospectus, a post-effective amendment will be filed to set forth the terms of such offering. |
Insofar as indemnification for
liabilities arising under the Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
II-9
SIGNATURES
Pursuant to the requirements of
the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized
in the City of Concord, Province of Ontario, on June 7 , 2011.
ENVIRONMENTAL SOLUTIONS
WORLDWIDE, INC.
By: |
/s/ Mark Yung Name: Mark Yung Title Executive Chairman |
Pursuant to the
requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates
stated.
Signatures |
Title |
Date |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
* Praveen Nair |
Chief
Financial Officer |
June 7 ,
2011 |
||||||||
/s/ Mark Yung Mark Yung |
Executive Chairman of the Board of Directors |
June 7 ,
2011 |
||||||||
* Nitin Amersey |
Director |
June 7 ,
2011 |
||||||||
* John Dunlap, III |
Director |
June 7 ,
2011 |
||||||||
* Benjamin Black |
Director |
June 7 ,
2011 |
||||||||
* Joshua Black |
Director |
June 7 ,
2011 |
||||||||
* John Hannan |
Director |
June 7 ,
2011 |
||||||||
* Zohar Loshitzer |
Director |
June 7 ,
2011 |
||||||||
* John Suydam |
Director |
June 7 ,
2011 |
* By: |
/s/ Mark Yung Mark Yung, Attorney-in-Fact |
II-10