SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended
– March 31, 2012.
OR
[ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER
000-30392
ENVIRONMENTAL SOLUTIONS
WORLDWIDE, INC.
(Exact name of Company as
specified in its charter)
Florida |
13-4172059 |
State or other jurisdiction of
incorporation or organization |
(I.R.S. Employer
Identification No.) |
200 PROGRESS DRIVE, MONTGOMERVILLE,
PA, 18936
(Address of principal executive offices, including postal code.)
(905) 695-4142 and (215) 699-0730
(Registrant's telephone number, including area code)
335 CONNIE CRESCENT, CONCORD,
ONTARIO, CANADA L4K 5R2
(Former address of principal executive
offices, including postal code.)
COMMON STOCK, $0.001 PAR
VALUE
(Title of class)
Indicate by check mark whether
the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether
the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company"
in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller reporting company [X]
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES [ ] NO [X]
There were 219,450,447 shares
of the registrant's Common Stock outstanding as of May 15th, 2012
PART I. FINANCIAL INFORMATION
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PAGE # |
Item 1. |
Financial Statements. |
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Consolidated Condensed Balance Sheets as of |
F2 |
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March 31, 2012 (unaudited) and December 31, 2011 |
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Consolidated Condensed Statements of Operations and |
F3 |
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Comprehensive Loss for the Three Month Periods |
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Ended March 31, 2012 and 2011 (unaudited) |
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Consolidated Condensed Statement of Changes in Stockholders' |
F4 |
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Equity for the Three Month Period Ended |
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March 31, 2012 (unaudited) |
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Consolidated Condensed Statements of Cash Flows |
F5 |
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for the Three Month Periods Ended March 31, 2012 and 2011 |
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(unaudited) |
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Notes to Consolidated Condensed Financial Statements |
F6-F20 |
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(unaudited) |
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Item 2. |
Management's Discussion And Analysis Of Financial Condition |
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And Results Of Operations |
2 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk. |
9 |
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Item 4. |
Controls And Procedures |
9 |
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PART II. |
OTHER INFORMATION |
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Item 1A. |
RISK FACTORS |
11 |
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Item 5. |
OTHER INFORMATION |
11 |
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Item 6. |
EXHIBITS. |
12 |
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
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MARCH 31, |
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DECEMBER 31, |
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2012 |
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2011 |
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(Unaudited) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
$ 651,866 |
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$ 1,103,649 |
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Accounts receivable, net of allowance |
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for doubtful accounts of $213,328 (2011 - $1,398) (Note 2) |
974,331 |
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1,204,734 |
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Inventory, net of reserve of $0 (2011 - $223,007) (Note 5) |
2,218,734 |
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2,431,027 |
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Prepaid expenses and sundry assets |
244,690 |
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295,211 |
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Total current assets |
4,089,621 |
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5,034,621 |
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Property, plant and equipment under construction (Note 6) |
300,608 |
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198,416 |
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Property, plant and equipment, net of accumulated |
1,217,590 |
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1,271,989 |
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depreciation of $3,740,546 (2011 - $6,867,760) |
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and loss on impairment of property, plant and equipment |
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of $29,559 (2011 - $163,668) (Note 6) |
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$ 5,607,819 |
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$ 6,505,026 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current Liabilities |
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Accounts payable |
$ 1,436,422 |
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$ 1,384,972 |
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Accrued liabilities (Note 15) |
504,606 |
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592,760 |
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Redeemable Class A special shares (Note 7) |
- |
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453,900 |
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Current portion of capital lease obligation (Note 12) |
- |
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1,241 |
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Total current liabilities |
1,941,028 |
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2,432,873 |
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Commitments and Contingencies (Note 12) |
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Subsequent Events (Note 17) |
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Stockholders' Equity (Notes 9 and 10) |
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Common stock, $0.001 par value, 250,000,000 (2011 - 250,000,000) |
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shares authorized; 219,450,447 shares |
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issued and outstanding (2011 - 219,450,447) |
219,450 |
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219,450 |
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Additional paid-in capital |
56,627,338 |
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56,606,629 |
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Accumulated deficit |
(53,179,997) |
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(52,753,926) |
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Total stockholders' equity |
3,666,791 |
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4,072,153 |
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$ 5,607,819 |
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$ 6,505,026 |
The accompanying notes are an integral part of these consolidated condensed financial statements.
F2
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
FOR THE THREE MONTH PERIODS ENDED MARCH 31,
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2012 |
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2011 |
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(Unaudited) |
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(Unaudited) |
Revenue |
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Net sales |
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$ 2,531,602 |
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$ 2,045,737 |
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Cost of sales |
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1,742,926 |
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2,092,081 |
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Gross profit |
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788,676 |
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(46,344) |
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Operating expenses |
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Marketing, office and general expenses |
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1,190,450 |
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1,051,753 |
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Restructuring charges |
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- |
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518,809 |
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Research and development costs |
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128,548 |
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183,626 |
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Officers' compensation and directors' fees |
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157,107 |
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211,644 |
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Consulting and professional fees |
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55,984 |
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27,102 |
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Foreign exchange loss |
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30,817 |
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60,126 |
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Depreciation and amortization |
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76,182 |
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120,350 |
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Loss on impairment of property, plant and equipment (Note 6) |
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29,559 |
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- |
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1,668,647 |
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2,173,410 |
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Loss from operations |
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(879,971) |
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(2,219,754) |
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Gain on deconsolidation of subsidiary (Note 7) |
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453,900 |
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- |
Change in fair value of exchange feature liability |
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- |
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(578,739) |
Interest on notes payable to related party |
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- |
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(34,521) |
Interest accretion expense |
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- |
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(1,050,000) |
Financing charge on embedded derivative liability |
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- |
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(485,101) |
Gain on convertible derivative |
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- |
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1,336,445 |
Bank fees related to credit facility covenant waivers |
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- |
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(106,512) |
Gain on disposal of property and equipment |
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- |
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3,550 |
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Net loss |
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(426,071) |
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(3,134,632) |
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Other comprehensive income: |
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Foreign currency translation of Canadian subsidiaries |
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- |
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72,264 |
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Net loss and comprehensive loss |
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$ (426,071) |
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$ (3,062,368) |
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Net loss per share (basic and diluted) (Note14) |
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$ (0.00) |
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$ (0.02) |
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Weighted average number of shares outstanding (basic and diluted) (Note14) |
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219,450,447 |
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129,463,767 |
The accompanying notes are an integral part of these consolidated
condensed financial statements.
F3
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2012
(UNAUDITED)
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Total |
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Common Stock |
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Additional |
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Accumulated |
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Stockholders' |
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Shares |
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Amount |
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Paid-In Capital |
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Deficit |
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Equity |
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Balance, January 1, 2012 |
219,450,447 |
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$ 219,450 |
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$ 56,606,629 |
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$ (52,753,926) |
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$ 4,072,153 |
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Net loss |
-- |
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-- |
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-- |
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(426,071) |
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(426,071) |
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Stock-based compensation |
-- |
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-- |
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20,709 |
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-- |
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20,709 |
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Balance, March 31, 2012 |
219,450,447 |
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$ 219,450 |
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$ 56,627,338 |
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$ (53,179,997) |
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$ 3,666,791 |
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The accompanying notes are an integral part of these consolidated
condensed financial statements
F4
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31,
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2012 |
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2011 |
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(Unaudited) |
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(Unaudited) |
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Net loss |
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$ (426,071) |
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$ (3,134,632) |
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Adjustments to reconcile net loss to net cash |
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used in operating activities: |
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Interest accretion expense |
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- |
|
1,050,000 |
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Change in fair value of exchange feature liability |
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- |
|
578,739 |
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Financing charge on embedded derivative liability |
|
- |
|
485,101 |
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Loss on disposal of inventory |
|
- |
|
124,972 |
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Depreciation of property, plant and equipment |
|
152,437 |
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206,824 |
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Loss on impairment of property, plant and equipment |
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43,565 |
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- |
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Interest on notes payable to related party |
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- |
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34,521 |
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Stock-based compensation |
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20,709 |
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25,886 |
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Amortization of patents and trademarks |
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- |
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16,145 |
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Provision for doubtful accounts |
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213,328 |
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- |
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Gain on disposal of property and equipment |
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(14,006) |
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(3,450) |
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Gain on convertible derivative |
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- |
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(1,336,445) |
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Gain on deconsolidation of subsidiary |
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(453,900) |
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- |
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(37,867) |
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1,182,293 |
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Increase (decrease) in cash flows from operating |
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activities resulting from changes in: |
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Accounts receivable |
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17,075 |
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1,101,029 |
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Inventory |
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212,293 |
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839,762 |
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Prepaid expenses and sundry assets |
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50,521 |
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(91,199) |
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Accounts payable and accrued liabilities |
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(36,704) |
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(99,301) |
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Customer deposits |
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- |
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(25,528) |
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243,185 |
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1,724,763 |
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Net cash used in operating activities |
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(220,753) |
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(227,576) |
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Investing activities: |
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Proceeds from sale of property and equipment |
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14,006 |
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3,450 |
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Acquisition of property, plant and equipment |
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(141,604) |
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(93,144) |
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(Addition to) reduction from property, plant and equipment under construction |
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(102,568) |
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105,423 |
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Net cash (used in) provided by investing activities |
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(230,166) |
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15,729 |
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Financing activities: |
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Proceeds from notes payable to related parties |
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- |
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3,000,000 |
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Repayment of bank loan |
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- |
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(1,823,319) |
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Repayment of capital lease obligation |
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(864) |
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(1,956) |
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Net cash (used in) provided by financing activities |
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(864) |
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1,174,725 |
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Net change in cash and equivalents |
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(451,783) |
|
962,878 |
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Foreign exchange gain on foreign operations |
|
- |
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(19,869) |
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Cash and cash equivalents, beginning of period |
|
1,103,649 |
|
13,328 |
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Cash and cash equivalents, end of period |
|
$ 651,866 |
|
$ 956,337 |
The accompanying notes are an integral part of these consolidated
condensed financial statements
F5
NOTES
TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND GOING
CONCERN
Environmental Solutions Worldwide, Inc.
