-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A66sX4xDEu0PAvpFw0DVG2rzGU6MQD/lgvrVap/rYdYESaqnlBZadwozZXuSpKgB hXtDAOMYQu0yu+xNMXrzMg== 0000909012-09-000710.txt : 20090409 0000909012-09-000710.hdr.sgml : 20090409 20090409165954 ACCESSION NUMBER: 0000909012-09-000710 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20081231 FILED AS OF DATE: 20090409 DATE AS OF CHANGE: 20090409 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 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-30392 FILM NUMBER: 09743348 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-K 1 t305231.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended - December 31, 2008 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) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, $0.001 PAR VALUE (Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 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] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] The issuer's revenues for its most recent fiscal year were $885,206 1 The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $10,398,117 as of March 31, 2009 based upon the closing sale price reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates of the registrant. There were 72,973,851 shares of the registrant's Common Stock outstanding as of March 31, 2009. 2 INDEX PAGE NO. PART I ITEM 1 Business 4 ITEM 1A Risk Factors 12 ITEM 1B Unresolved Staff Comments 17 ITEM 2 Properties 17 ITEM 3 Legal Proceedings 17 ITEM 4 Submission of Matters to a Vote of Security Holders 17 PART II ITEM 5 Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities 18 ITEM 6 Selected Financial Data 19 ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 ITEM 7A Quantitative And Qualitative Disclosures About Market Risk 32 ITEM 8 Financial Statements and Supplemental Data F-1 thru F-17 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34 ITEM 9A Controls and Procedures 34 ITEM 9B Other Information 35 PART III ITEM 10 Directors, Executive Officers and Corporate Governance 36 ITEM 11 Executive Compensation 39 ITEM 12 Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters 43 ITEM 13 Certain Relationships and Related Transactions and Director Independence 46 ITEM 14 Principal Accountant Fees and Services 48 PART IV ITEM 15 Exhibits and Financial Statement Schedule 49 Signatures 50 3 PART I This Form 10-K contains certain forward-looking statements regarding, among other things, the anticipated financial and operating results of the Company. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company 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, the Company cautions investors that actual financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. The words "anticipate," "believe," "estimate," "expect," "intend," "will," "should," "may," "plan," and similar expressions, as they relate to Environmental Solutions Worldwide Inc., ("ESW" or the "Company") or ESW's management, are intended to identify forward-looking statements. Such statements reflect ESW's current views of the Company with respect to future events and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, or planned. ESW assumes no obligations and does not intend to update these forward-looking statements. Readers are also urged to carefully review and consider the various disclosures made by ESW which attempts to advise interested parties of the factors that affect ESW's business, including without limitation the disclosures made under the caption "Management's Discussion and Analysis" and under the caption "Risk Factors" included herein. ITEM 1. BUSINESS GENERAL Environmental Solutions Worldwide Inc. was formed in 1987 in the State of Florida as BBC Stock Market, Inc. ("BBC") as a development stage enterprise. ESW did not engage in any significant business until January 1999 when it acquired all of the issued and outstanding shares of BBL Technologies Inc., ("BBL") a private company based in Ontario, Canada. BBC subsequently changed its name to Environmental Solutions Worldwide, Inc. During the years 1999 to 2001, ESW was a development stage company. In 2005, ESW relocated its executive offices to its present location, along with its new high volume manufacturing facility located at 335 Connie Crescent, Concord, Ontario L4K 5R2 Canada. ESW's research and development and testing facility is located in Montgomeryville, Pennsylvania. ESW operates through three wholly owned subsidiaries: ESW America Inc. (a Delaware corporation) is ESW's technical, research and development division. ESW America houses ESW's U.S. Environmental Protection Agency ("EPA") and California Air Resources Board ("CARB") recognized engine emissions testing laboratory and certification services known under the trade name "Air Testing Services(TM) ("ATS"). ATS is also recognized by Mine Safety and Health Administration ("MSHA") as being capable of performing verification testing on diesel engine after treatment devices. ESW America's capabilities include certification and verification of internal combustion and compression engines ranging from 0.5 to 600 horse power as well as vehicle chassis testing capabilities up to 1000 horse power. ESW America also houses ESW's catalyst coating and development laboratory. ESW America is a fully compliant ISO 9001:2000 certified manufacturing and laboratory testing facility. ESW Canada Inc. (an Ontario corporation) serves as a high volume production and substrate manufacturing facility, as well as houses ESW's sales division, managing all sales and marketing globally for ESW's catalytic product lines as well as development and testing services. ESW Canada houses a manufacturing line for all of ESW's military products including the Stlth Cat(TM) and Scat-IR-Shield(TM) exhaust shielding technology. ESW Canada is a fully compliant ISO 9001:2000 certified manufacturing facility. ESW Technologies Inc. (a Delaware corporation) holds ESW's intellectual property, and/or rights to the same. 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 market. ESW currently manufactures and markets a diversified line of catalytic emission control products and support technologies for diesel, gasoline and alternative fuelled engines. ESW's main line of business is the production of catalyzed substrates as an integral part of the catalytic converter systems and diesel oxidation catalyst systems. ESW serves original equipment vehicle manufacturers ("OEM"), as well as the retrofit and aftermarket sectors of the industry. ESW's website address is http://www.cleanerfuture.com. Information contained on the website is not incorporated into this document. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports and other information about ESW are available free of charge as soon as the reports are electronically filed with the Securities and Exchange Commission (SEC) from the SEC's website at www.sec.gov. 4 INDUSTRY TRENDS ESW's future performance and growth is directly related to certain trends within the global market. In recent years there has been an increasing emphasis on climate change the world over. The global response and efforts by governments around the world is to implement legislation and enforce upon manufacturers, re-sellers and large fleet operators of both combustion, and compression engines, to reduce emissions from these engines into the environment. There is a need to reduce harmful emissions exhausting from all types of combustion and compression engines. Compression and combustion engines include on road applications such as cars, trucks and buses, as well as numerous off road applications such as construction equipment, farm equipment, industrial equipment, lawn and garden equipment, railway trains, mining equipment and recreational vehicles. "Carbon dioxide is the greenhouse gas emitted in the largest quantity, other greenhouse gases such as methane, nitrous oxide, and hydro fluorocarbons also contribute to climate change. Many greenhouse gases have lifetimes of decades or even centuries in the atmosphere, so the problem cannot be eliminated quickly. Thus, the problems we are experiencing today do not accurately represent the full effects we may see years from now based on current levels of greenhouse gases. The United States has the highest emissions of greenhouse gases of any nation on Earth. In California, more than half of the fossil fuel emissions of carbon dioxide are related in some way to transportation. Fossil fuel combustion accounts for 98 percent of carbon dioxide emissions." SOURCE California Air Resources Board, factsheet - The Greenhouse Effect And California "Particulate matter (PM10) pollution consists of very small liquid and solid particles floating in the air. Of greatest concern to public health are the particles small enough to be inhaled into the deepest parts of the lung. These particles are less than 10 microns in diameter - about 1/7th the thickness of a human hair - and are known as PM10. This includes fine particulate matter ("PM") known as PM2.5. PM10 is a major component of air pollution that threatens both our health and our environment." SOURCE California Air Resources Board, Air Pollution - Particulate Matter Brochure "Diesel engines emit a complex mixture of air pollutants, composed of gaseous and solid material. The visible emissions in diesel exhaust are known as particulate matter or PM. In 1998, California identified diesel exhaust PM as a toxic air contaminant based on its potential to cause cancer, premature death, and other health problems. Diesel engines also contribute to California's fine particulate matter PM2.5 air quality problems. Those most vulnerable are children whose lungs are still developing and the elderly who may have other serious health problems. Based on year 2005 emissions in California, diesel PM contributes each year to approximately 3,500 premature deaths and thousands of hospital admissions, asthma attacks and other respiratory symptoms, and lost workdays. Overall, diesel engine emissions are responsible for the majority of California's known cancer risk from outdoor air pollutants. In addition, diesel soot causes visibility reduction and is a potent global warmer." SOURCE California Air Resources Board, factsheet - Health Effects Of Diesel Exhaust In United States of America (U.S.), the U.S. Environmental Protection Agency ("EPA"), the California Air Resources Board ("CARB") and the Mine Safety and Health Administration ("MSHA") continue to place great emphasis on compliance with emission reduction standards. Both the U.S. Federal and California regulatory bodies currently impose stringent emission control requirements on motor vehicles sold in their respective jurisdictions and it is anticipated that these emission requirements will become even more stringent in the future. As a result, ESW believes that the markets for off-road vehicles, utility engines and retrofitting existing vehicles will have great potential for its products in future years. The cost of meeting emission regulations, retrofit and replacement projects in the U.S. is estimated to be approximately $7.0 billion dollars as published in the National Clean Diesel Campaign Fact Sheet (Source EPA's National Clean Diesel Campaign Fact Sheet). California Air Resources Board estimates retrofits and engine replacements for approximately 420,000 trucks and buses registered in California as well as those transiting California roadways from other states and countries. As of today, sixteen U.S. states have committed to voluntarily adopt California's stricter regulations to control greenhouse gas emissions. Over the last five years, the EPA has brought forward a number of very successful innovative programs all designed to reduce emissions from diesel fleets. In conjunction with state and local governments, public interest groups and industry partners, the EPA has established a goal of reducing emissions from the over 11 million diesel engines in the existing fleets by 2014. Looking at these engines, the EPA determined there were general sectors that provided the best opportunity to obtain significant reductions. These sectors are transportation, ports, construction, freight, and agriculture. In addition, school buses were identified as a primary area where diesel emission control can greatly help a susceptible population. The EPA offers numerous programs in order to provide technical and financial assistance to stakeholders interested in reducing their fleets' emissions effectively and efficiently. The National Clean Diesel Funding Assistance Program is funded at $27.6 million for 2008 (Source: EPA's - National Clean Diesel Campaign). The EPA's Regional offices will administer competitions to deploy EPA or CARB verified and certified technologies to significantly reduce diesel emissions from existing fleets. Additionally, the EPA has established a nitrogen dioxide ("NO2") limit for diesel retrofit technologies verified under the EPA's National Clean Diesel Campaign ("NCDC") Retrofit Technology Verification Program. Effective January 1, 2009, the EPA is implementing an NO2 increase limit that is harmonized with the requirements for retrofit technologies by the California Air Resources Board. This requirement limits the increase in NO2 emissions associated with retrofit technologies to levels no greater than 20% above baseline engine levels. 5 CARB REGULATIONS CARB has adopted a pioneering regulation aimed at reducing toxic and cancer-causing diesel emissions from the state's estimated 180,000 "off-road" vehicles used in construction, mining, airport ground support and other industries. The requirements and deadlines vary depending on fleet size. For Large fleets, with a combined horsepower of 5000 or more, which equates to approximately 15-20 machines, must begin complying in 2010. Affected vehicles include bulldozers, loaders, backhoes and forklifts, as well as many other self-propelled off-road diesel vehicles. CARB's action also sets the stage for efforts to develop similar requirements for the hundreds of thousands of on-road trucks that travel on California's roads every day. This is called the "1B Goods Movement program". The California Air Resources Board adopted two critical regulations on December 12, 2008 directly aimed at cleaning up harmful emissions from the estimated one million heavy-duty diesel trucks that operate in California. Beginning January 1, 2011, the State-wide Truck and Bus rule will require truck owners to install diesel exhaust filters on their rigs, with nearly all vehicles upgraded by 2014. Owners must also replace engines older than the 2010 model year according to a staggered implementation schedule that extends from 2012 to 2022. Heavy-duty big rigs are the largest remaining source of unregulated diesel emissions; responsible for 32 percent of the smog-forming emissions and nearly 40 percent of the cancer-causing emissions from diesel mobile sources (other diesel emitters include trains, off-road vehicles and marine engines). The greenhouse gas reduction measure applies to more than 500,000 trailers, while the diesel regulation applies to about 400,000 heavy duty vehicles that are registered in the state, and about 500,000 out-of-state vehicles that do business in California. However, because many heavy duty vehicles are replaced or retired due to normal business practices on a faster schedule than what the new regulation will require, the number of vehicles expected to be retrofit by 2014 under the rule is about 230,000, while up to 350,000 vehicles would be replaced earlier than normal over the next 15 years. To help truck owners upgrade their vehicles, California is offering more than a billion dollars in funding opportunities. Options include Carl Moyer grants, which are designated for early or surplus compliance with diesel regulations; Proposition 1B funds, for air quality improvements related to goods movement; and AB 118, which establishes a low-cost truck loan program to help pay for early compliance with the truck rule. In addition, CARB is evaluating ways to integrate these programs so that truckers can get a grant and a loan at the same time, minimizing paperwork and significantly reducing the monthly payments for a new truck loan. MINE SAFETY AND HEALTH ADMINISTRATION REGULATIONS On May, 18, 2006, Mine Safety and Health Administration ("MSHA") promulgated its final rule on Diesel Particulate Matter ("DPM") Exposure of Underground Metal and Non metal Miners, phasing in the final DPM exposure limit over a 2-year period and will become effective May 20, 2008. The May 18, 2006 final rule requires mine operators to ensure that the miners' personal exposures to DPM in an underground mine does not exceed an airborne concentration of 160 micrograms of total carbon per cubic meter of air during an average 8-hour equivalent full shift, effective May 20, 2008. Emerging market regions such as Asia, Latin America and Eastern Europe are expected to experience significant growth in vehicle demand over the next ten years. With a global shift in manufacturing to lower cost locations there are significant number of suppliers and OEMs of internal combustion and compression engines looking for cost effective ways to bring their engines into compliance with the current North American emissions reduction targets demanded upon them. OEMs, resellers of engines and buyers of retrofit applications, are increasingly requiring their suppliers to have the capability to design and manufacture their products to meet this demand. Additionally, Customers are always looking for higher-technology products with a lower price. BUSINESS STRATEGY ESW's primary business objective is to capitalize on the growing global requirement of reducing emissions, by offering the best available catalyst technology solutions and build upon its military product lines to continue sales to the U.S. and North Atlantic Treaty Organization ("NATO") countries. ESW intends to continue to execute on the following key strategies in order to leverage its strengths and position ourselves for long-term growth and success: o Continue to invest in research and development in order to have products continually meet the new legislative regulations. o Continue investing in new product and process technologies to strengthen and differentiate its product portfolio. ESW also intends to continue its efforts to develop innovative products and manufacturing processes to serve its customers better and improve its product mix and profit margins. o Focus on its core business, ESW intends to continue to strengthen its growth strategy by seeking complimentary partnerships and investments that provide a competitive advantage and growth opportunities for its core businesses. o Maximize production capabilities, ESW continually implements initiatives designed to improve product quality while reducing manufacturing costs. ESW periodically evaluates opportunities to maximize facility and asset utilization. 6 o Focus on strategic partnerships and alliances that do not require significant upfront cash investments to pursue new business opportunities in other environmental products and sectors. COMPANY HISTORY Initially ESW was a development stage company. In 2001, ESW acquired specific equipment and technology that allowed it to focus on the production of metallic based catalytic converter products containing metallic wire based substrates, chemical formulas and precious metals. Subsequently, in 2001, ESW launched its first commercially viable product, The Quiet Cat(TM), a product for small engine applications, which serves as a catalytic converter within the muffler unit. ESW also developed commercially viable catalytic converter technologies both for diesel and gasoline products. The Clean Cat(R) product line is utilized in diesel applications. The market for ESW products includes Original Equipment Manufacturers ("OEM") of engines for automotive, off-road and stationary engines and other manufacturers of equipment who use internal combustion and compression combustion engines. ESW servers the replacement and retrofit markets for these products as well. In late 2001 ESW launched Air Sentinel(TM) a product line targeted at the large-scale off-road diesel engine market. Pro Cat(TM) was launched during 2001, this catalytic product was designed specifically for CNG/LPG (alternative fuels) engines for the customers in the utility, on-road, off-road and heavy-duty markets. In 2005 ESW launched a product compatible with two stroke diesel engines called XTRM Cat(TM); this product is aimed toward the locomotive and marine industry. In 2006 ESW launched M Cat(TM) and Terra Cat(TM) products which target the mining industry and associated equipment and vehicles. ESW also launched a military catalyst/muffler system branded Stlth Cat(TM) for usage on military vehicles and equipment. In 2007 ESW launched its proprietary heat/infrared reduction and exhaust shielding system branded SCAT-IR-SHIELD(TM). The SCAT-IR-SHIELD(TM) system is engineered to reduce the overall heat/infrared, sound and exhaust signature of the U.S. Marines' Light Armoured Vehicle (LAV). In late 2007 and through 2008 ESW undertook the initiative to meet regulations implemented by EPA's National Clean Diesel Campaign ("NCDC") with respect to nitrogen dioxide ("NO2") limits for diesel retrofit technologies. ESW has completed the development of a viable active level III (greater than 85% PM reduction) diesel particulate filter system targeted at off-road and on-road diesel engines. ESW has also completed the development of an advanced Level I (25% to 49% PM reduction) and Level II (50% to 84% PM reduction) technology to meet or exceed the standards set by EPA's National Clean Diesel Campaign. PRINCIPAL PRODUCTS AND THEIR MARKETS: The combined technologies of ESW's wire mesh substrate and chemical wash coat form the basis of ESW's woven stainless steel mesh catalytic converter. This product can be produced in almost any size and shape. The wire mesh substrate creates a turbulent environment, which increases catalytic activity, and when manufactured for diesel applications, is designed to serve as a partial filter of PM, an important factor in diesel emission control. ESW's manufacturing process and chemical wash coat formula is proprietary. ESW's customers have integrated its products as a component to meet their own needs, and have, where appropriate, received certification by the EPA, CARB, MSHA, and other authorities for engine products containing ESW's catalyst products as a component and requirement in the certification. Customers have had their engines certified using Clean Cat (R), Pro Cat (TM), Permissible Cat (TM), Quiet Cat (TM) and Terra Cat(TM) products. ESW's products are being marketed both domestically and internationally, including Asia, Europe and South America. ESW offers, and is developing catalyst products intended to allow its customers to comply with environmental regulations currently in effect, as well as, the regulations and increases in these requirements mandated for the future. In March 2003, ESW became the first company to receive a Performance Verification from ETV Canada for its High Performance Diesel Oxidation Catalyst ("DOC"), for utility engines, achieving a 66.7% PM reduction by weighted average. In 2004 ESW received an ETV Canada Certificate in an award ceremony at the Globe 2004 Environmental Exposition. ESW received a Gasoline Passenger Vehicle CARB Verification in August 2004. ESW is the first company in the world to achieve the Level II designation without the usage of a secondary technology and received in September 2004 an over the road Heavy Duty Diesel DOC Level II CARB Verification, this verification status has been removed effective January 01, 2009 with the EPA's newly regulated NO2 limits. The generation II of this product which meets or exceeds the newly regulated NO2 limits is now under the certification / verification review process with EPA. The EPA's Voluntary Diesel Retrofit Program signed a Memorandum of Agreement ("MOA") with the State of California Air Resources Board ("CARB") for the coordination and reciprocity in diesel retrofit device verification. The EPA recognizes and accepts those retrofit hardware strategies or device-based systems that have been verified by CARB. Upon verification of ESW's new line of products this reciprocity agreement will allows ESW's technology to be used in the remaining 49 states and it will allow ESW to participate in EPA funded programs worldwide. ESW's target markets include the following five segments: 1. On road vehicle sector generally comprised of on road trucks, school buses, waste haulers along with private and municipal fleets regulated in North America by EPA and CARB standards. 