0000909012-11-000335.txt : 20110516 0000909012-11-000335.hdr.sgml : 20110516 20110516165228 ACCESSION NUMBER: 0000909012-11-000335 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20110331 FILED AS OF DATE: 20110516 DATE AS OF CHANGE: 20110516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENVIRONMENTAL SOLUTIONS WORLDWIDE INC CENTRAL INDEX KEY: 0001082278 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 134172059 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-30392 FILM NUMBER: 11847967 BUSINESS ADDRESS: STREET 1: 335 CONNIE CRESCENT CITY: CONCORD STATE: A6 ZIP: L4K 5R2 BUSINESS PHONE: 905-695-4142 MAIL ADDRESS: STREET 1: 335 CONNIE CRESCENT CITY: CONCORD STATE: A6 ZIP: L4K 5R2 10-Q 1 t306378.txt 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, 2011. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 000-30392 ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. (Exact name of Company as specified in its charter) Florida 13-4172059 ------------------------------ ------------------ State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 335 CONNIE CRESCENT, CONCORD, ONTARIO, CANADA, L4K 5R2 (Address of principal executive offices, including postal code.) (905) 695-4142 (Registrant's telephone number, including area code) COMMON STOCK, $0.001 PAR VALUE (Title of class) Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [ ] NO [ ] (Not yet applicable to issuer) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer | | Accelerated Filer | | Non-Accelerated Filer | | Smaller reporting company [x] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES [ ] NO [X] There were 129,463,767 shares of the registrant's Common Stock outstanding as of May 16, 2011 PAGE # PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Condensed Balance Sheets as of F2 March 31, 2011 (unaudited) and December 31, 2010 Consolidated Condensed Statements of Operations and F3 Comprehensive Loss for the Three Month Periods Ended March 31, 2011 and 2010 (unaudited) Consolidated Condensed Statements of Changes in Stockholders' F4 Equity (Deficit) and Comprehensive Income for the Three Month Period Ended March 31, 2011 (unaudited) Consolidated Condensed Statements of Cash Flows F5 for the Three Month Period Ended March 31, 2011 and 2010 (unaudited) Notes to Consolidated Condensed Financial Statements F6-F30 (unaudited) Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations 2 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 14 Item 4. Controls And Procedures 15 PART II. OTHER INFORMATION Item 1A. RISK FACTORS 16 Item 5. OTHER INFORMATION. 20 Item 6. EXHIBITS. 23 ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED) MARCH 31, DECEMBER 31, 2011 2010 ------------ ------------ ASSETS Current Assets Cash and cash equivalents (Note 4) $ 956,337 $ 13,328 Accounts receivable, net of allowance 1,241,213 2,279,149 for doubtful accounts of $0 (2010 - $70,028) (Note 2) Inventory, net of reserve of $100,623 (2010 - 0) (Note 5) 3,514,465 4,414,518 Prepaid expenses and sundry assets 307,630 261,176 ------------ ------------ Total current assets 6,019,645 6,968,171 Property, plant and equipment under construction (Note 6) 78,807 185,542 Property, plant and equipment, net of accumulated depreciation of $6,044,872 1,836,992 1,931,373 (2010 - $5,765,164) (Note 6) Internal use software under development (Note 2) 129,603 126,340 Patents and trademarks, net of accumulated amortization of $2,131,423 (2010 - $2,115,091) (Note 2) -- 16,145 ------------ ------------ $ 8,065,047 $ 9,227,571 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY / (DEFICIT) Current Liabilities Bank loan (Note 8) $ 1,636,444 $ 3,424,889 Accounts payable 2,040,120 2,495,070 Accrued liabilities (Note 15) 880,369 512,964 Exchange feature liability (Note 10 and 12) 2,712,600 2,133,862 Notes payable to related party, net of debt discount (Note 7) 1,050,000 -- of $1,950,000 (2010 - $0) Convertible derivative liability (Note 7) 2,148,656 -- Customer deposits 3,794 29,322 Redeemable class A special shares (Note 9) 453,900 453,900 Current portion of capital lease obligation (Note 15) 1,806 3,552 ------------ ------------ Total current liabilities 10,927,689 9,053,559 ------------ ------------ Long-term Liabilities Capital lease obligation (Note 15) 1,319 1,490 ------------ ------------ Total long-term liabilities 1,319 1,490 ------------ ------------ Total liabilities 10,929,008 9,055,049 ------------ ------------ Commitments and Contingencies (Note 15) Stockholders' Equity / (Deficit) (Notes 12 and 13) Common stock, $0.001 par value, 250,000,000 (2010 - 250,000,000) shares authorized; 129,463,767 shares issued and outstanding (2010 - 129,463,767) 129,463 129,463 Additional paid-in capital 43,593,417 43,567,531 Accumulated other comprehensive income 518,813 446,549 Accumulated deficit (47,105,653) (43,971,021) ------------ ------------ Total stockholders' equity / (deficit) (2,863,960) 172,522 ------------ ------------ $ 8,065,047 $ 9,227,571 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F2 ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THREE MONTH PERIOD ENDED MARCH 31, (UNAUDITED)
2011 2010 ------------- ------------- Revenue Net sales $ 2,045,737 $ 2,248,596 Cost of sales 2,092,081 1,510,490 ------------- ------------- Gross (loss) / profit (46,344) 738,106 ------------- ------------- Operating expenses Marketing, office and general costs 1,051,753 995,802 Restructuring charges (Note 15) 518,809 -- Research and development costs 183,626 125,314 Officers' compensation and directors' fees 211,644 198,357 Consulting and professional fees 27,102 105,975 Foreign exchange loss 60,126 56,223 Depreciation and amortization 120,350 262,845 ------------- ------------- 2,173,410 1,744,516 ------------- ------------- Loss from operations (2,219,754) (1,006,410) Interest on long-term debt -- (183,858) Amortization of deferred costs -- (117,131) Long-term debt accretion -- (768,981) Inducement premium -- (2,909,872) Change in fair value of exchange feature liability (578,739) -- Interest on notes payable to related party (34,521) (11,342) Interest accretion expense (1,050,000) -- Financing charge on embedded derivative liability (485,101) -- Gain on convertible derivative 1,336,445 -- Bank fees related to credit facility covenant waivers (106,512) -- Gain on disposal of property and equipment 3,550 -- Interest income -- 35 ------------- ------------- Net loss (3,134,632) (4,997,559) ------------- ------------- Other comprehensive income: Foreign currency translation of Canadian subsidiaries 72,264 103,865 ------------- ------------- Net comprehensive loss $ (3,062,368) $ (4,893,694) ============= ============= Net loss per share (basic and diluted) (Note 16) $ (0.02) $ (0.06) ============= ============= Weighted average number of shares outstanding (basic and diluted) (Note 16) 129,463,767 77,694,404 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F3 ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2011 (UNAUDITED)
ACCUMULATED ADDITIONAL OTHER COMMON STOCK PAID-IN COMPREHENSIVE ACCUMULATED SHARES AMOUNT CAPITAL INCOME DEFICIT TOTAL Balance, January 1, 2010 73,823,851 73,822 26,083,635 425,383 (34,523,380) (7,940,540) Net loss -- -- -- -- (9,447,641) (9,447,641) Stock-based compensation -- -- 93,189 -- -- 93,189 Common stock issued from share subscription 1,500,000 1,500 598,500 -- -- 600,000 Broker fees related to share subscription -- -- (24,000) -- -- (24,000) Fair value of exchange feature liability -- -- (112,649) -- -- (112,649) Inducement on conversion of debentures with related party 4,375,668 4,376 1,658,377 -- -- 1,662,753 Common stock issued on conversion of debentures 49,764,248 49,765 14,730,479 -- -- 14,780,244 Intrinsic value of beneficial conversion feature of -- -- 540,000 -- -- 540,000 convertible debentures Foreign currency translation of Canadian subsidiaries -- -- -- 21,166 -- 21,166 ----------- -------- ----------- -------- ------------ ----------- Balance, January 1, 2011 129,463,767 $129,463 $43,567,531 $446,549 $(43,971,021) $ 172,522 Net loss -- -- -- -- (3,134,632) (3,134,632) Stock-based compensation -- -- 25,886 -- -- 25,886 Foreign currency translation of Canadian subsidiaries -- -- -- 72,264 -- 72,264 ----------- -------- ----------- -------- ------------ ----------- Balance, March 31, 2011 129,463,767 $129,463 $43,593,417 $518,813 $(47,105,653) $(2,863,960) =========== ======== =========== ======== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. F4 ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIOD ENDED MARCH 31, (UNAUDITED)
2011 2010 ------------ ------------ Net loss $ (3,134,632) $ (4,997,559) ------------ ------------ Adjustments to reconcile net loss to net cash used in operating activities: Interest accretion expense 1,050,000 -- Change in fair value of exchange feature liability 578,739 -- Financing charge on embedded derivative liability 485,101 -- Depreciation of property, plant and equipment 206,824 281,492 Loss on disposal of inventory 124,972 -- Interest on notes payable to related party 34,521 -- Stock-based compensation 25,886 -- Amortization of patents and trademarks 16,145 53,414 Inducement premium -- 2,909,872 Long-term debt accretion -- 768,981 Interest on long-term debt -- 183,858 Amortization of deferred costs -- 36,506 Provision for doubtful accounts -- 3,242 Gain on disposal of property, plant and equipment (3,450) -- Gain on convertible derivative (1,336,445) -- ------------ ------------ 1,182,293 4,237,365 ------------ ------------ Increase (decrease) in cash flows from operating activities resulting from changes in: Accounts receivable 1,101,029 (464,671) Inventory 839,762 (910,526) Prepaid expenses and sundry assets (91,199) (15,322) Accounts payable and accrued liabilities (99,301) 615,258 Customer deposits (25,528) 4,770 ------------ ------------ 1,724,763 (770,491) ------------ ------------ Net cash used in operating activities (227,576) (1,530,685) ------------ ------------ Investing activities: Proceeds from sale of property and equipment 3,450 -- Acquisition of property, plant and equipment (93,144) (81,096) Reduction in property, plant and equipment under construction 105,423 -- Addition to property, plant and equipment under construction -- (19,902) ------------ ------------ Net cash used in investing activities 15,729 (100,998) ------------ ------------ Financing activities: Proceeds from convertible debentures placement -- 3,000,000 Repayment of bank loan (1,823,319) (720,510) Notes payable to related party 3,000,000 -- Repayment of notes payable to related party -- (500,000) Repayment of capital lease obligation (1,956) (3,668) ------------ ------------ Net cash provided by financing activities 1,174,725 1,775,822 ------------ ------------ Net decrease in cash and equivalents 962,878 144,139 Foreign exchange loss (gain) on foreign operations (19,869) 172,277 Cash and cash equivalents, beginning of year 13,328 632,604 ------------ ------------ Cash and cash equivalents, end of year $ 956,337 $ 949,021 ============ ============ Supplemental disclosures: Cash interest paid $ -- $ 11,844 ============ ============ Other non-cash conversion of debentures and related interest $ -- $ 14,780,243 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F5 NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION Environmental Solutions Worldwide, Inc. (the "Company" or "ESW") through its wholly owned subsidiaries is engaged in the design, development, manufacturing and sales of environmental technologies and testing services with its primary focus on the international on-road and off-road diesel retrofit market. ESW currently manufactures and markets a line of catalytic emission control and enabling technologies for a number of applications. The unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), which contemplates continuation of the Company as a going concern. The Company has sustained recurring operating losses. As of March 31, 2011, the Company had an accumulated deficit of $47,105,653 and cash and cash equivalents of $956,337. Net cash used in operating activities for the three month period ended March 31, 2011 amounted to $227,576 as compared to $1,530,685 for the three month period ended March 31, 2010. There is no assurance that the Company will be successful in achieving sufficient cash flow from operations in the near future and there can be no assurance that it will either achieve or maintain profitability in the future. As a result, there is substantial doubt regarding the Company's ability to continue as a going concern. The Company will require additional financing to fund its continuing operations. The Company is seeking additional funds by way of equity and debt financing. The Company's ability to continue as a going concern is dependent on obtaining additional financing and achieving and maintaining a profitable level of operations. The outcome of these matters cannot be predicted at this time. On February 17, 2011, the Company raised $3 million through the issuance of unsecured subordinated promissory notes ("the Notes") to current shareholders and deemed affiliates of certain members of the board of directors of the Company. Proceeds of the Notes were targeted at funding working capital, planned capital investments and other general corporate purposes. With the proceeds of the Notes, the Company and its subsidiaries are in compliance with covenant obligations under the Demand Credit Agreement with the Canadian Imperial Bank of Commerce ("CIBC") dated March 10, 2010 for which the Company and its subsidiaries had previously obtained waivers of covenant obligations through to February 15, 2011. On May 3, 2011, the Company raised an additional $1 million through the issuance of unsecured subordinated promissory notes ("Bridge Loan") to current shareholders and deemed affiliates of certain members of the board of directors of the Company. Proceeds of the Bridge Loan, along with available cash, are targeted at funding the Company's working capital. Effective May 10, 2011, the Company entered into an Investment Agreement with current shareholders and subordinated lenders under unsecured promissory notes ("the Bridge Lenders") in the aggregate amount of $4.0 million. As per the Investment Agreement, the Bridge Lenders have agreed to provide a backstop commitment ("Backstop Commitment") to a rights offering targeted by the Company to raise up to $8 million ("the Qualified Offering"). Under the Backstop Commitment, the Bridge Lenders agree to purchase any shares offered in the Qualified Offering that are not purchased by the Company's shareholders of record, who are entitled to participate in the rights offering, after giving effect to any oversubscriptions. The Backstop Commitment will result in the Bridge Lenders purchasing up to 29,166,667 shares of Common Stock from the Company at a subscription price of $0.12 per share of Common Stock for a total purchase price of $3.5 million. The Company will also permit all Subordinated Lenders to exchange their Notes or Bridge Loan and any accrued interest thereon for shares of Common Stock under the Qualified Offering. The offering is expected to be completed by June 17, 2011. These unaudited consolidated condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. All adjustments considered necessary for fair presentation and of a normal recurring nature have been included in these consolidated condensed financial statements. F6 These statements have not been audited and should be read in conjunction with the consolidated financial statements and the notes thereto included in ESW's Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission for the year ended December 31, 2010. The methods and policies set forth in the year-end audited consolidated financial statements are followed in these interim consolidated condensed financial statements. All adjustments considered necessary for fair presentation and of a normal recurring nature have been included in these interim consolidated condensed financial statements. Revenues and operating results for the three month period ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, ESW America Inc. ("ESWA"), ESW Technologies Inc. ("ESWT"), ESW Canada Inc. ("ESWC") and BBL Technologies Inc. ("BBL"). All inter-company transactions and balances have been eliminated on consolidation. Amounts in the consolidated financial statements are expressed in US dollars. ESTIMATES The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported period. Actual results could differ from those estimates. Significant estimates include amounts for inventory valuation, impairment of property plant and equipment and intangible assets, share based compensation, redeemable class A special shares, valuation of the warrants, the exchange feature liability, and the convertible derivative liability, accrued liabilities and accounts receivable exposures. CONCENTRATIONS OF CREDIT RISK The 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. Four of its customers accounted for 29%, 23%, 17% and 16%, respectively, of the Company's revenue during the three month period ended March 31, 2011 and 28%, 21%, and 19%, respectively, of its accounts receivable as of March 31, 2011. Three of its customers accounted for 21%, 19%, and 13% respectively, of the Company's revenue in the fiscal year 2010 and 48%, 21%, and 13% respectively, of its accounts receivable as of December 31, 2010. As at March 31, 2011, the Company believes that there are no uncollectible accounts and accordingly has not recorded an allowance. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated credit risk by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is estimated and recorded based on 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 $0 and $70,028 was appropriate as of March 31, 2011 and 2010, respectively. F7 INVENTORY Inventory is stated at the lower of cost or market determined using the first-in first-out method. Inventory is periodically reviewed for use and obsolescence, and adjusted as necessary. Inventory consists of raw materials, work in progress and finished goods. PROPERTY, PLANT AND EQUIPMENT UNDER CONSTRUCTION The Company capitalizes customized equipment built to be used in the future day to day operations at cost. Once complete and available for use, the cost for accounting purposes is transferred to property, plant and equipment, where normal depreciation rates apply. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, generally 5 to 7 years. Maintenance and repairs are charged to operations as incurred. Significant renewals and betterments are capitalized. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated discounted cash flow used in determining the fair value of the asset. ESW conducted a test for impairment as of December 31, 2010 and found no impairment. INTERNAL-USE SOFTWARE ESW capitalizes costs related to computer software obtained or developed for internal use. Software obtained for internal use is enterprise-level business and finance software that ESW is customizing to meet specific operational needs. Costs incurred in the development phase are capitalized and amortized over the useful life of the internal use software, which is generally from three to five years. Capitalized internal-use software development costs for a project which is not yet complete is included as Internal-use Software under Development in the consolidated balance sheet. Capitalization of such costs ceases at the point at which the project is substantially complete and ready for its intended purpose. Costs capitalized for the period ended March 31, 2011 and year ended December 31, 2010 were $129,603 and $126,340, respectively. PATENTS AND TRADEMARKS Patents and trademarks consist primarily of the costs incurred to acquire them from an independent third party. Accounting Standards Codification ("ASC") Topic 350 requires intangible assets with a finite life be tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated discounted cash flow used in determining the fair value of the asset. ESW conducted a test for impairment as of December 31, 2010 and found no impairment. F8 Patents and trademarks are being amortized on a straight-line basis over their estimated life of ten years. Amortization expense for the period ended March 31, 2011 and 2010 was $16,145 and $53,414 respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS ASC Topic 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Included in the ASC Topic 820 framework is a three level valuation inputs hierarchy with Level 1 being inputs and transactions that can be effectively fully observed by market participants spanning to Level 3 where estimates are unobservable by market participants outside of the Company and must be estimated using assumptions developed by the Company. The Company discloses the lowest level input significant to each category of asset or liability valued within the scope of ASC Topic 820 and the valuation method as exchange, income or use. The Company uses inputs which are as observable as possible and the methods most applicable to the specific situation of each company or valued item. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, notes payable to related party, bank loan, redeemable Class A special shares and capital lease obligation approximate fair value because of the short-term nature of these items. Per ASC Topic 820 framework these are considered Level 2 inputs where estimates are unobservable by market participants outside of the Company and must be estimated using assumptions developed by the Company. The advance share subscription was classified as a liability and periodically marked to market until October 14, 2010 (see Note 10). The fair value of the advance share subscription obligation was determined by the cash settlement value at the end of each period based on the closing price of the Company's common stock and might be adversely affected by a change in the price of the Company's common stock. Per ASC Topic 820 framework this was considered a Level 2 input. The exchange feature liability and convertible derivative liability are classified as a liability and periodically marked to market. The fair value of the exchange feature liability and convertible derivative liability are determined by the cash settlement value at the end of each period based on the closing price of the Company's common stock and might be adversely affected by a change in the price of the Company's common stock. Per FAS 157 framework these are considered a Level 1 input. Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposure through its normal operating and financing activities. REVENUE RECOGNITION The Company derives revenue primarily from the sale of its catalytic products. In accordance with ASC Topic 605, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the amount is fixed or determinable, risk of ownership has passed to the customer and collection is reasonably assured. The Company also derives revenue (less than 2.7% of total revenue during the three month period ended March 31, 2011 and 1.3% during the three month period ended March 31, 2010.) from providing air testing and environmental certification services. Revenues from these services are recognized upon performance. F9 RESEARCH AND DEVELOPMENT The Company is engaged in research and development work. Research and development costs, are charged as operating expense of the Company as incurred. Any grant money received for research and development work is used to offset these expenditures. For the three month periods ended March 31, 2011 and 2010, the Company expensed $183,626 and $125,314 net of grant revenues, respectively, towards research and development costs. The expense excluding grant revenues used to offset research and development costs for the three month periods ended March 31, 2011 and 2010 amounted to $413,625 and $226,840 and grant money amounted to $229,999 and $101,526, respectively. PRODUCT WARRANTIES The Company provides for estimated warranty costs at the time of sale and accrues for specific items at the time their existence is known and the amounts are determinable. The Company estimates warranty costs using standard quantitative measures based on industry warranty claim experience and evaluation of specific customer warranty issues. The Company currently records warranty costs as 2% of revenue. As of March 31, 2011 and year ended December 31, 2010, $122,590 and $91,336, respectively, was accrued against warranty provision and included in accrued liabilities. For the three month periods ended March 31, 2011 and 2010, the total warranty, service, service travel and installation costs included in cost of sales was $78,886 and $49,001, respectively. SEGMENTED REPORTING ASC Topic 280 changed the way public companies report information about segments of their business in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company also derives revenue (less than 2.7% of total revenue during the three month period ended March 31, 2011 and 1.3% during the three month period ended March 31, 2010) from providing air testing and environmental certification services. For the three month periods ended March 31, 2011 and 2010, all revenues were generated from the United States. During the three month periods ended March 31, 2011 and 2010, expenses incurred in the United States were cost of sales of $28,359 and $10,639, officers' compensation and directors fees of $30,871 and $26,958, marketing, office and general costs of $228,677 and $241,584, consulting and professional fees of $5,538 and $16,717, depreciation and amortization of $82,360 and $96,116 and research and development of $129,422 and $136,444, respectively. As of the period ended March 31, 2011 and the year ended 2010, $1,069,699 and $1,182,263, respectively, of property, plant and equipment, net of depreciation, is located at the air testing facility in Pennsylvania and all remaining long lived assets are located in Concord, Ontario. NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In January 2010, the FASB issued Accounting Standards Update ("ASU" or "Update") No. 2010-06, Improving Disclosures about Fair Value Measurements ("ASU 2010-06"). ASU 2010-06 improves disclosures originally required under SFAS No. 157. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2009, and for interim periods within those years. The adoption of the guidance did not have a material effect on the Company's consolidated condensed financial position, results of operations, cash flows or related disclosures. F10 In December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets ("ASU 2009-16"). ASU 2009-16 amends the accounting for transfers of financials assets and will require more information about transfers of financial assets, including securitizations, and where entities have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 is effective at the start of a reporting entity's first fiscal year beginning after November 15, 2009, with early adoption not permitted. The adoption of the guidance did not have a material effect on the Company's consolidated condensed financial position, results of operations, cash flows or related disclosures. In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing ("ASU 2009-15"). ASU 2009-15 amends the accounting and reporting guidance for debt (and certain preferred stock) with specific conversion features or other options. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009. The adoption of the guidance did not have a material effect on the Company's consolidated condensed financial position, results of operations, cash flows or related disclosures. In August 2010, the FASB issued ASU No. 2010-22, Accounting for Various Topics - Technical Corrections to SEC Paragraphs. This update amends various SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements. In August 2010, the FASB issued ASU No. 