SEC Company Response from ENVIRONMENTAL SOLUTIONS WORLDWIDE INC (CIK 0001082278) — Sep 23, 2005
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC (CIK 0001082278)
Date: Sept. 23, 2005 · CIK: 0001082278 · Accession: 0000909012-05-000776
AI Filing Summary & Sentiment
File numbers found in text: 000-30392
Letter
September 22, 2005 Via EDGAR and Federal Express Securities and Exchange Commission 450 Fifth Street, N.W. Washington D.C. 20549 Attn: David R. Humphrey, Branch Chief-Accountant
Re: Environmental Solutions Worldwide Inc. (the "Company") Form 10-KSB for the Year Ended December 31, 2004, Form 10-QSB for the Quarterly Period Ended March 31, 2005 File No. 000-30392
Dear Mr. Humphrey,
Further to our discussions with Mr. Migone, we enclose responses that correspond directly to the numbered comments in the Commission's letter of June 15, 2005. Kindly note that the responses to items 3 and 4 have previously been included in the Company's Form 10-QSB for the quarterly period ended June 30, 2005. Provided the responses set forth herein are deemed satisfactory, the Company undertakes to incorporate all responses as applicable in its periodic reports filed prospectively with the Commission.
FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
ITEM 6- MANAGEMENT DISCUSSION AND ANALYSIS
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003 RESULTS OF OPERATIONS, PAGE 13
1. You only disclose how changes in material and direct labor costs affected cost of goods sold ("COGS) and how changes in shop as well as manufacturing related costs affected marketing, office and general expenses. Hence, it seems that the only production costs flowing through inventory and COGS arc materials and direct labor, while shop and manufacturing related costs are flowing through operating expenses. As such, please tell us the production costs that are capitalized to inventory and flow through COGS as inventory is released.
RESPONSE TO QUESTION #1
"Raw materials inventory" include only materials costs. "Work in process inventory" and "Finished goods inventory" include materials, direct labor, and an applicable share of overhead costs. When a product is sold, the costs associated with that product (i.e the finished goods amount) are reallocated from inventory to COGS.
All shop and manufacturing costs flowing through operating expense relate to "Research and development". It is ESW's policy to expense (and not capitalize) all "R&D" costs.
For future reporting periods, when words like "shop and manufacturing costs" are used in the MD&A section we will mention that it is in regards to Research and Development expenditures.
<PAGE>
SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING STANDARDS, PAGE 16
2. Your critical accounting policy disclosure should not duplicate the accounting policy disclosure in the notes to the financial statements. Instead, your critical accounting policy disclosure should address specifically why your accounting estimates or assumptions bear the risk of change (e.g. uncertainty attached to the estimate or assumption, difficulty in measuring or valuing) and, to the extent material, such factors as how you arrived at the estimates, how accurate the estimates/assumptions have been in the past. For example, you should expand your disclosure in the Critical Accounting Policies section of MD&A to give the reader and understanding of the type of uncertainties that are in place during your revenue recognition process (such as returns), the significant assumptions made during your intangible as well as well as fixed asset impairment tests, your procedures for reviewing accounts for receivable impairment and last but not least, disclosures regarding how you account for research and development costs. Please refer to the guidance in Section V of FR - 72 ( Release No. 33-8350 ).
RESPONSE TO QUESTION #2
We proposel to have this inserted in the Management's Discussion and Analysis section on a go forward basis. We would insert as well in the filing for Q3 2005.
CRITICAL ACCOUNTING POLICIES
General
Our discussion and analysis of the financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States Generally Accepted Accounting Principles.
A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates generally require us to make assumptions about matters that are highly uncertain at the time of the estimate; and if different estimates or judgments were used, the use of these estimates or judgments would have a material effect on our financial condition or results of operations.
The estimates and judgments we make that affect the reported amount of assets, liabilities, revenues and expenses are based on our historical experience and on various other factors, which we believe to be reasonable in the circumstances under which they are made. Actual results may differ from these estimates under different assumptions or conditions. We consider our accounting policies related to revenue recognition, the valuation of inventories and accounting for the value of long lived assets and intangible assets to be critical accounting policies.