2. Off road engine / vehicle sector defined as construction equipment, tractors, power generators, irrigation pumps, marine, locomotive and others. 3. Mining Industry, including all equipment and vehicles operating in and around a mine. 7 4. Military Sector, including catalyst products and support technologies. 5. Small engine utility sector comprised of lawn and garden utility engines regulated in North America by EPA and CARB standards. ESW markets its catalyst products using the trade names, ThermaCat(TM), Clean Cat(R), Enviro-Cat (TM), Air Sentinel(TM), XTRM Cat(TM), MCat(TM), Terra Cat (TM), Particulate Reactor(TM), Permissible Cat(TM), Stlth Cat(TM) and the Scat-IR-Shield(TM), TempMax(TM),. These products are marketed for spark ignited gasoline, CNG/LPG (alternative fuels) and diesel engine emissions control, and range in sizes from utility applications to large industrial applications. Some products are presently being used by customers who have had their engines certified using ESW catalysts. In addition to manufacturing products in house, ESW has established relationships with outside catalytic converter assemblers and marketers that fabricate ready to install products that can incorporate ESW substrates. This has allowed ESW to concentrate on what it believes is its core technological competency, which is in the development and manufacturing of catalyzed substrates. The products ESW has developed and branded to serve current and future market opportunities are: o ThermaCat(TM) active Particulate Filter System. The system is fully automated and is designed to meet CARB Level III (greater than 85% PM) emission reduction levels while maintaining a sub 20% NO2 make. The system also reduces hydrocarbons, carbon monoxide and unpleasant odors. o Generation II Particulate Reactor(TM) is a high efficiency Level II (greater than 50% PM) diesel substrate designed to reduce particulate matter in diesel exhaust while maintaining a sub 20% NO2 make. It is also designed to reduce hydrocarbons, carbon monoxide and unpleasant odors. o Clean Cat (R) is a High Performance DOC designed to be utilized on diesel engines. This technology is capable of meeting EPA's Level I (greater than 20% PM) emission reduction levels. It is also designed to reduce hydrocarbons, carbon monoxide and unpleasant odors. o Enviro Cat(TM) is a three-way gasoline catalytic converter specifically designed for spark ignited internal combustion engine applications. o ESW's Permissible Cat(TM) is a current product that helps the mining community meet the new emission targets regulated by MSHA and is currently being used by Bucyrus Inc as part of an engine pack to meet the new MSHA underground coal mining requirements. It is also designed to reduce hydrocarbons, carbon monoxide and unpleasant odors. o M Cat(TM) is a market specific catalyst, specially developed for use in the Mining industry and has demonstrated stand alone PM reduction above 40%. It is also designed to reduce hydrocarbons, carbon monoxide and unpleasant odors. o Terra Cat(TM) is a combination of high temperature fiberglass filter and M Cat(TM) diesel oxidation catalyst (DOC). It is an MSHA approved technology designed for all size off-road combustion and compression engines, yielding 85% or greater PM reduction efficiency. It is also designed to reduce hydrocarbons, carbon monoxide and unpleasant odors. o Air Sentinel(TM) is a heavy-duty industrial catalytic converter/silencer for stationary engines. The Air Sentinel(TM) can be used on diesel, propane, natural gas and diesel fuel. It is also designed to reduce hydrocarbons, carbon monoxide and unpleasant odors. o XTRM Cat(TM) is a heavy duty oxidation catalytic converter used to reduce particulate matter. It is designed for large two stroke diesel engines typically found in the locomotive or marine industries. It is also designed to reduce hydrocarbons, carbon monoxide and unpleasant odours. o TempMax(TM) is an engine exhaust tube designed to be installed as a direct replacement to the existing OEM factory unit. TempMax(TM) delivers the engines exhaust heat energy with very little temperature loss directly to the after-treatment device, sustaining long term catalyst performance in its application. o Stlth Cat(TM) unit construction incorporates the Company's proprietary catalyzed wire mesh substrate integrated into an advanced sound abatement system. The units were specifically engineered to decrease military vehicles and equipments overall signature by reducing the diesel engines black smoke (soot), eye and throat irritating noxious diesel engine emissions, temperature and sound. o Scat-IR-Shield(TM). This innovative technology, operates in combination with the Company's proprietary STLTH CAT(TM), a high performance catalyzed military muffler. The complete system is engineered to reduce the overall heat/infrared, sound and exhaust signature of military vehicles and equipment. ESW's Air Testing Services (ATS) testing facility enables it to expand existing certification and verification services to OEM's by providing advanced research, engineering and testing capabilities on a vast array of engine types and sizes. 8 ESW also has distribution agreements in place for to the following product: o Notox Silicon Carbide Substrates for diesel exhaust after-treatment device technologies. The SIC substrate technology is extremely durable and features the highest level of PM filtration efficiency. DISTRIBUTION METHODS OF PRODUCTS ESW has developed and employs a strategy whereby it sells products in three principal markets; direct to 1) OEM producers such as automotive and industrial equipment manufacturers, 2) sales to the retrofit and 3) aftermarket or the replacement equipment market through centralized distributors with existing distributions within their individual countries. ESW utilizes its own sales personnel, local trade magazines and trade shows to complement distribution of its products globally into key markets. ESW has partnered with International Truck and Engine Corporation which provides ESW with access to more than 900 dealers and associates on a global basis. ESW has also partnered with RECAT the country's largest surplus Caterpillar equipment dealer. RECAT's focus is geared towards the construction equipment sector and they are strategically located in the South West and North East where the bulk of the off-road retrofit will take place. In the mining sector ESW is represented by Filter Services & Testing Corporation and Bucyrus America Inc. ESW is currently working with key distributors in North American, European and Asian Markets at the government and local levels to develop retrofit catalyst applications. ESW's Sales and Marketing staff work closely with design and engineering personnel to prepare the materials used for bidding on new business and to provide a consistent interface between ESW and its key customers. COMPETITION Currently there is intense competition among companies that provide solutions for pollutant emissions for diesel, gasoline and CNG/LPG alternate fuelled engines. ESW competes primarily on the basis of technology, performance, price, quality, reliability, distribution, customer service, and support. ESW faces direct competition from companies that market similar products with stronger financial, technological, manufacturing and personnel resources. Other companies offer products that potential customers may consider to be acceptable alternatives to ESW's products and services. ESW also faces direct competition with companies who purchase their substrates from others, and do further processing with their own formulas and fabrication for direct sale to the market place. Corning, EMITEC, and NGK: These companies are providers of ceramic and metal foil substrates for Original Equipment Manufacturers and Catalyst coating companies. Johnson Matthey, BASF/Engelhard, and Umicore: These companies specialize in Chemical/Catalyst coatings and some application specific finished products. Nelson, Donaldson, and Arvin-Meritor: These companies are packagers of Catalytic converter substrates into muffler units for OEM's and retrofit applications. ESW believes it can address these competitive issues with the following: o Unique Substrate Technology - ESW's proprietary wire mesh substrate is very flexible in design, size, performance and overall product configuration. The high mechanical and thermally durable wire mesh technology is very suitable for Diesel Oxidation Catalyst, Three-way Catalyst and Selected Catalytic Reduction applications. The technology is very cost effective and can be applied to almost any application. Traditional ceramic or metal based flow-through type technologies are typically less efficient, larger in size, and are only available in pre-configured sizes and designs. o Solutions Provider - ESW does not only offer an emission control component, it also provides a variety of engineering solutions and services as required by the authorities for demonstrating new technologies. (Product development and project management services) This competitive edge allows ESW to participate in emerging markets such as emission control retrofit solutions for locomotive and marine applications. It also enables ESW to respond to immediate and time-sensitive business opportunities such as the Improvised Electronic Devices / Mine blast energy absorption project with the U.S. Military. o Vertically Integrated Manufacturing - Having all services combined under one roof is an advantage and is very unique in the emission control industry. ESW can respond immediately to customers in need for quick turnaround engineering solutions and fast product lead-times. The close cooperation between sales, research and development, implementation and manufacturing have helped in the past, and will help in the future to capitalize on "last minute" business opportunities where the customer is in need for control solutions enabling them to be in compliance with the latest emission standards. With the Air Testing Services and facility, ESW is also engaged in the very competitive market of pay for service emissions testing. Competition is this arena is primarily driven by price and reputation. ESW's major competitors in this area are Southwest Research Institute ("SWrI"), Clean Air Engineering, and several smaller testing facilities across the U.S. and Canada. The Air Testing facility is currently being used to verify ESW's Level III (greater than 85% PM reduction) products with CARB. 9 RAW MATERIALS The primary raw materials used to manufacture ESW products includes, but is not limited to stainless steel, stainless steel tubing, precious metals such as platinum and palladium and other components. ESW does not carry large inventories of raw materials or finished products in excess of those reasonably required to meet production and shipping schedules. Overall, raw steel and precious metals accounted for the most significant component of ESW's raw materials costs in 2008. ESW does spot buys of steel from suppliers to meet customer demand. Platinum prices remained high during the early part of 2008 and fell during the later part of the year. ESW continues to implement a strategy in an effort to mitigate the effect of fluctuating prices of raw materials on its result of operations. This strategy includes, delaying price increases from raw material suppliers; selling steel off cuts and scrap at the highest possible price; increase cost reduction programs throughout the business; and negotiate price relief from customers. ESW does not currently hedge any raw materials; however this approach could be considered as demand for ESW products increases. ESW's results of operations could be adversely affected if steel and precious metal prices fluctuate unless it is successful in passing along these price undulations to customers or otherwise offset these operating costs. Other raw materials or components purchased by ESW include tools, jigs, fasteners, other steel and component products, as well as a variety of custom alloy materials and chemicals, all of which are available from numerous sources. CUSTOMERS ESW recorded sales from approximately 21 customers in Fiscal 2008 as compared to 28 in Fiscal 2007. One of these customers accounted for 32 % and two other customers accounted for 29 % and 15% of ESW's revenue in Fiscal 2008. In Fiscal 2007, one customer accounted for 90% and two other customers accounted for 2% and 1% of ESW's revenue. ESW anticipates continuing its program of establishing long-term relationships with existing customers. ESW's sales and marketing efforts are designed to create overall awareness of its technology solutions and manufacturing capabilities, in order to have ESW considered and selected to supply its products for new and retrofit applications. Most of the sales and marketing personnel have engineering backgrounds which enable them to understand and participate in the design and engineering aspects of acquiring new business as well as ongoing customer service. When deemed appropriate, ESW also participates in industry trade shows. The loss of, or major reduction in business from, one or more of the major customers could have a material adverse effect on ESW's liquidity, financial position, or results of operations. PATENT AND TRADEMARKS ESW is developing technologies or furthering the development of acquired technologies through internal research and development efforts by its engineers and product specialists. Where practical, ESW is seeking to obtain the exclusive rights to use technology through patents or licenses for proprietary technologies or processes. Through its wholly owned subsidiary, ESW holds both Canadian and U.S. patents and pending applications covering the catalytic converter technology. The protections provided by patents and those sought by pending patents are important to ESW's business, although management believes that no individual right is material to ESW's business at the present time. There can be no assurance that these patents, combined with pending patent applications or existing or future trade secret protections that ESW seeks will survive legal challenge, or provide meaningful levels of protection. The Canadian patent only affords protection against the manufacture, use or sale of the patented technology within Canada. The U.S. patent application for ESW's method of producing a catalytic element was filed on October 1, 2004 and a patent has been issued as of December 02, 2008. There can be no assurances that any patents ESW may have or has applied for or any agreements ESW has in place or enters into will protect the technology and or prevent competitors from employing the use of ESW's design and production information. Moreover, there is no guarantee that ESW's proprietary rights will provide any significant competitive advantages. Additionally, ESW possesses certain registered, pending and common law trademarks. ESW considers the goodwill associated with the trademarks to be an important part of developing product identity. PRODUCT CERTIFICATION To date, ESW's customers have acquired, where necessary, engine certifications and catalyst verifications using ESW products from such authorities as the EPA, Mexico Department of Ecology, CARB and MSHA; ETV Canada for gasoline and diesel products. ESW was the first catalytic substrate manufacturer and catalyst coating company in North America to verify a metallic wire mesh substrate based catalytic converter system as a gasoline retrofit replacement devices. It is believed that the receipt of this exemption may allow for potential sales opportunities into the replacement catalytic converter and retrofit market. 10 ESW was the first catalytic substrate manufacturer and catalyst coating company in the world to verify a metallic wire mesh substrate based catalytic converter system as a passive stand alone Level II diesel retrofit replacement device. This verification status has been removed by CARB effective January 01, 2009 with the CARB/EPA's newly regulated NO2 limits In September 2004, ESW received a Level II CARB Executive Order ("EO") for an advanced Diesel Catalyst (Particulate Reactor (TM)) for all diesel engine models from the 1991 through 1993 model years used in on-road applications operating on standard CARB diesel fuel, and subsequently requested the Executive Order be expanded to include Medium Heavy Duty applications (up to and including 8 litre) for engine models from 1994 through 1997. In July 2006 CARB granted the extension. On May 7, 2007 ESW announced that it re-established its verification status with CARB for its proprietary Level II PARTICULATE Reactor(TM) catalyst device. This EO DE-04-011-02 allowed ESW to market the current Particulate Reactor(TM) for on-road applications through January 1, 2009. At the same time ESW received an EO from CARB which permits sale of catalytic converters for use on 4 litre or smaller gas engines for all model years up to 1995 on which GVW (gross vehicle weight) is 3,750 pounds or less. CARB has established three primary technology levels for diesel catalyst verifications. LEVEL I: PM reduction greater than 25% LEVEL II: PM reduction greater than 50% LEVEL III: PM reduction greater than 85% With new regulations becoming effective January 1, 2009, the EPA has established a nitrogen dioxide (NO2) limit for diesel retrofit technologies verified under the EPA's National Clean Diesel Campaign (NCDC) Retrofit Technology Verification Program. The EPA is implementing a NO2 increase limit that is harmonized with the requirements for retrofit technologies by CARB. This requirement limits the increase in NO2 emissions associated with retrofit technologies to levels no greater than 20% above baseline engine levels. ESW has completed an extensive research and development program to upgrade its existing Level II diesel retrofit replacement device to meet these new regulations. ESW has also completed the development for Level I and Level III technologies which will undergo the verification / certification process through CARB and EPA in 2009. The products that ESW has developed and/or presented for verification / certification cover the following primary technology levels established by CARB: o Level I + (+ INDICATES 2009 NO2 COMPLIANCE) o Diesel Oxidation Catalyst - PM reduction greater than 25% o High performance Diesel Oxidation Catalyst - PM reduction greater than 30% o Level II + o Diesel Oxidation Catalyst with Crank Case Ventilation - PM reduction greater than 50% o Level III + o Off Road Active Diesel Particulate Filter - PM reduction greater than 85% o On Road Active Diesel Particulate Filter - PM reduction greater than 85% ESW's products are generally sold according to appropriate government application regulations; however, ESW does not necessarily need government approval to sell its products into unregulated markets. WARRANTY MATTERS ESW may face an inherent business risk of exposure to product liability and warranty claims in the event that its products fail to perform as expected. ESW cannot assure that it will not experience any material warranty or product liability losses in the future or that it will not incur significant costs to defend such claims. In addition, if any of the products are or are alleged to be defective; ESW may be required to participate in a recall involving such products. Each of ESW's customers has its own policy regarding product recalls and other product liability actions relating to its suppliers. A successful claim brought against ESW or a requirement to participate in a product recall may have a material adverse effect on ESW's business. Some OEMs and emission solution customers are also increasingly requiring their outside suppliers to guarantee or warrant their products and bear the costs of repair and replacement of such products. Depending on the terms under which ESW supplies products to these customers, the customer may hold ESW responsible for some or all of the repair or replacement costs of defective products, when the product supplied do not perform as represented. ESW carries insurance for certain legal matters including product liability; however, ESW does not carry insurance for recall matters, as the cost and availability for such insurance, in the opinion of management, is cost prohibitive or not available. To date ESW has not had any product warranty recalls. MANUFACTURING ESW has made capital investments in manufacturing capability to support its products. ESW's substrate manufacturing plant located in Concord Ontario Canada enables ESW to control the complete manufacturing process required for production of catalyzed substrates. Catalyzed substrates are the integral part of all catalytic converter systems sold worldwide. This facility has the capability to design, develop and manufacture complete catalytic converter systems based on customer requirements. 