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This updates various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements. In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition - Milestone Method. The objective of this Update is to provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements. In April 2010, the FASB issued ASU No. 2010-013, Compensation - Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades a consensus of the FASB Emerging Issues Task Force. ASU 2010-13 addresses the classification of an employee share-based award with an exercise price denominated in the currency of a market in which the underlying equity security trades. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements. In October 2009, the FASB issued ASU No. 2009-13, Multiple Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force ("ASU 2009-13") (codified within ASC Topic 605). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements. F11 NOTE 4 - CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase. At March 31, 2011 and December 31, 2010 all of the Company's cash and cash equivalents consisted of cash. NOTE 5 - INVENTORY Inventory consists of: MARCH 31, DECEMBER 31, INVENTORY 2011 2010 --------------------------------------------- Raw materials $1,516,848 $1,669,481 Work-in-process 2,070,702 2,737,545 Finished goods 27,538 7,492 Less: Reserve for Obsolescence 100,623 -- -------------------------------------------- TOTAL $3,514,465 $4,414,518 ============================================ As of March 31, 2011, the Company recorded a $100,623 (March 31, 2010, - $0) reserve for obsolescence related to inventory that has been earmarked for sale at an amount lower than cost in order to recover cash. NOTE 6 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: MARCH 31, DECEMBER 31, CLASSIFICATION 2011 2010 ----------------------------------------------------------- Plant, machinery and equipment $ 5,954,815 $ 5,790,507 Office equipment 392,896 384,902 Furniture and fixtures 467,493 461,817 Vehicles 18,450 18,288 Leasehold improvements 1,048,210 1,041,023 -------------------------- 7,881,864 7,696,537 Less: accumulated depreciation (6,044,872) (5,765,164) -------------------------- $ 1,836,992 $ 1,931,373 -------------------------- MARCH 31, Depreciation Expense 2011 2010 ----------------------------------------------------------------------- Depreciation expense included in cost of sales $ 76,191 $ 41,511 Depreciation expense included in operating expenses 104,204 209,427 Depreciation expense included in research and development costs 29,163 34,109 ----------------------- Total depreciation expense $ 209,558 $ 285,047 ----------------------- At March 31, 2011 and December 31, 2010, the Company had $78,807 and $185,542, respectively, of customized equipment under construction. The office equipment above includes $0 in assets under capital lease with a corresponding accumulated depreciation of $0 as of March 31, 2011. The office equipment above includes $19,784 in assets under capital lease with a corresponding accumulated depreciation of $16,615 for the three month period ended March 31, 2010. F12 The plant, machinery and equipment above include $39,343 and $37,939 in assets under capital lease with a corresponding accumulated depreciation of $30,165 and $25,723 as of March 31, 2011 and December 31, 2010, respectively. NOTE 7 - NOTES PAYABLE TO RELATED PARTIES On February 17, 2011, the Company entered into note subscription agreements (collectively, the "Loan Agreements") with, and issued unsecured subordinated promissory notes to, Orchard Investments, LLC; Black Family 1997 Trust; Leon D. Black Trust UAD 11/30/92 FBO Alexander Black; Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black; Leon D. Black Trust UAD 11/30/92 FBO Joshua Black; Leon D. Black Trust UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan and Richard Ressler (each individually a "Subordinated Lender" or "Holder" and collectively the ("Subordinated Lenders" or "Holders") who are current shareholders and deemed affiliates of certain members of the board of directors of the Company. The Loan Agreements were approved by the independent directors of the Company. As per the Loan Agreements, the Subordinated Lenders made loans to the Company in the principal aggregate amount of $3 million, represented by unsecured subordinated promissory notes (the "Notes"), dated February 17, 2011. Proceeds of the Loan, along with available cash, will be used to fund working capital, planned capital investments and other general corporate purposes. With the proceeds of the Loan, the Company and its subsidiaries will be in compliance with covenant obligations under the Demand Credit Agreement (the "Credit Agreement") with the Canadian Imperial Bank of Commerce ("CIBC") dated March 10, 2010 for which the Company and subsidiaries had previously obtained waivers of covenant obligations that expired February 15, 2011. The Notes bear interest at a rate of 10% per annum, payable in-kind on a monthly basis commencing March 17, 2011, up to the date on which the Note has been paid in full. The maturity date of the Loan is the earlier of: (i) the closing of a rights offering of the Company's common stock, par value $.001 per share, at a sale price of $0.12 per share ( adjusted for any stock split, stock dividend or other similar adjustment) pursuant to which the Company plans to offer rights to purchase approximately $8 million in shares of Common Stock (the "Qualified Offering"), and will also permit all Subordinated Lenders to exchange their Notes, accrued interest (and the any Notes that may be issued for payment of interest) for shares of Common Stock at $0.12 per share or (ii) June 17, 2011 (the "Outside Date"). The Qualified Offering has also been approved by the independent directors of the Company. In the event the Qualified Offering does not take place on or before the Outside Date, then the Subordinated Lenders at their sole option, may require the Company to refrain from making any payments on any of the outstanding principal and accrued interest outstanding under the Notes; however, the Company will not be prohibited from paying any accrued interest in-kind through the issuance of substantially similar Notes, at any time. The Holders at their sole option may extend the Outside Date. In the event the Qualified Offering closes on or prior to the Outside Date and for any reason a Holder shall have failed to have exchanged in the Qualified Offering the principal or accrued interest outstanding under its Notes and the Holder wishes to exchange his or her Note(s) for Common Stock at a price of $0.12 per share (adjusted for any stock split, stock dividend or other similar adjustment), then the Company has agreed to offer such Holder the immediate right to purchase additional shares of Common Stock at the $0.12 price, so that all principal and accrued interest outstanding under the Notes shall have been exchanged for shares of Common Stock. In the event the Qualified Offering closes on or prior to the Maturity Date and, for any reason, certain Holders (the "Qualified Holders") collectively shall have failed to have invested at least $1 million in the Qualified Offering or pursuant to exchange of their Notes and the Qualified Holders wish to invest the balance of such $1 million aggregate amount to purchase Common Stock at a price of $0.12 per share (adjusted for any stock split, stock dividend or other similar adjustment), then the Company will be required to offer to the Qualified Holders the immediate right to invest the balance of such investment amount to purchase additional shares of Common Stock at such price, so that in the aggregate, the Qualified Holders shall collectively invested such $1 million amount. F13 If after the Maturity Date, any principal or interest is outstanding, the Holder may exchange at their option any or all outstanding interest or principal in any offering or other sale made by the Company for any shares in Common Stock. Concurrent with entering into the Loan Agreements and issuance of the Notes, CIBC, the Company and its subsidiaries; and the Subordinated Lenders entered into a Postponement and Subordination Agreement (the "Subordination Agreement") whereby the Subordinated Lenders agreed that the obligations of the Company and its subsidiaries under the Notes as issued would be subordinate to the obligations of the Company and its subsidiaries under the Credit Agreement. The terms of the Loan Agreements were analyzed in accordance with ASC 815 Derivatives and Hedging. The Loan Agreements allows for the price for Notes exchanged for Common Stock to be adjusted in certain circumstances. The potential adjustment in the exchange price precludes the Company from being qualified for the exemption from being considered to be a derivative instrument. As such, the option of the Holders to exchange Notes for Common Stock and the option of the Qualified Holders to invest the balance of $1 million aggregate amount to purchase Common Stock were determined to be derivatives embedded in the Notes. These embedded derivatives are bundled together as a single, compound embedded derivative and recorded and valued as a liability at the time of issuance on February 17, 2011 and on March 31, 2011. The fair value of the embedded derivatives issued under the Loan Agreements on February 17, 2011 and March 31, 2011 was determined to be $3,485,101 and $2,148,656, respectively with the following assumptions: (1) risk free interest rate of 0.15% and 0.17%, (2) remaining contractual life of 4 and 2.5 months, (3) expected stock price volatility of 194% and 201%, and (4) expected dividend yield of zero. Since the fair value of the embedded derivatives was in excess of the proceeds, the Company recorded an immediate expense of $485,101 to the condensed consolidated statement of operations as a financing charge on embedded derivative liability. The embedded derivatives liability was recorded as a discount to the Notes at the time of issuance. The discount is recorded as interest accretion expense in the consolidated condensed statements of operations using the effective-interest method. The change in the fair value of $1,336,445 of the embedded derivatives is recorded as gain in the consolidated condensed statements of operations. At March 31, 2011 and December 31, 2010, the $1,050,000 and $0 net outstanding balance of notes payable to related parties comprises $3,000,000 and $0 of debt, net of unamortized debt discount of $1,950,000 and $0, respectively. NOTE 8 - BANK LOAN Effective March 31, 2010, ESW's subsidiary, ESW Canada, entered into a demand revolving credit facility agreement with a Canadian chartered bank, Canadian Imperial Bank of Commerce ("CIBC") to meet working capital requirements (the "Demand Credit Agreement"). The Demand Credit Agreement has a credit limit of $4 million Canadian. Borrowings under the facility are limited to a percentage of accounts receivable plus a percentage of inventories (capped at $1 million Canadian or 50% of the accounts receivable portion) less any prior ranking claims. The Demand Credit Agreement is guaranteed by the Company and its subsidiaries, ESWC, ESWA, BBL, and ESWT, through a general security agreement over all assets to CIBC. The facility has been guaranteed to CIBC under EDC's Export Guarantee Program. Borrowings under the Demand Credit Agreement bear interest at 2.25% above CIBC's prime rate of interest. Obligations under the Demand Credit Agreement are collateralized by a first-priority lien on the assets of the Company and its subsidiaries, including accounts receivable, inventory, equipment and other tangible and intangible property, including the capital stock of all direct subsidiaries. F14 The terms relating to the Demand Credit Agreement specifically note that the Company maintain a tangible net worth of at least $4.0 million Canadian. The Demand Credit Agreement contains, among other things, covenants, representations and warranties and events of default customary for a facility of this type for the Company and its subsidiaries. Such covenants include certain restrictions on the incurrence of additional indebtedness, liens, acquisitions and other investments, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other repurchases in respect of capital stock, voluntary prepayments of certain other indebtedness, capital expenditures and transactions with affiliates, subject to certain exceptions. Under certain conditions amounts outstanding under the Demand Credit Agreement may be accelerated. Such events include failure to comply with covenants, breach of representations or warranties in any material respect, non-payment or acceleration of other material debt, entry of material judgments not covered by insurance, or a change of control of the Company. On November 8, 2010, November 26, 2010, and December 23, 2010, the Company's wholly owned subsidiary, ESWC, received the first, second and third waivers, respectively, of certain financial covenants under its Demand Credit Agreement with CIBC. Without the waiver, the Company's subsidiary would not be in compliance with the current ratio and effective tangible net worth covenants as set forth in the Demand Credit Agreement. In the event the Company and its subsidiary, ESWC, fail to comply with the terms of the waiver and meet the current ratio and effective tangible net worth covenants prior to the end of the waiver period, same would constitute an event of default and the bank loan may need to be repaid unless a further waiver or modification to the Demand Credit Agreement can be obtained. The third waiver provided by CIBC was through January 31, 2011 and also provides for a fee payable to the lender for the extension, as well as a reduction in the maximum security margin deficit as defined under the Demand Credit Agreement (by either reducing borrowing or increasing the borrowing base) and an increase in the annual interest rate to CIBC's prime rate plus 4.50% from CIBC's prime rate plus 2.25% effective January 1, 2011. Effective February 4, 2011, the Company's wholly owned subsidiary, ESWC, received a fourth waiver of certain financial covenants under its Demand Credit Agreement with CIBC. Without the waiver, the Company's subsidiary would not be in compliance with the current ratio and effective tangible net worth covenants as set forth in the Demand Credit Agreement. The fourth waiver provided by CIBC extends the waiver period from January 31, 2011 through February 14, 2011 and also provides for a fee payable to CIBC for the extension as well as requiring the elimination of any margin deficit by February 14, 2011. In the event the Company and its subsidiary, ESWC, failed to comply with the terms of the waiver and meet the current ratio and effective tangible net worth covenants prior to the end of the waiver period, same will constitute an event of default as set forth in the Demand Credit Agreement unless a further waiver or modification to the Demand Credit Agreement could be obtained. The closing of the $3 million unsecured subordinated promissory notes effective February 17, 2011 allowed the Company and its subsidiaries to comply with covenants and obligations under the Demand Credit Agreement with CIBC dated March 10, 2010. ESW is working on upgrading or renewing the Demand Credit Agreement and reviewing options with other senior lenders. The Company has obtained an extension to the Demand Credit Agreement to May 31, 2011 from its current senior lender and is working to extend this date. As of March 31, 2011 and December 31, 2010, $1,636,444 and $3,424,889, respectively, was owed under the credit facility to CIBC. NOTE 9 - REDEEMABLE CLASS A SPECIAL SHARES 700,000 Class A special $453,900 (based on the historical shares authorized, exchange rate at the time of issued, and outstanding. issuance.) F15 The redeemable Class A special shares were issued by the Company's wholly owned subsidiary, BBL, without par value, and are redeemable on demand by the holder of the shares, which is a private Ontario Corporation, at $700,000 Canadian (which translates to $721,980 US and $703,801 US at March 31, 2011 and December 31, 2010, respectively). As the redeemable Class A special shares were issued by the Company's wholly owned subsidiary, BBL, the maximum value upon which the Company is liable is the net book value of BBL. As of March 31, 2011 and December 31, 2010, BBL had an accumulated deficit of $1,192,858 US ($1,845,375 Canadian), and therefore, the holder would be unable to redeem the redeemable Class A special shares at their ascribed value. NOTE 10 - CONVERTIBLE DEBENTURES Convertible debentures issued by the Company are summarized as follows:
TOTAL 2008 DEBENTURES 2009 DEBENTURES 2010 DEBENTURES MARCH 31, 2010 --------------- -------------- --------------- --------------- Face value of convertible debenture $ 9,000,000 $ 1,600,000 $ 3,000,000 $ 13,600,000 Less: Beneficial conversion feature -- (256,000) (540,000) (796,000) Deferred costs (59,738) -- (80,625) (140,363) --------------- -------------- --------------- --------------- Book value upon issuance 8,940,262 1,344,000 2,379,375 12,663,637 Accretion of the debt discount -- 256,000 540,000 796,000 Amortization of deferred costs 59,738 -- 80,625 140,363 --------------- -------------- ---------------- --------------- Carrying Value 9,000,000 1,600,000 3,000,000 13,600,000 Conversion (March 25,2010) (9,000,000) (1,600,000) (3,000,000) (13,600,000) --------------- --------------- ---------------- --------------- Carrying Value (March 31,2011) $ -- $ -- $ -- $ -- =============== =============== ================ ===============
Effective March 19, 2010, the Company issued $3,000,000 of its 9% convertible debentures (the "2010 Debentures") to five (5) accredited investors under Rule 506 of Regulation D of Section 4(2) of the Securities Act. The 2010 Debentures were for a term of three (3) years and were convertible into shares of the Company's common stock at the option of the holder by dividing the principal amount of the 2010 Debenture to be converted by $0.50. The 2010 Debentures earned interest at a rate of 9% per annum payable in cash or in shares of the Company's common stock at the option of the holder. If the holder elected to receive interest in shares of common stock, the number of shares of common stock to be issued for interest would be determined by dividing accrued interest by $0.50. The 2010 Debentures had a mandatory conversion feature that required the holders to convert in the event a majority of the Company's pre-existing outstanding 9% convertible debentures converted. Subject to the holder's right to convert and the mandatory conversion feature, the Company had the right to redeem the 2010 Debentures at a price equal to one hundred and ten percent (110%) multiplied by the then outstanding principal amount plus unpaid interest to the date of redemption. Upon maturity, the debenture and interest was payable in cash or common stock at the option of the Holder. The Company also had provided the holders of the Debentures registration rights. The 2010 Debentures contained customary price adjustment protections. At the time the 2010 Debentures were issued, the Company recorded a debt discount for a beneficial conversion feature in the amount of $540,000. The debt discount being the aggregate intrinsic value calculated as the difference between the market price of the Company's share of stock on March 19, 2010 and the conversion price of the 2010 Debentures. The debt discount was being accreted over the three (3) year life of the debentures using the effective yield method. The effective yield on the debentures was 16.36%. F16 Effective March 25, 2010, the November 2008 and the August 2009 debenture holders agreed to convert all outstanding convertible debentures as per the terms of the respective debenture agreements. The early conversion of the debentures was a condition precedent to the Company's wholly owned subsidiary, ESWC, entering into a new credit facility with CIBC (see Note 8). A total of $10,600,000 in principal and $1,176,445 of accrued interest was converted into 43,756,653 shares of restricted common stock. The conversion of the November 2008 and the August 2009 debentures also triggered the mandatory conversion feature on the March 19, 2010 debentures. A total of $3,000,000 in principal and $3,797 in accrued interest was converted into 6,007,595 shares of restricted common stock. With these transactions effective March 25, 2010, the Company has $0 of convertible debentures and accrued interest on convertible debenture. As part of the agreement to convert all existing convertible debentures, the Company was committed to pay a premium as an inducement to convert all debentures. The premium was payable to all converting debenture holders and was subject to a positive fairness opinion, approval by a Fairness Committee consisting of independent Directors of the Company's Board of Directors and an increase in the share capital of the Company. The premium consists of 4,375,668 shares of common stock. As the Company did not have sufficient authorised shares as of the date of conversion of the debentures to fulfill the premium, the premium had been recorded as an advance share purchase agreement at a fair market value of $2,909,872 as of March 31, 2010. The agreement is without interest, subordinated to the bank's position and payable in a fixed number of common shares (4,375,668 shares) of the Company upon increase in the authorized share capital of the Company. Up to October 14, 2010, the Company did not have sufficient authorized and unissued shares to fulfill the advance share subscription. Under these conditions, FASB ASC Subtopic 815-40, Contracts in Entity' Own Equity, precludes equity classification of this obligation. As such, the advance share subscription was classified as a liability and periodically marked to market. The fair value of the obligation was determined to be $1,662,753 at October 14, 2010. The fair value of the obligation was determined by the cash settlement value at the end of each period based on the closing price of the Company's common stock. The decrease in fair value of this liability of $1,247,119 was recorded as a mark to market adjustment on advance share subscription in the consolidated statement of operations and comprehensive loss. Effective October 14, 2010, the Company's Board of Directors ratified certain corporate action approved by the written consent of a majority of the Company's shareholders pursuant to a Definitive Information Statement on Schedule 14C that the Company filed with the Securities and Exchange Commission on September 3, 2010 (the "Definitive Information Statement") and distributed to shareholders of record. The Board of Directors ratified an amendment to the Company's articles of incorporation whereby the Company proceeded to file an amendment to its articles of incorporation increasing its authorized shares of common stock from 125,000,000 to 250,000,000 shares. Effective November 30, 2010, the Company issued an aggregate of 4,375,668 restricted shares of common stock to thirteen (13) prior debenture holders in connection with the early conversion of their debentures. Included in the condensed consolidated financial statements of the Company at March 31, 2011, is the effect of an exchange feature included in the terms of the Share Subscription Agreement for $3,000,000 of Convertible Debentures issued on March 19, 2010, ("2010 Debentures") and fully converted including interest into 6,007,595 shares of common stock on March 25, 2010. The exchange feature provides that if within twelve months from March 19, 2010, the Company enters into or closes another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the Securities) on terms and conditions more favorable to another purchaser, the terms and conditions of the 2010 Debentures shall be adjusted to reflect the more favorable terms. The exchange feature was determined by the Company to be freestanding financial instrument and also to be a liability within the scope of ASC 480 Distinguishing Liabilities from Equity since there is an inverse relationship between the stock price of the Company and the Company's obligation. On December 31, 2010, the Company evaluated the fair value of the exchange feature based on the probability of closing another financing by March 18, 2011, and the fair value of the number of incremental shares to be issued at a lower estimated issue price. The probability of closing another financing by March 18, 2011, was estimated to be 100% on December 31, 2010. The fair value of the Company's common stock is determined by the closing price on the valuation date. On December 31, 2010, an exchange feature liability of $1,680,000 was recorded for the 2010 Debentures (see also note 12). F17 Effective February 17, 2011, the Company and the 2010 Debenture investors reached an agreement whereby the investors will receive an approximate aggregate of 19,000,000 additional shares of Common Stock at an estimated price of $0.12 in conjunction with certain rights under the Prior Subscription Agreements in the event the Company closes a Qualified Offering (see note 7 for details). At March 31, 2011, the exchange feature liability related to the 2010 Debenture was recorded at a fair value of $2,280,000 with the change in fair value of exchange feature liability of $600,000 recorded as an expense in the consolidated condensed statements of operations and comprehensive loss. EXCHANGE FEATURE LIABILITY TABLE
CHANGE IN FAIR VALUE OF EXCHANGE EXCHANGE EXCHANGE FEATURE FEATURE FEATURE TRANSACTION ORIGINAL ADDITIONAL LIABILITY LIABILITY LIABILITY DETAIL INSTRUMENT SHARES DECEMBER 31, 2010 MARCH 31, 2011 MARCH 31, 2011 COMMENTS ------------------------------------------------------------------------------------------------------------------------------------ March 2010 Offering Convertible Debenture 19,000,000 $1,680,000 $600,000 $2,280,000 See Note 10 November 2010 Offering Common Stock and Warrants 1,750,000 219,168 (9,299) 209,869 See Note 12 December 2010 Offering Common Stock and Warrants 1,750,000 228,262 (11,962) 216,300 See Note 12 ------------------------------------------------------------------------------------------------------------------------------------ Totals 22,500,000 $2,127,430 $578,739 $2,706,169
As of March 31, 2011 and December 31, 2010, total convertible debentures and corresponding accrued interest amounted to $0 and $0, respectively. As of December 31, 2010, the debt discount of $768,981 and deferred cost of $117,131 were fully amortized and expensed due to the conversion of the debentures effective March 25, 2010. LEGAL FEES RELATED TO 2008 AND 2010 CONVERTIBLE DEBENTURES The Company had also recorded a deferred cost asset of $80,625 for legal fees paid in relation to the issuance of the 2010 Debentures. The deferred costs were being amortized over the term of the 2010 Debentures using the straight line method. At December 31, 2010, the deferred cost assets were fully amortized due to the conversion of the debentures effective March 25, 2010. As of December 31, 2010, deferred cost assets have been presented net against the related convertible debentures. F18 NOTE 11- INCOME TAXES As of March 31, 2011, there are tax loss carry forwards for Federal income tax purposes of approximately $26,375,614 available to offset future taxable income in the United States. The tax loss carry forwards expire in various years through 2031. The Company does not expect to incur a Federal income tax liability in the foreseeable future. Accordingly, a valuation allowance for the full amount of the related deferred tax asset of approximately $9,231,465 has been established until realizations of the tax benefit from the loss carry forwards meet the "more likely than not" criteria. LOSS CARRY YEAR FORWARD ---- ------- 1999 $ 407,067 2000 2,109,716 2001 2,368,368 2002 917,626 2003 637,458 2004 1,621,175 2005 2,276,330 2006 3,336,964 2007 3,378,355 2008 3,348,694 2009 2,927,096 2010 2,389,225 2011 657,540 ---- ----------- Total $26,375,614 =========== Additionally, as of March 31, 2011, the Company's two wholly owned Canadian subsidiaries had non-capital tax loss carry forwards of approximately $12,182,415 be used, in future periods, to offset taxable income. The loss carry forwards expire in various years through 2031. The deferred tax asset of approximately $3,775,331 has been fully offset by a valuation allowance until realization of the tax benefit from the non-capital tax loss carry forwards are more likely than not. LOSS CARRY FORWARD FOREIGN YEAR OPERATIONS ---- ----------- 2006 $ 588,051 2007 7,397 2008 4,154,396 2009 2,846,379 2010 2,900,652 2011 1,685,540 ---- ----------- Total $12,182,415 =========== F19