-2- <PAGE>
REVENUE RECOGNITION The Company recognizes revenue when it is realized or realized and earned. The Company considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred, the amount is fixed and determinable, risk of ownership has passed to the customer and collection of the resulting receivable is reasonably assured.
On a monthly basis, an aged account receivable report is produced and management reviews all account receivables. Management reviews all amounts outstanding greater than sixty days. Based on previous customers payment history, management determines whether an (or portion of an) allowance needs to be provided on each customers' outstanding balance.
INVENTORIES Raw materials are stated at the lower of cost and replacement cost. Work in process and finished goods inventories are stated at the lower of cost and net realizable value. These costs include the cost of materials plus direct labor applied to the product and the applicable share of overhead. Cost is determined on a first-in-first-out basis.
The Company's policy for valuation of inventory, including the determination of obsolete or excess inventory, requires management to estimate the future demand for the Company's product. Inventory is subject to inexact estimates by management.
The Company purchases on a "buy to order" basis. When a customer orders a product, then the Company purchases the majority of the materials to start manufacturing the product.
VALUATION OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS The Company assesses the impairment on long lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Intangible assets are stated at cost less accumulated amortization and are comprised of licenses and patents. Unforeseen events, changes in circumstances and market conditions, and material differences in the value of long-lived and intangible assets due to changes in estimates of future cash flows could affect the fair value of the Company's assets and require an impairment charge. Intangible assets are reviewed annually to determine if any events have occurred that would warrant further review. In the event that a further assessment is required, the Company will analyze estimated undiscounted future cash flows to determine whether the carrying value of the intangible asset will be recovered and if an impairment charge will be required.
Patents include all costs necessary to acquire intellectual property such as patents and trademarks, as well as legal costs arising out of litigation relating to the assertion of any Company-owned patents.
RESEARCH AND DEVELOPMENT The Company is engaged in research and development work. Research and development costs for the acquisition of capital assets that have a future benefit have been capitalized. Due to uncertainties all other costs relating to research and development have been expensed as incurred.
ITEM 7- FINANCIAL STATEMENTS
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES. PAGE F-7
3. Due to the fact that you have incurred and will continue to incur significant research and development costs, please include disclosure indicating your accounting policy for these costs.
-3- <PAGE>
RESPONSE TO QUESTION #3
This has been inserted in Note 2 - Significant Accounting Policies in the Financial Statements, for Q2 June 2005.
RESEARCH AND DEVELOPMENT
The Company is engaged in research and development work. Research and development costs, other than for the acquisition of capital assets, are charged as operating expense of the Company as incurred.
EARNINGS PER COMMON SHARE, PAGE F-8
4. Please revise to disclose your calculation of weighted average shares. Your calculation should disclose the number of outstanding options, warrants and shares issuable upon conversion of outstanding convertible debt or preferred stock that could potentially dilute basic earnings per share in the future, but that were not included in the computation of diluted earnings per share for the periods presented in your financial statements because their impact was anti-dilutive for the periods presented in your financial statements. Refer to the requirements of paragraph 40 of SFAS No.
RESPONSE TO QUESTION #4
This format has been added in the Financial Statements for the quarter June 30, 2005
NOTE XX - EARNINGS (LOSS) PER SHARE
For the six months ended June 30, June 30, 2005 2004 ----------------- Number for basic and diluted earnings (loss) per share available to common stockholders $ xx $ xx =================
Denominator for basic earnings (loss) per share - Weighted average shares outstanding xx xx Effect of dilutive securities: Employee stock option xx xx Warrants xx xx Shares issuable upon conversion xx xx -----------------
Denominator for basic and diluted earnings (loss) per share - weighted average shares outstanding xx xx =================
Earnings (loss) per share Basic $ xx $ xx
Potential common shares of xxxx related to ESW's outstanding stock options and potential common shares of xxxxx related to ESW's outstanding Warrants and potential common shares of xxxxx related to ESW's 4 percent Convertible debentures were excluded from the computation of diluted earnings/(loss) per share for the six month period ended June 30, 2005, as inclusion of these shares and the related interest expense would have been anti-dilutive. Potential common shares of xxxxx related to ESW's outstanding stock options and potential common shares of xxxxx related to ESW's outstanding warrants were excluded from the computation of diluted earnings/(loss) per share for the six month period ended June 30, 2004, as inclusion of these shares would have been anti-dilutive.