11 ESW has made significant capital investment its Tech Center based in Montgomeryville Pennsylvania. This facility manufactures and provides the catalytic and chemical wash coat solutions for the Concord Ontario plant. As well, all of ESW's emission testing laboratories and testing capabilities are located there. The 40,200 sq ft facility houses a state of the art 18,000 sq ft expansion of "Air Testing Services", an EPA/CARB/MSHA recognized engine/vehicle emissions testing laboratory. The facilities include several testing systems, including nine dedicated engine and vehicle chassis test cells. These cells are used for certification and verification for engines ranging from 0.5 to in excess of 600 horse power. It is ESW's belief that the Air Testing Services ("ATS") group is equipped to better service its clientele for engine testing as well as EPA/CARB emissions testing and certification programs. ATS is also in a better position to provide additional testing support for ESW's internal research and development ("R&D") programs. Regular upgrading of ESW's manufacturing and testing capabilities is required to meet the challenges of a fast changing and growing business environment, increase the flexibility, efficiency and improving operating quality, while minimizing the overall effective costs, to produce products. ESW utilizes ISO 9001:2000 protocols and structured communication meetings at all levels of manufacturing to provide training and instruction as well as to assure a cohesive, focused effort toward common goals. ESW encourages employee involvement in all aspects of its business and views such involvement as a key element in its future success. ESW also pursues involvement from its suppliers and customers, which it believes is necessary to assure a consistent high quality and on time delivery of raw materials, components and finished products. RESEARCH AND DEVELOPMENT Prior to fiscal 2001, ESW was a development stage company. Starting in fiscal 2001, ESW began the transition from a development stage to an operating (manufacturing) company. In 2008, research and development costs amounted to $1,323,754 (2007 - $757,900). ESW aggressively pursues testing and research and development for new products to serve potential customers and meet new regulations that are regularly being imposed on the industry. Through a combination of proprietary methods for improving ESW's catalyzed substrates there are prospects for the development of innovative applications outside of ESW's present product line. ESW continues to spend further resources on new research and development projects. ENVIRONMENTAL MATTERS ESW is presently engaged in a business that does not generate significant hazardous wastes. ESW's facilities may have tanks for storage of diesel fuel and other petroleum products that are subject to laws regulating such storage tanks. Federal, state, and local provisions relating to the protection of the environment have not had, and are not expected to have, a material adverse effect on ESW's liquidity, financial position, and results of operations. However, like all manufacturers, if a release of hazardous substances occurs, ESW may be held liable for the contamination, and the amount of such liability could be material. While ESW devotes resources designed to maintaining compliance with these requirements, there can be no assurance that ESW operates at all times in complete compliance with all such requirements. EMPLOYEES ESW and its subsidiaries presently employ 45 full-time employees. ESW does not have any collective bargaining agreements and considers its relationship with its employees to be good. ITEM 1A. RISK FACTORS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report includes statements of our expectations, intentions, plans and beliefs that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the safe harbour protection provided by those sections. These statements, which involve risks and uncertainties, relate to matters such as sales growth, price demand for our products and services as well as competition, and our ability to obtain additional financing should same be necessary to sustain our operations. We have used words such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "thinks," "estimates," "seeks," "predicts," "could," "projects," "potential" and other similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties, risks and factors relating tour operations and business environments, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by these forward-looking statements. These risks and other factors include those listed in this Item 1A. "Risk Factors," and elsewhere in this report. When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and the documents incorporated by reference. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us. There may also be other factors that we cannot anticipate or that are not described in this report that could cause results to differ materially from our expectations. Forward-looking statements speak only as of the date they are made and we assume no obligation to update them after the date of this report as a result of new information, future events or subsequent developments, except as required by the federal securities law. 12 IF CASH FLOWS FROM OPERATIONS ARE NOT SUFFICIENT AND IF ESW IS UNABLE TO OBTAIN ADDITIONAL FUNDING THEN, ESW MAY HAVE TO SIGNIFICANTLY CURTAIL THE SCOPE OF ITS OPERATIONS AND ALTER ITS BUSINESS MODEL. ESW's sales and revenues continue to be unpredictable. In the event that profitable operations are not achieved, ESW's present financial resources and history of its ability for raising cash when needed, should allow it to continue operations through at least the next nine months. Should ESW receive a large order (defined by management as one in which monthly production and deliveries would exceed $2 million), ESW will need to either negotiate extremely favourable payment terms providing for at least some advance payment or ESW will need to obtain either debt or equity financing to allow it to purchase sufficient raw materials and meet its working capital needs. In 2007 ESW obtained a work in progress credit facility that will provide working capital related to export orders, however ESW needs to be profitable and meet certain financial covenants to use the facility. If additional financing is required and not available when required or is not available on acceptable terms, ESW may be unable to continue its operations at current levels or satisfy the requirements necessary to fill a large order. ESW continues to impose actions designed to minimize its operating losses. ESW would consider strategic opportunities, including investments in ESW, or other acceptable transactions, to sustain its operations. There can be no assurances that additional capital will be available to ESW on acceptable terms, or at all. ESW HAS INCURRED LOSSES IN THE PAST AND EXPECTS TO INCUR LOSSES IN THE FUTURE SHOULD ITS BUSINESS PLAN NOT BE EFFECTIVE. ESW has incurred losses in each year since its inception. ESW's net loss for the fiscal year ended December 31, 2008 was $7,091,252 and accumulated deficit as of December 31, 2008 was $28,586,428. As ESW's sales and revenue continue to be unpredictable, ESW expects to experience additional periods with operating losses. THE PRICE OF ESW'S SHARES MAY BE ADVERSELY AFFECTED BY THE PUBLIC SALE OF A SIGNIFICANT NUMBER OF THE SHARES ELIGIBLE FOR FUTURE SALE. Sales of a large amount of ESW's common stock in the public market could materially adversely affect the market price of ESW's common stock. Such sales may also inhibit ESW's ability to obtain future equity or equity-related financing on acceptable terms. The issuance of additional shares could have a significant adverse effect on the trading price of ESW's common stock. RISKS RELATED TO THE MARKET FOR ESW'S COMMON STOCK THE PRICE OF ESW'S COMMON STOCK HAS BEEN HIGHLY VOLATILE. ESW's common stock has traded as low as $0.06 per share and as high as $0.58 per share in the twelve (12) months ended December 31, 2008. Some of the factors leading to the volatility include: o price and volume fluctuation in the stock market at large and market conditions which are not necessarily related to ESW operating performance; o fluctuation in ESW's operating results; o concerns about ESW's ability to finance continuing operations; o financing arrangements which may require the issuance of a significant number of shares in relation to the number shares of ESW's common stock currently outstanding; o announcements of agreements, technological innovations or new products which ESW or its competitors make; o costs and availability of precious metals used in the production of ESW's products; and o Fluctuations in market demand and supply of ESW products. ESW'S COMMON STOCK IS CURRENTLY TRADED ON THE OVER-THE-COUNTER-BULLETIN-BOARD AND THE FRANKFURT EXCHANGE AND AN INVESTOR'S ABILITY TO TRADE ESW'S COMMON STOCK MAY BE LIMITED BY TRADING VOLUME. The trading volume in ESW's common stock has been relatively limited. A consistently active trading market for ESW's common stock may not continue on the Over-The-Counter-Bulletin-Board or the Frankfurt Stock Exchange. The average daily trading volume of ESW common stock on the Over-The-Counter-Bulletin-Board for the year ended December 31, 2008 was approximately 28,829 shares. While ESW's common stock started trading on the Frankfurt Exchange on March 16, 2007, ESW has a limited trading history and there can be no assurances that there will be increased liquidity in ESW stock. 13 ESW's Board of Directors may explore alternative listings of its Common Stock if deemed beneficial to ESW's shareholders. If ESW were to seek an alternative listing of its Common Stock, it may incur significant capital expenditures beyond those anticipated for general business operations. Disciplined capital expenditure decisions, focused on investments made for maintaining high quality service, cost structure improvement, and cash flow generation are essential. THE COMPANY MAY ISSUE MORE SHARES IN CONNECTION WITH A MERGER OR ACQUISITION, WHICH WOULD RESULT IN SUBSTANTIAL DILUTION. ESW's Certificate of Incorporation authorizes the issuance of a maximum of 125,000,000 shares of common stock. Any merger or acquisition effected by ESW may result in the issuance of additional securities without stockholder approval and may result in substantial dilution in the percentage of ESW's common stock held by ESW's then existing stockholders. Moreover, the common stock issued in any such merger or acquisition transaction may be valued on an arbitrary or non-arm's-length basis by ESW management, resulting in an additional reduction in the percentage of common stock held by ESW's then existing stockholders. ESW's Board of Directors has the power to issue any or all of such authorized but unissued shares without stockholder approval. To the extent that additional shares of common stock are issued in connection with a business combination or otherwise, dilution to the interests of ESW's stockholders will occur and the rights of the holders of common stock might be materially adversely affected. SEVERAL OF ESW'S SHAREHOLDERS OWN A SIGNIFICANT AMOUNT OF ESW'S OUTSTANDING SHARES AND COLLECTIVELY MAY BE ABLE TO DECIDE CERTAIN CORPORATE ACTION. Four of ESW's shareholders collectively own 31,381,383 shares which is equivalent to 43.0 percent of its currently issued and outstanding common stock as of March 31, 2009 on an undiluted basis. As such, all or some of these shareholders may be able to control aspects of ESW's business operations including the election of board members the acquisition or disposition of assets and the future issuance of shares. RISKS RELATED TO ESW'S BUSINESS ESW'S RESULTS MAY FLUCTUATE DUE TO CERTAIN REGULATORY, MARKETING AND COMPETITIVE FACTORS OVER WHICH ESW HAS LITTLE OR NO CONTROL. The factors listed below some of which ESW cannot control may cause the Company's revenues and result of operations to fluctuate significantly: o Actions taken by regulatory bodies relating to the verification and certification of ESW products. o The extent to which ESW products obtain market acceptance. o The timing and size of customer purchases. o Customer concerns about the stability of ESW's business which could cause them to seek alternatives to ESW products. ESW IS CURRENTLY DEPENDENT ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF ITS REVENUES. ESW recorded sales from approximately 21 customers in Fiscal 2008 as compared to 28 in Fiscal 2007. One of these customers accounted for 32% and two other customers accounted for 29% and 15% of revenue in Fiscal 2008. In Fiscal 2007, one customer accounted for 90% and two other customers accounted for 2% and 1% of revenue. ESW anticipates continuing the program of establishing long-term relationships with existing customers. The loss of, or major reduction in business from, one or more of ESW's major customers could have a material adverse effect on ESW's liquidity, financial position, or results of operations. ESW DOES NOT HAVE A LONG HISTORY OF SELLING AND MARKETING ITS PRODUCTS. At the current time, ESW has limited marketing capabilities as compared to many of ESW's competitors. ESW does not have a large sales, promotion and marketing budget. ESW is constrained by the lack of working capital and its ability to raise the necessary cash flow from business operations to re-invest in its marketing programs. As a result of ESW's limited marketing capabilities, it is forced to rely upon customer referrals, trade publications and a small sales force. ESW's competitors have direct advertising and sales promotion programs for their products as well as sales and marketing personnel that may have a competitive advantage over ESW in contacting prospective customers. ESW's position in the industry is considered minor in comparison to that of its competitors. ESW continues to develop and explore new marketing methods and techniques such as, trade show representation and programs directed toward foreign customers. ESW's ability to compete at the present time is limited. ESW's success depends upon the ability to market, penetrate and expand markets and form alliances with third party international distributors. 14 In November 2007, ESW signed an Emissions Control and Technologies Provider Agreement with International Truck and Engine Corporation so that ESW's products are being marketed by their "Green Diesel technology" division and sold and installed by International's global dealer network. There can be no assurances that: o ESW's selling efforts will be effective; o ESW will obtain an expanded degree of market acceptance; o ESW will be able to successfully form additional relationships with international distributors to market its products. ESW DEPENDS UPON THE MARKETABILITY OF ITS CORE PRODUCTS. Catalytic converters are ESW's primary products. ESW may have to cease operations if its primary products fail to achieve market acceptance and/or generate significant revenues. Additionally, the marketability of ESW's products is dependent upon obtaining verification and certifications as well as the effectiveness of the product in relation to various environmental regulations in the various jurisdictions ESW markets and sells its products. ESW MAY NOT BE ABLE OBTAIN DIRECT OR INDIRECT REGULATORY CERTIFICATION OR VERIFICATION APPROVALS WITH RESPECT TO ITS PRODUCTS. The industry that ESW operates in is regulated, in the United States of America these regulations are enforced by U.S. Environmental Protection Agency ("EPA") and California Air Resources Board ("CARB"). ESW plans to further develop and market catalytic converter products and support technologies that meet new regulations enforced by these agencies (see ITEM 1. BUSINESS, PRODUCT CERTIFICATION for regulations). If ESW is unable to demonstrate the feasibility of these products or obtain or obtain in a timely manner, the verification and or certifications for its products from such regulatory agencies as the EPA or CARB, ESW may have to abandon the products or alter its business plan. Such modifications to ESW's business plan will have an adverse effect on revenue and its ability to achieve profitability. The regulatory approval process with EPA and CARB is complex and requires a lengthy process of durability testing which must precede final certification/verification of ESW's products. ESW does not control the timeliness of the certification/verification process; however, ESW has taken steps to ensure the efficacy of ESW's contribution to the certification/verification process. ESW FACES CONSTANT CHANGES IN GOVERNMENTAL STANDARDS BY WHICH ITS PRODUCTS ARE EVALUATED. ESW believes that due to the constant focus on the environment and clean air standards throughout the world, ESW will be required in the future to adhere to new and more stringent regulations both domestically and abroad. Governmental agencies constantly seek to improve standards required for verification and or certification of products intended to promote clean air. In the event ESW's products fail to meet these ever changing standards, some or all of its products may become obsolete. ESW DOES NOT HAVE A LONG HISTORY OF MANUFACTURING ITS PRODUCTS AND DOES NOT HAVE A LONG HISTORY OF MANUFACTURING ITS PRODUCTS IN COMMERCIAL QUANTITIES. ESW may encounter difficulties in ramping up production of current and any future products due to: o lack of working capital necessary to gain market acceptance; o quality control and assurance; o raw material supplies; o shortages of qualified personnel; o equipment capable of producing large quantities; and o insufficient manufacturing space. Any of the foregoing would affect ESW's ability to meet increases in demand should its products gain market acceptance and reduce growth in its sales revenues. 15 ESW FACES INTENSE COMPETITION AND RAPID TECHNOLOGICAL ADVANCES FROM COMPETITORS. Competition among companies that provide solutions for pollutant emissions from diesel, leaded and unleaded engines is intense. Several companies market products that compete directly with ESW products. Other companies offer products that potential customers may consider to be acceptable alternatives to ESW products and services. ESW faces direct competition from companies with far greater financial, technological, manufacturing and personnel resources, including Corning, NGK and Emitec. Corning and NGK are the two major manufacturers of ceramic cores, which are integral components in current catalytic converter production, and Emitec is the major manufacturer of metal cores. ESW also faces direct competition with companies like BASF/Engelhard and Johnson Matthey, who purchase their substrates from others, and do further processing with their own formulas and fabrication for direct sale to the market place. Newly developed products could be more effective and cost efficient than ESW's current products or those ESW may develop in the future. Many of ESW's current and potential future competitors have substantially more engineering, sales and marketing capabilities, substantially greater financial technological and personnel resources, and broader product lines than ESW. ESW also faces indirect competition in the form of alternative fuel consumption vehicles such as those using methanol, hydrogen, ethanol and electricity. ESW CLAIMS CERTAIN PROPRIETARY RIGHTS IN CONNECTION WITH THE DESIGN AND MANUFACTURE OF ITS PRODUCTS. The protections provided by patents and those sought by pending patents are important to ESW's business, although ESW believes that no individual right is material to its business at the present time. There can be no assurance that these patents, combined with pending patent applications or existing or future trade secret protections that ESW seeks will survive legal challenge, or provide meaningful levels of protection. Additionally, there can be no assurances when these patents or pending patents may be assigned to ESW directly. The Canadian patent only affords protection against the manufacture, use or sale of the patented technology within Canada. The U.S. patent application for ESW's method of producing a catalytic element was filed on October 1, 2004 and a patent has been issued as of December 2, 2008. ESW does not presently have any worldwide patent protection or any immediate plans to file for protection in any foreign countries other than Canada. There can be no assurances that any patents ESW may have or have applied for or any agreements ESW has in place or will enter into will protect ESW's technology and or prevent competitors from employing the use of ESW's design and production information. ATTRACTION AND RETENTION OF KEY PERSONNEL. ESW's future success depends in significant part, on the continued services of key technical, sales and senior management personnel. The loss of any of ESW's executive officers or other key employees could have materially adverse effects on ESW's business, results of operations and financial condition. ESW's success depends upon its continued ability to attract and attain highly qualified technical, sales and managerial personnel. There can be no assurances that ESW can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. ESW IS DEPENDANT UPON KEY SUPPLIERS FOR CERTAIN PRECIOUS METALS WHICH ARE ONE OF THE NECESSARY COMPONENTS OF ITS PRODUCTS. The production process of ESW's products includes certain raw materials including: o stainless steel; o steel tubing; o precious metals and o components. An extended interruption of the supply of precious metals and components necessary for the production of ESW's products could have an adverse effect on ESW. Further, a substantial price increase or decrease of the raw materials that are components of ESW's products could also have an adverse effect on ESW's business. ESW currently relies on third party vendors to provide certain components of its products. ESW currently does not have any fixed commitments from suppliers to provide supplies. ESW DOES NOT HAVE A SIGNIFICANT LEVEL OF PRODUCT LIABILITY INSURANCE DUE TO ITS HIGH COST. ESW develops, markets and sells catalytic converter products and support technologies. Any failure of ESW's product may result in a recall or a claim against ESW. Due to the high cost of product liability insurance, ESW does not maintain significant amounts of insurance to protect against claims associated with use of its product. Any claim against ESW, whether or not successful, may result in expenditure of substantial funds and litigation. Further, any claims may require management's time and use of ESW resources and may have a materially adverse impact. JOINT VENTURES AND/OR RELATIONSHIPS ENTERED INTO OR SOUGHT BY ESW FOR DEVELOPMENT AND SALE OF ITS PRODUCTS. ESW's success partially depends on the relationships that it develops with various OEM's, dealers, and distributers for the further development and deployment of its technology in the field. ESW does not manage these entities nor is it necessary that ESW will be able to create relationships with these entities. The absence of such relationships could adversely impact ESW's business plans. 16 ITEM 1B. UNRESOLVED STAFF COMMENTS. ESW has received no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of our 2008 fiscal year and that remained unresolved. ITEM 2. PROPERTIES ESW does not own real property. Through its subsidiary, ESW Canada Inc. ESW leases its executive, sales and marketing offices as well as its production center which totals approximately 50,000 square feet located at 335 Connie Crescent, Concord, Ontario Canada under an offer to lease that expires July 14, 2010. Additionally, ESW's wholly owned subsidiary ESW America Inc. leases approximately 40,200 square feet at 200 Progress Drive, Montgomery Township, Pennsylvania. The leasehold space houses ESW's research and development facilities. The lease expires January 31, 2010. ITEM 3. LEGAL PROCEEDINGS ESW is currently not involved in any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of ESW's security holders during the fourth quarter of 2008. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUERS PURCHASES OF EQUITY SECURITIES MARKET INFORMATION The Company's Common Stock is quoted under the symbol "ESWW.OB" on the Over The Counter ("OTC") Bulletin Board operated by the National Association of Securities Dealers, Inc. On March 16, 2007 the Company's Common Stock became listed on the Frankfurt Stock exchange (FWB), under the trading symbol "EOW". The following table sets forth the high and low bid prices, on the OTC Bulletin Board, for the Common Stock for the quarters indicated, as reported by Bloomberg Reporting Service. Such market quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions: FISCAL 2008 HIGH LOW -------------------------------------- 1st Quarter $ 0.58 $ 0.31 2nd Quarter 0.42 0.20 3rd Quarter 0.30 0.11 4th Quarter 0.23 0.06 FISCAL 2007 HIGH LOW -------------------------------------- 1st Quarter $ 0.91 $ 0.60 2nd Quarter 0.90 0.71 3rd Quarter 0.85 0.60 4th Quarter 0.71 0.44 HOLDERS At March 31, 2009 there were approximately 275 stockholders of record of the Company's Common Stock. The Company estimates there are approximately 4,000 additional stockholders with stock held in street name. On March 31, 2009, there were 72,973,851 shares of common stock outstanding. DIVIDENDS The Company has not declared or issued any dividends in the past and intends to retain future earnings if any, for general business purposes and to retire debt. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table sets forth as at December 31, 2008 securities authorized for issuance under equity compensation plans.