For the period ended March 31, 2011 2010 --------------------------- Statutory tax rate: U.S. 35.00% 35.00% Foreign 31.00% 33.00% Loss before income taxes: U.S. $(1,460,821) $(4,653,428) Foreign (1,673,811) ( 344,131) --------------------------- $(3,134,632) $(4,997,559) =========================== Expected income tax recovery $(1,030,001) $(1,742,263) Differences in income tax resulting from: Depreciation (Foreign operations) 3,311 17,876 Change in fair value of exchange feature liability 202,559 -- Financing charge on embedded derivative liability 169,785 -- Inducement premium on conversion of Debentures -- 1,018,455 Stock based compensation 9,060 -- Gain on convertible derivative (467,756) -- Long-term debt accretion 367,500 269,143 Accrued interest on loans -- 64,350 --------------------------- (745,542) (372,439) Benefit of losses not recognized 745,542 372,439 --------------------------- Income tax provision (recovery) per financial statements $ -- $ -- ===========================
Components of deferred income tax assets are as follows: As at March 31, 2011 2010 ----------------------------- Property, plant and equipment $ 110,255 $ 94,203 Tax loss carry forwards 13,006,796 10,757,068 ----------------------------- Total 13,117,051 10,851,271 Valuation allowance (13,117,051) (10,851,271) ----------------------------- Carrying Value $ -- $ -- ============================= Effective January 1, 2007, the Company adopted FASB's guidance on accounting for uncertainty in income taxes. This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. There was no material impact on the Company's consolidated financial position and results of operations as a result of the adoption of this guidance. The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months. The Company will recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statement of operations and comprehensive loss. Accrued interest and penalties will be included within the related tax liability line in the consolidated balance sheet. F20 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, 2011: United States - Federal 2007 - present United States - State 2007 - present Canada - Federal 2008 - present Canada - Provincial 2008 - present Valuation allowances reflect the deferred tax benefits that management is uncertain of the Company's ability to utilize in the future. NOTE 12 - STOCKHOLDERS' EQUITY / (DEFICIT) On March 25, 2010, the Company issued 43,756,653 shares of common stock in connection with the conversion of 2008 Debentures and 2009 Debentures into equity (see Note 10). On March 25, 2010, the Company issued 6,007,595 shares of restricted common stock in connection with the conversion of 2010 Debentures into equity (see Note 10). On November 30, 2010, the Company issued 4,375,668 shares as an inducement premium to the holders to convert all convertible debentures outstanding as of March 25, 2010 (see Note 10). As fully disclosed in Note 10 to the consolidated financial statements, the Company's Board of Directors approved the increase in the authorized share capital effective October 14, 2010. Effective November 9, 2010 and December 8, 2010, the Company closed on its first tranche and second tranche of a unit offering in the amount of $300,000 per tranche for gross proceeds of $600,000 whereby the Company issued 1,500,000 ("Unit Offering") units. The unit offering is for up to $5 million. The units are in the form of shares of the Company's common stock, par value $0.001 at $0.40 per share plus for each share of Common Stock subscribed to under the unit offer the investor will receive one warrant, the exercise price will be $0.55; if an Investor Warrant is exercised between the first and second years from issuance, the exercise price will be $0.65. All investor warrants as issued will be subject to adjustment in all respects in the event of a stock split or similar adjustment by the Company. A commission of 4% of the gross proceeds was paid from the proceeds of the unit offering and 7.5 units for every $100 of the gross proceeds raised are payable for brokers fees are treated as a cost of capital and no income statement recognition is required. The Share Subscription Agreement for the units contains an exchange feature which provides that if within six months from effective date of closing, the Company enters into or closes another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the Securities) on terms and conditions more favorable to another purchaser, the terms and conditions of the unit offering shall be adjusted to reflect the more favorable terms. The exchange feature was determined by the Company to be freestanding financial instrument and also to be a liability within the scope of ASC 480 Distinguishing Liabilities from Equity since there is an inverse relationship between the stock price of the Company and the Company's obligation. On November 9, 2010, December 8, 2010 and December 31, 2010, the Company evaluated the fair value of the exchange feature based on the probability of closing another financing within six months and the fair value of the number of incremental shares and warrants to be issued at a lower estimated issue price for units. The probability of closing another financing in the next six months on November 9, 2010 and December 8, 2010 was estimated to be 50% and on December 31, 2010 was estimated to be 100%. F21 The fair value of the Company's common stock is determined by the closing price on the valuation date and the fair value of the warrants is determined using a binomial option valuation model. Key assumptions for the binomial option valuation were as follows:
November 9, 2010 Offering ------------------------- Nov. 9, 2010 - Dec. 31, 2010 - lower estimated lower estimated Valuation Date Nov. 9, 2010 strike price Dec. 31, 2010 strike price ------------ ------------ ------------- ------------ Strike Price - second year $0.65 $0.63 $0.65 $0.36 Strike Price - first year $0.55 $0.54 $0.55 $0.30 Closing market price $0.39 $0.39 $0.22 $0.22 Volatility 135.72% 135.72% 113.47% 113.47% Time to expiration 2 years 2 years 1.83 years 1.83 years Risk free rate 0.46% 0.46% 0.61% 0.61% Dividend yield 0% 0% 0% 0% December 8, 2010 Offering ------------------------- Dec. 8, 2010 - Dec. 31, 2010 - lower estimated lower estimated Valuation Date Dec. 8, 2010 strike price Dec. 31, 2010 strike price ------------ ------------ ------------- ------------ Strike Price - second year $0.65 $0.39 $0.65 $0.36 Strike Price - first year $0.55 $0.33 $0.55 $0.30 Closing market price $0.24 $0.24 $0.22 $0.22 Volatility 132.07% 132.07% 117.03% 117.03% Time to expiration 2 years 2 years 1.92 years 1.92 years Risk free rate 0.63% 0.63% 0.61% 0.61% Dividend yield 0% 0% 0% 0%
On December 31, 2010, an exchange feature liability of $453,861 was recorded for the unit offering. Effective February 17, 2011, the Company and the Unit Offering investors reached an agreement whereby the investors will receive an approximate aggregate of 3,500,000 additional shares of Common Stock at an estimated price of $0.12 in conjunction with certain rights under the Share Subscription Agreements in the event the Company closes a Qualified Offering (see note 7 for details). At March 31, 2011 the exchange feature liability related to the shares in the Unit Offering was recorded at a fair value of $432,600. At March 31, 2011 the exchange feature liability related to the warrants in the Unit Offering was recorded at a fair value of $0 since the probability of Company exchanging warrants with a lower strike price is estimated to be 0%. The change in fair value of exchange feature liability related to the Unit Offering of $(21,261) is recorded as a reduction of the loss on fair value of exchange feature liability related to the 2010 Debentures. EXCHANGE FEATURE LIABILITY TABLE
CHANGE IN FAIR VALUE OF EXCHANGE EXCHANGE EXCHANGE FEATURE FEATURE FEATURE TRANSACTION ORIGINAL ADDITIONAL LIABILITY LIABILITY LIABILITY DETAIL INSTRUMENT SHARES DECEMBER 31, 2010 MARCH 31, 2011 MARCH 31, 2011 COMMENTS ------------------------------------------------------------------------------------------------------------------------------------ March 2010 Offering Convertible Debenture 19,000,000 $1,680,000 $600,000 $2,280,000 See Note 10 November 2010 Offering Common Stock and Warrants 1,750,000 219,168 (9,299) 209,869 See Note 12 December 2010 Offering Common Stock and Warrants 1,750,000 228,262 (11,962) 216,300 See Note 12 ------------------------------------------------------------------------------------------------------------------------------------ Totals 22,500,000 $2,127,430 $578,739 $2,706,169
F22 NOTE 13 - STOCK OPTIONS AND WARRANT GRANTS On April 15, 2010 the Board of Directors granted an aggregate award of 900,000 stock options to a former executive officer and former director and one director. The options vest over a period of three years with an exercise price of $0.65 (fair market value of the Company's common stock as of the date of grant) with expiry five years from the date of award. Effective February 7, 2011, with the resignation of a director, the unvested portion of the stock options has lapsed, and ceases to vest. The balance of the stock option expense of the April 15, 2010 award is as follows: DATE Stock Option Expense -------------------------------------- April 15, 2011 $ 62,127 April 15, 2012 $ 82,836 April 15, 2013 $ 20,709 As of March 31, 2011 and 2010, $25,886 and $0, respectively, has been recorded in the consolidated condensed statements of operations and comprehensive loss for stock based compensation. During the three month period ended March 31, 2011, no stock options or warrants were issued. A summary of option transactions, including those granted pursuant to the terms of certain employment and other agreements is as follows: STOCK WEIGHTED PURCHASE AVERAGE DETAILS OPTIONS EXERCISE PRICE ------------------------------------------------------------- OUTSTANDING, JANUARY 1, 2010 3,670,000 $ 0.76 Granted 900,000 $ 0.65 Expired (1,765,000) ($ 0.97) ---------- ------ OUTSTANDING, DECEMBER 31, 2010 3,600,000 $ 0.68 Expired (200,000) ($ 0.65) ---------- ------ OUTSTANDING, DECEMBER 31, 2010 3,400,000 $ 0.67 ========== ====== At December 31, 2010, the outstanding options have a weighted average remaining life of 20 months. All options issued prior to 2010 have vested, and the April 15, 2010 options vest over a period of three years, in three equal parts each year. The weighted average fair value of options granted during 2010 was $0.41 and was estimated using the Black-Scholes option-pricing model, using the following assumptions: 2010 --------- Expected volatility 117% Risk-free interest Rate 1.08% Expected life 4 yrs Dividend yield 0.00% Forfeiture rate 0.00% The Black-Scholes options-pricing model used by the Company to calculate options and warrant values, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the 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. F23 At March 31, 2011, the Company had outstanding options as follows: NUMBER OF EXERCISE OPTIONS PRICE EXPIRATION DATE ---------------------------------------------------- 2,150,000 $0.71 February 16,2012 100,000 $1.00 February 8,2013 250,000 $0.27 August 6,2013 900,000 $0.65 April 15,2015 ---------------------------------------------------- 3,400,000 ==================================================== Warrants issued in connection with various private placements of equity securities, are treated as a cost of capital and no income statement recognition is required. A summary of warrant transactions is as follows: WEIGHTED AVERAGE DETAILS WARRANT SHARES EXERCISE PRICE ------------------------------------------------------------------------------- OUTSTANDING, JANUARY 1, 2010 -- $ -- Granted 1,545,000 $ 0.65 Exercised -- $ -- Expired -- $ -- ------------------------------------------------------------------------------- OUTSTANDING, DECEMBER 31, 2010 & MARCH 31, 2011 1,545,000 $ 0.65 =============================================================================== Effective November 9, 2010 and December 8, 2010, the Company closed on its first tranche and second tranche of a unit offering in the amount of $300,000 per tranche for gross proceeds of $600,000 whereby the Company issued 1,500,000 units. The unit offering is for up to $5 million. The units are in the form of shares of the Company's common stock, par value $0.001 at $0.40 per share plus for each share of Common Stock subscribed to under the unit offer the investor will receive one warrant exercisable for 1 share of common stock, the exercise price will be $0.55; if an Investor Warrant is exercised between the first and second years from issuance, the exercise price will be $0.65. All investor warrants as issued will be subject to adjustment in all respects in the event of a stock split or similar adjustment by the Company. A commission of 4% of the gross proceeds was paid and 7.5 units for every $100 of the gross proceeds raised are payable for brokers fees. No warrants were issued during the three month period ended March 31, 2011. NOTE 14 - RELATED PARTY TRANSACTIONS In addition to fees and salaries and reimbursement of business expenses, during the three month period ended March 31, 2011 transactions with related parties include: o $3,000,000 issuance of unsecured subordinated promissory notes (the information required by this item is included in Note 7 to the consolidated financial statements). F24 o The effect of an exchange feature included in the terms of the Share Subscription Agreement for $3,000,000 of Convertible Debentures issued on March 19, 2010 ("2010 Debentures") and fully converted including interest into 6,007,595 shares of common stock on March 25, 2010. The exchange feature provides that if within twelve months from March 19, 2010, the Company enters into or closes another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the Securities) on terms and conditions more favorable to another purchaser, the terms and conditions of the 2010 Debentures shall be adjusted to reflect the more favorable terms. The exchange feature was determined by the Company to be freestanding financial instrument and also to be a liability within the scope of ASC 480 Distinguishing Liabilities from Equity since there is an inverse relationship between the stock price of the Company and the Company's obligation. On December 31, 2010, the Company evaluated the fair value of the exchange feature based on the probability of closing another financing by March 18, 2011 and the fair value of the number of incremental shares to be issued at a lower estimated issue price. The probability of closing another financing by March 18, 2011 was estimated to be 100% on December 31, 2010. The fair value of the Company's common stock is determined by the closing price on the valuation date. On December 31, 2010, an exchange feature liability of $1,680,000 was recorded for the 2010 Debentures (see also note 12). Effective February 17, 2011, the Company and the 2010 Debenture investors reached an agreement whereby the investors will receive an approximate aggregate of 19,000,000 additional shares of Common Stock in conjunction with certain rights under the Prior Subscription Agreements in the event the Company closes a qualified offering (see note 7 for details). At March 31, 2011 the exchange feature liability related to the convertible debentures was re-valued to $2,258,739 with the change in fair value of exchange feature liability of $578,739 expense recorded in the consolidated condensed statements of operations and comprehensive loss. In March 2010, Orchard Investments, LLC invested $1 million in the $3 million convertible debentures offering; of the exchange feature liability $752,913 is attributed to the investment made by Orchard Investments, LLC ("Orchard") based on their relative contribution to the March 2010 subscription. Orchard will receive 6,333,333 additional shares of Common Stock in conjunction with certain rights under the Prior Subscription Agreements in the event the Company closes the Qualified Offering (see note 7 for details of the Qualified Offering) o $50,000 related to services provided by Orchard Capital Corporation under a services agreement effective January 30, 2011 as further disclosed in Note 18. o 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. He has no ownership equity in Bay City Transfer Agency Registrar Inc. nor is he an officer or a director of Bay City Transfer Agency Registrar Inc. For the three month period ended March 31, 2011 and 2010, the Company paid Bay City Transfer Agency Registrar Inc. $1,325 and $0, respectively. During the three month period ended March 31, 2010 transactions with related parties included $6,134,024 related to conversion of convertible debentures including interest of $634,024 thereon into common stock; $1,292,894 related to inducement on early conversion of convertible debentures; and the repayment of $511,342 principal and interest on promissory note in addition to salaries and reimbursement of business expenses. NOTE 15 - COMMITMENTS AND CONTINGENCIES LEASES Effective November 24, 2004, the 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. The lease commenced on January 15, 2005 and expired January 31, 2010. Effective October 16, 2009, the Company's wholly-owned subsidiary ESW America, Inc. entered into a lease renewal agreement with Nappen & Associates for the leasehold property at Pennsylvania. There were no modifications to the original economic terms of the lease under the lease renewal agreement. Under the terms of the lease renewal, the lease term will now expire February 28, 2013. Effective March 31, 2011, ESW America, Inc. entered into a lease amendment agreement with Nappen & Associates for the leasehold property at Pennsylvania, whereby ESWA has the sole option to extend the expiry of the lease agreement by an additional 3 years six months prior to February 28, 2013; there were no modifications to the original economic terms of the lease. F25 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 a high volume manufacturing plant. The possession of the leasehold space took place on May 24, 2005 and the term of the lease was extended to September 30, 2010. ESWC renewed its lease agreement at the current property for an additional five year term. The renewed lease period commenced on October 1, 2010 and ends on September 30, 2015. The following is a summary of the minimum annual lease payments, for both leases. YEAR 2011 $351,021 2012 468,029 2013 319,813 2014 297,476 2015 223,107 ---------- $1,659,446 ========== LEGAL MATTERS From time to time, the Company may be involved in a variety of claims, suits, investigations and proceedings arising from the ordinary course of our business, breach of contract claims, labor and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, ESW believes that the resolution of current pending matters will not have a 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 The Company is committed to the following lease payments in connection with the acquisition of equipment under capital leases: YEAR 2011 $ 2,124 2012 1,180 ------- TOTAL 3,304 Less imputed interest (179) ------- Total obligation under capital lease 3,125 Less current portion ( 1,806) ------- TOTAL LONG-TERM PORTION $ 1,319 ======= The Company incurred $80 and $515 of interest expense on capital lease obligation for the periods ended March 31, 2011 and 2010, respectively. F26 RESTRUCTURING EXPENSES AND SEVERANCE AGREEMENTS Restructuring charges relate to changes in the management and reductions in work force of the Company's subsidiary ESW Canada Inc., and consist of mainly of severance agreements amounting to $478,274, travel costs of $24,127 and legal fees of $16,408 associated with restructuring activities. The Company accrued a portion of the expenses related to severance agreements with a former Chief Executive Officer, Vice President of Operations and Director of Sales. As of March 31, 2011, $310,947 (March 31, 2010 - $0) was included in accrued liabilities towards the balance of severance payments owing. NOTE 16 - LOSS PER SHARE Potential common shares of 3,400,000 related to 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. Potential common shares of 3,495,000 related to ESW's outstanding stock options were excluded from the computation of diluted loss per share for the period ended March 31, 2010. The reconciliation of the number of shares used to calculate the diluted loss per share is calculated as follows: For the three month period ended March 31, 2011 2010 ------------- ------------- NUMERATOR Net loss for the year $ (3,134,632) $ (4,997,559) Interest on long term debt -- 183,858 Amortization of deferred costs -- 117,131 Long term debt accretion -- 768,981 Inducement premium -- 2,909,872 Change in fair value of exchange feature liability 578,739 -- Interest accretion expense 1,050,000 -- Financing charge on embedded derivative liability 485,101 -- Gain on convertible derivative (1,336,445) -- Bank fees related to credit facility covenant waivers 106,512 -- Interest on note payable to related party 34,521 11,307 ------------- ------------- $ (2,219,754) $ (1,006,410) ============= ============= DENOMINATOR Weighted average number of shares outstanding 129,463,767 77,694,404 Dilutive effect of : Stock options -- -- Warrants -- -- Exchange of unsecured subordinated promissory notes -- -- Exchange feature liability shares -- -- ------------- ------------- DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 129,463,767 77,694,404 ============= ============= NOTE 17 - COMPARATIVE FIGURES Certain 2010 figures have been reclassified to conform to the current financial statement presentation. F27 NOTE 18 - SUBSEQUENT EVENTS CONTRACTS AND AGREEMENTS On April 19, 2011, the Company's board of directors ratified a Services Agreement ("Agreement") between the Company and Orchard Capital Corporation ("Orchard") which was approved by the Company's Compensation Committee. Under the Agreement, which will be effective as of January 30, 2011, Orchard will provide services that may be mutually agreed to by and between Orchard and the Company including those duties customarily performed by the Chairman of the Board and executive of the Company as well as providing advice and consultation on general corporate matters and other projects as may be assigned by the Company's Board of Directors as needed. Orchard has agreed to appoint Mark Yung, who is also employed by Orchard, as the Company's Executive Chairman to act on Orchard's behalf and provide the services to the Company under the Agreement. Orchard reserves the right to replace Mr. Yung as the provider of services under the Agreement at its sole option. The Agreement may be terminated by either party upon thirty (30) days written notice unless otherwise provided for under the Agreement. Compensation under the agreement is the sum of $300,000 per annum plus reimbursement for out-of-pocket expenses incurred by Orchard. The agreement includes other standard terms including indemnification and limitation liability provisions. Orchard is controlled by Richard Ressler; affiliated entities of Orchard as well as Richard Ressler own shares of the Company. COMPENSATION On April 19, 2011, the Company's board of directors ratified a modification of the board compensation structure as approved by the Company's Compensation Committee. As a part of the modified compensation policy the board of directors ratified and approved a reduction and change in the composition in the fees paid to the chairpersons of the various board committees and other board members, as well as an amendment to the Company's 2010 Stock Incentive Plan (the "Plan") so as to permit the issuance of restricted shares of the Company's Common Stock to directors in addition to executive officers and employees as previously provided for under the Plan. The amendment to the Plan permits for board fees to be paid in the form of the Company's restricted common stock for all non-executive board members, with a cash component for the chairpersons of the various board committees. Previously, the board fee policy consisted of cash and options for all board members. Previously, the board fee policy consisted of cash of $2,500 per month and an additional $1,000 per month for audit committee chairperson and additional $2,000 per month for Chairman of the board. The revised board compensation structure is as follows: o Chairperson for the Company's Audit and Compensation Committees each receive cash compensation of two thousand five hundred ($2,500) dollars per month effective April 1, 2011 as well as 200,000 shares of the Company's restricted common stock annually (prorated for the current fiscal year so that said amount would be 150,000 shares) under the Company's 2010 Incentive Stock Option Plan (the "Plan"). o For outside directors who do not serve as a Chairperson of the Company's Audit or Compensation Committee, there would be no cash compensation for previously accrued Board fees through March 31, 2011, said fees would be converted into shares of the Company's restricted common stock issued under the Plan in addition, the outside directors not serving as Chairpersons of either the Audit or Compensation Committees would receive the Company's restricted common stock in the amount of 200,000 shares annually (prorated for the current fiscal year so that said amount would be 150,000 shares) under the Plan. o For inside Board members and the Company's current Executive Chairman, there would be no cash compensation for previously accrued Board fees through February 28, 2011, said fees would be converted into shares of the Company's restricted common stock issued under the Plan if permitted under the Plan, F28 UNSECURED SUBORDINATED PROMISSORY NOTES On May 3, 2011, the Company entered into certain note subscription agreements and issued unsecured subordinated promissory notes ( collectively the "Loan Agreements") with Orchard Investments, LLC ("Orchard"); Black Family 1997 Trust; Leon D. Black, UAD 11/30/92 FBO Alexander Black; Leon D. Black, UAD 11/30/92 FBO Benjamin Black; Leon D. Black, UAD 11/30/92 FBO Joshua Black; Leon D. Black, UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan and Richard Ressler ("Ressler")(each individually a "Subordinated Lender" or "Holder" and collectively the "Subordinated Lenders" or "Holders") who are current shareholders and subordinated lenders under prior loan agreements in the aggregate amount of $3 million with the Company entered into February 17, 2011 and may be deemed affiliates of the Company. The Loan Agreements were approved by the Company's independent directors. Pursuant to the Loan Agreements, the Subordinated Lenders agreed to make, and made, loans to the Company in the principal aggregate amount of $1 million (the "Loan"), subject to the terms and conditions set forth in the Loan Agreements and represented by unsecured subordinated convertible promissory notes (the "Notes"), effective as of April 27, 2011. Proceeds of the Loan, along with available cash, will be used by the Company to fund working capital. The Loan bears interest at a rate of 10% per annum, payable in-kind on a monthly basis commencing May 27, 2011, up to the date on which the Notes have been paid in full. The maturity date of the Loan is the earlier of: (i) the consummation of a rights offering of the Company's Common Stock, par value $.001 (the "Common Stock") registered under the Securities Act of 1933, as Amended (the "Act"), at a sale price of $0.12 per share (as adjusted for any stock split, stock dividend or other similar adjustment) pursuant to a rights offering targeted at $8 million by the Company that raises at least an incremental $2.5 million of cash for the Company and also permits all Subordinated Lenders to exchange their Notes (and the other notes paid