(the "Company" or "ESW") through its wholly-owned subsidiaries is engaged in the design, development, manufacturing
and sales of emissions control technologies. ESW also provides emissions testing and environmental certification services with
its primary focus on the North American on-road and off-road diesel 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
("U.S. GAAP"), which contemplates continuation of the Company as a going concern.
The Company has sustained recurring
operating losses. As of March 31, 2012, the Company had an accumulated deficit of $53,179,997 and cash and cash equivalents of
$651,866. During the year 2011 there were significant changes made to ESW’s business. These changes in operations, the relocation
of the Company’s operations, and the prevailing economic conditions all create uncertainty in the operating results and,
accordingly, there is no assurance that the Company will be successful in generating sufficient cash flow from operations or achieving
profitability in the near future. As a result, there is substantial doubt regarding the Company's ability to continue as a going
concern. The Company may require additional financing to fund its continuing operations. Financing may not be available at acceptable
terms or may not be available at all. The Company's ability to continue as a going concern is dependent on obtaining additional
financing and achieving and maintaining a profitable level of operations.
Effective July 12, 2011, the Company
raised a total of $4 million through the issuance of unsecured subordinated promissory notes (the “Notes”) to certain
shareholders, including deemed affiliates of certain members of the Board of Directors of the Company. Proceeds from the Notes
funded working capital, capital investments and other general corporate purposes. Proceeds from Notes, along with available cash,
were used to fund the Company's additional working capital needs related to its 2011 sales.
Effective May 10, 2011, the Company
entered into an Investment Agreement with certain of its current shareholders and subordinated lenders under unsecured promissory
notes (the “Bridge Lenders") for an aggregate amount of $4 million. As per the Investment Agreement, the Bridge Lenders
agreed to provide a backstop commitment (the "Backstop Commitment") to a rights offering targeted by the Company to raise
up to $8 million (the “Qualified Offering"). Under the Backstop Commitment, the Bridge Lenders agreed to purchase any
shares offered in the Qualified Offering that were not purchased by the Company's shareholders of record, after giving effect to
any oversubscriptions.
Effective June 30, 2011 the Company
completed its rights offering. The Company's shareholders subscribed to 38,955,629 shares including over subscriptions. Under the
Qualified Offering shareholders subscribed to $4.7 million, which was subscribed for via cash ($1.9 million), and the exchange
of principal and accrued interest on the Notes and the Bridge Loan Notes (approximately $2.8 million). Under the Backstop Commitment,
the Bridge Lenders purchased 27,714,385 shares of Common Stock at price of $0.12 per share for approximately $3.3 million, of which
$2.0 million was paid in cash and $1.3 million was paid for through the exchange of the balance of principal and accrued interest
due on the Notes. As a result of these transactions, the Company satisfied its obligations with the Bridge Lenders and effectively
cancelled the Notes effective June 30, 2011.
Effective July 18, 2011, ESW’s
wholly-owned subsidiary ESW Canada Inc., paid its senior lender the amount of $1.5 million (Canadian dollars) from the proceeds
of the rights offering to liquidate the outstanding balance on the bank loan. The senior lender has discharged all liens, encumbrances
and securities against the Company and its subsidiaries and cancelled the March 31, 2010 demand revolving credit facility agreement.
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 unaudited consolidated financial statements.
F6
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The unaudited consolidated
condensed financial statements include the accounts of the Company and its wholly-owned subsidiaries, ESW America Inc.
("ESWA"), ESW Technologies Inc. ("ESWT"), ESW Canada Inc. ("ESWC") and Technology Fabricators
Inc. (“TFI”). All inter-company transactions and balances have been eliminated on consolidation. Amounts in the
unaudited consolidated condensed financial statements are expressed in U.S. dollars.
Effective February 3, 2012
BBL Technologies Inc. (“BBL”), a non-operating subsidiary, filed for bankruptcy in the Province of Ontario,
Canada. At the time of filing, BBL had no assets but had issued and outstanding redeemable Class A special shares. The
Company did not provide any guarantee in relation to these redeemable Class A special shares. As a result of BBL’s
filing for bankruptcy, the Company lost its control over BBL and has deconsolidated BBL from the unaudited consolidated
condensed financial statements on the filing date. The Company recorded a $453,900 gain in the unaudited consolidated
condensed statement of operations and comprehensive loss for the three month period ended March 31, 2012 upon deconsolidation
of BBL.
ESTIMATES
The preparation of unaudited
consolidated condensed financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expense during the reported period. Actual
results could differ from those estimates. Significant estimates include amounts for inventory valuation, impairment of
property plant and equipment, share-based compensation, valuation of the warrants, accrued liabilities and accounts
receivable exposures.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company extends unsecured credit
to its customers in the ordinary course of business but mitigates the associated credit risk by performing credit checks and actively
pursuing past due accounts. An allowance for doubtful accounts is estimated and recorded based on management's assessment of the
credit history with the customer and current relationships with them. On this basis management has determined that an allowance
for doubtful accounts of $213,328 and $1,398 was appropriate as of March 31, 2012 and December 31, 2011, respectively.
INVENTORY
Inventory is stated at the lower of
cost or market determined using the first-in first-out method. Inventory is periodically reviewed for use and obsolescence, and
adjusted as necessary. Inventory consists of raw materials, work-in-process and finished goods.
PROPERTY, PLANT AND EQUIPMENT UNDER
CONSTRUCTION
The Company capitalizes customized equipment
built to be used in the future day to day operations at cost. Once complete and available for use, the cost for accounting purposes
is transferred to property, plant and equipment, where normal depreciation rates apply.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded
at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, generally 5 to 7 years.
Maintenance and repairs are charged to operations as incurred. Significant renewals and betterments are capitalized. 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.
F7
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. Properties held for sale are recorded at the lower
of the carrying amount or the expected sales price less costs to sell. Management reviewed the related assets for impairment in
the first quarter of 2012 (see Note 6 for details).
PATENTS AND TRADEMARKS
Patents and trademarks consist primarily
of the costs incurred to acquire them from an independent third party. Intangible assets with a finite life are 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.
Patents and trademarks were being amortized
on a straight-line basis over their estimated life of ten years. Amortization expense for the three month periods ended March 31,
2012 and 2011 was $0 and $16,145 respectively. At March 31, 2012 and December 31, 2011, patents and trademarks were fully written
down and had $0 carrying value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC Topic 820 defines fair value, establishes
a framework for measuring fair value, and expands disclosures about fair value measurements.
Included in the ASC Topic 820 framework
is a three level valuation inputs hierarchy with Level 1 being inputs and transactions that can be effectively fully observed by
market participants spanning to Level 3 where estimates are unobservable by market participants outside of the Company and must
be estimated using assumptions developed by the Company. The Company discloses the lowest level input significant to each category
of asset or liability valued within the scope of ASC Topic 820 and the valuation method as exchange, income or use. The Company
uses inputs which are as observable as possible and the methods most applicable to the specific situation of each company or valued
item.
The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short-term nature
of these items. Per ASC Topic 820 framework these are considered Level 2 inputs where inputs other than Level 1 that are observable,
either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical
or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.
Interest rate risk is the risk that
the value of a financial instrument might be adversely affected by a change in the interest rates. In seeking to minimize the risks
from interest rate fluctuations, the Company manages exposure through its normal operating and financing activities.
REVENUE RECOGNITION
The Company derives revenue primarily
from the sale of its catalytic products. In accordance with 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 5.9% and 2.7% of total revenue during the three month periods ended March 31, 2012 and 2011, respectively) from providing
air testing and environmental certification services. Revenues are recognized upon delivery of testing services when persuasive
evidence of an arrangement exists and collection of the related receivable is reasonably assured.
F8
LOSS PER SHARE
Loss per common share is computed by
dividing the net loss by the weighted average number of common shares outstanding during the year. Common stock equivalents are
excluded from the computation of diluted loss per share when their effect is anti-dilutive.
INCOME TAXES
Income taxes are computed in accordance
with the provisions of ASC Topic 740, which requires, among other things, a liability approach to calculating deferred income taxes.
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized
in its financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. The Company is required to make certain estimates and judgments
about the application of tax law, the expected resolution of uncertain tax positions and other matters. In the event that uncertain
tax positions are resolved for amounts different than the Company's estimates, or the related statutes of limitations expire without
the assessment of additional income taxes, the Company will be required to adjust the amounts of the related assets and liabilities
in the period in which such events occur.
Such adjustments may have a material
impact on ESW's income tax provision and results of operations.
SHIPPING AND HANDLING COSTS
The Company’s shipping and handling
costs of $26,543 and $24,287 are included in cost of sales for the three month periods ended March 31, 2012 and 2011, respectively.
Additionally, the Company has recorded recoveries of these costs amounting to $22,501 and $19,329, which are included in revenues
for the three month periods ended March 31, 2012 and 2011, respectively.