EQUITY COMPENSATION PLAN INFORMATION (A) (B) (C) - ----------------------------------------------------------------------------------------------------------------------------- Number of securities remaining NUMBER OF SECURITIES TO BE Weighted-average available for future issuance under ISSUED UPON EXERCISE OF exercise price of equity compensation plans (excluding PLAN CATEGORY OUTSTANDING OPTIONS outstanding options securities in column A) - ----------------------------------------------------------------------------------------------------------------------------- 2002 Stock Option Plan (Shareholder Approved. Authorized - 5,000,000 shares) 2,850,000 $ 0.74 905,000 - ----------------------------------------------------------------------------------------------------------------------------- 2000 Stock Option Plan (Shareholder Approved. Authorized - 10,000,000 shares) 500,000 $ 0.50 -- - -----------------------------------------------------------------------------------------------------------------------------
18 The 2002 Stock Option Plan is the successor plan to the 2000 Stock Option Plan, however, all previously granted stock options currently outstanding to employees and/or consultants under the 2000 Nonqualified Stock Option Plan remain in effect according to their terms. As reflected in the aggregate numbers above, the following options were awarded under the Company's 2002 stock plan in fiscal 2008. On February 7, 2008 the Board of Directors granted the aggregate award of 400,000 stock options to five employees, two executive officers and one director. The options have immediate vesting with an exercise price of $0.71 and $1.00 per share (above fair-market value at the date of grant) with exercise periods ranging from three and five years from the date of award. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and ESW's consolidated financial statements and the related notes appearing elsewhere in this Form 10-K. The consolidated statements of income data for the years ended December 31, 2007 and 2008, and the consolidated balance sheet data at December 31, 2007 and 2008, are derived from ESW's audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The consolidated statements of income data for the years ended December 31, 2004, 2005 and 2006, and the consolidated balance sheet data at December 31, 2004, 2005 and 2006, are derived from ESW's audited consolidated financial statements that are not included in this Annual Report on Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 2005 2006 2007 2008 - ---------------------------------------------------------------------------------------------------------------------------- Revenue Net Sales $ 1,906,704 $ 3,072,236 $ 3,195,176 $ 9,310,504 $ 885,206 Cost of sales 1,166,653 1,935,711 1,660,433 3,678,088 834,837 - ---------------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 740,051 1,136,525 1,534,743 5,632,416 50,369 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Marketing, office and general costs 1,330,126 2,721,210 3,588,455 3,768,710 3,683,165 Research and development costs 3,366 541,811 417,768 757,900 1,323,754 Officers' compensation and directors fees 394,178 404,541 591,250 1,240,070 611,293 Consulting and professional fees 365,715 257,966 210,992 138,021 171,746 Foreign exchange loss / (gain) (24,128) (3,460) (7,619) 357,850 (186,743) Depreciation and amortization 344,447 350,376 858,044 1,141,173 1,125,038 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 2,413,704 4,272,444 5,658,890 7,403,724 6,728,253 - ---------------------------------------------------------------------------------------------------------------------------- LOSS FROM OPERATIONS (1,673,653) (3,135,919) (4,124,147) (1,771,308) (6,677,884) Interest income and other (47,660) (211,308) (298,899) (392,313) (413,368) - ---------------------------------------------------------------------------------------------------------------------------- NET LOSS $ (1,721,313) $ (3,347,227) $ (4,423,046) $ (2,163,621) $ (7,091,252) ============================================================================================================================ Loss per share $ (0.03) $ (0.06) $ (0.08) $ (0.03) $ (0.10) ============================================================================================================================
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2004 2005 2006 2007 2008 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 4,633,013 $ 3,083,373 $ 1,393,294 $ 2,891,088 $ 2,247,623 Total assets $ 2,969,015 $ 6,602,270 $ 7,796,222 $ 6,214,823 $ 5,078,019 Total liabilities $ 5,624,197 $ 7,102,033 $ 10,217,609 $ 4,412,036 $ 10,184,087 Total stockholders' equity/(deficit) $ 1,150,056 $ 2,583,610 $ (1,028,093) $ 4,693,875 $ (2,858,445)
19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with ESW's Financial Statements and Notes thereto included elsewhere in this Report. This Form 10-K 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 caution 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. Risks and uncertainties inherent in forward-looking statements (are set forth in the Risk Factor disclosure contained elsewhere in this report) include, but are not limited to: o ESW's ability to obtain financing needed to fund its ongoing operations. o The Company's operating results may fluctuate due to regulatory, marketing and competitive factors over which it has little or no control. o The Company does not maintain a significant level of product liability insurance. o ESW does not have a long history in manufacturing its products and does not have a long history in manufacturing products in commercial quantities. o The Company is dependent on a few major customers for a significant portion of its revenue. o The Company faces intense competition and rapid technological advances by competitors. o Joint ventures and/or relationships entered into or sought by the Company for development and sale of its products. o Further verification and certification of ESW's products by various governmental agencies including but not limited to the Environmental Protection Agency (EPA), California Air Resources Board (CARB), ETV Canada and the Mine Safety and Health Administration (MSHA) o Costs and availability of raw materials, including precious metals necessary for the production of the Company's products. o Developments with respect to intellectual property, patents or proprietary rights. o Changes in environmental policy or regulations in the United States or abroad. o Fluctuations in market demand for and supply of the Company's products. o Litigation against the Company that may direct resources away from business development OVERVIEW Environmental Solutions Worldwide Inc. ("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, manufacturing and sales of environmental technologies. The ESW Group of Companies currently manufacture and market a diversified line of catalytic emission control products and support technologies for diesel, gasoline and alternative fuelled engines. The ESW Group of Companies also operates a comprehensive Environmental Protection Agency (EPA), California Air Resources Board (CARB) and the Mine Safety and Health Administration (MSHA) recognized emissions testing and verification laboratory. "The ESW Group of Companies" trade name is being used in part to identify the Company's potential participation in business opportunities outside its traditional focus of engine emissions controls. ESW is currently focused on the international automotive, utility engine, off-road, mining, marine, locomotive and military industries. ESW also manufactures and market a line of catalytic control and enabling products including a line of finished catalytic muffler products, proprietary catalytic converter substrates, catalytic conversion technologies and exhaust tubes for a number of applications. ESW offers engine and after treatment emissions verification testing and certification services. 20 ESW's main line of business is the production of catalyzed substrates. Catalyzed substrates are an integral part of catalytic converter systems sold worldwide. ESW serves both original equipment vehicle manufacturers ("OEMs") and the replacement markets, or aftermarket, worldwide. ESW is organized into two areas of business. The manufacturing of catalytic converters, emission control solutions and support technologies, as well as the emissions certification and verification of internal combustion and compression combustion engines and after treatment devices for engines ranging from 0.5 horse power (HP) to in excess of 600 HP. ESW has developed a commercially viable catalytic converter technology for diesel, gasoline and alternative (CNG/LPG) fuelled combustion engines. The unique technology consists of a wire based mesh substrate and wash coat formulas, which form the basis for the catalyzed substrate. The finished product can be produced in a myriad of sizes and shapes. The substrate creates a turbulent flow environment. This increases catalytic activity and serves as a filter of particulate matter, important in diesel emission control. ESW markets its catalyst products using the trade names, ThermaCat(TM), Clean Cat(R), Enviro-Cat (TM), XTRM Cat(TM), MCat (TM), Terra Cat (TM) Particulate Reactor(TM), TempMax(TM), Stlth Cat(TM) and the Scat-IR-Shield(TM). These products are marketed for spark ignited gasoline, CNG/LPG (alternative fuels) and diesel engine emissions control, and range in sizes from utility applications to large industrial uses. ESW's primary business objective is to capitalize on the growing global requirement of reducing emissions, by offering catalyst technology solutions to the market and build upon its military product lines for sales to the U.S. and NATO countries. ESW has and continues to seek to develop relationships with OEM's of engines for both automotive and other markets. As part of ESW's efforts to grow its business, as well as to achieve increased production and distribution efficiencies ESW has and continues to make capital investments in manufacturing capability to support its products as well as expensing money on research and development in order for new products to be developed that meet the new legislative regulations. Factors that are critical to ESW's success include winning new business, obtaining regulatory verifications for emission control products, managing ESW's manufacturing capabilities to correspond with business needs, maintaining competitive wages and benefits, maximizing efficiencies in the manufacturing processes, and reducing overall costs. In addition, ESW's ability to adapt to key industry trends, such as increasing technologically sophisticated products, changing aftermarket distribution partners, and increasing environmental standards, also plays a critical role in its success. Other factors that are critical to ESW's success include adjusting to environmental and economic challenges such as increases in the cost of raw materials and ESW's ability to successfully reduce the impact of any such cost increases through material substitutions, cost reduction initiatives and other methods. In 2008, ESW has incurred significant research and development costs. This investment in ESW's products was necessary for ESW to comply with new regulations (See ITEM 1. BUSINESS - PRODUCT CERTIFICATION) coming into force starting January of 2009. The products that ESW has developed and/or presented for verification / certification cover the following primary technology levels established by CARB: o Level I + (+ INDICATES 2009 NO2 COMPLIANCE) o Diesel Oxidation Catalyst - PM reduction greater than 25% o High performance Diesel Oxidation Catalyst - PM reduction greater than 30% o Level II + o Diesel Oxidation Catalyst with Crank Case Ventilation - PM reduction greater than 50% o Level III + o Off Road Active Diesel Particulate Filter - PM reduction greater than 85% o On Road Active Diesel Particulate Filter - PM reduction greater than 85% ESW believes that with the certifications/verification of the above range of products 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 regulatory approval process with EPA and CARB is complex and requires a lengthy process of durability testing which must precede final certification/verification of ESW's products. Durability has been completed for all ESW's Level III+ products to meet the new 2009 regulations and verification/certification is in process for all of ESW's products. ESW does not control the timeliness of the certification/verification process; however, ESW has taken steps to ensure the efficacy of ESW's contribution to the certification/verification process. In 2008 ESW's was focused primarily on (a) design, research and development of the new range of products and (b) realignment of ESW's sales and marketing strategy to target key markets segments such as school bus retrofits and government regulated retrofit programs. The cost of developing a complete range of products to meet new regulations is substantial. ESW believes that it possesses an advantage in seeking to comply with new regulations through its use of its Testing and Research facility in Montgomeryville to support its own certification and verification efforts, which ESW believes will lead to the commercialization of important new products in 2009. ESW's production, sales, technical and design staff at ESW Canada Inc., have undertaken to ensure that products are able to meet the diverse applications found in on and off road vehicles while maximising product commonality to reduce manufacturing and support costs. ESW has been developing an active dealer and support distribution network that has positioned ESW's products as the technology of choice for several key markets which are anticipated to see rapid distribution and deployment of ESW products upon final regulatory certification /verification. In 2008, ESW has implemented field sales support, customer service, installation and training support to allow the rapid growth and distribution of ESW product in the near future. 21 ESW's manufacturing and design facility, ESW Canada Inc. has been capitalised to streamline production of its new product line to maximise efficiency. Both ESW facilities are in full compliance with ISO 9001:2000. ESW currently holds a full registration certificate effective until March 2010 for ESW America Inc., and January 2010 for ESW Canada Inc. ESW has also made significant capital investment in its Tech Center based in Montgomeryville, Pennsylvania. This facility provides the catalytic and chemical wash coat solutions for the Concord Ontario plant. All of ESW's emission testing laboratories and testing capabilities are located there. The 40,200 sq ft facility houses a state of the art 18,000 sq ft expansion of "Air Testing Services", ESW's EPA/CARB/MSHA recognized engine/vehicle emissions testing lab. Upon certification/verification or ESW's new line of products, ESW believes that the Air Testing Services ("ATS") group will be available to better service ESW's clientele for engine testing as well as EPA/CARB emissions testing and certification programs. ATS currently provides testing support for ESW`s internal research and development ("R&D") programs. The focus at this facility in the near term is to support the necessary steps and provide testing for ESW`s research activities, in order to have new products verified in the shortest time frame possible. The field of emission control is very complex and requires a variety of different technologies to be employed. ESW has recognized this fact, and has partnered with several strategic alliances assuring immediate access to leading edge technologies that address the needs of ESW's global customer base. The technology can be either in form of customized precious metal solutions, critical system components or the complete transfer of the entire technology. This approach enables ESW to adapt quickly to an ever-changing marketplace. In effecting its business plan ESW achieved important goals in fiscal 2008. o In July of 2008 ESW successfully completed a comprehensive catalyzed /muffler design and engineering program for the Korean based off-road construction Original Equipment Manufacturer (OEM), Doosan Infracore America Corporation (DIA). The program involved the replacement of the DIA factory muffler, on their DL200 Wheel Loader, with ESW's catalyzed modular muffler. The new product, based on ESW's California Air Resources Board verified Level II Particulate Reactor(TM), was successfully tested by DIA in Korea for diesel engine emission reductions as well as vehicle integration. Subsequent to the successful testing, ESW manufactured and delivered the required units to DIA in September of 2008. o In October 2008 ESW announced that the Company had successfully completed the development and the durability program the Company's Clean Cat(TM) Level I High Performance Diesel Oxidation Catalyst for Medium Heavy Duty engines. This product has been submitted for regulatory certification/verification. o In October 2008 ESW announced that the Company received orders from International Truck and Engine for its proprietary Level III diesel catalyst branded ThermaCat(TM). The ThermaCat(TM) is engineered to reduce the highest level of Particulate Matter while operating in low temperature applications such as school buses and waste truck haulers. The ThermaCat(TM) is currently in the verification process with the CARB for both `on and off road' applications. As an important part of the verification process, units have been installed on several applications and have logged thousands of accumulative durability hours. o In October 2008 in a letter to its shareholders the Company announced that The California Air Resources Board ("CARB") and the South Coast Air Quality Management District has invited ESW to showcase its ThermaCat(TM) Active Level III Diesel Particulate Filters on a number of high profile applications to demonstrate the technology capabilities in retrofit applications on off road / construction vehicles and equipment for the California market. ESW working with a California based distributor, Recat installed ThermaCat(TM) units in two major Los Angeles ports, on Top Pick 350hp heavy duty lift vehicles that are used to move and stack containers. The significance of this application is that these vehicles are on duty 24 hours a day aiding port activities; Port operators cannot afford any down time. The ThermaCat(TM) offers a solution with its robust seamless integration while remaining invisible to the vehicle operations. o In October of 2008, one of ESW's products, the XtrmCat(TM) Diesel Oxidation Catalyst ("DOC"), was listed as an `Emerging Technology' from the U.S.A. Environmental Protection Agency (EPA). ESW applied to EPA to have the XtrmCat(TM) DOC listed as an `Emerging Technology' based on the fact that DOC's have not yet achieved stand alone EPA verification status on Electro Motive Diesel ("EMD") two stroke marine/locomotive engines. ESW worked closely with EPA to establish the test plan for this new technology, such as providing data from Southwest Research Institute (SwRI) to support the claim that ESW's product was capable of reducing 25% or greater Particulate Matter (PM). This achievement was demonstrated with the XtrmCat(TM) DOC installed as a post turbo catalyst/muffler application on the EMD test engine and required no other engine modifications. ESW is now working towards implementing the necessary steps for final verification in both field use and at SwRI's testing facility. ESW believes, once EPA verifies the XtrmCat(TM), it will give the Company a great head start in the marine/locomotive emissions retrofit sector. During this past year the Company has been pursuing various financing initiatives. On November 3, 2008, ESW completed an offering whereby it raised $6.0 million for general working capital purposes through the issuance of convertible debentures at terms deemed fair and reasonable by management. Concurrent, with the offering the Company satisfied all outstanding promissory notes, partially in cash from the proceeds of the offering and partially by the issuance of convertible debentures. As ESW has a substantial amount of indebtedness, its ability to generate cash, both to fund operations and service its debt, is also a significant area of focus for the Company. See "Liquidity and Capital Resources" below for further discussion of cash flows. 