-4- <PAGE>
INCOME TAXES, PAGE F-8
5. Please amend your filing to include all the disclosures required by paragraphs 43 through 49 of SFAS 109, as applicable and if significant. At a minimum, we believe that the disclosures specified in paragraph 43 of the above referenced statement should be provided.
RESPONSE TO QUESTION #5
The income tax expense for the Company's income from operations generated during the period in question was offset by a reduction in the valuation allowance established against deferred tax assets arising from prior periods. For the period ended December 30, 2004, the Company did not recognize an income tax benefit for its operating losses generated in that period based on uncertainties concerning its ability to generate taxable income in future periods. The tax benefit for the period ended December 30, 2004 was offset by a valuation allowance established against deferred tax assets arising from operating losses and other temporary differences, the realization of which could not be considered more likely than not. In future periods, tax benefits and related deferred tax assets will be recognized when management considers realization of such amounts to be more likely than not. There is only one temporary difference in both of the Canadian subsidiaries. The Net Book Value (NBV) per financial statements BBL Technologies Inc. is $37,755 versus the tax balance of $9,331. The NBV per financial statem
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[LOGO -- GRAPHIC OMITTED][LOGO -- GRAPHIC OMITTED]
Environmental Solutions Worldwide, Inc.
---------------------------------------
335 Connie Crescent
Concord, ON l4K 5R2
September 22, 2005
Via EDGAR and Federal Express
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Attn: David R. Humphrey, Branch Chief-Accountant
Re: Environmental Solutions Worldwide Inc. (the "Company")
Form 10-KSB for the Year Ended December 31, 2004,
Form 10-QSB for the Quarterly Period Ended March 31,
2005 File No. 000-30392
Dear Mr. Humphrey,
Further to our discussions with Mr. Migone, we enclose responses that correspond
directly to the numbered comments in the Commission's letter of June 15, 2005.
Kindly note that the responses to items 3 and 4 have previously been included in
the Company's Form 10-QSB for the quarterly period ended June 30, 2005. Provided
the responses set forth herein are deemed satisfactory, the Company undertakes
to incorporate all responses as applicable in its periodic reports filed
prospectively with the Commission.
FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
ITEM 6- MANAGEMENT DISCUSSION AND ANALYSIS
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER
31, 2003 RESULTS OF OPERATIONS, PAGE 13
1. You only disclose how changes in material and direct labor costs
affected cost of goods sold ("COGS) and how changes in shop as well
as manufacturing related costs affected marketing, office and
general expenses. Hence, it seems that the only production costs
flowing through inventory and COGS arc materials and direct labor,
while shop and manufacturing related costs are flowing through
operating expenses. As such, please tell us the production costs
that are capitalized to inventory and flow through COGS as inventory
is released.
RESPONSE TO QUESTION #1
"Raw materials inventory" include only materials costs. "Work in
process inventory" and "Finished goods inventory" include materials,
direct labor, and an applicable share of overhead costs. When a
product is sold, the costs associated with that product (i.e the
finished goods amount) are reallocated from inventory to COGS.
All shop and manufacturing costs flowing through operating expense
relate to "Research and development". It is ESW's policy to expense
(and not capitalize) all "R&D" costs.
For future reporting periods, when words like "shop and
manufacturing costs" are used in the MD&A section we will mention
that it is in regards to Research and Development expenditures.