in-kind for the payment of interest under the Notes) for shares of Common Stock at such price (with such offering referred to as the "Qualified Offering") or (ii) June 14, 2011 (the "Outside Date"). The Qualified Offering has also been approved by the independent directors of the Company. There can be no assurance, however, that the Company will successfully complete the Qualified Offering on or prior to the Outside Date or thereafter. In the event the Qualified Offering does not take place on or before the Outside Date, then the Subordinated Lenders at their sole option, may require the Company to refrain from making any and all payments on any of the outstanding principal and accrued interest outstanding under the Notes, however the Company will not be prohibited from paying any accrued interest in-kind through the issuance of substantially similar Notes, at any time. The Holders of the Note at their sole option may extend the Outside Date. In the event the Qualified Offering closes on or prior to the Outside Date and for any reason Ressler or Orchard as Holders collectively shall have failed to have invested at least $1 million in the Qualified Offering or pursuant to the Investment Agreement, and Ressler or Orchard wish to invest the balance of such $1 million aggregate amount to purchase Common Stock at a price of $0.12 per share (as adjusted for any stock split, stock dividend or other similar adjustment), then the Company will be required to offer Ressler or Orchard the immediate right to invest the balance of such investment amount to purchase additional shares of Common Stock at such price, so that in the aggregate, Ressler and Orchard shall have collectively invested such $1 million amount. Concurrent with entering into the Loan Agreements and issuance of the Notes, the commercial lender of the Company and its subsidiaries; the Company and its subsidiaries; and the Subordinated Lenders entered into an Amendment to the Postponement and Subordination Agreement (the "Subordination Agreement") whereby the Subordinated Lenders agreed that the Notes as issued, in addition to the notes issued on February 17, 2011 by the Company to the Subordinated Lenders, would be subordinate to the obligations of the Company and its subsidiaries under the Credit Agreement with the Company's commercial lender. F29 INVESTMENT AGREEMENT Effective May 10, 2011, the Company entered into an Investment Agreement (the "Investment Agreement") with Orchard Investments, LLC ("Orchard"); Black Family 1997 Trust; Leon D. Black, UAD 11/30/92 FBO Alexander Black; Leon D. Black, UAD 11/30/92 FBO Benjamin Black; Leon D. Black, UAD 11/30/92 FBO Joshua Black; Leon D. Black, UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan and Richard Ressler ("Ressler") (each individually a "Bridge Lender" and collectively the "Bridge Lenders"), who are current shareholders and subordinated lenders under unsecured promissory notes in the aggregate amount of $4.0 million with the Company effective February 17, 2011 and April 27, 2011 (the "Notes"). Pursuant to the Investment Agreement, the Bridge Lenders have agreed to provide a backstop commitment to the Qualified Offering and have agreed to collectively backstop the Qualified Offering by purchasing from the Company at a subscription price of $0.12 per share of Common Stock any shares not purchased by the Company's shareholders of record who are entitled to participate in the rights offering (after giving effect to any oversubscriptions) up to 29,166,667 shares of Common Stock for a total purchase price of $3.5 million (the "Backstop Commitment"). In addition to their rights to purchase shares pursuant to the Qualified Offering and the Backstop Commitment, the Bridge Lenders have the option, in their sole discretion, to purchase from the Company, at the subscription price, any other shares not purchased by the Company's stockholders through the Qualified Offering (the "Purchase Option"). If, after giving effect to the Qualified Offering, the Backstop Commitment and the Purchase Option, any of the Bridge Lenders shall have been unable to exchange any portion of his or its Notes, the Company will also offer each Bridge Lender the right to purchase additional shares of Common Stock at the subscription price (payable through the exchange of Bridge Loans for Common Stock) such that each Bridge Lender shall have exchanged all of his or its notes for shares of Common Stock (the "Additional Subscription Offer"). In addition, if Ressler and Orchard collectively acquire less than $1.0 million worth of shares of Common Stock as part of the Qualified Offering, the Backstop Commitment, the Purchase Option and the Additional Subscription Offer, the Company has agreed to offer to Ressler and Orchard an additional number of shares of Common Stock equal to the shortfall amount at the subscription price. The transactions with the Bridge Lenders under the Investment Agreement are being made in reliance on an exemption from the registration requirements of the Act, and any shares issued pursuant to the Investment Agreement will not be covered by a registration statement filed pursuant to the Act. The closing of the Investment Agreement is subject to satisfaction or waiver of customary conditions, including compliance with covenants and the accuracy of representations and warranties provided in the Investment Agreement, consummation of the Qualified Offering and the receipt of all requisite approvals and authorizations under applicable law. In addition, a condition to the closing the Investment Agreement provides that the Company will enter into a registration rights agreement with the Bridge Lenders to provide certain customary registration rights, which include demand and "piggyback" registration rights under the Act with respect to the shares of Common Stock purchased under the Investment Agreement and any other securities owned by the Bridge Lenders. The Investment Agreement may be terminated at any time prior to the closing of the Backstop Commitment and the Additional Subscription Rights, if any: (1) by mutual written agreement of the Bridge Lenders and the Company; (2) by either party, in the event the rights offering does not close; and (3) by either party, if any governmental entity shall have taken action prohibiting any of the contemplated transactions. The Company has agreed to indemnify the Bridge Lenders and their affiliates and each of their respective officers, directors, partners, employees, agents and representatives for losses arising out of (1) the Company's breach of any representation or warranty set forth in the Investment Agreement, (2) the Qualified Offering, or (3) claims, suits or proceedings challenging the authorization, execution, delivery, performance or termination of the Qualified Offering, the Investment Agreement, or any of the transactions contemplated thereby (other than any such losses attributable to the acts, errors or omissions on the part of the Bridge Lenders in violation of the Investment agreement). F30 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, 2010 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., ESW America Inc. and ESW Technologies Inc. (the "ESW Group of Companies") in the design, development, manufacture and sale of environmental and emission technologies. 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 a leading player in the environmental emissions market by providing leading-edge catalyst technology as well as best-in-class engine and vehicle emissions testing services. 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 are located at 335 Connie Crescent, Concord, Ontario, Canada L4K 5R2. Our telephone number is (905) 695-4142. Our web site is www.cleanerfuture.com. Information contained on our web site does not constitute a part of this 10-Q report. For 2011, ESW is focused 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 profitable growth as compared to 2010. The key factors that are in ESW's favor are: (a) continued regulatory push for emissions reductions in the United States, (b) additional 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) opportunities to market to third parties its CARB and EPA recognized emissions and durability testing services. ESW believes that it can improve, achieve and maintain profitability and grow its business by pursuing the following strategy: o Focus on delivering controlled and profitable growth to its shareholders. o Center the Company's sales strategy around identified "sweet-spots" that will allow manufacturing efficiency gains and optimized resource allocation. 2 o Educate the end customers about the technology and ensure realistic delivery timeline expectations. o Enhance scheduling and customer service functions and importance. o Locate recurring revenue opportunities and focus sales efforts on such opportunities. o Work with vendors to optimize ESW's material buys and lead times. o Constantly review operations, processes, product under a Continuous Improvement / Performance Based culture. To deliver against this strategic intent, in February 2011, ESW secured $3 million in additional financing through certain note subscription agreements and issued unsecured subordinated promissory notes to affiliate shareholders (the "Bridge Lender"). Proceeds of the notes, along with available cash, will be used to fund working capital, planned capital investments and other general corporate purposes. With the proceeds of the loan, the Company and its subsidiaries are in compliance with covenant obligations under the credit agreement with its senior lender dated March 10, 2010 for which the Company and subsidiaries had previously obtained waivers of covenant obligations that expired February 15, 2011. As of March 31, 2011, of the prior $3 million in additional financing secured, $1,823,319 was used to repay ESW's credit facility. ESW also utilized proceeds of the additional financing to reduce its accounts payable through negotiated payment plans with its vendors. Net cash used in operating activities for the three month period ended March 31, 2011 amounted to $227,576. The Company required additional working capital to secure and deliver against the current sales opportunities. On May 3, 2011, the Company secured $1 million in additional financing through certain note subscription agreements and issued unsecured subordinated promissory notes to affiliate shareholders. The Company is also pursuing a rights offering of the Company's common stock at a sale price of $0.12 per share (the "Qualified Offering"). The Company plans to offer rights to existing shareholders of record on the offering date to purchase approximately $8 million in shares of common stock, the increase in the amount of the rights offering from$6.5 million (as previously reported in the Company's 10K report filed March 31, 2011, with the SEC) to $8 million was approved by the independent board members and is intended to be used to pay down ESW's senior lender. The rights offering is expected to raise cash for the Company to meet its working capital needs and will also permit all subordinated lenders to exchange their unsecured subordinated promissory notes (and the other notes paid in-kind for the payment of interest under the notes) for shares of common stock under the offering. On May 10, 2011 the Company filed a Registration Statement related to the subscription rights to purchase Common Stock, $0.001 par value and the shares of Common Stock deliverable upon the exercise of the subscription rights pursuant to the rights offering. Effective May 10, 2011, the Company also announced that it had entered into an Investment Agreement with the Bridge Lenders, who are current shareholders and subordinated lenders under unsecured promissory notes in the aggregate amount of $4.0 million with the Company. The Bridge Lenders have agreed to provide a backstop commitment to the Qualified Offering and have agreed to collectively backstop the Qualified Offering by purchasing from the Company at a subscription price of $0.12 per share of Common Stock any shares not purchased by the Company's shareholders of record who are entitled to participate in the rights offering (after giving effect to any oversubscriptions) up to 29,166,667 shares of Common Stock for a total purchase price of $3.5 million. The qualified offering is expected to be completed by June 17, 2011. The additional capital anticipated to be raised by the rights offering is expected to give ESW the opportunity to execute against its short term and medium term plans. ESW has made significant investments in research and development and obtaining regulatory approvals for its technologies. The products that ESW is pursuing for verification / certification to cover the following primary technology levels established by CARB: 3 LEVEL II + o A high performance Diesel Oxidation Catalyst and filter - PM reduction greater than 50% LEVEL III + o Expansion of On Road Active Diesel Particulate Filter verification to include Exhaust Gas Recirculation engines - PM reduction greater than 85% ESW's Xtrm Cat(TM) product designed for marine and rail, Tier 0, turbocharged EMD 645 and 710 engines was tested at an EPA recognised facility for certification during March and April 2011. Certification applications are pending with the EPA. 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. In effecting its current business plan ESW has made the following adjustments to its business in the first quarter of 2011: 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 the first quarter of 2011 included the restructuring of its management team, the termination of certain contracts and the re-negotiation of board and consulting obligations, amongst others. ESW will continuously revisit opportunities to further streamline the business. 2) Since January 2010 there has been a significant increase in the cost of material and components that ESW uses. ESW is revising the pricing to its dealers to ensure operating margins remain consistent despite lower margins in the first quarter of 2011. Price increases will be implemented in two phases in 2011. 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 also focused on implementing 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 the vendors. ESW has also secured and continues to secure volume discounts on critical components. 5) ESW is in the process of reviewing its warranty policies to ensure that warranty terms and conditions meet industry standards whilst mitigating warranty risks to the fullest extent possible. 6) ESW is in the process of engaging its existing and new independent dealers in order for dealers to better understand ESW's business and strengthen ESW's partnership with its distribution base. 7) ESW is focusing on increasing revenues from its Air Testing Facility in Montgomeryville, Pennsylvania. The results from this adjustment to ESW's business are expected to improve operational results in the second and third quarter of 2011. 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 increasing 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 market the next generation of leading clean technology products and services. 4 COMPARISON OF THE THREE MONTH PERIOD ENDED MARCH 31, 2011 TO THE THREE MONTH PERIOD ENDED MARCH 31, 2010 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, 2010. Revenues for the three month period ended March 31, 2011, decreased by $202,859, or 9.0 percent, to $2,045,737 from $2,248,596 for the three month period ended March 31, 2010. The decrease in revenue is mainly related to ESW's customers facing delays in obtaining funding from public agencies to retrofit diesel vehicles. Cost of sales as a percentage of revenues for the three month period ended March 31, 2011 was negative 6.3 percent compared to 67.2 percent for the three month period ended March 31, 2010. Cost of Sales for the three month period ended March 31, 2011 increased by $581,591 or 38.5 percent. The primary reason for negative gross margin for the three month period ended March 31, 2011 was the write-down and a reserve for write down of inventory in the amount of $229,221. The increase in cost of sales in the current period is related to the following: (a) increases in the cost of materials of $190,534 mainly driven by the increasing cost of precious metals, components and supplies used in production, (b) sales by the Company of slow moving inventory to recover cash and the related write-down of $128,598 as a loss on sale of inventory and a reserve for obsolescence of $100,623 (c) an increase of $26,258 in labour cost mostly related to production inefficiency, (d) an increase in overhead costs of $96,389 as we apply higher overheads to our cost of sales due to improved visibility on the costs enabling better allocation of the overhead expenses, previously expensed as operating expenses, (e) increase in service and warranty costs of $29,885 over the prior period and (f) $9,304 related to discount provided to dealers to increase accounts receivable collections. The increases in cost of sales were complimented further with a decrease in revenue of $202,859. The Company has reviewed its production costing and has a plan in place to review and update the pricing of its products and reduce materials and production costs to maintain future margins. Marketing, office and general expenses for the three month period ended March 31, 2011, increased by $55,951, or 5.6 percent, to $1,051,753 from $995,802 for the three month period ended March 31, 2010. The increase is primarily due to the following: (a) $80,430 increase in general administration costs mainly related to increased financing charges on ESW's secured credit facility, (b) a marginal increase in administration salaries and wages of $4,005, and (c) an increase in factory expense of $98,877 mostly related to inefficient labour. These increases were offset by decreases in Sales and Marketing wages and selling expenses by $67,514, mainly resulting from reversal of bad debt provisions as of December 31, 2010, for which receivables were collected. A decrease of $25,079 in facility costs, resulting from higher overheads applied to cost of sales and a decrease in investor relation costs of $34,769 as the Company terminated the services of an investor relations firm. The Company incurred $518,809 as restructuring charges for the three month period ended March 31, 2011, relating to various severance payments, vacation payouts and agreements. The Company incurred expenses related to severance agreements with the former Chief Executive Officer, Vice President of Operations and Director of Sales in the amount of $432,377, of which $310,947 was included in accrued liabilities and will run-off during the balance of the period that severance payments are made. Research and development ("R&D") expenses for the three month period ended March 31, 2011 increased by $58,312, or 46.5 percent, to $183,626 from $125,314 for the three month period ended March 31, 2010. The primary driver of R&D expenses for the first three months of fiscal year 2011 related to ESW's pursuit of the certification / verification of its locomotive and marine product, the Xtrm Cat(TM), including the final EPA certification testing at a recognised testing facility. To offset this increase during the three month period ended March 31, 2011, the Company received grant money amounting to $229,999 compared to $101,526 for the three month period ended March 31, 2010. 5 Officer's compensation and director's fees for the three month period ended March 31, 2011, increased by $13,287, or 6.7 percent, to $211,644 from $198,357 for the three month period ended March 31, 2010. The increase in fees is mainly due to changes in executive management and the board of ESW. Consulting and professional fees for the three month period ended March 31, 2011, decreased by $78,873, or 74.4 percent, to $27,102 from $105,975 for the three month period ended March 31, 2010, the prior year period included legal fees in connection with the Company's Demand Credit Agreement with CIBC, higher consulting fees and audit fees. Foreign exchange loss for the three month period ended March 31, 2011, was $60,126 as compared to a loss of $56,223 for the three month period ended March 31, 2010. This is a result of the fluctuation in the exchange rate of the Canadian Dollar to the United States Dollar. Depreciation and amortization expense for the three month period ended March 31, 2011 decreased by $142,495, or 54.2 percent to $120,350 from $262,845 for the three month period ended March 31, 2010. In the three month period ended March 31, 2011 we applied $34,680 of additional depreciation to cost of sales, there was a reduction of $37,272 from patents being completely amortized and $ 70,543 from assets that have been fully amortized. Loss from operations for the three month period ended March 31, 2011, increased by $1,213,344, or 120.6 percent, to $2,219,754 from $1,006,410 for the three month period ended March 31, 2010. Interest expense on long-term debt related to Convertible Debentures was $0 for the three month period ended March 31, 2011 as compared to $183,858 for the three month period ended March 31, 2010. Amortization of deferred costs amounted to $0 for the three month period ended March 31, 2011 as compared to $117,131 for the three month period ended March 31, 2010. Effective March 25, 2010, the November 2008 and the August 2009 debenture holders agreed to convert all outstanding convertible debentures as per the terms of the respective debenture agreements. The early conversion of the debentures was a condition precedent to the Company's wholly owned subsidiary, ESW Canada, entering into a new credit facility with CIBC. The conversion of the November 2008 and the August 2009 debentures also triggered the mandatory conversion feature on the March 19, 2010, debentures. As part of the agreement to convert all existing convertible debentures the Company has paid a premium as an inducement to convert all debentures. The premium was payable to all converting debenture holders and was subject to a positive fairness opinion, approval by a Fairness Committee consisting of independent directors of the Company's Board of Directors and an increase in the share capital of the Company. The premium consists of 4,375,665 shares of Common Stock. As the Company did not have sufficient authorized shares as of the date of conversion of the debentures to fulfill the premium, the premium had been recorded as an advance share purchase agreement at fair market value $2,909,872 at March 31, 2010 ($0- March 31, 2011), the agreement was without interest, subordinated to the banks position and payable in a fixed number of common shares (4,375,665 shares) of the Company upon increase in the authorized share capital of the Company. In summary, the fair value of the advanced share subscription was dependent on the market price of the Company's common stock, as the Company did not have sufficient available authorized common shares to fulfill this obligation as on March 31, 2010. The advanced share subscription would re-valued based on the market price of the Company's common stock at the end of each reporting period or until it was fulfilled by the issuance of authorized common shares. The resulting revaluations either cause gains or losses on the consolidated condensed statement of operations and comprehensive loss. 6 The Share Subscription Agreement for the 2010 Debentures contains an exchange feature. The exchange feature provides that if within twelve months from March 19, 2010, the Company enters into or closes another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the Securities) on terms and conditions more favorable to another purchaser, the terms and conditions of the 2010 Debentures shall be adjusted to reflect the more favorable terms. On March 31, 2011, the Company re-evaluated the fair value of the exchange feature and determined that the probability of closing another financing was 100% and the conversion price of the 2010 Debentures would be reset. On March 31, 2011, an additional liability of $578,739 was recorded for the exchange feature in these consolidated condensed financial statements with a $578,739 expense related to change in fair value of exchange feature liability recorded in the consolidated statements of operations and comprehensive loss. Change in fair value of exchange feature liability for the three month period ended March 31, 2011, amounted to $578,739 as compared to $0 for the three month period ended March 30, 2010. The Company incurred $34,521 interest cost on notes payable to related party for the $3 million unsecured subordinated promissory notes for the three month period ended March 31, 2011, as compared to $11,342 for the three month period ended March 31, 2010 At March 31, 2011, the Company recorded interest accretion expense of $1,050,000 (March 31, 2010 - $0), financing charge on embedded derivative liability of $485,101 (March 31, 2010 - $0) and a gain on convertible derivative of $1,336,445 (March 31, 2010 - $0) related to the discount feature and the embedded derivative features in the $3 million notes payable to related party. 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, 2011, the Company used $227,567 of cash to sustain operating activities compared with $1,530,685 for the three month period ended March 31, 2010. As of March 31, 2011, and March 31, 2010, the Company had cash and cash equivalents of $956,337 and $949,021, respectively. Net cash used in operating activities for the three month period ended March 31, 2011, amounted to $227,576. This amount was attributable to the net loss of $3,134,632, plus non cash expenses such as depreciation, amortization, interest accretion expense, change in fair value of exchange feature liability and others of $1,182,293, and an increase in net operating assets and liabilities of $1,724,763. Net cash used in operating activities for the three month period ended March 31, 2010 amounted to $1,530,685. This amount was attributable to the net loss of $4,997,559, plus non cash expenses such as depreciation, amortization, interest and accretion on long term debt, inducement premium on conversion of debentures and others of $4,237,365, and a decrease in net operating assets and liabilities of $770,491. Net cash used in investing activities was $15,729 for the three month period ended March 31, 2011, as compared to $100,998 provided by investing activities for the three month period ended March 31, 2010. Net cash provided by financing activities totalled $1,174,725 for the three month period ended March 31, 2011, as compared to $1,775,822 for the three month period ended March 31, 2010. In the current period of 2011, $3,000,000 was provided through the issuance of the 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. In the prior year period of 2010, $3,000,000 was provided through issuance of convertible debentures, $720,510 was repaid under ESW`s bank loan, $500,000 repaid promissory notes to a related party, and $3,668 repaid a capital lease obligation. Based on ESW's current operating plan, management believes that the combination of the March 31, 2011 cash balance, anticipated cash flows from operating activities, and financing from the issuance of debt or equity securities will be sufficient to meet our working capital needs on a short-term basis. Overall, capital adequacy is monitored on an ongoing basis by our management and reviewed quarterly by the Board of Directors. 