22 COMPARISON OF YEAR ENDED DECEMBER 31, 2008 TO YEAR ENDED DECEMBER 31, 2007 RESULTS OF OPERATIONS Revenues for the year ended December 31, 2008 decreased by $8,425,298, or 90.5 percent, to $885,206 from $9,310,504 for the year ended December 31, 2007. The net loss for the year ended December 31, 2008 amounted to $7,091,252 (2007 - net loss of $2,163,621). The revenue decline can be attributed to the fact that the previous period included the sale of shroud Scat-R-shield(TM) units to the U.S. military valued at $7.4 Million did not reoccur in the current year. In the current year the Company focused its efforts on developing the next generation of diesel catalyst products to meet new regulations; these products are expected to generate revenues in the 2009 and beyond. Cost of sales as a percentage of revenues for the year ended December 31, 2008 was 94.3 percent compared to 39.5 percent for year ended December 31, 2007. The gross profit for the year ended December 31, 2008 was 5.7 percent as compared to a gross margin of 60.5 percent for the year ended December 31, 2007. During the fourth quarter of 2008 management decided to write down $207,889 of inventory due to discontinued product lines. The inventory write down resulted in a significant increase in the cost of sales. Some of the orders produced during the year ended December 31, 2008 were mainly sample or prototype orders that have low volumes associated with production. Efficient economies of scale would be achieved on higher volumes. Additionally all orders for the Company's Level III product currently undergoing verification / certification testing are being installed by the Company's installation team, this provides the Company an opportunity to train the dealer network that the Company has developed to manage installations once the volume of orders increase. Marketing, office and general expenses for the year ended December 31, 2008 decreased by $85,545, or 2.3 percent, to $3,683,165 from $3,768,710 for the year ended December 31, 2007. The decrease is primarily due to decreases in the following areas. Debt accretion costs decreased by $123,803, plant related expenses were lower by $151,381 as a result of lower sale volumes, investor relations expense was lower by $140,227 attributed to a reduction in investor road shows held in the current period and general and administration costs decreased by $118,288. These decreases were offset by increases in the following areas. Sales and marketing salaries and wages increase of $167,929. During the first six months of the current fiscal year the Company had more staff to support its internal sales infrastructure in preparation for the release of new products. ESW also participated in several industry trade shows. Administration salaries and wages increased by $142,085 in support of ESW's research and development programs. Facility costs increased over the previous period by $138,140 due to reduced sales volumes and lower overhead costs attributed to sales. Research and development ("R&D") expenses for the year ended December 31, 2008 increased by $565,854 to $1,323,754 from $757,900 for the year ended December 31, 2007. As planned, ESW has continued to aggressively pursue testing and research and development in an effort to develop innovative products to serve its customers, meet new regulations and improve its product mix and profit margins. ESW believe that this expenditure will result in increase orders for its products. As a percentage of revenue R&D expense increased to 149.5 percent for the year ended December 31, 2008 compared to 8.1 percent for the year ended December 31, 2007 the increase is primarily due to the lower level of sales in the current period complemented by an increase in R&D expenditures for ESW's new product line. Officer's compensation and director's fees for the year ended December 31, 2008 decreased by $628,777, or 50.7 percent, to $611,293 from $1,240,070 for the year ended December 31, 2007. As a percentage of revenue, officer's compensation and director's fees increased to 69.1 percent for the year ended December 31, 2008, compared to 13.3 percent for the year ended December 31, 2007. The main reason for the decrease in officers' compensation and directors' fees was stock based compensation expense which amounted to $9,773 in the current period compared to $710,330 in the prior period offset by a marginal increase due to the addition of two new officers in February 2008. Consulting and professional fees for the year ended December 31, 2008 increased by $33,725, or 24.4 percent, to $171,746 from $138,021 for the year ended December 31, 2007. The increase is mainly attributed to audit fees, tax consulting fees and fees related to compliance activities for requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Foreign exchange gain for the year ended December 31, 2008 amounted to $186,743 as a result of the strengthening of the United States Dollar to the Canadian Dollar. For the year ended December 31, 2007 foreign exchange loss amounted to $357,850. Depreciation and amortization expense for the year ended December 31, 2008 decreased by $16,135, or 1.4 percent to $1,125,038 from $1,141,173 for the year ended December 31, 2007. Interest expense on long-term debt was $129,072 for the year ended December 31, 2008 as compared to $171,636 for the year ended December 31, 2007. On November 3, 2008, the Company completed a transaction whereby it issued $6.0 million of 9% convertible debentures (the "Debentures") to six accredited investors. The Debentures are for a term of three years and are convertible into shares of the Company's common stock at the option of the holder at any time six (6) months after the date of issuance of the Debenture by dividing the principal amount of the Debenture to be converted by $0.25. The Debentures earn 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 elects to receive interest in shares of common stock, the number of shares of common stock to be issued for interest shall be determined by dividing accrued interest by $0.25. Subject to the holder's right to convert, the Company has 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 is payable in cash or common stock at the option of the Holder. The Debentures contain customary price adjustment protections. 23
SUMMARY OF ALL PROMISSORY NOTES Description Amount Total - -------------------------------------------------------------------------------------------------------------------- Consolidated Note #1 1,000,000 Consolidated Note #2 1,200,000 Interest on Consolidated Notes 108,148 - -------------------------------------------------------------------------------------------------------------------- "FEBRUARY 9, 2007 CONSOLIDATED NOTE" 2,308,148 Consolidated Subordinate Note #1 500,000 Consolidated Subordinate Note #2 500,000 Interest on Consolidated Subordinate Notes 2,589 - -------------------------------------------------------------------------------------------------------------------- "MARCH 7, 2007 CONSOLIDATED SUBORDINATE NOTE" 1,002,589 Notes issued under the $1.5 Million Credit Facility 1,253,000 Partial repayment (150,000) - -------------------------------------------------------------------------------------------------------------------- "NOTES UNDER THE CREDIT FACILITY" 1,103,000 2007 interest expense 284,282 2008 interest expense up to November 03, 2008 278,748 Partial repayment (52,689) Loss on extinguishment of debt added to notes 275,922 Partial repayment (2,200,000) - -------------------------------------------------------------------------------------------------------------------- CONVERTIBLE DEBENTURE ISSUED ON EXTINGUISHMENT OF ABOVE NOTES 3,000,000 CONVERTIBLE DEBENTURE ISSUED ON NOVEMBER 03, 2008 6,000,000 - -------------------------------------------------------------------------------------------------------------------- PRINCIPAL BALANCE OF ALL CONVERTIBLE DEBENTURE AS AT DECEMBER 31, 2008 9,000,000 Less: Deferred costs ( See Note 10) (56,419) - -------------------------------------------------------------------------------------------------------------------- CONVERTIBLE DEBENTURE AS AT DECEMBER 31, 2008 $ 8,943,581 ====================================================================================================================
From the proceeds of the offering, the Company elected to repay $2,200,000, the principal portion only, of a previously issued Consolidated Note to a Company controlled by a trust to which a director and shareholder of the Company is the beneficiary. The debt holder agreed to have the remaining amount of $433,923, due under the Consolidated Note, to be applied to a Debenture subscription under the November 3, 2008 offering. Concurrently, the Company has agreed to repay the Consolidated Subordinated Note that it had previously issued to debt holder who is a director and shareholder of the Company in the principal amount of $1,002,589. The debt holder has agreed to have the full amount of principal and accumulated interest, in the amount of $1,158,024 due under the Consolidated Subordinated Note, applied to a subscription of a Debenture under the offering. Additionally the Company's $1.5 million credit facility also provided by the same debt holder, which the Company had drawn down the sum of $1,103,000 as of November 3, 2008, will also be satisfied by way of issuance of Debentures under the November 3, 2008 offering. With the agreement to settle all the notes previously issued by the Company, the debt holder is subscribing to an aggregate of $2,566,077 of Debentures under the offering. In September 2004, a company controlled by a trust of which a director and shareholder is the beneficiary, purchased $1.25 million of convertible debentures in which the basis of conversion into our common stock is $0.50 per share, which included warrants to purchase an additional 625,000 shares of common stock at $0.85 per share. The debentures are for a term of three (3) years and earn interest at the rate of 4% per annum. In accordance with the terms of the debentures, 220,238 shares of our common stock were issued as payment of the first second and third year's interest earned. On September 13, 2007, the convertible debenture matured. Pursuant to the terms of the convertible debentures, the Company elected to satisfy the convertible debentures through the issuance of 2,500,000 shares of the Company's common stock, $0.001 par value. Interest expense on notes payable to a related party was $304,146 for the year ended December 31, 2008 as compared to $ 284,282 for the year ended December 31, 2007. During 2007, ESW consolidated two unsecured subordinated promissory notes ("Consolidated Note") previously issued in the principal amount of $1 million, and $1.2 million and accrued interest into one Consolidated Note with principal amount of $2,308,148, to a Company controlled by a trust to which a director and shareholder of our Company is the beneficiary. The note bears interest at 9% per annum. The holder of the consolidated note has the option to receive payment of principal and all accrued interest in the form of restricted shares of the Company's common stock, par value ($0.001) with cost free piggyback registration rights. Under this repayment option, interest will be calculated at 12% per annum. 24 Additionally, the Company issued a $500,000 unsecured subordinated demand promissory note to a member of the Company's Board of Directors and subsequently entered into an agreement whereby it borrowed an additional sum of $500,000 and consolidated this sum with the principal and accrued interest of the $500,000 unsecured demand promissory note previously issued ("Consolidated Subordinated Note"). This Consolidated Subordinated Note is in the principal amount of $1,002,589 and bears interest at a rate of 9% per annum and is payable upon demand. The Company may prepay the Consolidated Subordinated Note without penalty at any time. Effective June 2, 2008 the Company entered into a Credit Facility Agreement a director and shareholder of the Company. Pursuant to the Agreement, the Company can request draw down(s) under the Facility of up to $1,500,000 in the aggregate with funds to be used for general working capital purposes. All request(s) to draw down under the Facility are subject to the debt holders consent and approval. An approved draw down by the Company under the Facility will be represented by a 9% unsecured subordinated demand promissory note issued by the Company to the debtor or his designee. The Company may repay the Note at anytime without penalty. At the option of the Note holder, in lieu of cash, principal and interest earned on the Note can be repaid in restricted common stock of the Company. Should the Note holder elect to receive stock of the Company, interest on principal will be calculated at a rate of 12% per annum. The number of shares of Common Stock to be issued in satisfaction of interest and principal shall be determined by dividing the principal and accrued interest by the greater of 105% of the twenty (20) day average closing price of the Company's Common Stock immediately preceding the date the Note holder elects to have the Note satisfied with Common Stock, or the Closing Price on that date. Under no circumstance can the conversion price be below the fair market price of the Company's Common Stock on the date the Note holder elects to have the Note satisfied with Common Stock. The Company may request draw down(s) under the Facility through December 31, 2008. Subsequently, from June 2008 to October 2008 a total of nine unsecured subordinated promissory notes were issued totalling to $1,253,000 in principal. These nine notes are part of a series of draw downs against a Credit Facility Agreement. The Company repaid $150,000 in principal and interest due to a shareholder of the Company who by separate agreement with the above debt holder and the Company agreed to provide funding to the Company under the credit facility. On November 3, 2008 the Company recorded $275,922 in the Consolidated Statements Of Changes In Stockholders' Equity (Deficit) relating to a loss on extinguishment of debt as a payment to a director and shareholder of the Company to surrender the right to convert the existing notes payable into common stock of the Company. On November 3, 2008, the "February 9, 2007 Consolidated Note" with a principal amount of $2,308,148, the "March 7, 2007 Consolidated Subordinated Note" with principal amount of $1,002,589 and all notes issued under the Credit Facility Agreement of June 2, 2008 in the principal amount of $1,103,000 have been extinguished through a repayment of $2,200,000 and the balance of principal and interest has been converted into a convertible debenture. LIQUIDITY AND CAPITAL RESOURCES ESW's principal sources of operating capital have been the proceeds from its various financing transactions; in 2007 ESW generated $674,213 of cash from operations. In 2008, the Company used $4,855,230 of cash to sustain operating activities. As of December 31, 2008 and 2007, the Company had cash and cash equivalents of $ 2,247,623 and 2,891,088 respectively. Net Cash used in operating activities for the year ended December 31, 2008 amounted to $4,855,230. This amount was attributable to the net loss of $7,091,252, plus non cash expenses such as depreciation, amortization, amortization of the fair value of the debenture warrant and others of $1,939,350, and a decrease in net operating assets and liabilities of $296,672. Net Cash provided by operating activities for the year ended December 31, 2007 amounted to $674,213. This amount was attributable to the loss of $2,163,621, plus non cash expenses such as depreciation, amortization, amortization of the fair value of the debenture warrant and others of $2,642,625, and a decrease in net operating assets and liabilities of $195,209. Net Cash used in investing activities was $445,676 for the year ended December 31, 2008 as compared to $515,173 for the year ended December 31, 2007. The capital expenditures during 2008 were primarily dedicated to production tooling changes, purchases / development of presses and rolling equipment required for ESW's new product lines. Net cash provided by financing activities totalled $4,856,233 for the year ended December 31, 2008 as compared to $888,436 for the year ended December 31, 2007. o $1,253,000 was received through the issuance of notes payable from the $1.5 Million Credit Facility Agreement entered into with a director and shareholder of the Company. o $324,046 was borrowed against a line of credit agreement with a Canadian chartered bank, repayments on bank loan amounted to $246,878. o On November 3, 2008 the Company completed a transaction whereby it issued $6.0 million of 9% convertible debentures to six accredited investors. The $ 6 Million of proceeds from the financing were used in part to repay o $2,402,689 of notes payable and related interest on the notes to related parties. o The Company repaid $150,000 in principal and $4,475 interest due to a shareholder of the Company who by separate agreement with the Company agreed to provide funding to the Company under the $1.5 Million Credit Facility. o On November 7, 2008 the "February 9, 2007" Consolidated Note with a principal amount of $2,308,148, the "March 7, 2007" Consolidated Subordinated Note with a principal amount of $1,002,589 and the balance of the unpaid notes issued under the Credit Facility Agreement of June 2, 2008 with the principal amount of $1,103,000 were extinguished through a repayment of $2,200,000 the principal portion only of the $2,308,148 Consolidated Note and $48,214 as taxes withholding and the balance of principal and interest has been converted into a new convertible debenture agreement of $3,000,000. 25 o Legal fees paid for Convertible Debentures amounted to $59,738. In 2007 a total of $1,085,340 was received through the issuance of notes payable, ESW repaid $500,000 of notes payable and $310,000 was received through the issuance of shares from the exercise of options and warrants. o $40,500 for the exercise of 150,000 options exercisable at $0.27 per share and issued 150,000 shares of common stock. o $252,500 for the exercise of 505,000 options exercisable at $0.50 per share and issued 505,000 shares of common stock. o $17,000 for the exercise of 20,000 warrants at $0.85 per share to purchase 20,000 shares of common stock. In 2007, ESW elected to issue shares of common stock as payment of interest earned on its 4% convertible debentures that were issued in September 2004. A total of 338,889, 387,302 and 348,571 shares of common stock were issued to 10 debenture holders for the $244,000 of accrued interest earned each year through September 13, 2007, 2006 and 2005 respectively. On September 13, 2007, the related Convertible Debentures matured. Pursuant to the terms of the Debentures, ESW elected to satisfy the Debentures through the issuance of 12,200,000 shares of the Company's common stock, $0.001 par value. During the year 2008, $11,508 was repaid under our capital lease obligation. In 2007, $6,904 was repaid under our capital lease obligation. In 2007, ESW's subsidiary, ESW Canada entered into a $2.5 Million revolving credit facility with Royal Bank of Canada ("RBC"), to finance orders on hand. This credit line will provide ESW with the working capital to complete larger contracts. Effective September 2, 2008, ESW completed its negotiations with Royal Bank of Canada and entered into an amendment to the secured commercial loan agreement. The amendment to the Agreement extends the term of the Agreement from June 30, 2008 through June 30, 2009. In addition to extending the term of the Agreement, certain financial covenants have also been amended. The new arrangement in the agreement provides for a revolving facility available by way of a series of term loans of up to $750,000 to finance future production orders. The Credit Facility is guaranteed by the Company and its subsidiary ESW Canada through the pledge of their assets to secure RBC. The Credit Facility bears interest at a base rate of one and a half percentage (1.5%) points above the Canadian prime rate. At the time ESW Canada entered into the extension and amendment to the Credit Facility, there was no outstanding obligations due to RBC under the Credit Facility. As of December 31, 2008, $ 77,168 is outstanding and due to RBC under the Credit Facility. On November 3, 2008, ESW issued $6.0 million of convertible debentures (the "Debentures") to six accredited investors under Rule 506 of Regulation D. The Debentures are for a term of three years and are convertible into shares of the Company's common stock at the option of the holder at any time six (6) months after the date of issuance of the Debenture by dividing the principal amount of the Debentures to be converted by $0.25. ESW used $2.2 Million of the cash to pay down a previously issued promissory note as well as settling all the other notes previously issued by the Company. In addition to the $6.0 million, an additional $3.0 Million of convertible Debt has been issued. Currently ESW has a principal amount of $9.0 million of Convertible debt at December 31, 2008 ($8,943,581 net of deferred costs of $56,419) all at the same terms and conditions. (See Debt structure for further details.) The expansion and capital expenditures made during 2007 and 2008 and ESW's intent to capitalize on an anticipated increase in demand for ESW`s products are the steps that ESW has taken to become profitable and generate positive cash flow. Based on ESW's current operating plan, management believes that at December 31, 2008 cash balances, anticipated cash flows from operating activities, and, the appropriate borrowings under our credit facility and other available financing sources, such as the issuance of debt or equity securities will be sufficient to meet our working capital needs on a short-term basis for at least the next nine months. Overall, capital adequacy is monitored on an ongoing basis by our management and reviewed quarterly by the Board of Directors. 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 invest in research and development to prove up its technologies and bring them to the point where its customers have a high confidence level allowing them to place larger orders. The length of time a customer needs to build confidence in ESW's technologies cannot be predetermined and as a result, during 2008, ESW sustained an operating loss as a result of not generating sufficient sales to generate a profit from operations. There is no assurance that the Company will be successful in achieving sufficient cash flow from its current operations. Although this indicates a potential working capital deficiency and a potential concern about the Company's ability to continue to operate as going concern, ESW's management believes that the revenues will increase once certain ESW products obtain verification. Certain products, (See ITEM 1. BUSINESS - PRODUCT CERTIFICATION) are currently in the verification/certification stages and ESW believes that these products, will be verified by CARB and EPA during 2009. ESW also has a good history of receiving capital infusions when needed. ESW's principal source of liquidity in 2007 was cash provided from prior financing activities along with a small amount contributed from operations. In 2007, ESW also received funds from the exercise of options and warrants. ESW did not produce sufficient cash from operations in 2008 to support its expenditures; the November 3, 2008 the $6.0 million offering of convertible debentures along with continued borrowing on ESW's credit facility afforded ESW the opportunity to support its operations and to execute its business plan. ESW's principal use of liquidity will be to finance any further capital expenditures needed, to provide working capital availability and to pay previously issued debt. ESW does not anticipate having any major capital expenditures in 2009 related to the general operation of our business, however should the need arise for further tooling or equipment as a result of specific orders or the introduction of new product lines, ESW would evaluate the need and make provisions as necessary. ESW does not expect that total capital expenditures for 2009 will amount to more than $300,000. 