<PAGE>
SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING STANDARDS, PAGE 16
2. Your critical accounting policy disclosure should not duplicate the
accounting policy disclosure in the notes to the financial
statements. Instead, your critical accounting policy disclosure
should address specifically why your accounting estimates or
assumptions bear the risk of change (e.g. uncertainty attached to
the estimate or assumption, difficulty in measuring or valuing) and,
to the extent material, such factors as how you arrived at the
estimates, how accurate the estimates/assumptions have been in the
past. For example, you should expand your disclosure in the Critical
Accounting Policies section of MD&A to give the reader and
understanding of the type of uncertainties that are in place during
your revenue recognition process (such as returns), the significant
assumptions made during your intangible as well as well as fixed
asset impairment tests, your procedures for reviewing accounts for
receivable impairment and last but not least, disclosures regarding
how you account for research and development costs. Please refer to
the guidance in Section V of FR - 72 ( Release No. 33-8350 ).
RESPONSE TO QUESTION #2
We proposel to have this inserted in the Management's Discussion and
Analysis section on a go forward basis. We would insert as well in
the filing for Q3 2005.
CRITICAL ACCOUNTING POLICIES
General
Our discussion and analysis of the financial condition and results
of operations are based upon our consolidated financial statements,
which have been prepared in accordance with United States Generally
Accepted Accounting Principles.
A critical accounting policy is defined as one that is both material
to the presentation of our financial statements and requires
management to make difficult, subjective or complex judgments that
could have a material effect on our financial condition and results
of operations. Specifically, critical accounting estimates generally
require us to make assumptions about matters that are highly
uncertain at the time of the estimate; and if different estimates or
judgments were used, the use of these estimates or judgments would
have a material effect on our financial condition or results of
operations.
The estimates and judgments we make that affect the reported amount
of assets, liabilities, revenues and expenses are based on our
historical experience and on various other factors, which we believe
to be reasonable in the circumstances under which they are made.
Actual results may differ from these estimates under different
assumptions or conditions. We consider our accounting policies
related to revenue recognition, the valuation of inventories and
accounting for the value of long lived assets and intangible assets
to be critical accounting policies.
-2-
<PAGE>
REVENUE RECOGNITION
The Company recognizes revenue when it is realized or realized and
earned. The Company considers revenue realized or realizable and
earned when persuasive evidence of an arrangement exists, delivery
has occurred, the amount is fixed and determinable, risk of
ownership has passed to the customer and collection of the resulting
receivable is reasonably assured.
On a monthly basis, an aged account receivable report is produced
and management reviews all account receivables. Management reviews
all amounts outstanding greater than sixty days. Based on previous
customers payment history, management determines whether an (or
portion of an) allowance needs to be provided on each customers'
outstanding balance.
INVENTORIES
Raw materials are stated at the lower of cost and replacement cost.
Work in process and finished goods inventories are stated at the
lower of cost and net realizable value. These costs include the cost
of materials plus direct labor applied to the product and the
applicable share of overhead. Cost is determined on a
first-in-first-out basis.
The Company's policy for valuation of inventory, including the
determination of obsolete or excess inventory, requires management
to estimate the future demand for the Company's product. Inventory
is subject to inexact estimates by management.
The Company purchases on a "buy to order" basis. When a customer
orders a product, then the Company purchases the majority of the
materials to start manufacturing the product.
VALUATION OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS
The Company assesses the impairment on long lived assets and
intangible assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.
Intangible assets are stated at cost less accumulated amortization
and are comprised of licenses and patents. Unforeseen events,
changes in circumstances and market conditions, and material
differences in the value of long-lived and intangible assets due to
changes in estimates of future cash flows could affect the fair
value of the Company's assets and require an impairment charge.
Intangible assets are reviewed annually to determine if any events
have occurred that would warrant further review. In the event that a
further assessment is required, the Company will analyze estimated
undiscounted future cash flows to determine whether the carrying
value of the intangible asset will be recovered and if an impairment
charge will be required.