7 The industry that ESW operates in is capital intensive and there is a timing issue bringing product to market which is considered normal for this industry. ESW continues to invest in research and development to improve its technologies and bring them to the point where its customers have a high confidence level allowing them to place larger orders. During the first quarter of 2011 and 2010, ESW did not produce sufficient cash from operations to support its expenditures. Prior financings, including the increased utilization of ESW's CIBC credit facility, 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. Effective March 31, 2010, ESW's subsidiary, ESW Canada, entered into a demand revolving credit facility agreement with a Canadian chartered bank, CIBC to meet working capital requirements (the "Demand Credit Agreement"). The Demand Credit Agreement has a credit limit of $4 million Canadian. Borrowings under the Demand Credit Agreement are limited to a percentage of accounts receivable plus a percentage of inventories (capped at CAD$ 1 million or 50% of the accounts receivable portion) less any prior ranking claims. ESW anticipates certain capital expenditures in 2011 related to the general operation of its business as well as to upgrade the air testing facilities in Montgomeryville, Pennsylvania. ESW does not expect that total capital expenditures for 2011 will amount to more than $1,400,000. In February 2011, ESW secured $3 million in additional financing through certain note subscription agreements and issued unsecured subordinated promissory notes (collectively, "the Notes"). Proceeds of the Notes, along with available cash, will be used to fund working capital, planned capital investments and other general corporate purposes. As at March 31, 2011, of the prior $3 million in additional financing secured, $1,823,319 was used to repay the Demand Credit Agreement, additionally, ESW reduced its accounts payable through payment plans agreed upon with its vendors. Net cash used in operating activities for the three month period ended March 31, 2011 amounted to $227,576. The Company required additional working capital to secure and deliver the current sales opportunities. On May 3, 2011, the Company secured $1 million in additional financing through certain note subscription agreements and issued unsecured subordinated promissory notes to affiliate shareholders. The Company's board further approved plans for a rights offering of the Company's common stock, at a sale price of $0.12 per share whereby the Company plans to offer rights to existing shareholders on the offering date to purchase and exchange debt, up to $8 million in shares of common stock. This capital will be used to fund working capital, capital expenditure needs and to repay ESW's senior lender CIBC. With the anticipated growth in revenue of the Company, profitability and cash flow should improve to reflect the operating leverage of the Company. Enhanced profitability and cash flow will also result from ESW's initiatives to enhance its commercial policies, streamline its infrastructure and drive its operational efficiencies across the Company. 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 has 700,000 Class A special shares, authorized, issued and outstanding, recorded at $453,900 (based on the historical exchange rate at the time of issuance). The Class A special shares are issued by ESW's wholly-owned subsidiary BBL Technologies, Inc. ("BBL") without par value, and are redeemable on demand by the Holder of the shares which is a private Ontario Corporation at $700,000 Canadian (which translates to $721,980 US and $703,801 US at March 31, 2011 and December 31, 2010, respectively). As the redeemable Class A special shares were issued by the Company's wholly owned subsidiary, BBL, the maximum value upon which the Company is liable is the net book value of BBL. As of March 31, 2011 and December 31, 2010, BBL had an accumulated deficit of $1,192,858 US ($1,845,375 Canadian), and therefore, the holder would be unable to redeem the redeemable Class A special shares at their ascribed value. 8 DEBT STRUCTURE Effective March 19, 2010, the Company issued $3,000,000 of its 9% convertible debentures (the "Debentures") to five (5) accredited investors under Rule 506 of Regulation D. The Debentures were for a term of three (3) years and were convertible into shares of the Company's common stock at the option of the holder by dividing the principal amount of the Debenture to be converted by $0.50. The Debentures earned interest at a rate of 9% per annum payable in cash or in shares of the Company's common stock at the option of the holder. If the Holder elected to receive interest in shares of common stock, the number of shares of common stock to be issued for interest would be determined by dividing accrued interest by $0.50. The Debentures had a mandatory conversion feature that required the holders to convert in the event a majority of the Company's pre-existing outstanding 9% convertible debentures converted. Subject to the holder's right to convert and the mandatory conversion feature, the Company had the right to redeem the Debentures at a price equal to one hundred and ten percent (110%) multiplied by the then outstanding principal amount plus unpaid interest to the date of redemption. Upon maturity, the debenture and interest was payable in cash or common stock at the option of the Holder. The Company also had provided the holders of the Debentures registration rights. The Debentures contained customary price adjustment protections. Effective March 25, 2010, the November 2008 and the August 2009 debenture holders agreed to convert all outstanding convertible debentures as per the terms of the respective debenture agreements. The early conversion of the debentures was a condition precedent to the Company's wholly-owned subsidiary ESW Canada entering into a new credit facility with CIBC. The conversion of the November 2008 and the August 2009 debentures also triggered the mandatory conversion feature on the March 19, 2010 debentures. As part of the agreement to convert all existing convertible debentures the Company has paid a share-based premium as an inducement to convert all debentures. The premium was payable to all converting debenture holders and was subject to a positive fairness opinion, provided by a Fairness Committee consisting of independent directors of the Company's Board of Directors, and an increase in the share capital of the Company. The premium consisted of 4,375,665 shares of Common Stock. As the Company did not have sufficient authorized shares as of the date of conversion of the debentures to fulfill the premium, the premium had been recorded as an advance share purchase agreement at fair market value $2,909,872 at March 31, 2010 ($0 at March 31, 2011), the agreement was without interest, subordinated to the banks position and payable in a fixed number of common shares (4,375,665 shares) of the Company upon a subsequent increase in the authorized share capital of the Company. In summary, the fair value of the advanced share subscription was dependent on the market price of the Company's common stock, as the Company did not have sufficient available authorized common shares to fulfill this obligation as on March 31, 2010, it was treated as a liability. The advanced share subscription was re-valued based on the market price of the Company's common stock at the end of each reporting period until it was fulfilled by the issuance of authorized common shares. Gains and losses from the resulting revaluations were recognized on the consolidated condensed statement of operations and comprehensive loss. The Share Subscription Agreement for the 2010 Debentures contains an exchange feature. The exchange feature provides that if within twelve months from March 19, 2010, the Company enters into or closes another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the Securities) on terms and conditions more favorable to another purchaser, the terms and conditions of the 2010 Debentures shall be adjusted to reflect the more favorable terms. On March 31, 2011, the Company re-evaluated the fair value of the exchange feature and determined that the probability of closing another financing was 100% and the conversion price of the 2010 Debentures would be reset. On March 31, 2011 an additional liability of $578,739 was recorded for the exchange feature in these consolidated condensed financial statements with a $578,739 expense related to change in fair value of exchange feature liability recorded in the consolidated statements of operations and comprehensive loss. Effective March 31, 2010 ESW's subsidiary, ESW Canada Inc., entered into the Demand Credit Agreement. The Demand Credit Agreement has a credit limit of CAD $4 million. Borrowings under the facility are limited to a percentage of accounts receivable plus a percentage of inventories (capped at CAD $1 million or 50% of the accounts receivable portion) less any prior ranking claims. The Demand Credit Agreement is guaranteed by the Company and its subsidiaries ESW Canada Inc., ESW America Inc., BBL Technologies Inc., and ESW Technologies Inc., through a general security agreement over all assets to its senior lender. The Demand Credit Agreement has been guaranteed to the bank under the EDC's Export Guarantee Program. Borrowings under the Demand Credit Agreement bear interest at 4.5% above the bank's prime rate of interest. Obligations under the Demand Credit Agreement are collateralized by a first-priority lien on the assets of the Company and its subsidiaries, including, accounts receivable, inventory, equipment and other tangible and intangible property, including the capital stock of all direct subsidiaries. 9 The terms relating to the Demand Credit Agreement specifically note that the Company maintain a tangible net worth of at least $4.0 million. The Demand Credit Agreement contains, among other things, covenants, representations and warranties and events of default customary for a facility of this type for the Company and its subsidiaries. Such covenants include certain restrictions on the incurrence of additional indebtedness, liens, acquisitions and other investments, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other repurchases in respect of capital stock, voluntary prepayments of certain other indebtedness, capital expenditures and transactions with affiliates, subject to certain exceptions. Under certain conditions amounts outstanding under the credit agreements may be accelerated. Such events include failure to comply with covenants, breach of representations or warranties in any material respect, non-payment or acceleration of other material debt, entry of material judgments not covered by insurance, or a change of control of the Company. ESW is working on upgrading or renewing the Demand Credit Agreement and reviewing options with other senior lenders. The Company has obtained an extension to the Demand Credit Agreement to May 31, 2011 from its current senior lender and is working to extend this date. From November 8, 2010 through February 14, 2011, the Company's wholly owned subsidiary, ESW Canada Inc., received waivers of certain financial covenants under the Demand Credit Agreement. Without the waivers, the Company's subsidiary would not be in compliance with certain covenants in the Demand Credit Agreement. On February 17, 2011, the Company raised a $3 million through the issuance of unsecured subordinated promissory notes. With the proceeds of the Notes, the Company and its subsidiaries are in compliance with covenant obligations under the Demand Credit Agreement with CIBC. As of March 31, 2011, $1,636,444 was owed under the Demand Credit Agreement compared to $0 as of March 31, 2010. On February 17, 2011, the Company entered into note subscription agreements (collectively, the "Loan Agreements") with, and issued unsecured subordinated promissory notes to, nine lenders, who are current shareholders and deemed affiliates of certain members of the board of directors of the Company ("the Subordinated Lenders"). The Loan Agreements were approved by the independent directors of the Company. As per the Loan Agreements, the Subordinated Lenders made loans to the Company in the principal aggregate amount of $3 million, represented by unsecured subordinated promissory notes (the "Notes"), dated February 17, 2011. Proceeds of the Loan, along with available cash, will be used to fund working capital, planned capital investments and other general corporate purposes. The Notes bear interest at a rate of 10% per annum, payable in-kind on a monthly basis commencing March 17, 2011, up to the date on which the Note has been paid in full. The maturity date of the Loan is the earlier of: (i) the closing of a rights offering of the Company's common stock, par value $.001 per share, at a sale price of $0.12 per share ( adjusted for any stock split, stock dividend or other similar adjustment) pursuant to which the Company plans to offer rights to purchase approximately up to $8 million in shares of Common Stock the ("Qualified Offering"), and will also permit all Subordinated Lenders to exchange their Notes, accrued interest (and the any Notes that may be issued for payment of interest) for shares of Common Stock at $0.12 per share or (ii) June 17, 2011 (the "Outside Date"). The Qualified Offering has also been approved by the independent directors of the Company. As of March 31, 2011, $3,000,000 of principle and $34,521 of interest was owed under the notes to $0 of principle and $0 of interest as of March 31, 2010. ESW is dependent upon the closing of a Qualified Offering and the transactions contemplated by the Investment Agreement to meet its debt service obligations under the Demand Credit Agreement and the Bridge Loans. ESW's ability to service its 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 believes that, based upon its current business plan and anticipated capital raise through a Qualified Offering and the transactions contemplated by the Investment Agreement it will be able to meet its debt service obligations when due. ESW may need additional financing after the completion of a Qualified Offering 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 indebtedness and to meet other obligations and commitments, ESW might be required to refinance or to dispose off assets to obtain funds for such purpose. There is no assurance that refinancing or asset dispositions or raising funds from sales of equity or otherwise could be effected on a timely basis or on satisfactory terms. 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. 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. The lease commenced on January 15, 2005 and expired January 31, 2010. Effective October 16, 2009, the Company's wholly-owned subsidiary ESW America, Inc. entered into a lease renewal agreement with Nappen & Associates for the leasehold property at Pennsylvania. There were no modifications to the original economic terms of the lease under the lease renewal agreement. Under the terms of the lease renewal, the lease term will now expire February 28, 2013. Effective March 31, 2011, ESW America, Inc. entered into a lease amendment agreement with Nappen & Associates for the leasehold property at Pennsylvania, whereby ESWA has the sole option to extend the expiry of the lease agreement by an additional 3 years six months prior to February 28, 2013; there were no modifications to the original economic terms of the lease. 10 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 a high volume manufacturing plant. The possession of the leasehold space took place on May 24, 2005 and the term of the lease was extended to September 30, 2010. ESWC renewed its lease agreement at the current property for an additional five year term. The renewed lease period commenced on October 1, 2010 and ends on September 30, 2015. The following is a summary of the minimum annual lease payments, for both leases. YEAR 2011 $351,021 2012 468,029 2013 319,813 2014 297,476 2015 223,107 ---------- $1,659,446 ========== LEGAL MATTERS From time to time, the Company may be involved in a variety of claims, suits, investigations and proceedings arising from the ordinary course of our business, breach of contract claims, labor and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, ESW believes that the resolution of current pending matters will not have a 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 The Company is committed to the following lease payments in connection with the acquisition of equipment under capital leases: YEAR 2011 $ 2,124 2012 1,180 ------- TOTAL 3,304 Less imputed interest (179) ------- Total obligation under capital lease 3,125 Less current portion ( 1,806) ------- TOTAL LONG-TERM PORTION $ 1,319 ======= The Company incurred $80 and $515 of interest expense on capital lease obligation for the periods ended March 31, 2011 and 2010, respectively. RESTRUCTURING EXPENSES AND SEVERANCE AGREEMENTS The Company accrued expenses related to severance agreements with a former Chief Executive Officer, Vice President of Operations and Director of Sales. As of March 31, 2011, $310,947 was included in accrued liabilities towards the balance of severance payments owing. 11 NEW ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In January 2010, the FASB issued Accounting Standards Update ("ASU" or "Update") No. 2010-06, Improving Disclosures about Fair Value Measurements ("ASU 2010-06"). ASU 2010-06 improves disclosures originally required under SFAS No. 157. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2009, and for interim periods within those years. The adoption of the guidance did not have a material effect on the Company's consolidated condensed financial position, results of operations, cash flows or related disclosures. In December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets ("ASU 2009-16"). ASU 2009-16 amends the accounting for transfers of financials assets and will require more information about transfers of financial assets, including securitizations, and where entities have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 is effective at the start of a reporting entity's first fiscal year beginning after November 15, 2009, with early adoption not permitted. The adoption of the guidance did not have a material effect on the Company's consolidated condensed financial position, results of operations, cash flows or related disclosures. In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing ("ASU 2009-15"). ASU 2009-15 amends the accounting and reporting guidance for debt (and certain preferred stock) with specific conversion features or other options. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009. The adoption of the guidance did not have a material effect on the Company's consolidated condensed financial position, results of operations, cash flows or related disclosures. In August 2010, the FASB issued ASU No. 2010-22, Accounting for Various Topics - Technical Corrections to SEC Paragraphs this update amends various SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements. In August 2010, the FASB issued ASU No. 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This updates various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements. In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition - Milestone Method. The objective of this Update is to provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements. In April 2010, the FASB issued ASU No. 2010-013, Compensation - Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades a consensus of the FASB Emerging Issues Task Force. ASU 2010-13 addresses the classification of an employee share-based award with an exercise price denominated in the currency of a market in which the underlying equity security trades. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements. 12 In October 2009, the FASB issued ASU No. 2009-13, Multiple Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force ("ASU 2009-13") (codified within ASC Topic 605). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES ESW's significant accounting policies are summarized in Note 2 to the Consolidated Condensed Financial Statements included its quarterly reports and its 2010 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 results of operations and the financial position of ESW's operations in Canada is principally measured in Canadian currency and translated into U.S. dollars. The future effects of foreign currency fluctuations between U.S. dollars and Canadian dollars will be somewhat mitigated by the fact that certain expenses will be generally incurred in the same currency in which revenues will be generated. The future reported income of ESW's Canadian subsidiary would be higher or lower depending on a weakening or strengthening of the U.S. dollar against the Canadian currency. During the first quarter of 2011, the Company experienced a net loss on foreign exchange due the fluctuation of the U.S. dollar against the Canadian dollar. A portion of ESW's assets are based in its foreign operation and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each period, Accordingly, ESW's consolidated investment will fluctuate depending upon the weakening or strengthening of the Canadian currency against the U.S. dollar. Adjustments resulting from ESW's foreign Subsidiaries' financial statements are included as a component of other comprehensive income within stockholders equity / (deficit) because the functional currency of subsidiaries is not the U.S. dollar. 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ESW is exposed to financial market risks, including changes in currency exchange rates and interest rates. The Company also has foreign currency exposures at its foreign operations related to buying and selling currencies other than the local currencies. The risk under these interest rate and foreign currency exchange agreement is not considered to be significant. FOREIGN EXCHANGE RISK ESW's foreign subsidiaries conduct their businesses in local currency predominantly the Canadian Dollar. ESW's exposure to foreign currency transaction gains and losses is the result of certain net receivables due from its foreign subsidiaries. ESW's exposure to foreign currency translation gains and losses also arises from the translation of the assets and liabilities of its subsidiaries to U.S. dollars during consolidation. ESW recognized a translation gain of $72,264 for the three month period ended March 31, 2011 as compared to a gain of $103,865 for the three month period ended March 31, 2010 reported as comprehensive loss in the Consolidated Condensed Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Income, ESW recognized a translation loss of $60,126 for the three month period ended March 31, 2011 as compared to a loss of $56,223 for the three month period ended March 31, 2010 reported as Foreign exchange loss in the Consolidated Condensed Statements Of Operations And Comprehensive Loss primarily as a result of exchange rate differences between the U.S. dollar and the Canadian Dollar. ESW's strategy for management of currency risk relies primarily upon conducting its operations in the countries' respective currency and ESW may, from time to time, engage in hedging intended to reduce its exposure to currency fluctuations. At March 31, 2011, ESW had no outstanding forward exchange contracts. INTEREST RATE RISK ESW invests in highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase. These investments are fixed rate investments. Investments in fixed rate interest earning products carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. However due to the limited amount of investment in such securities and their terms restricted to three months or less, ESW does not expect the impact on these investments to be material. At March 31, 2011 and December 31, 2010, ESW had no investments. The interest payable on one of ESW`s subsidiaries bank loan is based on variable interest rates and therefore affected by changes in market interest rates. The Canadian prime business interest rates have increased over the last year. The average interest rate the Company is paying is 6.5% due to a recent increase in interest rate by its senior lender. Increasing interest rates have negatively impacted interest expense. Due to the short term nature of these loans the impact of changing interest rates is not considered significant at this time. ESW currently has no variable-rate long-term debt that exposes ESW to interest rate risk. Generally, the fair market value of ESW`s fixed-rate subordinate unsecured promissory notes will increase as interest rates fall and decrease as interest rates rise. At March 31, 2011, ESW had $3 million of subordinate unsecured promissory. At December 31, 2010, ESW had $0 of subordinate unsecured promissory notes. 14 ITEM 4. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURE EVALUATION OF THE COMPANY'S DISCLOSURE AND INTERNAL CONTROLS The Company evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" as of the end of the period covered by this report. This evaluation was done with the participation of management, under the supervision of the Executive Chairman ("EC") and Chief Financial Officer ("CFO"). LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls. CONCLUSIONS Based on our evaluation, the EC and CFO concluded that the registrant's disclosures, controls and procedures are effective to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Security Exchange Commission rules and forms. (c) CHANGES IN INTERNAL CONTROLS Not applicable. 15 PART II OTHER INFORMATION ITEM 1A. RISK FACTORS. In evaluating an investment in our common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1 of our Annual Report to the Securities and Exchange Commission for the year ended December 31, 2010, as well as the information contained in this Quarterly Report and our other reports and registration statements filed with the Securities and Exchange Commission. The following risk factors are intended to update and supplement, as applicable, the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2010, to reflect material developments that occurred during the quarter ended March 31, 2011: IF A QUALIFIED OFFERING AND THE TRANSACTIONS CONTEMPLATED BY THE INVESTMENT AGREEMENT ARE NOT CONSUMMATED OR WE ARE NOT ABLE TO OBTAIN ALTERNATIVE FINANCING, WE MAY NOT HAVE AN IMMEDIATE SOURCE OF FUNDS TO MEET OUR WORKING CAPITAL REQUIREMENTS AND TO SATISFY OUR REPAYMENT OBLIGATIONS UNDER THE BRIDGE LOANS AND THE DEMAND CREDIT AGREEMENT. We have limited funds and are dependent upon the consummation of a Qualified Offering and the transactions contemplated by the Investment Agreement to fund our working capital needs. If we fail to consummate a Qualified Offering or the transactions contemplated by the Investment Agreement, we may not be able to execute our current business plan and fund business operations long enough to achieve profitability. Our ultimate success is therefore dependent upon our ability to raise additional capital through a Qualified Offering and the transactions contemplated by the Investment Agreement. Moreover, we are dependent upon the consummation of the Qualified Offering and the transactions contemplated by the Investment Agreement to fulfill our obligations under the Bridge Loans and the Demand Credit Agreement. We have incurred an aggregate of $4.1 million of indebtedness, including estimated accrued interest, under the Bridge Loans, and as of May 16, 2011, we have outstanding indebtedness under the Demand Credit Agreement of $1.3 million. The Bridge Loans mature on the earlier of the consummation of a Qualified Offering and June 17, 2011. The Demand Credit Agreement matures on May 31, 2011, and we are currently working on renewing the facility with our lender and are reviewing options with other lenders. In the absence of deleveraging our balance sheet and restructuring our capital structure (whether as a result of this rights offering and the Investment Agreement or otherwise), we may not have sufficient liquidity to satisfy our obligations under the Demand Credit Agreement and the Bridge Loans and to continue our current operations. In this event, we could face a default and acceleration of our debt and other obligations. There can be no assurance that the Qualified Offering or the transactions contemplated by the Investment Agreement will be consummated. If we fail to consummate the Qualified Offering and the transactions contemplated by the Investment Agreement, we will be forced to seek alternative sources of capital to support our business operations. Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuance of incentive awards under equity employee incentive plans, which may have additional dilutive effects to existing stockholders. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition and results of operations. Our ability to obtain needed financing may be impaired by such factors as the condition of the economy and capital markets, both generally and specifically in our industry, and the fact that we are not profitable, which could impact the availability or cost of future financings. 16 If the amount of capital we are able to raise from financing activities, together with our revenues and cash flows from operations, is not sufficient to satisfy our capital needs, we may be required to cease operations. OUR AUDITOR HAS EXPRESSED SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN. Based on our experience of negative cash flows from operations and our dependency upon future financing, our auditor has expressed substantial doubt as to our ability to continue as a going concern. We have sustained recurring operating losses. As of December 31, 2010, we had an accumulated deficit of $44.0 million and cash and cash equivalents of $0.1 million and were in violation of certain financial covenants under the Demand Credit Agreement for which a waiver was obtained. As of March 31, 2011, we had an accumulated of $47 million and cash and cash equivalents of $1.0 million. There can be no assurance that we will be successful in achieving sufficient cash flow from operations in the near future and there can be no assurance that we will either achieve or maintain profitability in the future. As a result, there is substantial doubt regarding our ability to continue as a going concern. We will require additional financing to fund our continuing operations. We have sought additional funds through the Bridge Loans, a Qualified Offering and the Investment Agreement. Our ability to continue as a going concern is dependent on obtaining additional financing through the Qualified Offering and the transactions contemplated by the Investment Agreement and achieving and maintaining a profitable level of operations. The outcome of these matters cannot be predicted at this time, and we can provide no assurance that we will be able to raise additional funds. Even if we are able to raise additional cash or obtain financing through the public or private sale of debt or equity securities, funding from joint-venture or strategic partners, debt financing or short-term loans, the terms of such transactions may be unduly expensive or burdensome to us or disadvantageous to our existing stockholders. WE MAY NEED ADDITIONAL FINANCING AFTER COMPLETION OF THE CONTEMPLATED QUALIFIED OFFERING, WHICH MAY BE UNAVAILABLE OR COSTLY. Even if we are successful in consummating the contemplated Qualified Offering and the transactions contemplated by the Investment Agreement, our ability to meet our financial projections and obligations will then depend on our ability to achieve our operating plan. We may be unable to implement certain elements of our operating plan following completion of the Qualified Offering due to continuing pressures on our operating cash flow. Our ability to achieve and sustain operating profitability will depend on many factors, including actions taken by regulatory bodies relating to the verification and certification of our products, the extent to which our products obtain market acceptance, the timing and size of customer purchases, and customers and distributors concerns about the stability of our business which could cause them to seek alternatives to our products. Our sales are unpredictable in light of the highly competitive environment that is focused on federal and state-level public budgets. If we receive a large order (defined by management as one in which monthly production and deliveries would exceed $2 million), we would need to either, negotiate extremely favorable payment terms providing for at least some advance payment or we will need to obtain either debt or equity financing to allow us to meet our working capital needs. In addition, our business, our future performance and our liquidity will be affected by general industry and market conditions and growth rates and general economic and political conditions, including the global economy and other future events. Consequently, we may have to raise additional funds, which may be costly, to operate our business and provide other needed capital, and we may be unable to do so on favorable terms or at all. Our actual funding requirements could vary materially from our current estimates. We base our financial projections on assumptions that we believe are reasonable but which contain significant uncertainties that could affect our business, our future performance and our liquidity. If we are unable to access the capital and commercial bank credit markets, obtain additional equity capital, sell assets or otherwise raise additional financing in a timely manner, our financial condition and ability to operate our business will be significantly affected and one possible outcome may be bankruptcy or insolvency. 17 In addition, our senior management has spent, and will continue to spend, significant time managing these liquidity and other planning issues, which diverts management's attention from operational and other business concerns and could negatively affect our results of operations. IN THE PAST, WE HAVE FAILED TO MEET CERTAIN COVENANTS INCLUDED IN THE DEMAND CREDIT AGREEMENT. IF WE ARE UNABLE TO RAISE SUFFICIENT FUNDS THROUGH THE CONTEMPLATED QUALIFIED OFFERING, RESTRUCTURE THE DEMAND CREDIT AGREEMENT OR FIND ALTERNATIVE FINANCING, WE WOULD ENCOUNTER DIFFICULTIES IN FUNDING OUR OPERATIONS, WHICH WOULD HAVE A MATERIAL ADVERSE AFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We have relied upon the Demand Credit Agreement to meet a portion of our working capital requirements. As of May 16, 2011, we had $1.3 million of outstanding indebtedness under the Demand Credit Facility. Borrowings under the facility are limited to a percentage of accounts receivable plus a percentage of inventories (capped at $ 1 million or 50% of the accounts receivable portion) less any prior ranking claims. The Demand Credit Agreement contains covenants regarding our maintenance of an adjusted net worth of $4.0 million and an adjusted current ratio of at least 1.25 to 1. From November 8, 2010 through December 31, 2010, we received waivers of certain financial covenants under the Demand Credit Agreement. Without the waivers, we would not have been in compliance with the covenants. We are dependent upon the Qualified Offering or alternative equity financing to comply with the terms of the Demand Credit Agreement. The credit facility expires on May 31, 2011, and we are currently working on renewing the facility with our lender and are reviewing options with other lenders. We cannot assure you that we ultimately reach an agreement with a bank or that such agreement will be on favorable terms to us. Our ability to restructure or refinance the Demand Credit Agreement depends on the condition of the capital markets and our financial condition. Any refinancing of the Demand Credit Agreement could be at higher interest rates and may require us to comply with different covenants, which could restrict our business operations. If we are unsuccessful in restructuring the Demand Credit Agreement or in finding a suitable alternative, the lender could accelerate all of our outstanding debt and we would encounter difficulties in funding our operations. As a result, we could be required to dispose of material assets or operations or raise alternative funding through the issuance of debt or equity securities. There is no assurance that we would be able to consummate such dispositions or that we will be able to raise additional cash or obtain financing through the public or private sale of debt or equity securities in terms that are favorable to us or advantageous to our existing shareholders. If we fail to restructure or otherwise repay our debt, or if we are required to use a significant portion or all of our cash and current assets to repay our debt, our business, financial condition and results of operations would be materially adversely affected. THERE CAN BE NO GUARANTEE THAT THE TRANSACTIONS CONTEMPLATED BY THE INVESTMENT AGREEMENT WILL BE CONSUMMATED. The Backstop Commitment is subject to certain conditions. If those conditions are not met, the Bridge Lenders will not be obligated to purchase any shares of our common stock through the Backstop Commitment. Consequently, there can be no guarantee that the transactions contemplated by the Investment Agreement will be consummated and that 66,666,667 shares will be issued in connection with the Qualified Offering. WE MAY ISSUE MORE SHARES WHICH WOULD RESULT IN SUBSTANTIAL DILUTION. Our certificate of incorporation authorizes the issuance of a maximum of 250,000,000 shares of common stock. As of May 16, 2011, we have 129,463,767 issued and outstanding shares of common stock. In the future, we may engage in equity financings which may result in the issuance of additional securities without stockholder approval and may result in substantial dilution in the percentage of our common stock held by our then existing stockholders. Moreover, the common stock issued in any such financing may be valued on an arbitrary or non-arm's-length basis by our management, resulting in an additional reduction in the percentage of common stock held by our then existing stockholders. Our board of directors have the power to issue any or all of such authorized but unissued shares without stockholder approval. To the extent that additional shares of common stock are issued in connection with an equity financing, dilution to the interests of our stockholders will occur and the rights of the holders of common stock might be materially adversely affected. In addition, we may issue additional shares of common stock pursuant to our equity incentive plan, pursuant to which we have reserved up to 5,000,000 shares of common stock for issuance. The issuance of shares under our plan will result in a dilution to our shareholders. 18 We do not expect to pay dividends on our common stock and investors will only be able to receive cash in respect of their shares of common stock upon the sale of their shares. We have never paid any cash dividends on our common stock, and we have no intention in the foreseeable future to pay any cash dividends on our common stock. Therefore, an investor in our common stock will obtain an economic benefit from the common stock only after an increase in its trading price and only by selling the common stock. OUR STOCKHOLDERS HAVE APPROVED A REVERSE STOCK SPLIT AND A REVERSE STOCK SPLIT COULD HAVE CERTAIN ADVERSE EFFECTS. In September 2010, our stockholders approved an amendment of our articles of incorporation at the discretion of the board of directors to effect a combination of our shares of common stock, or reverse stock split, at a ratio of up to eight shares of common stock converted into one share of common stock with the par value remaining the same. The authorization to permit our board of directors the discretion to effectuate a reverse split will be limited to certain instances where our board of directors in its best judgment determines that a reverse split will be beneficial to us and our shareholders for business opportunities in the future or for potential listings on a new exchange that is intended to provide greater liquidity in shares of our common stock. In the proposed share combination, the par value of our common stock and the amount of authorized stock will not change. All the fractional shares resulting from a combination would be rounded up to the nearest whole share. A reverse stock split could have certain adverse consequences, including: o If the reverse stock split is effected and the market price of our common stock declines, the percentage decline may be greater than would occur in the absence of a reverse stock split. o There can be no assurance that the total market capitalization of our common stock (the aggregate value of all our common stock at the then market price) after a reverse stock split is implemented will be equal to or greater than the total market capitalization before a reverse stock split or that the per share market price of our common stock following the implementation of a reverse stock split will increase in proportion to the reduction in the number of shares of our common stock outstanding before a reverse stock split. o If the reverse stock split is effected, the resulting per-share stock price may not attract institutional investors or investment funds and may not satisfy the investing guidelines of such investors and, consequently, the trading liquidity of our common stock may not be improved. While the Board of Directors may believe that a higher stock price may help generate investor interest, there can be no assurance that the implementation of a reverse stock split will result in a per-share price that will attract institutional investors or investment funds or that such share price will satisfy the investing guidelines of institutional investors or investment funds. As a result, the trading liquidity of our common stock may not necessarily improve. o Since the number of issued and outstanding shares of common stock would decrease as result of the reverse stock split, the number of authorized but unissued shares of common stock may increase on a relative basis. If we issue additional shares of common stock, the ownership interest of our current stockholders would be diluted, possibly substantially. o The proportion of unissued authorized shares to issued shares could, under certain circumstances, have an anti-takeover effect. For example, the issuance of a large block of common stock could dilute the stock ownership of a person seeking to effect a change in the composition of the board of directors or contemplating a tender offer or other transaction for the combination of the company with another company. o The reverse stock split may result in some stockholders owning "odd lots" of less than 100 shares of common stock. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in "round lots" of even multiples of 100 shares. 19 ITEM 5. OTHER INFORMATION CONTRACTS AND AGREEMENTS On April 19, 2011, the Company's board of directors ratified a Services Agreement ("Agreement") between the Company and Orchard Capital Corporation ("Orchard") which was approved by the Company's Compensation Committee. Under the Agreement, which will be effective as of January 30, 2011, Orchard will provide services that may be mutually agreed to by and between Orchard and the Company including those duties customarily performed by the Chairman of the Board and executive of the Company as well as providing advice and consultation on general corporate matters and other projects as may be assigned by the Company's Board of Directors as needed. Orchard has agreed to appoint Mark Yung, who is also employed by Orchard, as the Company's Executive Chairman to act on Orchard's behalf and provide the services to the Company under the Agreement. Orchard reserves the right to replace Mr. Yung as the provider of services under the Agreement at its sole option. The Agreement may be terminated by either party upon thirty (30) days written notice unless otherwise provided for under the Agreement. Compensation under the agreement is the sum of $300,000 per annum plus reimbursement for out-of-pocket expenses incurred by Orchard. The agreement includes other standard terms including indemnification and limitation liability provisions. Orchard is controlled by Richard Ressler; affiliated entities of Orchard as well as Richard Ressler own shares of the Company. COMPENSATION On April 19, 2011, the Company's board of directors ratified a modification of the board compensation structure as approved by the Company's Compensation Committee. As a part of the modified compensation policy the board of directors ratified and approved a reduction and change in the composition in the fees paid to the chairpersons of the various board committees and other board members, as well as an amendment to the Company's 2010 Stock Incentive Plan (the "Plan") so as to permit the issuance of restricted shares of the Company's Common Stock to directors in addition to executive officers and employees as previously provided for under the Plan. The amendment to the Plan permits for board fees to be paid in the form of the Company's restricted common stock for all non-executive board members, with a cash component for the chairpersons of the various board committees. Previously, the board fee policy consisted of cash and options for all board members. Previously, the board fee policy consisted of cash of $2,500 per month and an additional $1,000 per month for audit committee chairperson and additional $2,000 per month for Chairman of the board in addition to certain options. The revised board compensation structure is as follows: o Chairperson for the Company's Audit and Compensation Committees each receive cash compensation of two thousand five hundred ($2,500) dollars per month effective April 1, 2011 as well as 200,000 shares of the Company's restricted common stock annually (prorated for the current fiscal year so that said amount would be 150,000 shares) under the Company's 2010 Incentive Stock Option Plan (the "Plan"). o For outside directors who do not serve as a Chairperson of the Company's Audit or Compensation Committee, there would be no cash compensation for previously accrued Board fees through March 31, 2011, said fees would be converted into shares of the Company's restricted common stock issued under the Plan in addition, the outside directors not serving as Chairpersons of either the Audit or Compensation Committees would receive the Company's restricted common stock in the amount of 200,000 shares annually (prorated for the current fiscal year so that said amount would be 150,000 shares) under the Plan. o For inside Board members and the Company's current Executive Chairman, there would be no cash compensation for previously accrued Board fees through February 28, 2011, said fees would be converted into shares of the Company's restricted common stock issued under the Plan if permitted under the Plan, 20 UNSECURED SUBORDINATED PROMISSORY NOTES On May 3, 2011, the Company entered into certain note subscription agreements and issued unsecured subordinated promissory notes ( collectively the "Loan Agreements") with Orchard Investments, LLC ("Orchard"); Black Family 1997 Trust; Leon D. Black, UAD 11/30/92 FBO Alexander Black; Leon D. Black, UAD 11/30/92 FBO Benjamin Black; Leon D. Black, UAD 11/30/92 FBO Joshua Black; Leon D. Black, UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan and Richard Ressler ("Ressler")(each individually a "Subordinated Lender" or "Holder" and collectively the "Subordinated Lenders" or "Holders") who are current shareholders and subordinated lenders under prior loan agreements in the aggregate amount of $3 million with the Company entered into February 17, 2011 and may be deemed affiliates of the Company. The Loan Agreements were approved by the Company's independent directors. Pursuant to the Loan Agreements, the Subordinated Lenders agreed to make, and made, loans to the Company in the principal aggregate amount of $1 million (the "Loan"), subject to the terms and conditions set forth in the Loan Agreements and represented by unsecured subordinated convertible promissory notes (the "Notes"), effective as of April 27, 2011. Proceeds of the Loan, along with available cash, will be used by the Company to fund working capital. The Loan bears interest at a rate of 10% per annum, payable in-kind on a monthly basis commencing May 27, 2011, up to the date on which the Notes have been paid in full. The maturity date of the Loan is the earlier of: (i) the consummation of a rights offering of the Company's Common Stock, par value $.001 (the "Common Stock") registered under the Securities Act of 1933, as Amended (the "Act"), at a sale price of $0.12 per share (as adjusted for any stock split, stock dividend or other similar adjustment) pursuant to a rights offering targeted at $8 million by the Company that raises at least an incremental $2.5 million of cash for the Company and also permits all Subordinated Lenders to exchange their Notes (and the other notes paid in-kind for the payment of interest under the Notes) for shares of Common Stock at such price (with such offering referred to as the "Qualified Offering") or (ii) June 14, 2011 (the "Outside Date"). The Qualified Offering has also been approved by the independent directors of the Company. There can be no assurance, however, that the Company will successfully complete the Qualified Offering on or prior to the Outside Date or thereafter. In the event the Qualified Offering does not take place on or before the Outside Date, then the Subordinated Lenders at their sole option, may require the Company to refrain from making any and all payments on any of the outstanding principal and accrued interest outstanding under the Notes, however the Company will not be prohibited from paying any accrued interest in-kind through the issuance of substantially similar Notes, at any time. The Holders of the Note at their sole option may extend the Outside Date. In the event the Qualified Offering closes on or prior to the Outside Date and for any reason Ressler or Orchard as Holders collectively shall have failed to have invested at least $1 million in the Qualified Offering or pursuant to the Investment Agreement, and Ressler or Orchard wish to invest the balance of such $1 million aggregate amount to purchase Common Stock at a price of $0.12 per share (as adjusted for any stock split, stock dividend or other similar adjustment), then the Company will be required to offer Ressler or Orchard the immediate right to invest the balance of such investment amount to purchase additional shares of Common Stock at such price, so that in the aggregate, Ressler and Orchard shall have collectively invested such $1 million amount. Concurrent with entering into the Loan Agreements and issuance of the Notes, the commercial lender of the Company and its subsidiaries; the Company and its subsidiaries; and the Subordinated Lenders entered into an Amendment to the Postponement and Subordination Agreement (the "Subordination Agreement") whereby the Subordinated Lenders agreed that the Notes as issued, in addition to the notes issued on February 17, 2011 by the Company to the Subordinated Lenders, would be subordinate to the obligations of the Company and its subsidiaries under the Credit Agreement with the Company's commercial lender. 21 INVESTMENT AGREEMENT Effective May 10, 2011, the Company entered into an Investment Agreement (the "Investment Agreement") with Orchard Investments, LLC ("Orchard"); Black Family 1997 Trust; Leon D. Black, UAD 11/30/92 FBO Alexander Black; Leon D. Black, UAD 11/30/92 FBO Benjamin Black; Leon D. Black, UAD 11/30/92 FBO Joshua Black; Leon D. Black, UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan and Richard Ressler ("Ressler") (each individually a "Bridge Lender" and collectively the "Bridge Lenders"), who are current shareholders and subordinated lenders under unsecured promissory notes in the aggregate amount of $4.0 million with the Company effective February 17, 2011 and April 27, 2011 (the "Notes"). Pursuant to the Investment Agreement, the Bridge Lenders have agreed to provide a backstop commitment to the Qualified Offering and have agreed to collectively backstop the Qualified Offering by purchasing from the Company at a subscription price of $0.12 per share of Common Stock any shares not purchased by the Company's shareholders of record who are entitled to participate in the rights offering (after giving effect to any oversubscriptions) up to 29,166,667 shares of Common Stock for a total purchase price of $3.5 million (the "Backstop Commitment"). In addition to their rights to purchase shares pursuant to the Qualified Offering and the Backstop Commitment, the Bridge Lenders have the option, in their sole discretion, to purchase from the Company, at the subscription price, any other shares not purchased by the Company's stockholders through the Qualified Offering (the "Purchase Option"). If, after giving effect to the Qualified Offering, the Backstop Commitment and the Purchase Option, any of the Bridge Lenders shall have been unable to exchange any portion of his or its Notes, the Company will also offer each Bridge Lender the right to purchase additional shares of Common Stock at the subscription price (payable through the exchange of Bridge Loans for Common Stock) such that each Bridge Lender shall have exchanged all of his or its notes for shares of Common Stock (the "Additional Subscription Offer"). In addition, if Ressler and Orchard collectively acquire less than $1.0 million worth of shares of Common Stock as part of the Qualified Offering, the Backstop Commitment, the Purchase Option and the Additional Subscription Offer, the Company has agreed to offer to Ressler and Orchard an additional number of shares of Common Stock equal to the shortfall amount at the subscription price. The transactions with the Bridge Lenders under the Investment Agreement are being made in reliance on an exemption from the registration requirements of the Act, and any shares issued pursuant to the Investment Agreement will not be covered by a registration statement filed pursuant to the Act. The closing of the Investment Agreement is subject to satisfaction or waiver of customary conditions, including compliance with covenants and the accuracy of representations and warranties provided in the Investment Agreement, consummation of the Qualified Offering and the receipt of all requisite approvals and authorizations under applicable law. In addition, a condition to the closing the Investment Agreement provides that the Company will enter into a registration rights agreement with the Bridge Lenders to provide certain customary registration rights, which include demand and "piggyback" registration rights under the Act with respect to the shares of Common Stock purchased under the Investment Agreement and any other securities owned by the Bridge Lenders. The Investment Agreement may be terminated at any time prior to the closing of the Backstop Commitment and the Additional Subscription Rights, if any: (1) by mutual written agreement of the Bridge Lenders and the Company; (2) by either party, in the event the rights offering does not close; and (3) by either party, if any governmental entity shall have taken action prohibiting any of the contemplated transactions. The Company has agreed to indemnify the Bridge Lenders and their affiliates and each of their respective officers, directors, partners, employees, agents and representatives for losses arising out of (1) the Company's breach of any representation or warranty set forth in the Investment Agreement, (2) the Qualified Offering, or (3) claims, suits or proceedings challenging the authorization, execution, delivery, performance or termination of the Qualified Offering, the Investment Agreement, or any of the transactions contemplated thereby (other than any such losses attributable to the acts, errors or omissions on the part of the Bridge Lenders in violation of the Investment agreement). 22 ITEM 6. EXHIBITS EXHIBITS: 10.1 Form of Services Agreement by and between the Company and Orchard Capital Corporation dated as of January 30, 2011. 10.2 Environmental Solutions Worldwide amended 2010 stock incentive plan as of April 19, 2011. 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. 