RESEARCH AND DEVELOPMENT
The Company is engaged in research and
development work. Research and development costs are charged as operating expense of the Company as incurred. Any grant money received
for research and development work is used to offset these expenditures. For the three month periods ended March 31, 2012 and 2011,
the Company expensed $128,548 and $183,626, net of grant revenues, respectively, towards research and development costs. For the
three month periods ended March 31, 2012 and 2011, gross research and development expense, excluding any offsetting grant revenues,
amounted to $128,548 and $413,625, respectively, and grant money amounted to $0 and $229,999, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company
and its foreign subsidiaries is the U.S. dollar. Most of the Company’s revenue and materials purchased from suppliers are
denominated in or linked to the U.S. dollar. Transactions denominated in currencies other than a functional currency are converted
to the functional currency on the transaction date, and any resulting assets or liabilities are further translated at each reporting
date and at settlement. Gains and losses recognized upon such translations are included within foreign exchange gain (loss) in
the unaudited consolidated condensed statements of operations and comprehensive income.
PRODUCT WARRANTIES
The Company provides for estimated warranty
costs at the time of sale and accrues for specific items at the time their existence is known and the amounts are determinable.
The Company estimates warranty costs using standard quantitative measures based on industry warranty claim experience and evaluation
of specific customer warranty issues. The Company currently records warranty costs as 2% of revenue. As of March 31, 2012 and December
31, 2011, $173,678 and $192,373, respectively, was accrued against warranty provision and included in accrued liabilities. For
the three month periods ended March 31, 2012 and 2011, the total warranty, service, service travel and installation costs included
in cost of sales were $46,609 and $78,886, respectively.
F9
SEGMENTED REPORTING
ESW operates in two reportable segments.
ASC 280-10, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for the way
that public business enterprises report information about operating segments in the Company’s consolidated condensed
financial statements. Operating segments are components of an enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
ESW’s operating segments include manufacturing operations and air testing services. ESW’s Chief Operating Decision
Maker is the Company’s Executive Chairman.
RESTRUCTURING CHARGES
In 2011 ESW underwent a significant
restructuring of its operations. ESW recognizes restructuring expenses as they are incurred. ESW also evaluates the inventory and
property, plant and equipment associated with restructuring actions for impairment. Asset impairment and accelerated depreciation
expenses primarily relate to inventory write-downs for rationalized products and adjustments in the carrying value of the closed
facilities to the Company’s estimated fair value. In addition, the remaining useful lives of other property, plant and equipment
associated with the related operations were re-evaluated based on the respective plan, resulting in the impairment of certain assets.
In accordance with ASC 420-10-25-11 costs to terminate an operating lease arise when a lessee will either: (a) terminate an operating
lease; or (b) if it is unable to terminate the lease, discontinue its use of the asset and continue to make lease payments over
the remaining term of the lease without benefit. When the lease will be terminated, the lessee should recognize a liability for
the cost of terminating the lease at the time the lease is terminated. If the lease will not be terminated and the lessee will
continue to incur costs under the lease without future benefit, the lessee should recognize a liability on the cease-use date (the
date the lessee discontinues its use of the asset). In accordance with paragraphs 420-10-30-7 through 30-9, a liability for the
remaining lease rentals, reduced by actual (or estimated) sublease rentals, would be recognized and measured at its fair value
at the cease-use date. In accordance with paragraphs 420-10-35-1 through 35-4, the liability would be adjusted for changes, if
any, resulting from revisions to estimated cash flows after the cease-use date, measured using the credit-adjusted risk-free rate
that was used to measure the liability initially. At March 31, 2012 and December 31, 2011, the Company determined that no liability
accrual was required.
NOTE 3 – RECENTLY ADOPTED ACCOUNTING
PRONOUNCEMENTS
In June 2011, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-5 – “Comprehensive
Income – Presentation of Comprehensive Income”. This statement removed the presentation of comprehensive income
in the statement of changes in stockholders’ equity. The only two allowable presentations are below the components
of net income in a statement of comprehensive income or in a separate statement of comprehensive income that begins with total
net income. The guidance is effective for interim or annual reporting periods beginning after December 15, 2011. The adoption
of this ASU had no effect on the Company's unaudited consolidated condensed financial statements.
In May 2011, an update was made by the
FASB to achieve common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards
(“IFRS”). It provides amendments to the definition of fair value and the market participant concept, grants an
exception for the measurement of financial instruments held in a portfolio with certain offsetting risks, and modifies most disclosures.
The changes in disclosures include, for all Level 3 fair value measurements, quantitative information about significant unobservable
inputs used and a description of the valuation processes in place. The new guidance also requires disclosure of the
highest and best use of a nonfinancial asset. This standard will be effective prospectively during interim and for annual
periods beginning after December 15, 2011. Early application by public entities was not permitted. The adoption
of this FASB update had no effect on the Company's unaudited consolidated condensed financial statements.
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash
and highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase. At March
31, 2011 and December 31, 2011, all of the Company's cash and cash equivalents consisted of cash.
F10
NOTE 5 - INVENTORY
Inventory consists of:
|
March 31, |
|
December 31, |
Inventory |
2012 |
|
2011 |
Raw materials |
$ 708,592 |
|
$ 846,113 |
Work-in-process |
1,481,735 |
|
1,705,346 |
Finished goods |
28,407 |
|
102,575 |
|
2,218,734 |
|
2,654,034 |
Less: reserve for inventory obsolescence |
- |
|
(223,007) |
|
|
|
|
Total |
$ 2,218,734 |
|
$ 2,431,027 |
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
March 31, |
|
December 31, |
Classification |
2012 |
|
2011 |
|
|
|
|
Plant, machinery and equipment |
$ 3,705,500 |
|
$ 6,338,221 |
Office equipment |
194,058 |
|
383,912 |
Furniture and fixtures |
242,090 |
|
456,981 |
Vehicles |
19,468 |
|
25,604 |
Leasehold improvements |
826,579 |
|
1,098,699 |
|
4,987,695 |
|
8,303,417 |
Less: accumulated depreciation |
(3,740,546) |
|
(6,867,760) |
Less: impairment loss |
(29,559) |
|
(163,668) |
|
|
|
|
Total |
$ 1,217,590 |
|
$ 1,271,989 |
Depreciation expense recognized in the unaudited
consolidated condensed statements of operations and comprehensive loss was included in the following captions:
|
For the three month periods ended |
|
March 31, |
|
March 31, |
Depreciation Expense |
2012 |
|
2011 |
|
|
|
|
Cost of sales |
$ 76,255 |
|
$ 76,191 |
Operating expenses |
76,182 |
|
104,204 |
Research and development |
- |
|
29,163 |
|
|
|
|
Total |
$ 152,437 |
|
$ 209,558 |
At March 31, 2012 and December 31, 2011,
the Company had $300,608 and $198,416, respectively, of customized equipment under construction.
The plant, machinery and equipment above
include $0 and $37,508 in assets under capital lease with a corresponding accumulated depreciation of $0 and $34,384 as of March
31, 2012 and December 31, 2011, respectively.
F11
At March 31, 2012, the Company recognized
an impairment loss for furniture, fixtures and office equipment located at its Canadian facility. The estimated recovery from the
sale of furniture, fixtures and office equipment is not considered material and, accordingly, the Company determined that the carrying
value of these assets exceeded the sum of undiscounted cash flows from their eventual disposition. The Company has assessed a value
of $0 to these assets and recorded an impairment loss equal to the full amount of their carrying value. Any recovery from the sale
of these assets and differences due to exchange rate fluctuations will be offset against the impairment loss in future periods.
Impairment loss for the three month periods ended March 31, 2012 and 2011 amounted to $29,559 and $0, respectively.
The details of impairment loss recognized for 2012 are summarized
in the follows table:
|
Impairment loss |
Asset grouping |
recognized |
Furniture and fixtures (Abandonment) |
$ 1,837 |
Office equipment (Abandonment) |
2,176 |
Computer hardware (Abandonment) |
18,856 |
Computer software (Abandonment) |
20,696 |
|
43,565 |
Less: gain on disposal of property and equipment |
(14,006) |
|
|
Impairment loss recognized for the period |
$ 29,559 |
NOTE 7 - REDEEMABLE CLASS A SPECIAL
SHARES
At December 31, 2011, the redeemable
Class A special shares that were issued by the Company's wholly-owned subsidiary, BBL, without par value, were redeemable on demand
by the holder of the shares, which is a private Ontario Corporation, at $700,000 Canadian (historically translated to $453,900
at December 31, 2011). On February 3, 2012, BBL filed for bankruptcy and the redeemable Class A special shares were subsequently
cancelled.
NOTE 8 - INCOME TAXES
As of March 31, 2012, there are tax loss
carry forwards for Federal income tax purposes of approximately $28,772,605 available to offset future taxable income in the United
States. The tax loss carry forwards expire in various years through 2032. The Company does not expect to incur a Federal income
tax liability in the foreseeable future. Accordingly, a valuation allowance for the full amount of the related deferred tax asset
of approximately $10,070,223 has been established until realizations of the tax benefit from the loss carry forwards meet the "more
likely than not" criteria.