26 Should ESW not be profitable, it will need to finance its operations through other capital financings. ESW continues to seek, equity financing and/or debt financing in the form of private placements at favourable terms, or the exercise of currently outstanding derivatives that would provide additional capital. However, such additional financing may not be available to ESW, if and when needed, on acceptable terms or at all. ESW intends to retain any future earnings to retire debt, finance the expansion of its business, necessary capital expenditures, and for general corporate purposes. ESW's operating profitability requires increased sales coupled with lower overall cost to manufacture its products and to improve both sales and administrative productivity through process and system enhancements. This will be largely dependent on the success of ESW's initiatives to streamline its infrastructure and drive its operational efficiencies across the Company. ESW's failure to successfully implement these initiatives, or the failure of such initiatives to result in improved profit margins, could have a material adverse effect ESW's liquidity, financial position, and results of operations. ESW believes the success of its newly developed products will continue to motivate others to develop similar designs, many of the same functional and physical characteristics as ESW's product. ESW has patents covering the technology embodied in its products, and intend to enforce those patents as appropriate. If ESW is not successful in enforcing its patents, competition from such products could adversely affect ESW's market share and prices for its products. Although overall pricing has been stable recently, the average price of ESW's products may decline in the future. There is no assurance that current or future products will be able to successfully compete with products developed by others. ESW expects an increase in consulting and audit fees related to the impact of our Sarbanes-Oxley internal control certification efforts, with which we are required to be in compliance by December 31, 2009. Effective February 7, 2008, ESW accounted for stock-based compensation plans in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment" which requires a fair value method of accounting for compensation costs related to our stock-based compensation plans. Under the fair value method recognition provision of the statement, a share-based payment is measured at the grant date based upon the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards requires judgment in estimating employee and market behaviour. If actual results differ significantly from these estimates, stock-based compensation expense and ESW's results of operations could be materially impacted. For the years ended December 31, 2008 and 2007, as a result of adopting SFAS No. 123(R), ESW's results of operations incurred an additional expense of $13,646 and $776,271 respectively. ESW has 700,000 Class A special shares recorded at $453,900 (based on the historical exchange rate at the time of issuance.), authorized, issued, and outstanding. 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 ($574,713 USD) at December 31, 2008. As the Class A special shares are issued by ESW's wholly-owned subsidiary BBL, the maximum value upon which ESW is liable is the net book value of BBL. At December 31, 2008 BBL had an accumulated deficit and therefore would be unable to redeem the Class A special shares at their ascribed value. DEBT STRUCTURE On January 9, 2007, the Company paid back the $0.5 million subordinated promissory note it had previously issued on November 13, 2006 in the principal amount of $500,000 by paying the Holder the sum of $506,780 in cash, representing $500,000 principal and $6,780 interest. Subsequently, on February 9, 2007, the two unsecured subordinated promissory notes in the principal amount of $1.2 million and $1.0 million and accrued interest were consolidated into one unsecured subordinated demand note with principal amount of $2,308,148 (the "Consolidated Note). In accordance with the terms of the Consolidated Note, same will be due and payable to Holder upon demand. As with the original Promissory Notes, the Consolidated Note will continue to bear interest at a rate of 9% per annum if principal and interest are paid by the Company in cash, or if principal and interest are paid in shares of restricted common stock of the Company, the Consolidated Note will bear interest at a rate of 12% per annum. The Company may repay the Consolidated Note without penalty at any time. On February 15, 2007 the Company issued a $500,000 unsecured subordinated demand promissory note to a member of the Company's Board of Directors. The Note will bear interest at 9% per annum and is payable upon demand. On March 7, 2007 the Company entered into an agreement whereby it borrowed the sum of $500,000 from a member of the Company's Board of Directors and consolidated this sum with the principal and accrued interest of the $500,000 unsecured demand promissory note previously issued on February 15, 2007 (the "Consolidated Subordinate Note"). This Consolidated Subordinate Note is in the principal amount of $1,002,589 and bears interest at a rate of 9% per annum and is payable upon demand. The Company may repay the Consolidated Subordinate Note without penalty at any time. Effective June 2, 2008 the Company entered into a Credit Facility Agreement a director and shareholder of the Company. Pursuant to the Agreement, the Company can request draw down(s) under the Facility of up to $1,500,000 in the aggregate with funds to be used for general working capital purposes. All request(s) to draw down under the Facility are subject to the debt holders consent and approval. An approved draw down by the Company under the Facility will be represented by a 9% unsecured subordinated demand promissory note issued by the Company to the debtor or his designee. The Company may repay the Note at anytime without penalty. At the option of the Note holder, in lieu of cash, principal and interest earned on the Note can be repaid in restricted common stock of the Company. Should the Note holder elect to receive stock of the Company, interest 27 on principal will be calculated at a rate of 12% per annum. The number of shares of Common Stock to be issued in satisfaction of interest and principal shall be determined by dividing the principal and accrued interest by the greater of 105% of the twenty (20) day average closing price of the Company's Common Stock immediately preceding the date the Note holder elects to have the Note satisfied with Common Stock, or the Closing Price on that date. Under no circumstance can the conversion price be below the fair market price of the Company's Common Stock on the date the Note holder elects to have the Note satisfied with Common Stock. The Company may request draw down(s) under the Facility through December 31, 2008. Subsequently, from June 2008 to October 2008 a total of nine unsecured subordinated promissory notes were issued totalling to $1,253,000 in principal. These nine notes are part of a series of draw downs against a Credit Facility Agreement. The Company repaid $154,475 in principal and interest due to a shareholder of the Company who by separate agreement with the above debt holder and the Company agreed to provide funding to the Company under the credit facility. On November 3, 2008 the Company recorded $275,922 in the Consolidated Statements Of Changes In Stockholders' Equity (Deficit) towards loss on extinguishment of debt as a payment to a director and shareholder of the Company to surrender the right to convert the existing notes payable into common stock of the Company. Also, on November 3, 2008 the February 9, 2007 Consolidated Note with principal amount of $2,308,148, the March 7, 2007 Consolidated Subordinate Note with principal amount of $1,002,589 and all notes issued under the Credit Facility Agreement of June 2, 2008 in the principal amount of 1,103,000 have been extinguished through a repayment of $2,200,000 the principal portion only of the $2,308,148 Consolidated Note and $48,214 as taxes withholding and the balance of principal and interest has been converted into a convertible debenture. As at December 31, 2008, principal and interest accrued on notes payable to related party was $ nil. As at December 31, 2007 $258,885 of interest payable has been accrued on the $1,002,589, and the $2,308,148 notes payable to related party. On November 3, 2008, the Company completed a transaction whereby it issued $6.0 million of 9% convertible debentures to six accredited investors. The Debentures are for a term of three years and are convertible into shares of the Company's common stock at the option of the holder at any time six (6) months after the date of issuance of the Debenture by dividing the principal amount of the Debenture to be converted by $0.25. The Debentures earn 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 elects to receive interest in shares of common stock, the number of shares of common stock to be issued for interest shall be determined by dividing accrued interest by $0.25. Subject to the holder's right to convert, the Company has 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 is payable in cash or common stock at the option of the Holder. The Debentures contain customary price adjustment protections. From the proceeds, the Company elected to repay $2.2 million, the principal portion only, of a previously issued Consolidated Note to a company controlled by a trust to which a director and shareholder of the Company is the beneficiary. The debt holder has agreed to have the remaining amount of $433, 923, due under the note, to be applied to a subscription to a Debenture under the November 3, 2008 offering. Concurrently, the Company has agreed to repay a Consolidated Subordinate Note that it had previously issued to debt holder who is a director and shareholder of the Company in the principal amount of $1.02 million. The debt holder has agreed to have the full amount of principal and accumulated interest, in the amount of $1,158,024 due under the note, applied to a subscription of a Debenture under the offering. Additionally the Company's $1.5 million credit facility also provided by the same debt holder, on which the Company had drawn down the sum of $1,103,000 as of November 3, 2008, will also be satisfied by way of issuance of Debentures under the November 3, 2008 offering. With the agreement to settle all the notes previously issued by the Debt holder is subscribing to an aggregate of $2,566,077 of Debentures under the offering. As at December 31, 2008, the new Convertible Debenture amounted to $8,943,851 net of deferred costs of $56,419, with corresponding accrued interest of $125,753. In 2007, ESW's subsidiary, ESW Canada entered into a $2.5 Million revolving credit facility with Royal Bank of Canada, to finance orders on hand. This credit line will provide ESW with the working capital to complete larger contracts. Effective September 2, 2008, we completed our negotiations with Royal Bank of Canada and entered into an amendment to the secured commercial loan agreement originally entered into March 19, 2007. The amendment to the Agreement extends the term of the Agreement from June 30, 2008 through June 30, 2009. In addition to extending the term of the Agreement, certain financial covenants have also been amended. The new arrangement in the agreement provides for a revolving facility available by way of a series of term loans of up to $750,000 to finance future production orders. The Credit Facility is guaranteed by the Company and its subsidiary ESW Canada through the pledge of their assets to secure RBC. The Credit Facility bears interest at a base rate of one and a half percentage (1.5%) points above the Canadian prime rate. At the time ESW Canada entered into the extension and amendment to the Credit Facility, there was no outstanding obligations due to RBC under the Credit Facility. As of December 31, 2008 $77,168 is outstanding due to RBC under the Credit Facility. 28 The amount of availability at any time is dependent upon various factors, including, the amount of open export orders on hand, and the amount of eligible receivables. The terms relating to the credit agreement specifically note that at the time of any borrowing under the credit agreement, the Company's subsidiary ESW Canada Inc. maintain a tangible net worth of at least $1.5 million. The credit agreement contains, among other things, covenants, representations and warranties and events of default customary for a facility of this type for both the Company and its subsidiary ESW Canada Inc. 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 pay any principal, interest or other amounts when due, 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's ability to service our indebtedness in cash will depend on its future performance, 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, it will be able to meet its debt service obligations when due. Significant assumptions underlie this belief, including, among other things, that ESW will be successful in implementing its business strategy, that some of ESW's new products receive verification from the appropriate regulatory authorities, 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 its debt 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, ESW's ability to pay principal and interest on its debt would be impaired. In such circumstance, ESW would have to issue shares of its common stock as repayment of this debt, which would be of a dilutive nature to ESW's present shareholders. CONTRACTUAL OBLIGATIONS LEASES Effective November 24, 2004, ESW's wholly owned subsidiary ESW America Inc. entered into a lease agreement for approximately 40,200 square feet of leasehold space, which houses our research and development facilities in Montgomery Township, Pennsylvania. The lease commenced on January 15, 2005 and expires January 31, 2010. Effective December 20, 2004, ESW's wholly owned subsidiary ESW Canada Inc. entered into an offer to lease agreement for approximately 50,000 square feet of leasehold space which houses its executive offices and a manufacturing plant located in Concord, Ontario Canada. The following breakdown as at December 31, 2008 is the total, of the minimum annual lease payments outstanding, for both leases. YEAR $ ----------------- 2009 $439,601 2010 $144,388 CAPITAL LEASE OBLIGATION The Company is committed to the following lease payments in connection with the acquisition of capital assets under capital leases: YEAR $ ---------------------------- 2009 19,289 2010 11,387 2011 2,488 2012 1,037 ------- TOTAL $34,201 Less imputed interest (3,195) ------- Total obligation under capital lease $31,006 Less current portion (12,001) ------- TOTAL LONG-TERM PORTION $19,005 ======= 29 The Company has incurred $4,157 interest expense on capital leases for the year. CRITICAL ACCOUNTING POLICIES AND ESTIMATES GENERAL ESW's discussion and analysis of the financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles, in the United States ("US GAAP"). A critical accounting policy is defined as one that is both material to the presentation of ESW's financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on ESW's financial condition and results of operations. Specifically, critical accounting estimates generally require management to make assumptions about matters that are highly uncertain at the time of the estimate; and if different estimates or judgments were used, the use of these estimates or judgments would have a material effect on ESW's financial condition or results of operations. The estimates and judgments ESW makes that affect the reported amount of assets, liabilities, revenues and expenses are based on historical experience and on various other factors, which ESW believes to be reasonable in the circumstances under which they are made. Actual results may differ from these estimates under different assumptions or conditions. ESW considers accounting policies related to revenue recognition, the valuation of inventories, research and development and accounting for the value of long-lived assets and intangible assets to be critical accounting policies. REVENUE RECOGNITION AND EVALUATION OF DOUBTFUL ACCOUNTS ESW recognizes revenue when it is realized or realizable and earned. ESW considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred, the amount is fixed and determinable, risk of ownership has passed to the customer and collection of the resulting receivable is reasonably assured. On a monthly basis, an aged account receivable report is produced and ESW reviews all account receivables. ESW reviews all amounts outstanding greater than sixty days. Based on previous customers payment history, ESW management determines whether an (or portion of an) allowance needs to be provided on each customers' outstanding balance. INVENTORIES Raw materials are stated at the lower of cost and replacement cost. Work in process and finished goods inventories are stated at the lower of cost and net realizable value. These costs include the cost of materials plus direct labor applied to the product and the applicable share of overhead. Cost is determined on a first-in-first-out basis. ESW's policy for valuation of inventory, including the determination of obsolete or excess inventory, requires ESW management to estimate the future demand for the Company's product. Inventory is subject to inexact estimates by management. ESW purchases on a "buy to order" basis. When a customer orders a product, then ESW purchases the majority of the materials to start the manufacturing the product. IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS ESW assesses the impairment of long-lived assets and intangible assets annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets are stated at cost less accumulated amortization and are comprised of licenses and patents. Unforeseen events, changes in circumstances and market conditions, and material differences in the value of long-lived and intangible assets due to changes in estimates of future cash flows could affect the fair value of the ESW's assets and require an impairment charge. Intangible assets are reviewed annually to determine if any events have occurred that would warrant further review. In the event that a further assessment is required, ESW will analyze estimated discounted future cash flows to determine whether the carrying value of the intangible asset will be recovered and if an impairment charge will be required. Patents include all costs necessary to acquire intellectual property such as patents and trademarks, as well as legal costs arising out of litigation relating to the assertion of any Company-owned patents. 30 RESEARCH AND DEVELOPMENT ESW is engaged in research and development work. Research and development costs for the acquisition of capital assets that have a future benefit have been capitalized. Due to uncertainties all other costs relating to research and development have been expensed as incurred. Any grant money received will be used to offset these expenditures. NEW ACCOUNTING PRONOUNCEMENTS In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles". SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". The Company has evaluated the impact of SFAS No. 162 on its financial statements, and the adoption of this statement does not have a significant effect on the Company's financial statements. In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 ("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No.133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. ESW will be required to adopt SFAS 161 in the first quarter of 2009. ESW currently does not have any derivative financial instruments subject to accounting or disclosure under SFAS 133; therefore, ESW does not expect the adoption of SFAS 161 to have a significant on our consolidated statement of financial position, results of operations or cash flows. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how a company recognizes assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at fair value at the acquisition date. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effect of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. ESW will consider the effect of SFAS 141 and its impact on any future acquisitions. In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interest of the parent and the interest of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of SFAS 160 to have a significant effect on its financial position, results of operation or cash flows. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115," ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). SFAS 159 became effective for the Company on January 1, 2008. The Company has evaluated SFAS 159 and has chosen not to adopt SFAS No. 159. No new accounting pronouncements have been issued during the fiscal year ended December 31, 2008 that would have a material impact on ESW's financial statements. ESW has reviewed the status of its accounting pronouncements and believes there are no significant changes from that disclosed in this report. 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. In 2008, the Company experienced a net gain on foreign exchange due the strengthening 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 stockholders' investment will fluctuate depending upon the weakening or strengthening of the Canadian currency against the U.S. dollar. 31 Adjustments resulting from ESW's foreign Subsidiaries' financial statements are included as a component of other comprehensive income within stockholders equity because the functional currency of subsidiaries is non-USD. ITEM 7A. 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 pre dominantly 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 loss of $198,792 in 2008 reported in the Consolidated Statements of Changes in Stockholders' Equity (Deficit) primarily as a result of generally strengthening U.S. dollar against 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 December 31, 2008, 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 December 31, 2008, ESW had nil 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 decreased over the last two years. The average interest rate the Company is paying is 5.25%. Falling interest rates have positively impacted interest expense. Due to the short term nature of these loans the impact of changing interest rates is not considered significant. ESW currently has no variable-rate, long-term debt that exposes ESW to interest rate risk. As of December 31, 2008, ESW has principal $9 million of convertible debentures with a fixed interest rate of 9%. Generally, the fair market value of ESW`s fixed interest rate convertible debentures will increase as interest rates fall and decrease as interest rates rise. As at December 31, 2008, the new Convertible Debenture amounted to $8,943,581 net of deferred costs of $56,419. 32 ITEM 8. FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS To the Board of Directors and Stockholders of Environmental Solutions Worldwide, Inc. Toronto, Ontario, Canada We have audited the accompanying consolidated balance sheets of Environmental Solutions Worldwide, Inc. and subsidiaries (the "Company") as of December 31, 2008 and 2007, and the related consolidated statements of operations and comprehensive loss, changes in stockholders' equity (deficit), and cash flows for each of the two years in the period ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Environmental Solutions Worldwide, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Deloitte & Touche LLP Independent Registered Chartered Accountants Licensed Public Accountants April 8, 2009 F-1 ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31,