23 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 16th, 2011 Concord, Ontario Canada ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. BY: /S/ MARK YUNG ------------------------- MARK YUNG EXECUTIVE CHAIRMAN /S/ PRAVEEN NAIR ------------------------- PRAVEEN NAIR CHIEF FINANCIAL OFFICER 24 EX-10.1 2 ex10-1.txt EXHIBIT 10.1 Orchard Capital Corp. Confidential SERVICES AGREEMENT dated as of January 30, 2011 by and between ENVIRONMENTAL SOLUTIONS WORLDWIDE INC. as Company and ORCHARD CAPITAL CORPORATION as Service Provider Orchard Capital Corp. Confidential TABLE OF CONTENTS Definitions and Interpretation.................................................3 Appointment and Authority of Service Provider; Provision of Services...........4 Fees...........................................................................4 Limitation of Liability........................................................5 Indemnification................................................................5 Termination....................................................................6 Assignment and Sub-Contracting.................................................7 Notices........................................................................7 Binding Nature of Agreement; Successors and Assigns; Amendment.................8 Entire Agreement...............................................................8 Controlling Law................................................................8 Choice of Forum................................................................8 Waiver of Jury Trial...........................................................8 Independent Contractor.........................................................9 Third Party Beneficiary Rights.................................................9 Indulgences Not Waivers........................................................9 Titles Not to Affect Interpretation............................................9 Execution in Counterparts......................................................9 Provisions Separable...........................................................9 Orchard Capital Corp. Confidential SERVICES AGREEMENT This SERVICES AGREEMENT (as amended, modified or supplemented from time to time, this "Agreement"), dated as of January 30, 2011, is entered into by and between ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC, a Florida corporation with offices located at 335 Connie Crescent, Concord, Ontario, Canada, L4K 5R2 as the company (together with its successors and assigns permitted hereunder, the "Company"), and ORCHARD CAPITAL CORPORATION, a California corporation, with offices located at 6922 Hollywood Boulevard, Suite 900, Los Angeles, California 90028, as service provider (together with its successors and assigns permitted hereunder, "Service Provider"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company and its Affiliates are in the business of manufacturing and marketing catalytic emission conversion, control and support products and technologies; WHEREAS, the Service Provider is in the business of providing financial services, legal services, personnel services and other similar human resources support to, among others, the Company and its Affiliates; and WHEREAS, the Company and its Affiliates on the one hand, and the Service Provider on the other hand, wish to amend and restate all existing agreements and understandings between them for the provision of services, whether written or oral, as set forth herein. NOW, THEREFORE, in consideration of the premises and mutual agreements herein set forth, and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company and Service Provider agree as follows: Section 1. Definitions and Interpretation. "Affiliate" means any other Person that, directly or indirectly, Controls, is Controlled by or under common Control with such Person, or is a director or officer of such Person. "Business Day" means a day, other than a Saturday or a Sunday, on which banks are generally open for business in Los Angeles, California and/or Concord, Ontario, Canada. "Control," and the correlative term "Controlled," means the possession, direct or indirect, of the power to direct or cause the direction of the management policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Fees" means the charges for the provision of the Services as set out in the applicable Services Schedules. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, sole proprietorship, joint venture, government (or any agency or political subdivision thereof) or other entity. 3 "Service Schedule" means each of the Schedules attached to this Agreement that set forth the Services to be provided by Service Provider to the Company and/or its Affiliates and any future schedules setting forth the additional services as agreed upon between the parties hereto. The use of the terms "include" or "including" shall be construed without limitation to the words following; words denoting the singular number only include the plural and vice versa; words denoting any gender include all genders and words denoting persons include firms and corporations and vice versa. Section 2. Appointment and Authority of Service Provider; Provision of Services. (a) The Company hereby appoints Orchard Capital Corporation ("OCC") as Service Provider and directs Service Provider to perform such duties as are described in the Service Schedules (collectively, the "Services"). OCC hereby accepts such appointment and appoints Mark Yung to act on OCC's behalf in providing the Services, and, subject to and in accordance with the applicable terms and provisions of this Agreement, agrees to perform the Services during the applicable term set forth herein or in the applicable Service Schedule to and for the benefit of the Company and any of its Affiliates identified in the applicable Service Schedule. OCC reserves the rights to replace Mark Yung at its sole discretion. (b) If the Company desires Service Provider to provide the Company and/or an Affiliate with additional services not set forth on a Service Schedule, the Company and Service Provider shall discuss in good faith the addition of such additional services to a new or existing Service Schedule and, upon the parties' written agreement on such new or amended Service Schedule, such additional services shall be deemed "Services" for all purposes in this Agreement. (c) Service Provider shall, and is hereby authorized by the Company to, perform the Services in a manner consistent with applicable law and in accordance with the applicable terms and provisions hereof. Service Provider shall use all reasonable skill, care and diligence in the performance of the Services. Service Provider shall follow the customary standards, policies and procedures currently used by it in the performance of such Services for itself and for other Persons. (d) Service Provider may perform any Services directly or by or through agents, accountants, experts, attorneys or Affiliates. Service Provider shall exercise reasonable care in the selection of any such third parties. Service Provider shall remain fully responsible and liable for the performance of the Services notwithstanding any delegation to any such third party. Performance by any such third party of any Services shall be deemed to be performance thereof by Service Provider. Section 3. Fees. (a) In consideration of and subject to the supply of the Services in accordance with the terms of this Agreement, the Company shall pay to Service Provider the Fees. (b) Service Provider will invoice the Company monthly in arrears for all Services provided during the preceding month. The Company shall pay such invoice within thirty (30) Business Days of receipt thereof. 4 (c) For any Services for which the Fees are based on a cost or cost-plus methodology, Service Provider shall provide the Company with reasonable detail of the cost of its provision of the Services in conjunction with its invoices. (d) Except to the extent set forth in the applicable Service Schedule, each of the Company and Service Provider shall bear its own costs and expenses with respect to the provision of Services. In the event so indicated in the applicable Service Schedule, the Company shall, at the direction of Service Provider, either reimburse Service Provider from time to time for, or pay directly, the out-of-pocket expenses incurred in providing the Services, including travel, accommodation, communication, meals and similar expenses. Section 4. Limitation of Liability. (a) Except as otherwise expressly provided in this Section 4, Service Provider shall in no event have any liability to the Company under or as a result of this Agreement or the performance of the Services, except to the extent such liability results from the gross negligence, fraud or willful misconduct of Service Provider (or that of any agent, accountant, expert, attorney or Affiliate performing the Services as contemplated by Section 2(d)). (b) Without limiting the generality of the foregoing, Service Provider will not be liable to the Company for: (i) any loss of profits, loss of revenue, loss of reputation or goodwill; (ii) any indirect, special or consequential loss; or (iii) any exemplary or punitive damages, whether arising in contract, tort, negligence, misrepresentation, for breach of duty (including without limitation statutory duty) or otherwise. (c) Other than pursuant to Section 4(a) above, the maximum aggregate liability of Service Provider to the Company, whether in contract, tort (including without limitation negligence) or breach of duty (including without limitation statutory duty) or otherwise shall not exceed the Fees paid to Service Provider by the Company in the twelve months immediately preceding the relevant event, occurrence or omission and any amount recoverable under any insurance policies; provided that, with respect to liability of Service Provider to the Company related to the performance of a particular Service, the maximum liability of Service Provider shall be the aggregate fees paid to Service Provider by the Company with respect to such Service. Section 5. Indemnification. (a) The Company shall indemnify Service Provider and its Affiliates and each of their respective officers, directors, employees, stockholders, members, partners, agents and representatives (each, an "Indemnified Person") and hold them harmless from and against any and all claims, losses, damages, liabilities, obligations and out-of-pocket costs or expenses, including reasonable attorneys' fees and expenses and costs and expenses of investigations (collectively, "Losses"), arising out of or resulting from this Agreement or Service Provider's performance of the Services (including through any agent, accountant, expert, attorney or Affiliate as contemplated by Section 2(d)), except to the extent such Losses result from Service Provider's gross negligence or willful misconduct in performing the Services (or that of any agent, accountant, expert, attorney or Affiliate performing the Services as contemplated by Section 2(d)). 5 (b) The Company shall promptly reimburse each Indemnified Person for all fees and expenses (including reasonable attorneys' fees and expenses) as such fees and expenses are incurred in connection with investigating, preparing, pursuing or defending any action, claim, suit, investigation or proceeding (each, a "Proceeding") arising out of or resulting from this Agreement or the provision of the Services; provided that such Indemnified Person shall promptly repay to the Company any such amount to the extent judicially determined by judgment or order not subject to further appeal or discretionary review that such fees and expenses were not Losses subject to the indemnity provided by this Section 5 (such Losses, "Indemnifiable Losses"). If for any reason (other than that the Losses sustained are not Indemnifiable Losses) the indemnification provided by this Section 5 is unavailable to any Indemnified Person or insufficient to hold it harmless, then the Company shall contribute to the amount paid or payable by such Indemnified Person as a result of such Losses in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and such Indemnified Person, on the other hand, or, if such allocation is not permitted by applicable law, to reflect not only the relative benefits referred to above but also any other relevant equitable considerations. (c) To the extent a claim in respect of any Proceeding as contemplated by this Section 5 is to be made by an Indemnified Person against the Company, the Company shall be entitled to participate in such Proceeding and, to the extent that it may wish, assume the defense thereof, with counsel reasonably satisfactory to such Indemnified Person, and, after notice from the Company to such Indemnified Person of its election to assume the defense thereof, the Company shall not be liable to such Indemnified Person for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such Indemnified Person in connection with the defense thereof, other than reasonable costs of investigation (unless (i) counsel for such Indemnified Person advises that there are issues which raise conflicts of interest between such Indemnified Person and the Company, in which case such Indemnified Person may retain counsel reasonably satisfactory to it and the Company shall pay all reasonable fees and expenses of such counsel for such Indemnified Person or (ii) the Company has failed to diligently pursue the defense of a Proceeding it has assumed). No Indemnified Person shall effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened Proceeding in respect of which indemnification or contribution from the Company may be sought hereunder (whether or not the Company is an actual or potential party to such Proceeding) without the written consent of the Company, which consent shall not be unreasonably withheld. The Company shall not effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened Proceeding in respect of which indemnification or contribution from the Company may be sought hereunder (whether or not any Indemnified Person is an actual or potential party to such Proceeding), on a basis that would result in (A) the imposition of a consent order, injunction or decree that would restrict the future activity or conduct of Service Provider or any of its Affiliates, (B) a finding or admission of any wrong-doing, (C) any monetary liability of the Indemnified Person that will not be promptly paid or reimbursed by the Company or (D) anything less than a complete release being provided to the Indemnified Person and its Affiliates. (d) An Indemnified Person shall not be denied indemnification in whole or in part under this Section 5 or otherwise by reason of the fact that such Indemnified Person had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted or not expressly prohibited by the terms and conditions of this Agreement. 6 Section 6. Term and Termination. (a) The term of this Agreement begins on the date hereof and will continue until the earlier of (i) the expiration of each of the Service-specific terms set forth in the Service Schedules, if any, and (ii) the termination of this Agreement in accordance with clause (b) of this Section 6. (b) This Agreement may be terminated by either the Company or Service Provider upon thirty (30) days' prior written notice, unless a longer period with regard to any particular Service is provided for in the applicable Service Schedule. (c) Termination of this Agreement shall not prejudice or affect the parties' accrued rights and liabilities as at termination. (d) Sections 3 (with respect to amounts incurred prior to termination), 4, 5 and 11 through 18 shall survive any termination of this Agreement pursuant to this Section 6. Section 7. Assignment and Sub-Contracting. (a) Except for the delegation of its obligations hereunder in accordance with and subject to the terms of Section 2(d), Service Provider shall not assign, delegate or otherwise transfer this Agreement or its obligations hereunder without the express prior written consent of the Company. (b) The Company shall not assign or otherwise transfer its rights under this Agreement without the express prior written consent of Service Provider. Section 8. Notices. Unless expressly provided otherwise herein, all notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when delivered against receipt or upon actual receipt of registered or certified mail, postage prepaid, return receipt requested, or, in the case of telecopy notice, when received in legible form, addressed as set forth below: (a) If to the Company: Environmental Solutions Worldwide, Inc. 335 Connie Crescent Concord, ON L4K 5R2 Telephone No.: (905) 695-4142 Fax No.: (905) 695-5013 Attention: Praveen Nair 7 (b) If to Service Provider: Orchard Capital Corporation 6922 Hollywood Boulevard Suite 900 Los Angeles, California 90028 Telephone: (323) 860-4900 Telecopy: (323) 860-4904 Attention: General Counsel Any party may change the address or telecopy number to which communications or copies directed to such party are to be sent by giving notice to the other parties of such change of address or telecopy number in conformity with the provisions of this Section 8 for the giving of notice. Section 9. Binding Nature of Agreement; Successors and Assigns; Amendment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns as provided herein. This Agreement may not be amended, modified or terminated (except as otherwise expressly provided herein) except by each of the parties hereto in writing. Section 10. Entire Agreement. This Agreement contains the entire agreement and understanding between the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof and thereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. Section 11. Controlling Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD, TO THE FULLEST EXTENT PERMITTED BY LAW, TO ANY CONFLICTS OF LAW RULES WHICH MIGHT APPLY THE LAWS OF ANY OTHER JURISDICTION). Section 12. Choice of Forum. Each of the parties hereto hereby irrevocably and unconditionally (a) submits to the jurisdiction of any federal or California state court located within the County of Los Angeles (the "Chosen Courts") for any action, suit or proceeding arising out of or related to this Agreement (including any non-contractual disputes related hereto) and hereby waives, and agrees not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in the Chosen Courts, (b) waives and agrees not to assert any objection to the laying of venue of any such action, suit or proceeding in any such court and (c) waives and agrees not to plead or claim that any such action, suit or proceeding brought in any Chosen Court has been brought in an inconvenient forum. The parties hereto hereby consent to and grant such Chosen Courts jurisdiction over the person of such parties and, to the extent permitted by law, over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 8 or in such other manner as may be permitted by law shall be valid and sufficient service thereof. 8 Section 13. Waiver of Jury Trial. THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND AGREE THAT ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. Section 14. Independent Contractor. The relationship of the parties under this Agreement shall be that of independent contractors only. Nothing contained in his Agreement shall be deemed or construed to create a partnership or joint venture, to create the relationships of employee/employer or principal/agent, or otherwise create any liability whatsoever of either party with respect to the indebtedness, liabilities, obligations or actions of the other or any of their respective officers, directors, employees, stockholders, agents or representatives, or any other Person or entity. Section 15. Third Party Beneficiary Rights. Except as provided in Section 5, no provisions of this agreement are intended, nor shall be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, employee, affiliate, stockholder, partner of any party hereto or any other Person unless specifically provided otherwise herein and, except as so provided, all provisions hereof shall be personal solely between the parties hereto. Section 16. Indulgences Not Waivers. Neither the failure nor any delay on the part of any party hereto to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. Section 17. Titles Not to Affect Interpretation. The titles of paragraphs and subparagraphs contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof. Section 18. Execution in Counterparts. This Agreement may be executed in any number of counterparts by facsimile, electronic or other written form of communication, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. 9 Section 19. Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. By: -------------------------------- Name: Title: SERVICE PROVIDER: ORCHARD CAPITAL CORPORATION By: -------------------------------- Name: Richard S. Ressler Title: President 11 Orchard Capital Corp. Confidential SERVICE SCHEDULE 1 DESCRIPTION OF SERVICE: As may be agreed upon by the parties from time to time, including those duties customarily performed by the Chairman of the Board and executive of the Company as well as providing advise and consultation on general corporate matters, and on other projects as may be assigned by the Company's Board of Directors on an as needed basis (the "Service"). TERM: January 30, 2011 until terminated upon thirty (30) days' prior written notice by either of the parties. FEES: $300,000 per annum. OTHER: The Company shall reimburse Service Provider for any out-of-pocket expenses incurred by Service Provider in providing the Service, including but not limited to travel, accommodation, communication, meals and similar expenses. EX-10.2 3 ex10-2.txt EXHIBIT 10.2 ENVIRONMENTAL SOLUTIONS WORLDWIDE 2010 STOCK INCENTIVE PLAN SECTION 1. Purposes The purposes of the Environmental Solutions Worldwide Inc. 2010 Stock Incentive Plan (the "Plan") are (i) to enable Environmental Solutions Worldwide Inc. (the "Company") and its Related Companies (as defined below) to attract, retain and reward employees and strengthen the existing mutuality of interests between such employees and the Company's shareholders by offering such employees an equity interest in the Company, (ii) to enable the Company to offer incentives to employees of entities which are acquired or established by the Company from time to time as incentives and inducements for employment, and (iii) to enable the Company to pay part of the compensation of its Outside Directors (as defined in Section 5.2) in options to purchase the Company's common stock ("Stock"), thereby increasing such directors' proprietary interests in the Company. For purposes of the Plan, a "Related Company" means any corporation, partnership, joint venture or other entity in which the Company owns, directly or indirectly, at least a 20% beneficial ownership interest. SECTION 2. Types of Awards 2.1 Awards under the Plan to employees may be in the form of (i) Stock Options; (ii) Stock Appreciation Rights; (iii) Limited Stock Appreciation Rights; (iv) Restricted Stock; (v) Deferred Stock; (vi) Bonus Stock; or (vii) Tax Offset Payments. 2.2 An eligible employee may be granted one or more types of awards, which may be independent or granted in tandem. If two awards are granted in tandem, the employee may exercise (or otherwise receive the benefit of) one award only to the extent he or she relinquishes the tandem award. 2.3 Directors may receive only (i) Stock Options; (ii), related Limited Stock Appreciation Rights; (iii) Restricted Stock and (iv) Tax Offset Payments. SECTION 3. Administration 3.1 The Plan shall be administered (i) by the Committee (as defined below) or the Company's Board of Directors in the case of awards to employees, and (ii) by the Company's Board of Directors (the "Board") (with recusals as necessary or appropriate) in the case of awards to Outside Directors. The Committee shall be the Compensation Committee of the Board or such other committee of directors as the Board shall designate, which shall consist of not less than two Outside Directors. 3.2 The Committee shall have the following authority with respect to awards under the Plan other than awards to Outside Directors: to grant awards to eligible employees under the Plan; to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall deem advisable; to interpret the terms and provisions of the Plan and any award granted under the Plan; and to otherwise supervise the administration of the Plan. In particular, and without limiting its authority and powers, except with respect to awards to Outside Directors, the Committee shall have the authority: (a) to determine whether and to what extent any award or combination of awards will be granted hereunder, including whether any awards will be granted in tandem with each other; (b) to select the employees to whom awards will be granted; (c) to determine the number of shares of Stock to be covered by each award granted hereunder subject to the limitations contained herein; (d) to determine the terms and conditions of any award granted hereunder, including, but not limited to, any vesting or other restrictions based on such performance objectives (the "Performance Objectives") and such other factors as the Committee may establish, and to determine whether the Performance Objectives and other terms and conditions of the award are satisfied; (e) to determine the treatment of awards upon an employee's retirement, disability, death, termination for cause or other termination of employment; (f) to determine pursuant to a formula or otherwise the fair market value of the Stock on a given date; provided, however, that if the Committee fails to make such a determination, fair market value of the Stock on a given date shall be the mean between the highest and lowest quoted selling price, regular way, of the Stock on the Over the Counter Bulletin Board (or the principal market or exchange upon which the Stock is traded or listed) on such date, or if no such sale of Stock occurs on such date, the weighted average of the high and low prices on the nearest trading date before such date; (g) to determine that amounts equal to the amount of any dividends declared with respect to the number of shares covered by an award (i) will be paid to the employee currently or (ii) will be deferred and deemed to be reinvested or (iii) will otherwise be credited to the employee, or (iv) that the employee has no rights with respect to such dividends; (h) to determine whether, to what extent, and under what circumstances Stock and other amounts payable with respect to an award will be deferred either automatically or at the election of an employee, including providing for and determining the amount (if any) of deemed earnings on any deferred amount during any deferral period; (i) to provide that the shares of Stock received as a result of an award shall be subject to a right of first refusal, pursuant to which the employee shall be required to offer to the Company any shares that the employee wishes to sell, subject to such terms and conditions as the Committee may specify; (j) to amend the terms of any award, prospectively or retroactively; provided, however, that no amendment shall impair the rights of the award holder without his or her written consent; and (k) to substitute new awards with more favorable terms and conditions for previously granted awards under the Plan, or for stock options or awards granted under other plans or agreements. 3.3 The Committee shall have the right to designate awards as "Performance Awards." Awards so designated shall be granted and administered in a manner designed to preserve the deductibility of the compensation resulting from such awards in accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The grant or vesting of a Performance Award shall be subject to the achievement of Performance Objectives established by the Committee based on one or more of the following criteria, in each case applied to the Company on a consolidated basis and/or to a business unit, and which the Committee may use either as an absolute measure or as a measure of comparative performance relative to a peer group of companies: sales, operating profits, operating profits before interest expense and taxes, net earnings, earnings per share, return on equity, return on assets, return on invested capital, cash flow, debt to equity ratio, market share, stock price, economic value added, and market value added. 