Originating |
Loss |
Year |
carryforward |
|
|
1999 |
$ 407,607 |
2000 |
2,109,716 |
2001 |
2,368,368 |
2002 |
917,626 |
2003 |
637,458 |
2004 |
1,621,175 |
2005 |
2,276,330 |
2006 |
3,336,964 |
2007 |
3,378,355 |
2008 |
3,348,694 |
2009 |
2,927,096 |
2010 |
2,269,987 |
2011 |
2,212,173 |
2012 |
961,056 |
|
|
Total |
$ 28,772,605 |
F12
Additionally, as of March 31, 2012, the
Company's two wholly-owned Canadian subsidiaries had non-capital tax loss carry forwards of approximately $14,713,999 available
to be used, in future periods, to offset taxable income. The loss carry forwards expire in various years through 2032. The deferred
tax asset of approximately $3,899,210 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.
|
Loss |
|
carryforward |
Originating |
foreign |
Year |
operations |
|
|
2006 |
$ 568,765 |
2008 |
4,063,322 |
2009 |
2,783,522 |
2010 |
2,372,712 |
2011 |
3,399,262 |
2012 |
1,526,416 |
|
|
Total |
$ 14,713,999 |
The reconciliation of the difference between
the income tax provision using the statutory tax rates and the effective tax rate is as follows:
|
For the three month periods ended |
|
March 31, |
|
March 31, |
|
2012 |
|
2011 |
|
Statutory tax rates: |
|
|
|
|
U.S. |
35.00% |
|
35.00% |
|
Canada |
26.50% |
|
31.00% |
|
|
|
|
|
Loss before income taxes |
|
|
|
|
U.S. |
$ (981,765) |
|
$ (1,460,821) |
|
Foreign |
555,694 |
|
(1,673,811) |
|
|
$ (426,071) |
|
$ (3,134,632) |
|
Expected tax recovery at statutory tax rates |
$ (196,359) |
|
$ (1,030,001) |
Differences in income taxes resulting from: |
|
|
|
|
Depreciation and impairment (foreign operations) |
(246,273) |
|
3,311 |
|
Change in fair value of exchange feature liability |
- |
|
202,559 |
|
Financing charge on embedded derivative liability |
- |
|
169,785 |
|
Stock-based compensation |
7,248 |
|
9,060 |
|
Gain on convertible derivative |
- |
|
(467,756) |
|
Long-term debt interest expense accretion |
- |
|
367,500 |
|
(435,384) |
|
(745,542) |
Benefit of losses not recognized |
435,384 |
|
745,542 |
|
Income tax provision per unaudited consolidated |
|
|
|
|
condensed financial statements |
$ - |
|
$ - |
F13
Components of deferred income tax assets are as follows:
|
|
|
|
|
March 31, |
|
December 31, |
|
|
|
|
|
2012 |
|
2011 |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ - |
|
$ 488,494 |
Tax loss carryforwards |
|
13,969,433 |
|
13,255,075 |
|
|
|
|
|
13,969,433 |
|
13,743,569 |
Valuation allowance |
|
(13,969,433) |
|
(13,743,569) |
|
|
|
|
|
|
|
|
Carrying value |
|
$ - |
|
$ - |
Based on the Company’s current
tax loss position tax benefits to be recognized is more-likely-than-not to be sustained upon examination by taxing authorities.
The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.
The Company will recognize
interest and penalties related to unrecognized tax benefits within the income tax expense line in the unaudited consolidated
condensed statements of operations and comprehensive loss. Accrued interest and penalties will be included within the related
tax liability line in the consolidated condensed balance sheets.
In many cases the Company's uncertain
tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open
tax years, by major tax jurisdiction, as of March 31, 2012:
United States - Federal |
2008 – present |
United States - State |
2008 – present |
Canada – Federal |
2009 – present |
Canada - Provincial |
2009 – present |
Valuation allowances reflect the deferred
tax benefits that management is uncertain of the Company's ability to utilize in the future.
NOTE 9 - STOCKHOLDERS' EQUITY
No stock was issued during the three month period ended March
31, 2012.
The following table sets forth a summary
of the shares issued on July 15, 2011 as a result of the closing of the rights offering effective June 30, 2011:
|
Number of Shares |
Amount |
Subscription receivable at June 30, 2011 |
32,143,170 |
$3,857,180 |
Conversion of notes payable to related parties and related accrued interest |
34,390,418 |
4,126,850 |
Conversion of accrued expenses |
136,424 |
16,374 |
Reclassification of conversion option liabilities to equity |
-- |
2,654,730 |
Conversion of exchange feature liability |
22,500,000 |
2,712,600 |
Rights offering costs |
-- |
(419,410) |
Total |
89,170,012 |
$12,948,324 |
Effective November 6, 2011 the Company
issued 400,000 restricted shares of common stock to two Board members in connection with restricted stock grants under the 2010
stock incentive plan.
F14
Effective November 6, 2011 the Company
issued 166,668 restricted shares of common stock to four Board members in lieu of outstanding board fees.
Effective December 31, 2011 the Company
issued 250,000 restricted shares of common stock to five Board members in connection with restricted stock grants under the 2010
stock incentive plan.
NOTE 10 - STOCK OPTIONS AND WARRANT GRANTS
STOCK OPTIONS
On April 15, 2010 the Board of Directors
(the “Board”) granted an aggregate award of 900,000 stock options to a former executive officer and former director
and one director. The options vest over a period of three years with an exercise price of $0.65 (fair market value of the Company's
common stock as of the date of grant) with expiry of five years from the date of award. Effective February 7, 2011, with the resignation
of a director, the unvested portion of the stock options was cancelled as a result of the resignation. The balance of the stock
option expense of the April 15, 2010 award is as follows:
|
Stock Option |
Date |
Expense |
April 15, 2011 |
$ 62,127 |
April 15, 2012 |
$ 82,836 |
April 15, 2013 |
$ 20,709 |
A summary of option transactions, including
those granted pursuant to the terms of certain employment and other agreements is as follows:
|
Stock purchase options |
Weighted average exercise price |
Outstanding, January 1, 2011 |
3,600,000 |
$ 0.68 |
Granted |
475,000 |
$ 0.12 |
Expired or cancelled |
(500,000) |
$ (0.73) |
Outstanding, December 31, 2011 |
3,575,000 |
$ 0.60 |
Expired |
(2,150,000) |
$ (0.71) |
|
|
|
Outstanding, March 31, 2012 |
1,425,000 |
$ 0.43 |
At March 31, 2012 the outstanding options
have a weighted average remaining life of 28 months. All options issued prior to 2010 have vested, and the April 15, 2010 options
vest over a period of three years, in three equal parts each year.
No stock options were granted for the
three month period ended March 31, 2012. The weighted average fair value of options granted during 2011 was $0.02 and was estimated
using the Black-Scholes option pricing model, using the following assumptions:
|
2011 |
Expected volatility |
111% |
Risk-free interest rate |
0.42% |
Expected life |
1.5 yrs |
Dividend yield |
0.00% |
Forfeiture rate |
0.00% |
F15
The Black-Scholes option-pricing model
used by the Company to calculate options and warrant values was developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ from the Company's stock purchase options and warrants.
The model also requires highly subjective assumptions, including future stock price volatility and expected time until exercise,
which greatly affect the calculated values. Accordingly, management believes that this model does not necessarily provide a reliable
single measure of the fair value of the Company's stock options and warrants.
At March 31, 2012, the Company had outstanding
options as follows:
Number Of |
Exercise |
|
Options |
Price |
Expiration Date |
100,000 |
$1.00 |
February 8, 2013 |
250,000 |
$0.27 |
August 6, 2013 |
600,000 |
$0.65 |
April 15, 2015 |
250,000 |
$0.12 |
December 31, 2012 |
225,000 |
$0.12 |
June 30, 2016 |
1,425,000 |
|
|
Effective November 6, 2011, the Board
approved restricted stock grants to 7 Board members under the 2010 stock incentive plan, as per the terms of the grant each of
the 7 Board members will receive 150,000 shares vesting in equal parts on December 31, 2011, December 31, 2012 and December 31,
2013 subject to the execution of the requisite grant agreements. The Board also approved restricted stock grants to 2 Board members
for serving as chair to various committees, as per the terms of the grant each of the 2 Board members will receive 200,000 shares
vesting immediately subject to the execution of the requisite grant agreements. Stock-based compensation expense will be recorded
as of the vesting terms of the grants. Of the vested shares 650,000 restricted shares of common stock were issued as of December
31, 2011.
Effective January 12, 2012 the board
approved a management incentive plan which includes a 10% restricted common equity pool for management, key participants of this
plan will be executive officers and a member of the Company’s board, secondary participants include other management with
a trickle down to other core members of the team, the program entails a 5 year vesting program commencing January 2012, there will
be accelerated vesting for certain participants of the plan. The equity grants are effective subject to the execution of the requisite
grant agreements, no agreements have been executed to date.
During the three month periods
ended March 31, 2012 and 2011, $20,709 and $25,886, respectively, has been recorded in the unaudited consolidated condensed
statements of operations and comprehensive loss for stock-based compensation.
WARRANTS
Warrants issued in connection with various
private placements of equity securities are treated as a cost of capital and no income statement recognition is required. A summary
of warrant transactions is as follows:
|
Warrants |
Weighted average
exercise price |
Outstanding, January 1, 2010 |
- |
$ - |
Granted |
1,545,000 |
$ 0.65 |
Expired or cancelled |
- |
$ - |
Outstanding, December 31, 2010, and 2011, |
1,545,000 |
$ 0.65 |
and March 31, 2012 |
|
|
F16
In 2010, the Company closed a unit offering
in the amount of $300,000 per tranche for gross proceeds of $600,000 whereby the Company issued 1,500,000 units. The unit offering
was for up to $5 million. The units were in the form of shares of the Company's common stock, at $0.40 per share plus for each
share of common stock subscribed to under the unit offer the investor received one warrant exercisable for 1 share of common stock
at $0.55; if an Investor Warrant is exercised between the first and second years from issuance, the exercise price will be $0.65.