Patents include all costs necessary to acquire intellectual property
such as patents and trademarks, as well as legal costs arising out
of litigation relating to the assertion of any Company-owned
patents.
RESEARCH AND DEVELOPMENT
The Company is engaged in research and development work. Research
and development costs for the acquisition of capital assets that
have a future benefit have been capitalized. Due to uncertainties
all other costs relating to research and development have been
expensed as incurred.
ITEM 7- FINANCIAL STATEMENTS
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES. PAGE F-7
3. Due to the fact that you have incurred and will continue to incur
significant research and development costs, please include
disclosure indicating your accounting policy for these costs.
-3-
<PAGE>
RESPONSE TO QUESTION #3
This has been inserted in Note 2 - Significant Accounting Policies
in the Financial Statements, for Q2 June 2005.
RESEARCH AND DEVELOPMENT
The Company is engaged in research and development work. Research
and development costs, other than for the acquisition of capital
assets, are charged as operating expense of the Company as incurred.
EARNINGS PER COMMON SHARE, PAGE F-8
4. Please revise to disclose your calculation of weighted average
shares. Your calculation should disclose the number of outstanding
options, warrants and shares issuable upon conversion of outstanding
convertible debt or preferred stock that could potentially dilute
basic earnings per share in the future, but that were not included
in the computation of diluted earnings per share for the periods
presented in your financial statements because their impact was
anti-dilutive for the periods presented in your financial
statements. Refer to the requirements of paragraph 40 of SFAS No.
128
RESPONSE TO QUESTION #4
This format has been added in the Financial Statements for the
quarter June 30, 2005
NOTE XX - EARNINGS (LOSS) PER SHARE
For the six months ended
June 30, June 30,
2005 2004
-----------------
Number for basic and diluted earnings (loss)
per share available to common stockholders $ xx $ xx
=================
Denominator for basic earnings (loss) per share -
Weighted average shares outstanding xx xx
Effect of dilutive securities:
Employee stock option xx xx
Warrants xx xx
Shares issuable upon conversion xx xx
-----------------
Denominator for basic and diluted earnings (loss)
per share - weighted average shares outstanding xx xx
=================
Earnings (loss) per share
Basic $ xx $ xx
Potential common shares of xxxx related to ESW's outstanding stock
options and potential common shares of xxxxx related to ESW's
outstanding Warrants and potential common shares of xxxxx related to
ESW's 4 percent Convertible debentures were excluded from the
computation of diluted earnings/(loss) per share for the six month
period ended June 30, 2005, as inclusion of these shares and the
related interest expense would have been anti-dilutive. Potential
common shares of xxxxx related to ESW's outstanding stock options
and potential common shares of xxxxx related to ESW's outstanding
warrants were excluded from the computation of diluted
earnings/(loss) per share for the six month period ended June 30,
2004, as inclusion of these shares would have been anti-dilutive.
-4-
<PAGE>
INCOME TAXES, PAGE F-8
5. Please amend your filing to include all the disclosures required by
paragraphs 43 through 49 of SFAS 109, as applicable and if
significant. At a minimum, we believe that the disclosures specified
in paragraph 43 of the above referenced statement should be
provided.
RESPONSE TO QUESTION #5
The income tax expense for the Company's income from operations
generated during the period in question was offset by a reduction in
the valuation allowance established against deferred tax assets
arising from prior periods. For the period ended December 30, 2004,
the Company did not recognize an income tax benefit for its
operating losses generated in that period based on uncertainties
concerning its ability to generate taxable income in future periods.
The tax benefit for the period ended December 30, 2004 was offset by
a valuation allowance established against deferred tax assets
arising from operating losses and other temporary differences, the
realization of which could not be considered more likely than not.
In future periods, tax benefits and related deferred tax assets will
be recognized when management considers realization of such amounts
to be more likely than not. There is only one temporary difference
in both of the Canadian subsidiaries. The Net Book Value (NBV) per
financial statements BBL Technologies Inc. is $37,755 versus the tax
balance of $9,331. The NBV per financial statem