2008 2007 ------------ ------------ ASSETS Current assets Cash and cash equivalents (Note 4) $ 2,247,623 $ 2,891,088 Accounts receivable, net of allowance 103,728 271,703 for doubtful accounts of $1,901 (2007 - $NIL) (Note 2) Inventory (Note 5) 723,812 1,030,843 Prepaid expenses and sundry assets 313,936 138,713 ------------ ------------ Total current assets 3,389,099 4,332,347 Property, plant and equipment under construction (Note 6) 171,445 18,622 Property, plant and equipment, net of accumulated depreciation of $ 3,530,182 3,324,364 4,105,746 (2007 - $2,460,565) (Note 6) Patents and trademarks, net of accumulated amortization of $1,688,157 440,734 649,196 (2007 - $1,475,077) (Note 2) ------------ ------------ $ 7,325,642 $ 9,105,911 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 420,277 $ 145,352 Accrued liabilities 258,155 459,533 Notes payable to related party (Note 7) -- 3,310,737 Bank loan (Note 8) 77,168 -- Redeemable class A special shares (Note 9) 453,900 453,900 Current portion of capital lease obligation (Note 15) 12,001 13,032 ------------ ------------ Total current liabilities 1,221,501 4,382,554 Long Term Liabilities Convertible Debentures net of deferred costs 8,943,581 -- of $56,419 (2007 - $NIL) (Note 10) Capital lease obligation (Note 15) 19,005 29,482 ------------ ------------ Total Long Term liabilities 8,962,586 29,482 Total liabilities 10,184,087 4,412,036 ------------ ------------ Commitments and contingencies (Note 15) Stockholders' Equity (Note 12)(Note 13) Common stock, $0.001 par value, 125,000,000 shares authorized; 72,973,851 shares issued and outstanding 72,972 72,972 Additional paid-in capital 25,403,485 25,665,761 Accumulated other comprehensive income 251,526 450,318 Accumulated deficit (28,586,428) (21,495,176) ------------ ------------ Total stockholders' (deficit) / equity (2,858,445) 4,693,875 ------------ ------------ $ 7,325,642 $ 9,105,911 ============ ============
The accompanying notes are an integral part of these financial statements F-2 ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31,
2008 2007 ------------ ------------ Revenue Net sales $ 885,206 $ 9,310,504 Cost of sales 834,837 3,678,088 ------------ ------------ Gross profit 50,369 5,632,416 ------------ ------------ Operating expenses Marketing, office and general costs 3,683,165 3,768,710 Research and development costs 1,323,754 757,900 Officers' compensation and directors fees 611,293 1,240,070 Consulting and professional fees 171,746 138,021 Foreign exchange (gain) / loss (186,743) 357,850 Depreciation and amortization 1,125,038 1,141,173 ------------ ------------ 6,728,253 7,403,724 ------------ ------------ Loss from operations (6,677,884) (1,771,308) Interest on long term debt (129,072) (171,636) Interest on notes payable to related party (304,146) (284,282) Interest Income 19,850 63,605 ------------ ------------ Net loss $ (7,091,252) $ (2,163,621) ------------ ------------ Other comprehensive (loss)/gain: Foreign currency translation of Canadian subsidiaries (198,792) 450,318 ------------ ------------ Comprehensive loss $ (7,290,044) $ (1,713,303) ------------ ------------ Loss per share (Basic and diluted) $ (0.10) $ (0.03) ============ ============ Weighted average number of shares outstanding 72,973,851 63,602,387 ============ ============
The accompanying notes are an integral part of these financial statements F-3
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 ACCUMULATED ADDITIONAL OTHER COMMON STOCK PAID-IN COMPREHENSIVE ACCUMULATED SHARES AMOUNT CAPITAL INCOME DEFICIT TOTAL ------------ ------------ ------------ ------------ ------------ ------------ December 31, 2006 59,753,240 $ 59,752 $ 18,243,710 $ -- $(19,331,555) $ (1,028,093) Net loss -- -- -- -- (2,163,621) (2,163,621) Stock-based compensation -- -- 776,271 -- -- 776,271 Common stock issued from exercise of options 655,000 655 292,345 -- -- 293,000 Common stock issued for services 6,722 6 4,994 -- -- 5,000 Issuance of common stock for interest on debentures 338,889 339 243,661 -- -- 244,000 Issuance of common stock for principal on debentures 12,200,000 12,200 6,087,800 -- -- 6,100,000 Common stock issued from exercise of warrants 20,000 20 16,980 -- -- 17,000 Foreign currency translation of Canadian subsidiaries -- -- -- 450,318 -- 450,318 ------------ ------------ ------------ ------------ ------------ ------------ December 31, 2007 72,973,851 $ 72,972 $ 25,665,761 $ 450,318 $(21,495,176) $ 4,693,875 Net loss -- -- -- -- (7,091,252) (7,091,252) Stock-based compensation -- -- 13,646 -- -- 13,646 Loss on extinguishment of debt with related party -- -- (275,922) -- -- (275,922) Foreign currency translation of Canadian subsidiaries -- -- -- (198,792) -- (198,792) ------------ ------------ ------------ ------------ ------------ ------------ December 31, 2008 72,973,851 $ 72,972 $ 25,403,485 $ 251,526 $(28,586,428) $ (2,858,445) ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements F-4 ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2008 2007 ----------- ----------- Net Loss $(7,091,252) $(2,163,621) ----------- ----------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property, plant and equipment 1,069,617 1,066,311 Amortization of patents and trademarks 213,080 212,158 Provision (Recovery) for uncollectible accounts 1,901 -- Interest on long term debt 125,753 171,636 Interest on notes to related party 304,146 284,282 Amortization of debenture warrant fair value -- 123,803 Amortization of deferred costs 3,318 -- Common stock issued for services provided -- 5,000 Loss on disposal of property, plant and equipment -- 3,164 Stock based compensation 13,646 776,271 Write down of Inventory 207,889 -- ----------- ----------- 1,939,350 2,642,625 Increase (decrease) in cash flows from operating activities resulting from changes in: Accounts receivable 166,074 157,797 Inventory 99,142 675,403 Prepaid expenses and sundry assets (175,223) 15,696 Accounts payable and accrued liabilities 206,679 (653,687) ----------- ----------- 296,672 195,209 ----------- ----------- Net cash (used in)/ provided by operating activities (4,855,230) 674,213 ----------- ----------- Investing activities: Proceeds from sale of property, plant and equipment -- 15,099 Acquisition of property, plant and equipment (288,235) (517,702) Property, plant and equipment under construction (152,823) -- Increase in patents and trademarks (4,618) (12,570) ----------- ----------- Net cash used in investing activities (445,676) (515,173) ----------- ----------- Financing activities: Convertible Debentures 6,000,000 -- Deferred costs - legal fees paid for convertible debentures (59,738) -- Bank loan 324,046 -- Repayment of bank loan (246,878) -- Notes payable from related party 1,253,000 1,085,340 Repayment of notes payable to related party (2,350,000) (500,000) Repayment of interest on notes payable to related party (52,689) -- Issuance of common stock -- 310,000 Capital lease obligation (11,508) (6,904) ----------- ----------- Net cash provided by financing activities 4,856,233 888,436 ----------- ----------- Net (decrease)/increase in cash and equivalents (444,673) 1,047,476 Effect of foreign currency translation of Canadian subsidiaries (198,792) 450,318 Cash and cash equivalents, beginning of year 2,891,088 1,393,294 ----------- ----------- Cash and cash equivalents, end of year $ 2,247,623 $ 2,891,088 =========== =========== Supplemental disclosures: Interest received $ 19,850 $ 63,605 =========== ===========
The accompanying notes are an integral part of these financial statements F-5 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 market. ESW currently manufactures and markets a line of catalytic emission control and enabling technologies for a number of applications. The audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), which contemplates continuation of the company as a going concern. The Company, however, has sustained operating losses and presently lacks a sufficient source of commercial income, which creates uncertainty about the Company's ability to continue as a going concern. The Company's ability to continue operations as a going concern and to realize its assets and to discharge its liabilities is dependent upon obtaining additional financing sufficient for continued operations as well as the achievement and maintenance of a profitable level of operations. Management believes the current business plan if successfully implemented may provide an opportunity for the Company to achieve profitable operations and allow it to continue as a going concern. The Company has incurred significant losses to date. As of December 31, 2008, the Company has an accumulated deficit of $28,586,428, the Company was successful in its pursuit of its financing initiatives; and on November 3, 2008, the Company raised an additional $6.0 million through the issuance of convertible debentures (See Note 10). However, there is no assurance that the Company will be successful in achieving sufficient cash flow from operations. The ability of the Company to continue as going concern is dependent upon the Company obtaining regulatory approvals for its new line of products, during the current year the company has expensed significant resources and completed the development of products to meet the new 2009 emission standards enforced by the regulators (See ITEM 1. BUSINESS - PRODUCT CERTIFICATIONS for regulations). The Company expects the regulatory approvals to come to fruition in the second quarter of 2009. Any significant delay in achieving or absence of the regulatory approvals would impact the ability of the Company to generate sufficient cash flow from its operations, the Company will be required to significantly reduce or limit operations and /or seek additional financing to fund its continuing operations and meet its obligations as they come due. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern for a reasonable period of time. All adjustments considered necessary for fair presentation and of a normal recurring nature have been included in these interim consolidated financial statements. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, ESW America Inc., ESW Technologies Inc., ESW Canada Inc. and BBL Technologies Inc. All inter-company transactions and balances have been eliminated on consolidation. Amounts in the consolidated financial statements are expressed in U.S. dollars. ESTIMATES The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported period. Actual results could differ from those estimates. Significant estimates include amounts for impairment of property plant and equipment, intangible assets, share based compensation, inventory 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 $100,000 ($250,000 per depositor through December 31, 2009) for each bank by the Federal Deposit Insurance Corporation. The balances at times may exceed these limits. Accounts Receivable and Concentrations of Credit Risk: The Company performs on-going credit evaluations of its customer's financial condition and generally does not require collateral from its customers. Three of its customers accounted for 32%, 29%, and 15%, respectively of the Company's revenue in the fiscal year 2008 and 32%, 31%, and 0%, respectively of its accounts receivable as at December 31, 2008. Three of its customers accounted for 90%, 2%, and 1%, respectively of the Company's revenue in Fiscal 2007 and 56%, 2%, and 0%, respectively of its accounts receivable as at December 31, 2007. 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 a reserve of $1,901 was appropriate as at December 31, 2008 and that a reserve of $ nil was appropriate as at December 31, 2007. F-6 INVENTORY Inventory is stated at the lower of cost (first-in first-out) or market. 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 at cost, customized equipment built to be used in the future day to day operations. 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. PATENTS AND TRADEMARKS Patents and trademarks consist primarily of the costs incurred to acquire them from an independent third party. The Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets," requires intangible assets with a finite life be tested for impairment whenever events or circumstances indicate that a 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 and as of December 31, 2008 found no impairment. Patents and trademarks are being amortized on a straight-line basis over their estimated life of ten years. Amortization expense for the year ended December 31, 2008 and 2007 were $213,080 and $212,158 respectively. DEFERRED COSTS Deferred costs consist of legal fees paid in connection to the issuance of the new convertible debenture notes during the year. The amount is being amortised in a straight line basis over a three year period from the date of issuance of the new convertible debenture notes. The amortization for the current year is $3,319 (2007 - nil). (See Note: 10). The deferred costs asset for the year ended December 31, 2008, amounted to $56,419 (2007 - $ nil) and has been netted against Convertible Debentures under Long Term Liabilities. FAIR VALUE OF FINANCIAL INSTRUMENTS FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FAS 157 was issued in September 2006 and the Company's adoption of FAS 157 effective January 1, 2008 for financial assets and liabilities did not have an impact on its consolidated financial position, results of operations or cash flows. Included in the FAS 157 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 FAS 157 and the valuation method as exchange, income or use. The Company uses inputs which are as observable as possible and the methods most applicable to the specific situation of each company or valued item. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, 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. The carrying amount of the convertible debentures approximates their fair value as at December 31, 2008. 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 SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements", revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the amount is fixed and determinable, risk of ownership has passed to the customer and collection of the resulting receivable is reasonably assured. F-7 The Company also derives revenue (less than 4% of total revenue) from providing air testing and environmental certification services. Revenues from these services are recognized upon performance. LOSS PER COMMON SHARE Loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the year. Common stock equivalents are excluded from the computation of diluted loss per share when their effect is anti-dilutive. Therefore diluted loss per share has not been calculated for 2008 and 2007. (See Note 16) INCOME TAXES Income taxes are computed in accordance with the provisions of Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires, among other things, a liability approach to calculating deferred income taxes. SFAS 109 requires a company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in a company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company has adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109" ("FIN 48") as of January 01, 2007. The implementation of the provisions of FIN 48 requires the Company to make certain estimates and judgments about the application of tax law, the expected resolution of uncertain tax positions and other matters. In the event that uncertain tax positions are resolved for amounts different than the Company's estimates, or the related statutes of limitations expire without the assessment of additional income taxes, the Company will be required to adjust the amounts of the related assets and liabilities in the period in which such events occur. Such adjustments may have a material impact on ESW's income tax provision and results of operations. NOTE 11- INCOME TAXES of the condensed consolidated financial statements describes FIN 48 and the effects on results of operations and financial position arising from its adoption. IMPAIRMENT OF LONG-LIVED ASSETS The Company follows SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the assets' carrying amounts may not be recoverable. In performing the review for recoverability, if future undiscounted cash flows (excluding interest charges) from the use and ultimate disposition of the assets are less than their carrying values, an impairment loss represented by the difference between its fair value and carrying value, is recognized. Management reviewed the related assets for impairment in the fourth quarter and found no impairment. RESEARCH AND DEVELOPMENT The Company is engaged in research and development work. Research and development costs, are charged as operating expense of the Company as incurred. Any grant money received for research and development work will be used to offset these expenditures. For the year ended December 31, 2008 and 2007 the Company expensed $1,323,754 and $757,900 respectively towards research and development costs. In 2008 and 2007, grant money amounted to $221,990 and $28,010 respectively. FOREIGN CURRENCY TRANSLATION The consolidated financial statements have been translated into United States dollars in accordance with SFAS No. 52, "Foreign Currency Translation". All monetary items have been translated using the exchange rates in effect at the balance sheet date. All non -monetary items have been translated using the historical exchange rates at the time of transactions. Income statement amounts have been translated using the average exchange rate for the year. The unrealized portion of a foreign exchange gain or loss is included in Accumulated other comprehensive income. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No.130 (SFAS 130), "Reporting comprehensive income" establishes standards for reporting and display of comprehensive income and its components. For the years ended December 31, 2008 accumulated other comprehensive income was reported as a component of stockholders' equity. F-8 SEGMENTED REPORTING SFAS Number 131, "Disclosure About Segments of an Enterprise and Related Information", 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. For the year ended December 31, 2008, all revenues were generated from the United States. NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles". SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". The Company has evaluated the impact of SFAS No. 162 on its financial statements, and the adoption of this statement does not have a significant effect on the Company's financial statements. In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 ("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No.133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. ESW will be required to adopt SFAS 161 in the first quarter of 2009. ESW currently does not have any derivative financial instruments subject to accounting or disclosure under SFAS 133; therefore, ESW does not expect the adoption of SFAS 161 to have a significant effect on ESW's consolidated statement of financial position, results of operations or cash flows. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how a company recognizes assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at fair value at the acquisition date. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effect of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. ESW will consider the effect of SFAS 141R and its impact on any future acquisitions. In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interest of the parent and the interest of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of SFAS 160 to have a significant effect on its financial position, results of operation or cash flows. In February 2007, the Financial Accounting Standards Board (FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115," ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). SFAS 159 became effective for the Company on January 1, 2008. The Company has evaluated SFAS 159 and has chosen not to adopt SFAS No. 159. 