All investor warrants as issued are subject to adjustment in the event of a stock split or similar adjustment by the Company. A
commission of 4% of the gross proceeds was paid and 7.5 units for every $100 of the gross proceeds raised were payable for brokers’
fees.
No warrants were issued during the three
month periods ended March 31, 2012 and 2011.
NOTE 11 - RELATED PARTY TRANSACTIONS
During the three month period ended
March 31, 2012, in addition to fees and salaries; reimbursement of business expenses; transactions with related parties include:
•
$75,000 related to services provided by Orchard Capital Corporation under a services agreement
effective January 30, 2011. On April 19, 2011, the Company's Board ratified a Services Agreement (the "Agreement") between
the Company and Orchard Capital Corporation ("Orchard") which was approved by the Company's Compensation Committee. Under
the Agreement, Orchard agreed to provide services that may be mutually agreed to by and between Orchard and the Company including
those duties customarily performed by the Chairman of the Board and executive of the Company as well as providing advice and consultation
on general corporate matters and other projects as may be assigned by the Company's Board as needed. Orchard is controlled by Richard
Ressler. Certain affiliated entities of Orchard as well as Richard Ressler own shares of the Company.
•
Mr. Nitin Amersey who is a director of the Company is listed as a control person with the
Securities and Exchange Commission of Bay City Transfer Agency Registrar Inc., the Company's transfer agent. For the three month
period ended March 31, 2012, the Company paid Bay City Transfer Agency Registrar Inc. $1,301.
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
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 and fully converted including interest into 6,007,595 shares of common stock on March 25,
2010. At March 31, 2011 the exchange feature liability related to the convertible debentures was re-valued to $2,258,739 with
the change in fair value of exchange feature liability of $578,739 expense recorded in the unaudited consolidated
condensed statement of operations and comprehensive loss for the three month period then ended.
•
$50,000 related to services provided by Orchard under a services agreement effective January
30, 2011.
•
Mr. Nitin Amersey who is a director of the Company is listed as a control person with the
Securities and Exchange Commission of Bay City Transfer Agency Registrar Inc., the Company's transfer agent. For the three month
period ended March 31, 2011, the Company paid Bay City Transfer Agency Registrar Inc., $1,325.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
LEASES
Effective November 24, 2004, the Company's
wholly-owned subsidiary, ESWA, entered into a lease agreement for approximately 40,220 square feet of leasehold space at 2 Bethlehem
Pike Industrial Center, Montgomery Township, Pennsylvania. The leasehold space houses the Company's research and development facilities
and also houses ESW’s new manufacturing operations. The lease commenced on January 15, 2005 and was to expire January 31,
2010. Effective October 16, 2009, the Company's wholly-owned subsidiary ESWA entered into a lease renewal agreement with Nappen
& Associates for the leasehold property in Pennsylvania. There were no modifications to the original economic terms of the
lease under the lease renewal agreement. Under the terms of the lease renewal, the lease term will now expire February 28, 2013.
Effective March 31, 2011, ESWA entered into a lease amendment agreement with Nappen & Associates for the leasehold property
in Pennsylvania, whereby ESWA has the sole option to extend the expiry of the lease agreement by an additional 3 years if exercised,
six months prior to February 28, 2013; there were no modifications to the original economic terms of the lease.
F17
Effective December 20, 2004, the Company's
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 Company's executive offices and previously housed the manufacturing
operations. 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 lessor of the Canadian property has terminated the lease for the facility
as of May 1, 2012. ESW is in negotiations with the lessor to be released from the lease obligations.
The following is a summary of the minimum
annual lease payments for both leases:
Year |
Amount |
|
|
2012 |
$ 344,991 |
2013 |
311,699 |
2014 |
289,143 |
2015 |
216,857 |
|
|
Total |
$ 1,162,690 |
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 unfavorable resolution of one or more such proceedings could in the future
materially and adversely affect ESW's financial position, results of operations or cash flows in a particular period.
CAPITAL LEASE OBLIGATION
As of March 31, 2012 and December 31,
2011, the Company’s capital lease obligation amounted to $0 and $1,241, respectively.
NOTE 13 – OPERATING SEGMENTS
The Company has two principal operating
segments, air testing services and catalyst manufacturing. These operating segments were determined based on the nature of the
products and services offered. Operating segments are defined as components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing
performance. The Company’s Executive Chairman has been identified as the chief operating decision-maker, and directs
the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.
The Company evaluates performance based
on several factors, of which the primary financial measure is net income. The accounting policies of the business segments are
the same as those described in “Note 2: Summary of Accounting Policies.” No intersegment sales were made for the three
month periods ended March 31, 2012 and 2011. The following tables show the operations of the Company’s reportable segments:
F18
|
|
|
|
|
For the three month period ended March 31, 2012 |
|
|
|
|
|
Catalyst |
|
Air Testing |
|
Unallocated |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ 2,381,083 |
|
$ 150,519 |
|
$ - |
|
$ 2,531,602 |
Net income (loss) |
|
$ (764,890) |
|
$ (513,244) |
|
$ 852,063 |
|
$ (426,071) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2012 |
|
|
|
|
|
Catalyst |
|
Air Testing |
|
Unallocated |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ 3,465,496 |
|
$ 1,603,807 |
|
$ 538,516 |
|
$ 5,607,819 |
Property, plant and equipment |
|
|
|
|
|
|
|
|
|
under construction |
|
$ 5,138 |
|
$ 295,470 |
|
$ - |
|
$ 300,608 |
Property, plant and equipment |
|
$ 248,791 |
|
$ 968,799 |
|
$ - |
|
$ 1,217,590 |
Accounts receivable |
|
$ 837,518 |
|
$ 136,813 |
|
$ - |
|
$ 974,331 |
Inventories |
|
$ 2,184,942 |
|
$ 33,792 |
|
$ - |
|
$ 2,218,734 |
|
|
|
|
For the three month period ended March 31, 2011 |
|
|
|
|
|
Catalyst |
|
Air Testing |
|
Unallocated |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
$ 1,990,222 |
|
$ 55,515 |
|
$ - |
|
$ 2,045,737 |
Net loss |
|
$ 1,673,809 |
|
$ 391,626 |
|
$ 1,069,197 |
|
$ 3,134,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011 |
|
|
|
|
|
Catalyst |
|
Air Testing |
|
Unallocated |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ 4,329,986 |
|
$ 1,551,848 |
|
$ 623,192 |
|
$ 6,505,026 |
Property, plant and equipment |
|
|
|
|
|
|
|
|
|
under construction |
|
$ - |
|
$ 198,416 |
|
$ - |
|
$ 198,416 |
Property, plant and equipment |
|
$ 328,489 |
|
$ 943,500 |
|
$ - |
|
$ 1,271,989 |
Accounts receivable |
|
$ 1,028,720 |
|
$ 176,014 |
|
$ - |
|
$ 1,204,734 |
Inventory |
|
$ 2,393,507 |
|
$ 37,520 |
|
$ - |
|
$ 2,431,027 |
NOTE 14 - LOSS PER SHARE
Potential common shares of 1,425,000
related to ESW's outstanding stock options and 1,545,000 shares related to ESW's outstanding warrants, were excluded from the computation
of diluted loss per share for the three month period ended March 31, 2012 because the inclusion of these shares would be anti-dilutive.
Potential common shares of 3,400,000
related to ESW's outstanding stock options, 1,500,000 shares related to ESW's 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
because the inclusion of these shares would be anti-dilutive.
F19
NOTE 15 - RISK MANAGEMENT
CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE
The Company's cash balances are maintained
in various banks in Canada and the United States. Deposits held in banks in the United States are insured up to $250,000 per depositor
for each bank by the Federal Deposit Insurance Corporation. Deposits held in banks in Canada are insured up to $100,000 Canadian
per depositor for each bank by The Canada Deposit Insurance Corporation, a federal crown corporation. Actual balances at times
may exceed these limits.
Accounts Receivable and Concentrations
of Credit Risk: The Company performs on-going credit evaluations of its customers' financial condition and generally does not require
collateral from its customers. Three of its customers accounted for 32.2%, 12.3% and 11.8%, of the Company's revenue during the
three month period ended March 31, 2012 and 22.8%, 14.5% and 13.4%, respectively, of its accounts receivable as of March 31, 2012.
Four of its customers accounted for
29.0%, 23.0%, 17.0% and 16.0%, respectively, of the Company's revenue during the three month period ended March 31, 2011 and 28.0%,
21.0%, 19.0%, and 15%, respectively, of its accounts receivable as of March 31, 2011.
For the three month period ended March
31, 2012, the Company purchased approximately 21.2% and 19.8% of its inventory from two vendors. For the three month period ended
March 31, 2011, the Company purchased approximately 25.4% of its inventory from one vendor. The accounts payable to these vendors
aggregated approximately $229,712 and $674,443 as of March 31, 2012 and 2011, respectively.
NOTE 16 - COMPARATIVE FIGURES
Certain 2011 figures have been reclassified
to conform to the current financial statement presentation.
NOTE 17 - SUBSEQUENT EVENTS
On April 25, 2012, the
Company’s wholly-owned subsidiary ESWA entered into a Machinery and Equipment Loan Fund (“MELF Facility”)
with the Commonwealth of Pennsylvania for up to $500,000 for the purchase of equipment and related purchases. Two (2)
draw-downs are permitted under the MELF Facility by ESWA. The first draw down of $280,787 was made under the MELF
Facility in connection with equipment purchased by ESWA on April 25, 2012 (the “Closing Date”). ESWA may
make one (1) additional draw down per the terms of the MELF Facility so that the aggregate amount borrowed under the MELF
Facility may be up to $500,000. Terms of the MELF Facility include initial interest at three (3%) percent per annum with
monthly payments and full repayment of the MELF Facility on or before the first day of the eighty fifth (85) calendar month
following the Closing Date. In connection with the MELF Facility, the Company entered into a Guaranty and a Loan and Security
Agreement on behalf of its wholly-owned subsidiary ESWA. In the event ESWA defaults on any payments, the MELF Facility
may be accelerated with full payment due along with certain additional modifications including the increase in interest to
twelve and one half (12 1/2%) percent.