2 The Performance Objectives for a particular Performance Award relative to a particular period shall be established by the Committee in writing no later than 90 days after the beginning of such period. The Committee's determination as to the achievement of Performance Objectives relating to a Performance Award shall be made in writing. The Committee shall have discretion to modify the Performance Objectives or vesting conditions of a Performance Award only to the extent that the exercise of such discretion would not cause the Performance Award to fail to quality as "performance-based compensation" within the meaning of Section 162(m) of the Code. 3.4 With respect to awards to Outside Directors, the Board shall have authority to grant and amend awards subject to the limitations of Sections 2.3, 6 and 7.2; to interpret the Plan and grants to Outside Directors pursuant to the Plan; to adopt, amend, and rescind administrative regulations to further the purposes of the Plan; and to take any other action necessary to the proper operation of the Plan. Subject to any express limitations set forth in the Plan, the Board shall have the same powers with respect to awards to Outside Directors as are set forth for the Committee with respect to awards to employees. 3.5 All determinations made by the Committee or the Board pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. 3.6 The Committee may from time to time delegate to one or more officers of the Company any or all of its authorities granted hereunder except with respect to awards granted to persons subject to Section 15 of the Securities Exchange Act of 1934 or Performance Awards. The Committee shall specify the maximum number of shares that the officer or officers to whom such authority is delegated may award. SECTION 4. Stock Subject to Plan 4.1 The total number of shares of Stock reserved and available for distribution under the Plan shall be 5,000,000 (subject to adjustment as provided below). Such shares may consist of authorized but unissued shares or treasury shares. The exercise of a Stock Appreciation Right for cash or the payment of any other award in cash shall not count against this share limit. 4.2 To the extent a Stock Option terminates without having been exercised, or an award terminates without the employee having received stock in payment of the award, or shares awarded are forfeited, the shares subject to such award shall again be available for distribution in connection with future awards under the Plan. If the exercise price of an option is paid in Stock or if shares of Stock are withheld from payment of an award to satisfy tax obligations with respect to such award, such shares will also not count against the Plan limits and shall again be available for distribution in connection with future awards under the Plan. 4.3 No recipient shall be granted Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock and/or Bonus Stock, or any combination of the foregoing with respect to more than 1,500,000 shares of Stock in any fiscal year of the Company (subject to adjustment as provided in Section 4.4). No employee shall be granted Tax Offset Payments with respect to more than the number of shares of Stock covered by awards held by such employee. 3 4.4 In the event of any merger, reorganization, consolidation, sale of substantially all assets, recapitalization, Stock dividend, Stock split, spin-off, split-up, split-off, distribution of assets or other change in corporate structure affecting the Stock, a substitution or adjustment, as may be determined to be appropriate by the Committee or the Board in its sole discretion, shall be made in the aggregate number and kind of shares or other property reserved for issuance under the Plan, the number and kind of shares or other property as to which awards may be granted to any individual in any fiscal year, the number and kind of shares or other property subject to outstanding awards and the amounts to be paid by award holders or the Company, as the case may be, with respect to outstanding awards; provided, however, that no such adjustment shall increase the aggregate value of any outstanding award. In addition, upon the dissolution or liquidation of the Company, or upon any reorganization, merger or consolidation as a result of which the Company is not the surviving corporation (or survives as a wholly-owned subsidiary of another corporation), or upon a sale of substantially all the assets of the Company, the Board may take such action as it in its discretion deems appropriate to (i) cash out outstanding Stock Options at or immediately prior to the date of such event, (ii) provide for the assumption of outstanding Stock Options by surviving, successor or transferee corporations, and/or (iii) provide that Stock Options shall be exercisable for a period of at least 10 business days from the date of receipt of a notice from the Company of such event, following the expiration of which period any unexercised Stock Options shall terminate. The Board's determination as to which adjustments shall be made and the extent thereof shall be final, binding and conclusive. SECTION 5. Eligibility 5.1 Employees of the Company or a Related Company, including employees who are officers and/or directors of the Company, are eligible to be granted awards under the Plan. The employee participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible. 5.2 For purposes of the Plan, the term Outside Director shall mean any director of the Company other than one who is an employee of the Company or a Related Company. SECTION 6. Stock Options 6.1 The Stock Options awarded to employees under the Plan may be of two types: (i) Incentive Stock Options within the meaning of Section 422 of the Code or any successor provision thereto; and (ii) Non-Qualified Stock Options. To the extent that any Stock Option is identified as a Non-Qualified Stock Option or does not qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock Option. All Stock Options awarded to Outside Directors shall be Non-Qualified Stock Options. 6.2 Subject to the following provisions, Stock Options awarded to employees by the Committee and Stock Options awarded to Outside Directors by the Board shall be in such form and shall have such terms and conditions as the Committee or the Board, as the case may be, may determine. All references to the Committee in the following paragraphs of this Section 6.2 shall be deemed to refer to the Board with respect to awards to Outside Directors. (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee, and may not be less than the fair market value of the Stock on the date of the award of the Stock Option. (b) Option Term. The term of each Stock Option shall be fixed by the Committee. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. The Committee may waive such exercise provisions or accelerate the exercisability of the Stock Option at any time in whole or in part. 4 (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment of the purchase price. Payment of the purchase price shall be made in such manner as the Committee may provide in the award, which may include cash (including cash equivalents), delivery of shares of Stock already owned by the optionee and held for at least six months or subject to awards hereunder, "cashless exercise", any other manner permitted by law determined by the Committee, or any combination of the foregoing. If the Committee determines that a Stock Option may be exercised using shares of Restricted Stock, then unless the Committee provides otherwise, the shares received upon the exercise of a Stock Option which are paid for using Restricted Stock shall be restricted in accordance with the original terms of the Restricted Stock award. (e) No Shareholder Rights. An optionee shall have neither rights to dividends or other rights of a shareholder with respect to shares subject to a Stock Option until the optionee has given written notice of exercise and has paid for such shares. (f) Surrender Rights. The Committee may provide that options may be surrendered for cash upon any terms and conditions set by the Committee. (g) Transferability. Stock Options shall not be transferable by the optionee other than by will or by the laws of descent and distribution, and during the optionee's lifetime, all Stock Options shall be exercisable only by the optionee or by his or her guardian or legal representative; provided, however, the Committee may, in its discretion, authorize all or a portion of the Stock Options to be granted to an optionee to be on terms which permit transfer by such optionee to (i) the spouse, children, stepchildren or grandchildren (including relationships arising from legal adoption) of the optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (x) there shall be no consideration for any such transfer (other than interests in the transferee partnership), (y) the instrument pursuant to which such options are transferred must be approved by the Committee, and must expressly provide for the transferability in a manner consistent with this Section as well as any additional conditions on transfer and restrictions on the rights of the transferree, as may be required by the Committee, and (z) subsequent transfers of transferred options shall be prohibited except those by will or the laws of descent and distribution. Following any such transfer, the Stock Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer. (h) Termination of Employment. Following the termination of an optionee's employment (or Board service) with the Company or a Related Company, the Stock Option shall be exercisable to the extent determined by the Committee. The Committee may provide different post-termination exercise provisions with respect to termination of employment or service for different reasons. The Committee may provide that, notwithstanding the option term fixed pursuant to Section 6.2(b), a Stock Option which is outstanding on the date of an optionee's death shall remain outstanding for an additional period after the date of such death. 6.3 Notwithstanding the provisions of Section 6.2, no Incentive Stock Option shall (i) have an option price which is less than 100% of the fair market value of the Stock on the date of the award of the Incentive Stock Option, (ii) be exercisable more than ten years after the date such Incentive Stock Option is awarded, or (iii) be awarded after July 6, 2020. No Incentive Stock Option granted to an employee who owns more than 10% of the total combined voting power of all classes of stock of the Company or any of its parent or subsidiary corporations, as defined in Section 424 of the Code, shall (A) have an option price which is less than 110% of the fair market value of the Stock on the date of award of the Incentive Stock Option or (B) be exercisable more than five years after the date such Incentive Stock Option is awarded. 5 SECTION 7. Stock Appreciation Rights and Limited Stock Appreciation Rights 7.1 A Stock Appreciation Right awarded to an employee shall entitle the holder thereof to receive payment of an amount, in cash, shares of Stock or a combination thereof, as determined by the Committee, equal in value to the excess of the fair market value of the number of shares of Stock as to which the award is granted on the date of exercise over an amount specified by the Committee. Any such award shall be in such form and shall have such terms and conditions as the Committee may determine. The grant shall specify the number of shares of Stock as to which the Stock Appreciation Right is granted. 7.2 The Committee (or the Board with respect to Outside Directors), may grant a Stock Appreciation Right which may be exercised only within the 60-day period following occurrence of a Change of Control (as defined in Section 15.2) (such Stock Appreciation Right being referred to herein as a Limited Stock Appreciation Right). Unless the Committee (or Board with respect to Outside Directors) provides otherwise, in the event of a Change of Control the amount to be paid upon exercise of a Stock Appreciation Right or Limited Stock Appreciation Right shall be based on the Change of Control Price (as defined in Section 15.3). SECTION 8. Restricted Stock Subject to the following provisions, all awards of Restricted Stock to employees shall be in such form and shall have such terms and conditions as the Committee may determine: (a) The Restricted Stock award shall specify the number of shares of Restricted Stock to be awarded, the price, if any, to be paid by the recipient of the Restricted Stock and the date or dates on which, or the conditions upon the satisfaction of which, the Restricted Stock will vest. The grant and/or the vesting of Restricted Stock may be conditioned upon the completion of a specified period of service with the Company or a Related Company, upon the attainment of specified Performance Objectives or upon such other criteria as the Committee may determine. (b) Stock certificates representing the Restricted Stock awarded to an employee shall be registered in the employee's name, but the Committee may direct that such certificates be held by the Company on behalf of the employee. Except as may be permitted by the Committee, no share of Restricted Stock may be sold, transferred, assigned, pledged or otherwise encumbered by the employee until such share has vested in accordance with the terms of the Restricted Stock award. At the time Restricted Stock vests, a certificate for such vested shares shall be delivered to the employee (or his or her designated beneficiary in the event of death), free of all restrictions. (c) The Committee may provide that the employee shall have the right to vote and/or receive dividends on Restricted Stock. Unless the Committee provides otherwise, Stock received as a dividend on, or in connection with a stock split of, Restricted Stock shall be subject to the same restrictions as the Restricted Stock. (d) Except as may be provided by the Committee, in the event of an employee's termination of employment before all of his or her Restricted Stock has vested, or in the event any conditions to the vesting of Restricted Stock have not been satisfied prior to any deadline for the satisfaction of such conditions set forth in the award, the shares of Restricted Stock which have not vested shall be forfeited, and the Committee may provide that (i) any purchase price paid by the employee shall be returned to the employee or (ii) a cash payment equal to the Restricted Stock's fair market value on the date of forfeiture, if lower, shall be paid to the employee. (e) The Committee may waive, in whole or in part, any or all of the conditions to receipt of, or restrictions with respect to, any or all of the employee's Restricted Stock, other than Performance Awards whose vesting was made subject to satisfaction of one or more Performance Objectives (except that the Committee may waive conditions or restrictions with respect to Performance Awards if such waiver would not cause the Performance Award to fail to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code). 6 SECTION 9. Deferred Stock Awards Subject to the following provisions, all awards of Deferred Stock to employees shall be in such form and shall have such terms and conditions as the Committee may determine: (a) The Deferred Stock award shall specify the number of shares of Deferred Stock to be awarded to any employee and the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred. The Committee may condition the grant or vesting of Deferred Stock, or receipt of Stock or cash at the end of the Deferral Period, upon the attainment of specified Performance Objectives or such other criteria as the Committee may determine. (b) Except as may be provided by the Committee, Deferred Stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. (c) At the expiration of the Deferral Period, the employee (or his or her designated beneficiary in the event of death) shall receive (i) certificates for the number of shares of Stock equal to the number of shares covered by the Deferred Stock award, (ii) cash equal to the fair market value of such Stock, or (iii) a combination of shares and cash, as the Committee may determine. (d) Except as may be provided by the Committee, in the event of an employee's termination of employment before the Deferred Stock has vested, his or her Deferred Stock award shall be forfeited. (e) The Committee may waive, in whole or in part, any or all of the conditions to receipt of, or restrictions with respect to, Stock or cash under a Deferred Stock award, other than with respect to Performance Awards (except that the Committee may waive conditions or restrictions with respect to Performance Awards if such waiver would not cause the Performance Award to fail to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code). SECTION 10. Bonus Stock The Committee may award Bonus Stock to any eligible employee subject to such terms and conditions as the Committee shall determine. The grant of Bonus Stock may be conditioned upon the attainment of specified Performance Objectives or upon such other criteria as the Committee may determine. The Committee may waive such conditions in whole or in part other than with respect to Performance Awards (except that the Committee may waive conditions or restrictions with respect to Performance Awards if such waiver would not cause the Performance Award to fail to qualify as Aperformance-based compensation@ within the meaning of Section 162(m) of the Code). The Committee shall also have the right to eliminate or reduce the amount of Cash Bonus otherwise payable under an award. Unless otherwise specified by the Committee, no money shall be paid by the recipient for the Bonus Stock. Alternatively, the Committee may offer eligible employees the opportunity to purchase Bonus Stock at a discount from its fair market value. The Bonus Stock award shall be satisfied by the delivery of the designated number of shares of Stock which are not subject to restriction. SECTION 11. Tax Offset Payments The Committee (or the Board, with respect to Outside Directors) may provide for a Tax Offset Payment by the Company with respect to one or more awards granted under the Plan. The Tax Offset Payment shall be in an amount specified by the Committee (or the Board, with respect to Outside Directors), which shall not exceed the amount necessary to pay the federal, state, local and other taxes payable with respect to the applicable award and the receipt of the Tax Offset Payment, assuming that the recipient is taxed at the maximum tax rate applicable to such income. The Tax Offset Payment shall be paid solely in cash. 7 SECTION 12. Election to Defer Awards The Committee may permit an employee to elect to defer receipt of an award for a specified period or until a specified event, upon such terms as are determined by the Committee. SECTION 13. Tax Withholding 13.1 Each award holder shall, no later than the date as of which the value of an award first becomes includible in such person's gross income for applicable tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, the minimum statutory federal, state, local or other taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company (and, where applicable, any Related Company), shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the award holder. 13.2 To the extent permitted by the Committee, and subject to such terms and conditions as the Committee may provide, an employee may elect to have the minimum statutory withholding tax obligation with respect to any awards hereunder, satisfied by (i) having the Company withhold shares of Stock otherwise deliverable to such person with respect to the award or (ii) delivering to the Company shares of unrestricted Stock held for at least six months. Alternatively, the Committee may require that a portion of the shares of Stock otherwise deliverable be applied to satisfy the minimum statutory withholding tax obligations with respect to the award. SECTION 14. Amendments and Termination The Plan shall continue in effect for an unlimited period. The Board may discontinue the Plan at any time and may amend it from time to time. No amendment or discontinuation of the Plan shall adversely affect any award previously granted without the award holder's written consent. Amendments may be made without shareholder approval except as required by law. SECTION 15. Change of Control 15.1 In the event of a Change of Control, unless otherwise provided in the grant or by amendment (with the holder's consent) of such grant: (a) all outstanding Stock Options and all outstanding Stock Appreciation Rights (including Limited Stock Appreciation Rights) awarded under the Plan shall become fully exercisable and vested; (b) the restrictions applicable to any outstanding Restricted Stock and Deferred Stock awards under the Plan shall lapse and such shares and awards shall be deemed fully vested; and (c) to the extent the cash payment of any award is based on the fair market value of Stock, such fair market value shall be the Change of Control Price. 8 15.2 A "Change of Control" means the happening of any of the following after grant: (a) When any Person, as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof, including a "Group" as defined in Section 13(d) of the Exchange Act, but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee), or any person, entity or group specifically excluded by the Board, directly or indirectly, becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time) of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; (b) When Incumbent Directors cease for any reason to constitute at least two-thirds of the Board (where "Incumbent Director" means any director on the date of adoption of the Plan and any director elected by, or on the recommendation of, or with the approval of, a majority of the directors who then qualified as Incumbent Directors); (c) The effective date of any merger or consolidation of the Company with another corporation where (i) the shareholders of the Company, immediately prior to the merger or consolidation, do not beneficially own, immediately after the merger or consolidation, shares entitling such shareholders to 50% or more of all votes (without consideration of the rights of any class of stock to elect directors by a separate class vote) to which all shareholders of the corporation issuing cash or securities in the merger or consolidation would be entitled in the election of directors, or (ii) where the members of the Board, immediately prior to the merger or consolidation, do not, immediately after the merger or consolidation, constitute a majority of the board of directors of the corporation issuing cash or securities in the merger; provided, however, that, in each of the cases set forth above in clauses (c)(i) or (c)(ii), no "Change of Control" shall be deemed to take place if the transaction was approved by the Board of Directors, the majority of the members of which were in place prior to the commencement of such sale, merger or consolidation; or (d) The date of approval by the shareholders of the Company of the liquidation of the Company or the sale or other disposition of all or substantially all of the assets of the Company. 15.3 "Change of Control Price" means the highest price per share paid in any transaction reported on the OTCBB or on any national securities exchange or other market where the Stock is traded, or paid or offered in any transaction related to a Change of Control, at any time during the 90-day period ending with the Change of Control. Notwithstanding the foregoing sentence, in the case of Stock Appreciation Rights granted in tandem with Incentive Stock Options, the Change of Control Price shall be the highest price paid on the date on which the Stock Appreciation Right is exercised. SECTION 16. General Provisions 16.1 Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the Stock subject or related thereto upon any securities exchange or market or under any state or federal law, or (ii) the consent or approval of any government regulatory body or (iii) an agreement by the recipient of an award with respect to the disposition of Stock is necessary or desirable (in connection with any requirement or interpretation of any federal or state securities law, rule or regulation) as a condition of, or in connection with, the granting of such award or the issuance, purchase or delivery of Stock thereunder, such award shall not be granted or exercised, in whole or in part, unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 9 16.2 Nothing set forth in this Plan shall prevent the Board from adopting other or additional compensation arrangements. Neither the adoption of the Plan nor any award hereunder shall confer upon any employee of the Company, or of a Related Company, any right to continued employment, and no award under the Plan shall confer upon any Outside Director any right to continued service as a director. 16.3 Determinations by the Committee or the Board under the Plan relating to the form, amount, and terms and conditions of awards need not be uniform, and may be made selectively among persons who receive or are eligible to receive awards under the Plan, whether or not such persons are similarly situated. 16.4 No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination or interpretation taken or made with respect to the Plan, and all members of the Board or the Committee and all officers or employees of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. SECTION 17. Effective Date of Plan The Plan shall be effective upon approval by the Company's Board of Directors and Shareholders. 10 EX-31.1 4 ex31-1.txt EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark Yung, certify that: 1. I have reviewed this quarterly report on Form 10Q of Environmental Solutions Worldwide, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying Officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f) for the Registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance the generally accepted accounting principles; c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's first fiscal quarter of 2011 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. DATE: MAY 16th, 2011 BY: /S/ MARK YUNG ---------------------------- MARK YUNG EXECUTIVE CHAIRMAN EX-31.2 5 ex31-2.txt EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Praveen Nair, certify that: 1. I have reviewed this quarterly report on Form 10Q of Environmental Solutions Worldwide, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying Officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f) for the Registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance the generally accepted accounting principles; c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's first fiscal quarter of 2011 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. DATE: MAY 16th, 2011 /S/ PRAVEEN NAIR ----------------------- PRAVEEN NAIR CHIEF FINANCIAL OFFICER EX-32.1 6 ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10- Q of Environmental Solutions Worldwide, Inc. (the "Company") for the quarterly period March 31, 2011 (the "Report"), Mark Yung, Executive Chairman of the Company, hereby certify, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) To my knowledge, the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. DATE: MAY 16th, 2011 BY: /S/ MARK YUNG --------------------------- MARK YUNG EXECUTIVE CHAIRMAN A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Environmental Solutions Worldwide, Inc. and will be retained by Environmental Solutions Worldwide, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 7 ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10- Q of Environmental Solutions Worldwide, Inc. (the "Company") for the quarterly period March 31st , 2011 (the "Report"), Praveen Nair, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1). To my knowledge, the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. DATE: MAY 16TH, 2011 /S/ PRAVEEN NAIR ----------------------- PRAVEEN NAIR CHIEF FINANCIAL OFFICER A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Environmental Solutions Worldwide, Inc. and will be retained by Environmental Solutions Worldwide, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.