Effective May 1, 2012 the lessor of
the Company’s wholly-owned subsidiary ESWC terminated the lease agreement for the ESWC facility located at 335 Connie Crescent,
Concord, Ontario, Canada (the “Facility”) previously occupied by the Company and ESWC. The Facility had been vacated
prior to the lease termination. ESWC has established temporary offices in Ontario to manage its limited operations and the Company
had moved its executive offices to 200 Progress Drive, Montgomeryville Township, Pennsylvania where the Company’s wholly-owned
subsidiary ESWA maintains its offices. ESWC is in the process of negotiating a full release from the lease with lessor; however,
there can be no assurances that ESWC and the lessor will agree to final release terms.
F20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be
read in conjunction with ESW's consolidated condensed financial statements and Notes thereto included elsewhere in this Report.
This Form 10-Q contains certain forward-looking
statements regarding, among other things, the anticipated financial and operating results of ESW's business. Investors are cautioned
not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. ESW undertakes no obligation
to publicly release any modifications or revisions to these forward-looking statements to reflect events or circumstances occurring
after the date hereof or to reflect the occurrence of unanticipated events. In connection with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, ESW cautions investors that actual financial and operating results may differ
materially from those projected in forward-looking statements made by, or on behalf of, ESW. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements to be
materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.
This report should be read in conjunction with ESW's Annual Report on Forms 10-K, for the year ended December 31, 2011 as filed
with the Securities and Exchange Commission.
GENERAL OVERVIEW
Environmental Solutions Worldwide Inc.
("we," "us," "ESW" or the "Company") is a publicly traded company engaged through its wholly-owned
subsidiaries ESW Canada Inc. (“ESWC”), ESW America Inc. (“ESWA”), Technology Fabricators Inc. (“TFI”)
and ESW Technologies Inc. (“ESWT”), (together the "ESW Group of Companies") in the design, development, manufacture
and sale of emission technologies and services. ESW is currently focused on the international medium duty and heavy duty diesel
engine market for on-road and off-road vehicles as well as the utility engine, mining, marine, locomotive and military industries.
ESW also offers engine and after treatment emissions verification testing and certification services.
ESW's focus is to be an integrated solutions
provider to the environmental emissions market by providing leading-edge catalyst technology as well as best-in-class engine and
vehicle emissions testing and certification services. The Company's strategy is centered on identifying and deploying resources
against its "sweet-spot" products, where ESW has identified its core competencies and differentiation in the marketplace.
ESW's core geography focus is North America, and will opportunistically explore business development opportunities in other markets
if accretive to the Company in the short term. By focusing financial, human and intellectual capital on ESW's core competencies
and markets, the Company is targeting profitable growth in the short term and value creation for its shareholders over the long
term.
ESW was incorporated in the State
of Florida in 1987. Our principal executive offices were previously located at 335 Connie Crescent, Concord, Ontario, Canada L4K
5R2, we have relocated our principal offices to 200 Progress Drive, Montgomeryville, PA, 18936. Our telephone number is (905) 695-4142
and (215) 699 0730. Our web site is www.cleanerfuture.com. Information contained on our web site does not constitute a part of
this 10-Q report.
In 2012, ESW continues to focus on optimizing
the Company's operations around its "sweet spots" and capturing a greater market share in the catalytic converter and
emissions testing markets whilst ensuring steps towards profitable growth. The key factors that are in ESW's favor are: (a) continued
regulatory push for emissions reductions in the United States, (b) funding available from public agencies, (c) a market-leading
Level III active catalytic converter technology and an established distribution network in North America, and (d) CARB and EPA
certification and verification capable emissions and durability testing services.
ESW believes that it can improve and
achieve profitability and grow its business by continuing to pursue the following strategy:
• Focus on delivering controlled
and profitable growth to its shareholders.
2
• Provide integrated solutions
to the emissions market by leveraging its product development, testing and certification services, and distribution and post-sale
services capabilities.
• Center the Company's sales strategy
around identified "sweet-spots" that will allow manufacturing efficiency gains and optimized resource allocation.
• Educate the end customers and
regulatory agencies about the technology and ensure realistic delivery expectations.
• Enhance scheduling and customer
service functions and importance.
• Work with vendors to optimize
ESW's material buys and lead times.
• Constantly review operations,
processes and products under a Continuous Improvement / Performance Based culture.
ESW has made significant investments
in research and development and obtaining regulatory approvals for its technologies.
On August 23, 2011, ESW received notification
from the United States Environmental Protection Agency ("EPA") that the Company's XtrmCat Kit is now certified for 2
stroke, Category 2, marine engines. The Certifications are applicable to Electro-Motive Diesel (“EMD”) 710 and 645
engines. The XtrmCat can achieve Tier 0 and Tier I compliance as per 40 CFR 1042 when retrofitted to EMD 710 and 645 engines. ESW
is pursuing opportunities to commercialize this technology into the marketplace.
The products that ESW is pursuing for
verification / certification to cover the following primary technology levels established by CARB and EPA:
• Expansion of On Road Active Diesel
Particulate Filter verification to include Exhaust Gas Recirculation engines for Level III +- PM reduction greater than 85%.
• ESW's XtrmCat product designed
for locomotive, Tier 0, turbocharged EMD 645 and 710 engines was tested at an EPA recognized facility for certification during
March and April 2011 along with the marine product. Certification applications for the rail product are pending and currently ESW
is focusing on obtaining the verification of the Expansion of On Road Active Diesel Particulate Filter for Exhaust Gas Recirculation
engines.
ESW believes that with the additional
certifications/verification of the above range of products, ESW will cover a significant portion of the market and give ESW the
competitive advantage to be the technology of first choice in retrofit and OEM applications.
The cost of developing a complete range
of products to meet regulations is substantial. ESW believes that it possesses a competitive advantage in ensuring regulatory compliance
by leveraging its Testing and Research facility in Montgomeryville, Pennsylvania to support its certification and verification
efforts. ESW has also managed to offset some of these development costs through the application of research grants and tax refunds.
ESW made the following adjustments to
its business in 2011 to improve its operational results in 2012:
1) ESW has reviewed and continues to
review its costs for inefficiencies and has taken steps to reduce its operating expenses. Key cost reduction initiatives during
2011 included the restructuring of its management team, the termination of certain contracts and the re-negotiation of board and
consulting obligations, amongst others. In addition, during the second semester of 2011, ESW reduced its overhead costs by re-locating
its Canadian manufacturing operations to its facilities located in Pennsylvania, United States. For the Canadian facility at Concord,
Ontario ESW is in negotiations with the landlord to be released from the lease obligations. The landlord of the Canadian property
has terminated the lease for the facility as of May 1, 2012. ESW is also offsetting a portion of the relocation and training costs
through state grants provided by the State of Pennsylvania.
3
ESW has applied and received from the
State of Pennsylvania commitment of funding for up to $500,000 capital financing under its economic development programs. ESW closed
on the first tranche of the financing on April 25, 2012 of $280,787 to procure additional Air Testing lab equipment.
ESW will continuously revisit opportunities
to further streamline the business.
2) ESW is closely monitoring its bill
of materials and costing and periodically revises pricing to its dealers to help recover product margins. ESW has also revised
its overall commercial policies, including its general terms and conditions and lead time expectations on its products. Changes
have also been implemented to ESW's costing and quoting processes, including frequent periodic review of its bill of materials
and the proactive negotiation of raw material prices.
3) ESW is focusing on increasing sales
volumes on its core "sweet spot" products to reduce production complexities and improve inventory management. ESW is
has also implemented new continuous improvement programs such as the cross-functional "Product and Process Review" stream
led by ESW's engineering team searching for product, product quality and product development process enhancements.
4) ESW
has revisited relationships with critical vendors, in addition to setting up favorable payment plans to reduce the outstanding
balances with these vendors. ESW has also secured and continues to secure volume discounts on critical components. ESW has also
identified and engaged new vendors in the U.S. for parts supply. In addition, there is a greater focus on outsourcing opportunity
for labor intensive parts.
5) ESW has revised and implemented its
new warranty policy to ensure that warranty terms and conditions meet industry standards whilst mitigating warranty risks to the
fullest extent possible. ESW has also launched a backend website to assist its distributors and installers in day to day operations,
training and processes.
6) ESW is in the process of continuously
engaging its existing dealers to help better understand ESW's business and product positioning and to strengthen ESW's partnership
with its distribution base. ESW is also opportunistically adding new independent emissions focused dealers to enhance the Company’s
North American sales coverage.
7) ESW is focusing on increasing revenue
from testing services provided to third parties from its Air Testing Facility in Montgomeryville, Pennsylvania.
ESW’s Air Testing Services in
Montgomeryville, PA continues to see a sizeable increase in business, in line with ESW’s effort to increase revenues from
these operations.
As a result from these actions, the Company
is positioned to improve its operational results in 2012. The Company has reduced inefficiencies in personnel-related costs, manufacturing
costs and other discretionary expenditures that are within the Company's control. The Company is also seeking to lower its overhead
costs while maintaining its focus on the Sales, Marketing and Customer Service efforts. The changes in the business are anticipated
to lower the overall operating costs in the Company and improve the Company's overall results, without affecting the Company's
positioning of its existing products and testing services as well as its efforts to develop and deliver to market the next generation
of leading emissions products and services.
COMPARISON OF THE THREE MONTH PERIOD ENDED MARCH 31, 2012
TO THE THREE MONTH PERIOD ENDED MARCH, 2011
RESULTS OF OPERATIONS
The following management's discussion
and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the MD&A included
in ESW's Annual Report on Forms 10-K, for the year ended December 31, 2011.
4
Revenues for the three month period
ended March 31, 2012, increased by $485,865, or 23.8 percent, to $2,531,602 from $2,045,737 for the three month period ended March
31, 2011. The increase in revenue is related to sales of ESW's ThermaCat (TM) product in the on-road school bus market and a sale
of product to the U.S. military.
Cost of sales as a percentage of
revenues for the three month period ended March 31, 2011 was 68.8 percent compared to 102.3 percent for the three month period
ended March 31, 2011. 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. In addition, the overhead costs in cost of sales reflected
the costs for the Canadian manufacturing facility. The reduction in cost of sales in the current period is reflective of the changes
that were implemented in the Company’s operations in 2011. Gross margin for the three month period ended March 31, 2012 was
31.2 percent compared to negative 2.3 percent for the three month period ended March 31, 2011. The improvement in the gross margin
is related to the adjustments made to the operations in 2011 and sales into the military segment.
Marketing, office and general expenses
for the three month period ended March 31, 2012, increased by $138,697, or 13.2 percent, to $1,190,450 from $1,051,753 for the
three month period ended March 31, 2011. The increase is primarily due to the following (a) a provision for uncollectable accounts
of $213,328 recorded for two distributors with whom the Company has a commercial dispute (b) an increase in sales and marketing
wages and selling expenses by $74,780, because the prior year three month period had an offsetting recovery of $70,654 of uncollectable
accounts, (c) an increase in facility expenses of $48,386 resulting from rent and costs related to the Canadian facility, and (d)
an increase in administration salaries and wages of $64,176. The increases were offset by the following decreases: (e) a decrease
in factory expense of $234,517 resulting from cost saving initiatives and higher factory overheads applied to cost of sales, (f)
a decrease in investor relation costs of $23,861 and (g) a $4,354 decrease in general administration expenses.
The Company incurred $0 and $518,809
as restructuring charges for the three month period ended March 31, 2012 and 2011, respectively. The 2011 costs related to various
severance payments, vacation payouts and agreements.
Research and development ("R&D")
expenses for the three month period ended March 31, 2012 decreased by $55,078, or 30.0 percent, to $128,548 from $183,626 for the
three month period ended March 30, 2011. The primary driver of R&D expenses for the three month period ended March 31, 2011
was related to ESW's pursuit of the verification expansion of its Level III product. In addition to the decrease, in the prior
year three month period the Company received grant money amounting to $229,999. During the three month period ended March 31, 2012
there was no grant funding to offset R&D cost.
Officers’ compensation and
directors’ fees for the three month period ended March 31, 2012 decreased by $54,537, or 25.8 percent, to $157,107 from $211,644
for the three month period ended March 31, 2011. Included in the March 31, 2012 officers’ compensation and directors’
fees is $20,709 of stock based compensation expenses for options issued in 2010 to a past officer and director. The decrease in
fees is mainly due to changes in executive management and the board compensation structure of ESW.
Consulting and professional fees
for the three month period ended March 31, 2012 increased by $28,882, or 106.6 percent, to $55,984 from $27,102 for the three month
period ended March 31, 2011. The increase is a result of a change in accrual for the annual audit costs, as the Company has started
accruing the annual fees on a monthly basis as opposed to an annual basis.
Foreign exchange loss for the three
month period ended March 31, 2012, was $30,817 as compared to a loss of $60,126 for the three month period ended March 31, 2011.
This is a result of the fluctuation in the exchange rate of the Canadian Dollar to the United States Dollar.
Depreciation and amortization expense
for the three month period ended March 31, 2012 decreased by $44,168, or 36.7 percent to $76,182 from $120,350 for the three month
period ended March 31, 2011. The depreciation costs for the three month period ended March 31, 2012 were substantially lower due
to: (a) write-off of assets located in ESW’s Canadian operations as a result of the relocation of operations in 2011, (b)
application of additional depreciation to cost of sales, (c) fully amortized patents and (d) full depreciation for a portion of
the assets.
5
The Company has valued the impairment
loss at $29,559 for the balance of the office equipment, furniture and fixtures of ESW Canada Inc., as of March 31, 2012. The landlord
of the Canadian property has terminated the lease for the facility as of May 01, 2012. ESW is in negotiations with the landlord
to be released from the lease obligations. Any costs recovered from the sale of these assets will be offset against impairment
cost in future periods. Loss on impairment of property plant and equipment for the three month period March 31, 2011 was $0.
Loss from operations for the three
month period ended March 31, 2012 decreased by $1,339,783, or 60.4 percent, to $879,971 from $2,219,754 for the three month period
ended March 31, 2011. ESW’s loss from operations for the three month period ended March 31, 2012 included the following non-cash
items: allowance for doubtful accounts of $213,328, depreciation expenses of $152,437, an impairment loss of $29,559 and stock
based compensation expense of $20,709. In addition, cash costs of $133,804 related to the rent and other facility costs of the
Canadian facility are included in loss from operations for the three month period ended March 31, 2012.
Effective February 3, 2012 ESW’s
wholly-owned non-operational subsidiary BBL Technologies Inc., (“BBL”) filed for bankruptcy in the Province of Ontario,
Canada. Due to the insolvency of BBL, the redeemable Class A special shares were cancelled and the Company recorded a $453,900
gain on the Consolidated Condensed Statement of Operations and Comprehensive Loss.
In the prior year three month period
ended March 31, 2011, the Company incurred the following costs related to various financing and debt transactions that were not
incurred in the three month period ended March 31, 2012:
• $578,739
- Change in fair value of exchange feature liability
• $34,521
- Interest on notes payable to related party
• $1,050,000
- Interest accretion expense
• $485,101
- Financing charge on embedded derivative liability
• ($1,336,445)
- Gain on convertible derivative
• $106,512
- Bank fees related to credit facility covenant waivers
LIQUIDITY AND CAPITAL RESOURCES
ESW's principal sources of operating
capital have been the proceeds from its various financing transactions. During the three month period ended March 31, 2012, the
Company used $221,130 of cash to sustain operating activities compared with $227,576 for the three month period ended March 31,
2011. As of March 31, 2012 and 2011, the Company had cash and cash equivalents of $651,866 and $956,337, respectively.
Net cash used in operating activities
for the three month period ended March 31, 2012 amounted to $221,130. This amount was attributable to the net loss of $426,071,
plus non-cash expenses such as depreciation, impairment loss, stock based compensation, gain on deconsolidation of BBL and others
of $38,244, and an increase in net operating assets and liabilities of $243,185. 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 and accretion on long term debt, inducement premium on conversion
of debentures and others of $1,182,293, and a decrease in net operating assets and liabilities of $1,724,763.
Net cash used in investing activities
was $229,789 for the three month period ended March 31, 2012, as compared to $15,729 provided by investing activities for the three
month period ended March 31, 2011.
Net cash used in financing activities
totaled $864 towards repayment under capital lease obligation for the three month period ended March 31, 2012, as opposed to net
cash provided by financing activities of $1,174,725 for the three month period ended March 31, 2011. In the prior year period of
2011, $3,000,000 was provided through the issuance of the notes payable to related parties, $1,823,319 was repaid under ESW's CIBC
credit facility and $1,956 was repaid under capital lease obligation.
6
ESW operates in a capital intensive
and highly regulated industry, where a long lead time to bring new products into market is considered normal. ESW continues to
invest in research and development to improve its technologies and bring them to the point where its customers have a high confidence
level to purchase our products.
During three month period ended
March 31, 2012 and in 2011, ESW did not produce sufficient cash from operations to support its expenditures. Prior financings supported
the Company's operations during the period. ESW's principal use of liquidity relates to the Company's working capital needs and
to finance any further capital expenditures or tooling needed for production and/or its testing facilities.
ESW anticipates certain capital
expenditures in 2012 related to the general operation of its business as well as to upgrade the air testing facilities in Montgomeryville,
Pennsylvania.
Overall, capital adequacy is
monitored on an ongoing basis by our management and reviewed quarterly by the Board of Directors.
Competition is expected to intensify
as the market for ESW's products expands. ESW's ability to continue to gain significant market share will depend upon its ability
to continue to develop strong relationships with distributors, customers and develop new products. Increased competition in the
market place could result in lower average pricing which could adversely affect ESW's margins and pricing for its products.
ESW's ability to service its
future indebtedness, other obligations and commitments in cash will depend on its future performance and ability to raise capital,
which will be affected by prevailing economic conditions, financial, business, regulatory and other factors. Certain of these factors
are beyond ESW's control. ESW may need additional financing to meet its financial projections and obligations. Significant assumptions
underlie ESW's projections, including, among other things, that ESW will be successful in implementing its business strategy, that
some of ESW's products that have received verification from the appropriate regulatory authorities will obtain customer and market
acceptance, and that there will be no material adverse developments in ESW's business, liquidity or capital requirements. If ESW
cannot generate sufficient cash flow from operations to service its future indebtedness and to meet other obligations and commitments,
ESW might be required to refinance or to dispose of assets to obtain funds for such purpose. There is no assurance that refinancing
or asset dispositions or raising funds from sales of equity or otherwise could be effected on a timely basis or on satisfactory
terms. In such circumstance, ESW would have to issue shares of its common stock as repayment of these obligations, which would
be of a dilutive nature to ESW's present shareholders.
DEBT STRUCTURE
For the three month period ended March 31, 2012, ESW
does not have any short or long term debt.
CONTRACTUAL OBLIGATIONS
LEASES
Effective November 24, 2004, the Company's
wholly-owned subsidiary, ESWA, entered into a lease agreement for approximately 40,220 square feet of leasehold space at 2 Bethlehem
Pike Industrial Center, Montgomery Township, Pennsylvania. The leasehold space houses the Company's research and development facilities
and also houses ESW’s new manufacturing operations. The lease commenced on January 15, 2005 and was to expire January 31,
2010. Effective October 16, 2009, the Company's wholly-owned subsidiary ESWA entered into a lease renewal agreement with Nappen
& Associates for the leasehold property in Pennsylvania. There were no modifications to the original economic terms of the
lease under the lease renewal agreement. Under the terms of the lease renewal, the lease term will now expire February 28, 2013.
Effective March 31, 2011, ESWA entered into a lease amendment agreement with Nappen & Associates for the leasehold property
in Pennsylvania, whereby ESWA has the sole option to extend the expiry of the lease agreement by an additional 3 years if exercised,
six months prior to February 28, 2013; there were no modifications to the original economic terms of the lease.
7
Effective December 20, 2004, the Company's
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 Company's executive offices and previously housed the manufacturing
operations. 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 lessor of the Canadian property has terminated the lease for the facility
as of May 1, 2012. ESW is in negotiations with the lessor to be released from the lease obligations.
The following is a summary of the minimum
annual lease payments for both leases:
Year |
Amount |
|
|
2012 |
$ 344,991 |
2013 |
311,699 |
2014 |
289,143 |
2015 |
216,857 |
|
|
Total |
$ 1,162,690 |
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 unfavorable resolution of one or more such proceedings could in the future
materially and adversely affect ESW's financial position, results of operations or cash flows in a particular period.
CAPITAL LEASE OBLIGATION
As of March 31, 2012 and December 31,
2011, the Company’s capital lease obligation amounted to $0 and $1,241, respectively.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2011, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-5 – “Comprehensive
Income – Presentation of Comprehensive Income”. This statement removed the presentation of comprehensive income
in the statement of changes in stockholders’ equity. The only two allowable presentations are below the components
of net income in a statement of comprehensive income or in a separate statement of comprehensive income that begins with total
net income. The guidance is effective for interim or annual reporting periods beginning after December 15, 2011. The adoption
of this ASU had no effect on the Company's unaudited consolidated condensed financial statements.
In May 2011, an update was made
by the FASB to achieve common fair value measurement and disclosure requirements in GAAP and International Financial Reporting
Standards (“IFRS”). It provides amendments to the definition of fair value and the market participant concept,
grants an exception for the measurement of financial instruments held in a portfolio with certain offsetting risks, and modifies
most disclosures. The changes in disclosures include, for all Level 3 fair value measurements, quantitative information about
significant unobservable inputs used and a description of the valuation processes in place. The new guidance also requires
disclosure of the highest and best use of a nonfinancial asset. This standard will be effective prospectively during interim
and for annual periods beginning after December 15, 2011. Early application by public entities was not permitted.
The adoption of this FASB update had no effect on the Company's unaudited consolidated condensed financial statements.
8
SIGNIFICANT ACCOUNTING POLICIES
AND ESTIMATES
ESW's significant accounting policies
are summarized in Note 2 to the consolidated condensed financial statements included its quarterly reports and its 2011 Annual
Report to Shareholders. In preparing the consolidated condensed financial statements, we make estimates and assumptions that affect
the expected amounts of assets and liabilities and disclosure of contingent assets and liabilities. We apply our accounting policies
on a consistent basis. As circumstances change, they are considered in our estimates and judgments, and future changes in circumstances
could result in changes in amounts at which assets and liabilities are recorded.
FOREIGN CURRENCY TRANSACTIONS
The functional currency of the Company
and its foreign subsidiaries is the U.S. dollar. Most of the Company’s revenue and materials purchased from suppliers are
denominated in or linked to the U.S. dollar. Transactions denominated in currencies other than a functional currency are converted
to the functional currency on the transaction date, and any resulting assets or liabilities are further translated at each reporting
date and at settlement. Gains and losses recognized upon such translations are included within foreign exchange gain (loss) in
the consolidated condensed statements of operations and comprehensive income.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
ESW is exposed to financial market
risks, including changes in currency exchange rates and interest rates. The Company also has foreign currency exposures at its
foreign operations related to buying and selling currencies other than the local currencies. The risk under these interest rate
and foreign currency exchange agreement is not considered to be significant.
ESW's exposure to foreign currency
translation gains and losses also arises from the translation of the assets and liabilities of its subsidiaries to U.S. dollars
during consolidation. These risks have been significantly mitigated by the move of ESW’s manufacturing operations to PA USA.
During the year 2011, the Company
changed the functional currency of its Canadian operations from the Canadian dollar to the U.S. dollar. For the three month period
ended March 31, 2011 ESW recognized a translation loss $72,264 reported as other comprehensive (loss)/income in the consolidated
condensed statements of operations and comprehensive loss.
Included in foreign exchange
loss in the consolidated statements of operations and comprehensive loss for the period ended March 31, 2012, ESW has recognized
a translation loss of $30,817 as compared to a loss of $60,126 in March 31, 2011 primarily as a result of exchange rate differences
between the U.S. dollar and the Canadian dollar.
INTEREST RATE RISK
ESW currently has no variable-rate
long-term debt that exposes ESW to interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE
CONTROLS AND PROCEDURE
EVALUATION OF THE COMPANY'S
DISCLOSURE AND INTERNAL CONTROLS
The Company evaluated the
effectiveness of the design and operation of its "disclosure controls and procedures" as of the end of the period covered
by this report. This evaluation was done with the participation of management, under the supervision of the Executive Chairman
("EC") and Chief Financial Officer ("CFO").
9
LIMITATIONS ON THE EFFECTIVENESS
OF CONTROLS
A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons,
by collusion of two or more people, or by management override of the control. The design of any system of controls also is based
in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations
in a cost effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic
evaluations of its internal controls to enhance, where necessary, its procedures and controls.
CONCLUSIONS
Based on our evaluation, the
EC and CFO concluded that the registrant's disclosures, controls and procedures are effective to ensure that information required
to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Security Exchange Commission rules and forms.
(c) CHANGES IN INTERNAL CONTROLS
Not applicable.
10
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
In evaluating an investment in our
common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1
of our Annual Report to the Securities and Exchange Commission for the year ended December 31, 2011, as well as the information
contained in this report and our other reports and registration statements filed with the Securities and Exchange Commission.
ITEM 5. OTHER INFORMATION
On April 25, 2012, the Company’s
wholly-owned subsidiary ESW America, Inc. (“ESWA”) entered into a Machinery and Equipment Loan Fund (“MELF Facility”)
with the Commonwealth of Pennsylvania for up to $500,000 for the purchase of equipment and related purchases. Two (2) draw-downs
are permitted under the MELF Facility by ESWA. The first draw down of $280,787 was made under the MELF Facility in connection
with equipment purchased by ESWA was effective the April 25, 2012 closing date (the “Closing Date”). ESWA may
make one (1) additional draw down per the terms of the MELF Facility so that the aggregate amount borrowed under the MELF Facility
may be up to $500,000. Terms of the MELF Facility include initial interest at three (3%) percent per annum with monthly payments
and full repayment of the MELF Facility on or before the first day of the eighty fifth (85) calendar month following the Closing
Date. In connection with the MELF Facility, the Company entered into a Guaranty and a Loan and Security Agreement on behalf of
its wholly-owned subsidiary ESWA. In the event ESWA defaults on any payments, the MELF Facility may be accelerated with full
payment due along certain additional modifications including the increase in interest to twelve and one half (12 1/2 %) percent.
Effective May 1, 2012 the landlord
for the Company’s wholly-owned subsidiary ESW Canada, Inc. (“ESWC”) terminated the lease agreement for the ESWC
facility located at 335 Connie Crescent, Concord Ontario Canada (the “Facility”) previously occupied by the Company
and ESWC. The Facility had been vacated prior to the lease termination. ESWC has established temporary offices in Ontario to manage
its limited operations and the Company had moved its executive offices to 200 Progress Drive, Montgomeryville Township Pennsylvania
where the Company’s wholly-owned subsidiary ESW America Inc. maintains its offices. ESW Canada is in the process of negotiating
a full release from the lease with landlord however there can be no assurances that ESW Canada and the landlord will agree to final
release terms.
11
ITEM 6. EXHIBITS
EXHIBITS:
31.1 |
Certification of Executive Chairman and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
Certification of Chief Financial Officer, pursuant to the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2 |
Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
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101.ins |
XBRL Instance |
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101.xsd |
XBRL Schema |
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101.cal |
XBRL Calculation |
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101.def |
XBRL Definition |
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101.lab |
XBRL Label |
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101.pre |
XBRL Presentation |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
DATED: May 15th, 2012
Montgomeryville, PA, USA
ENVIRONMENTAL SOLUTIONS
WORLDWIDE, INC.
BY: /S/ MARK YUNG
MARK YUNG
EXECUTIVE CHAIRMAN
/S/ PRAVEEN NAIR
PRAVEEN NAIR
CHIEF FINANCIAL OFFICER