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. F-9 NOTE 5 - INVENTORY Inventory is summarized as follows: DECEMBER 31, INVENTORY 2008 2007 --------------------------------------------- Raw materials $ 503,129 $ 761,832 Work-In-Process 201,173 251,358 Finished goods 19,510 17,653 --------------------------------------------- TOTAL $ 723,812 $1,030,843 ============================================= NOTE 6 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: DECEMBER 31, CLASSIFICATION 2008 2007 ----------------------------------------------------------- Plant, machinery and equipment $ 5,126,108 $ 4,966,177 Office equipment 294,250 242,098 Furniture and fixtures 424,426 421,550 Vehicles 12,014 12,014 Leasehold improvements 997,748 924,472 -------------------------- $ 6,854,546 $ 6,566,311 Less: accumulated depreciation (3,530,182) (2,460,565) -------------------------- $ 3,324,364 $ 4,105,746 -------------------------- At December 31, 2008 and 2007, the Company had $171,445 and $18,622, respectively, of customized equipment under construction. The office equipment above includes $17,665 in assets under capital lease with a corresponding accumulated depreciation of $11,668 for the year ended December 31, 2008. As at year ended December 31, 2007 office equipment included $17,665 in assets under capital lease with a corresponding depreciation of $7,879. The Plant, machinery and equipment above includes $33,957 in assets under capital lease with a corresponding accumulated depreciation of $11,539 for the year ended December 31, 2008. As at year ended December 31, 2007, plant, machinery and equipment included $33,957 in assets under capital lease with a corresponding accumulated depreciation of $4,347. NOTE 7 - NOTES PAYABLE TO RELATED PARTY On January 5, 2007 the Company extended the maturity date of the unsecured subordinated promissory note originally issued on June 26, 2006 in the principal amount of $1.2 million; and the August 29, 2006 unsecured subordinated promissory note in the principal amount of $1.0 million, through to January 31, 2007. On February 9, 2007, the Company's two unsecured subordinated promissory notes in the principal amount of $1.2 million and $1.0 million and accrued interest were consolidated into one unsecured subordinated demand note (the "Consolidated Note") with principal amount of $2,308,148. In accordance with the terms of the Consolidated Note in the principal amount of $2,308,148, the same was due and payable to Holder upon demand. The Consolidated Note bears interest at a rate of 9% per annum if principal and interest are paid by the Company in cash, or if principal and interest are paid in shares of restricted common stock of the Company, the Consolidated Note will bear interest at a rate of 12% per annum. The Company may repay the Consolidated Note without penalty at any time. The Consolidated Note was issued to a company controlled by a trust of which a director and shareholder of our Company is the beneficiary. The holder of the Consolidated Note has the option to receive payment of principal and all accrued interest in the form of restricted shares of the Company's common stock, par value ($0.001) with cost free registration rights. On February 15, 2007 the Company issued a $500,000 unsecured subordinated demand promissory note to a member of the Company's Board of Directors. On March 7, 2007 the Company issued a second $500,000 unsecured subordinated demand promissory note to a member of the Company's Board of Directors and consolidated this sum with the principal and accrued interest of the $500,000 unsecured demand promissory note previously issued on February 15, 2007 (the "Consolidated Subordinated Note"). The Consolidated Subordinated Note is in the principal amount of $1,002,589. The Consolidated Subordinated Note bears interest at a rate of 9% per annum and is payable upon demand. The Company may repay the Consolidated Subordinated Note without penalty at any time. The Consolidated Subordinated Note was issued to a director and shareholder of the Company. F-10 Effective June 2, 2008 the Company entered into a Credit Facility Agreement with a director and shareholder of the Company. Pursuant to the Agreement, the Company can request draw downs under the Facility of up to $1,500,000 in the aggregate with funds to be used for general working capital purposes. All requests to draw down under the Facility are subject to the debt holders consent and approval. An approved draw down by the Company under the Facility will be represented by a 9% unsecured subordinated demand promissory note (the "Note") issued by the Company to the debtor or his designee. The Company may repay the Note at anytime without penalty. At the option of the Note holder, in lieu of cash, principal and interest earned on the Note can be repaid in restricted common stock of the Company. Should the Note holder elect to receive stock of the Company, interest on principal will be calculated at a rate of 12% per annum. The number of shares of common stock to be issued in satisfaction of interest and principal shall be determined by dividing the principal and accrued interest by the greater of 105% of the twenty (20) day average closing price of the Company's common stock immediately preceding the date the Note holder elects to have the Note satisfied with common stock, or the Closing Price on that date. Under no circumstance can the conversion price be below the fair market price of the Company's common stock on the date the Note holder elects to have the Note satisfied with common stock. The Company may request draw downs under the Credit Facility Agreement through December 31, 2008. Subsequently, from June 2008 to October 2008 a total of nine unsecured subordinated promissory notes were issued totalling to $1,253,000 in principal. These nine unsecured subordinated promissory notes are part of a series of draw downs against the aforementioned Credit Facility Agreement. Of the nine unsecured subordinated promissory notes the Company repaid one unsecured subordinated promissory note in the amount of $150,000 in principal and $ 4,475 interest, this unsecured subordinated promissory note was due to a shareholder of the Company who by separate agreement with the above debt holder and the Company agreed to provide funding to the Company under the Credit Facility. In November 2008 the Company recorded $275,922 in the Consolidated Statements Of Changes In Stockholders' Equity (Deficit) towards a loss on extinguishment of debt as a payment to a director and shareholder of the Company to surrender the right to convert the existing notes payable into common stock of the Company. Also, on November 7, 2008, the "February 9, 2007" Consolidated Note with principal amount of $2,308,148, the "March 7, 2007" Consolidated Subordinated Note with principal amount of $1,002,589 and all notes issued under the Credit Facility Agreement, dated June 2, 2008, in the principal amount of 1,103,000 have been extinguished through a repayment of $2,200,000 the principal portion only of the $2,308,148 Consolidated Note and $48,214 as taxes withholding and the balance of principal and interest has been converted into a convertible debenture (see Note 10 CONVERTIBLE DEBENTURES). As at December 31, 2008, principal and interest on notes payable to related party was $nil. As at December 31, 2007, $258,885 of interest payable had been accrued on the $1,002,589, and the $2,308,148 Consolidated Subordinated Note and Consolidated Note, respectively. NOTE 8 - BANK LOAN Effective September 2, 2008, the Company's wholly owned subsidiary ESW Canada, Inc., completed its negotiations with a Canadian Chartered Bank and entered into an amendment to a secured commercial loan agreement (the "Agreement") originally entered into on March 19, 2007. The amendment to the Agreement extends the term of the Agreement from June 30, 2008 through to June 30, 2009. In addition to extending the term of the Agreement, certain financial covenants have also been amended. The new arrangement in the Agreement provides for a revolving facility available by way of a series of term loans of up to $750,000 to finance future production orders to cover direct costs such as material and labour for specific sales orders. The facility has been guaranteed to the bank under Export Development Canada ("EDC") pre-shipment financing program. Borrowings under the revolving credit agreement bear interest at 1.5% above the bank's prime rate of interest. Repayments of the loan are required no later than one year from the date of the advancement of the loan. Obligations under the revolving credit agreement are collateralized by a first-priority lien on the assets of the Company and its subsidiary ESW Canada, Inc. including, accounts receivable, inventory, equipment and other tangible and intangible property, including the capital stock of all direct subsidiaries. At December 31, 2008 and 2007, $77,168 and $ nil respectively was owed. 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.) The redeemable Class A special shares are issued by the Company'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 Dollars (which translates to $574,713 USD at December 31, 2008). 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 at December 31, 2008 BBL has an accumulated deficit of $ 1,183,183 USD ($1,834,989 Canadian dollars as at December 31, 2008) and therefore, the holder would be unable to redeem the redeemable Class A special shares at their ascribed value. NOTE 10 - CONVERTIBLE DEBENTURES On November 3, 2008, the Company completed a transaction whereby it issued $6.0 million of 9% convertible debentures (the "Debentures") to six accredited investors. The Debentures are for a term of three (3) years and are convertible into shares of the Company's common stock at the option of the holder at any time six (6) months after the date of issuance of the Debenture by dividing the principal amount of the Debenture to be converted by $0.25. The Debentures earn 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 elects to receive F-11 interest in shares of common stock, the number of shares of common stock to be issued for interest shall be determined by dividing accrued interest by $0.25. Subject to the holder's right to convert, the Company has 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 is payable in cash or common stock at the option of the Holder. The Debentures contain customary price adjustment protections. From the proceeds, the Company elected to repay $2,200,000, the principal portion only, of a previously issued Consolidated Note in the amount of $2,308,148 to a company controlled by a trust to which a director and shareholder of the Company is the beneficiary. The debt holder agreed to have the remaining amount of $433,923, due under the Consolidated Note, applied to a subscription of a Debenture under the November 3, 2008 offering. Concurrently, the Company has agreed to repay a Consolidated Subordinated Note that it had previously issued to a debt holder who is a director and shareholder of the Company, in the principal amount of $1,002,589. The debt holder has agreed to have the full amount of principal and accumulated interest, in the amount of $1,158,024 due under the Consolidated Subordinated Note, applied to a subscription of a Debenture under the offering. Additionally the Company's $1.5 million credit facility also provided by the same debt holder, from which the Company had drawn down the sum of $1,103,000 as of November 3, 2008, will also be satisfied by way of issuance of Debentures under the November 3, 2008 offering. With the agreement to settle all the notes previously issued by the Debt holder is subscribing to an aggregate of $2,566,077 of Debentures under the offering. As at December 31, 2008, the new Convertible Debenture amounted to $8,943,581 net of deferred costs of $56,419, with corresponding accrued interest of $125,753. The Company has analysed the details of the agreement and no beneficial conversion feature applies. LEGAL FEES RELATED TO CONVERTIBLE DEBENTURES The Company has recorded a deferred cost asset of $59,738 for legal fees paid in relation to the issuance of the Convertible Debentures. The tax asset will be amortized over the term of the Convertible Debenture. As at December 31, 2008, the deferred cost asset and related amortization was $56,419 and $3,319 respectively as at December 31, 2007, the Deferred cost asset and related amortization was $ nil. Legal fees have been presented net against the related instrument. NOTE 11- INCOME TAXES As at December 31, 2008, there are tax loss carry forwards for Federal income tax purposes of approximately $20,406,859 available to offset future taxable income in the United States. The tax loss carry forwards expire in various years through 2028 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 $7,142,401 has been established until realizations of the tax benefit from the loss carry forwards are more likely than not. Additionally, as at December 31, 2008, the Company's two wholly owned Canadian subsidiaries had non-capital tax loss carry forwards of approximately $4,067,206 be used, in future periods, to offset taxable income. The loss carry forwards expire in various years through 2028 The deferred tax asset of approximately $1,362,514 has been fully offset by a valuation allowance until realization of the tax benefit from the non-capital tax loss carry forwards are more likely than not. F-12
For the year ended December 31, 2008 2007 ----------------------------- Statutory tax rate: U.S. 35.0% 35.0% Foreign 33.5% 36.1% Income (loss) before income taxes: U.S. $ (3,367,446) $ (4,154,899) Foreign (3,723,806) 1,991,429 ----------------------------- $ (7,091,252) $ (2,163,470) ----------------------------- Expected income tax recovery $ (2,426,081) $ (735,309) Differences in income tax resulting from: Depreciation (Foreign operations) $ (1,595) $ 23,319 Stock Based Compensation $ 4,776 $ 271,695 Accrued interest on loans $ 44,014 $ -- ----------------------------- $ (2,378,887) $ (440,295) Benefit of losses not recognized $ 2,378,887 $ 440,295 ----------------------------- Income tax provision (recovery) per financial statements $ -- $ -- -----------------------------
Deferred income tax assets and liabilities consist of the following difference:
As at December 31, 2008 2007 ----------------------------- Assets Capital Assets - Tax Basis (Foreign operations only) $ 1,426,857 $ 1,162,470 Capital Assets - Book Value (Foreign operations only) (1,204,388) (1,770,003) ----------------------------- Net Capital Assets $ 222,469 $ (607,533) Tax loss carry forwards 24,474,065 18,127,056 ----------------------------- Net temporary differences (foreign operations only) $ 24,696,534 $ 17,519,523 Statutory tax rate: U.S. 35.0% 35.0% Foreign 33.5% 36.1% Temporary differences (foreign operations only) $ 8,579,442 $ 6,575,601 Valuation allowance $ (8,579,442) $ (6,575,601) ----------------------------- Carrying Value $ -- $ -- =============================
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 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 not a material impact on the Company's consolidated financial position and results of operations as a result of the adoption of the provisions of FIN 48. 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. Accrued interest and penalties will be included within the related tax liability line in the consolidated balance sheet. 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 December 31, 2008: United States - Federal 2004 - present United States - State 2004 - present Canada - Federal 2005 - present Canada - Provincial 2005 - present F-13 Valuation allowances reflect the deferred tax benefits that management is uncertain of the Company's ability to utilize in the future. NOTE 12 - ISSUANCE OF COMMON STOCK The Company did not issue any common stock in 2008. From April to August, 2007 the Company received $252,500 for the exercise of 505,000 options exercisable at $0.50 per share and issued 505,000 shares of common stock. On April 18, 2007 the Company issued 6,722 shares of common stock for the payment of an account payable in the amount of $5,000 for legal fees. The expense was previously recorded as compensation expense in fiscal year 2005. On September 20, 2007 the Company issued 338,889 shares of common stock, as payment for $244,000 of accrued interest through September 13, 2007 as per the terms of the debentures. On September 20, 2007, the Company issued 12,200,000 shares of the Company's common stock, $0.001 par value as payment of principal on the Convertible Debentures which matured. On September 20, 2007 the Company received $17,000 for the exercise of 20,000 warrants to purchase 20,000 shares of common stock. NOTE 13 - STOCK OPTIONS AND WARRANT GRANTS A total of $13,646 and $776,271 for stock based compensation has been recorded for the year ended December 31, 2008 and 2007, respectively. On February 7, 2008 the Board of Directors granted an aggregate award of 400,000 stock options to five employees, two executive officers and one director. The options vested immediately with exercise prices of $0.71 and $1.00 per share (above fair-market value at the date of grant) with expiry ranging from three and five years from the date of award. On February 13, 2007 the Board of Directors granted an aggregate award of 2,450,000 stock options to eight employees, two Executive Officer/Directors and four outside Directors. The options vested immediately with an exercise price of $0.71 per share (fair-market value at the date of grant) with expiry ranging from three and five years from the date of award. 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, 2007 5,246,667 $ 0.60 Granted 2,450,000 $ 0.71 Expired (45,000) ($ 0.50) Exercised (655,000) ($ 0.45) ---------- ------ OUTSTANDING, JANUARY 1, 2008 6,996,667 $ 0.60 Granted 100,000 $ 0.71 Granted 300,000 $ 1.00 Expired (1,276,667) ($ 0.72) ---------- ------ OUTSTANDING, DECEMBER 31, 2008 6,120,000 $ 0.65 ========== ====== At December 31, 2008, the outstanding options have a weighted average remaining life of 23 months. The weighted average fair value of options granted during 2008 and 2007 was $0.93 and $0.71 respectively and was estimated using the Black-Scholes option-pricing model, and the following assumptions: F-14 2008 2007 ----------------- ----------------- Expected volatility 49% - 52% 56% - 69% Risk-free interest Rate 3.00% 5.00% Expected life 1.5 yrs - 2.5 yrs 1.5 yrs - 2.5 yrs Dividend yield 0.00% 0.00% Forfeiture rate 0.00% 0.00% The Black-Scholes model used by the Company to calculate options and warrant values, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock purchase options and warrants. The model also requires highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values. Accordingly, management believes that this model does not necessarily provide a reliable single measure of the fair value of the Company's stock options and warrants. At December 31, 2008, the Company had outstanding options as follows: NUMBER OF EXERCISE OPTIONS PRICE EXPIRATION DATE ---------------------------------------------------- 50,000 $0.45 April-20-09 500,000 $0.50 May-01-09 1,750,000 $0.50 August-11-09 150,000 $0.50 December-01-09 175,000 $0.71 February-16-10 795,000 $1.00 December-31-10 100,000 $0.71 February-06-11 100,000 $1.00 February-06-11 2,150,000 $0.71 February-16-12 100,000 $1.00 February-08-13 250,000 $0.27 August-06-13 ---------------------------------------------------- 6,120,000 ==================================================== 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, 2007 6,322,500 $ 0.93 Granted -- -- Exercised (20,000) $(0.85) Expired (3,030,000) $(0.85) --------------------------------------------------------------------- Outstanding, January 1, 2008 3,272,500 $ 1.28 Granted -- -- Exercised -- -- Expired 3,272,500 $(1.28) --------------------------------------------------------------------- Outstanding, December 31, 2008 -- -- ===================================================================== There are no outstanding warrants as of December 31, 2008. NOTE 14 - RELATED PARTY TRANSACTIONS During the year ended December 31, 2008 and 2007, the Company paid shareholders and their affiliates $2,663,422 and $nil, respectively for various services, principal and interest on promissory notes and fees rendered in addition to salaries and reimbursement of business expenses. All transactions are recorded at the exchange amounts. Any one transaction or combination attributed to one individual or entity exceeding $120,000 on an annual basis has been disclosed. F-15 NOTES PAYABLE TO RELATED PARTY The information required by this item is included under the caption "NOTE 7 - NOTES PAYABLE TO RELATED PARTY and NOTE 10 - CONVERTIBLE DEBENTURES". CONSULTING AGREEMENT A director and shareholder of the Company provided consulting services to the Company under a consulting agreement. The agreement provided for a monthly retainer of $12,500 per month. For the year ended December 31, 2008, $137,500 was paid as per the agreement for consulting services. In December 2008 the Company and the consultant mutually decided to terminate the agreement, as per the separation terms of the agreement which called for four monthly retainer payments, the Company recorded an additional $50,000 of expenses payable to the consultant over the period of four (4) months subsequent to the separation. CONVERTIBLE DEBENTURE ISSUED TO RELATED PARTY On November 3, 2008, the Company completed a transaction whereby it issued $6.0 million of 9% convertible debentures to six accredited investors. Based on the beneficial ownership position The Leon Black 1997 Family Trust is included as a related party, all other entities participating in the November convertible debenture offering disclaim beneficial ownership (see beneficial ownership table PART III - ITEM 12 of this 10K report). The Leon Black 1997 Family Trust participated in the November convertible debenture offering with a principal investment of $2,000,000. Further information required by this item is included under the caption "NOTE 10 - - CONVERTIBLE DEBENTURES". As at December 31, 2008, the principal amount of Convertible Debenture due to related party amounted to $5,000,000 with a corresponding interest of $68,548. At December 31, 2007, Convertible Debentures due to related party and corresponding interest was $nil. NOTE 15 - COMMITMENTS AND CONTINGENCIES LEASES Effective November 24, 2004, the Company's wholly owned subsidiary ESW America, Inc. 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 expires January 31, 2010. Effective December 20, 2004, the Company's wholly owned subsidiary ESW Canada, Inc. 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 will run for a period of five (5) years from the commencement date of July 15, 2005. The following breakdown is the total, of the minimum annual lease payments, for both leases. YEAR $ --------------------- 2009 $439,601 2010 $144,388 LEGAL MATTERS The Company has no pending lawsuits. CAPITAL LEASE OBLIGATION The Company is committed to the following lease payments in connection with the acquisition of capital assets under capital leases: YEAR $ --------------------- 2009 19,289 2010 11,387 2011 2,488 2012 1,037 ------- TOTAL $34,201 ======= Less imputed interest ( 3,195) ------- Total obligation under capital lease $31,006 Less current portion ( 12,001) ------- TOTAL LONG-TERM PORTION $19,005 ======= F-16 The Company has incurred $4,157 of interest expense on capital leases for the year. NOTE 16 - LOSS PER SHARE Potential common shares of 6,120,000 related to ESW's outstanding stock options were excluded from the computation of diluted loss per share for the period ended December 31, 2008. As at December 31, 2007, 6,996,667 anti-dilutive stock options and 3,272,500 anti-dilutive stock warrants have been excluded from the computation of diluted earnings per share as the effect of inclusion of these shares and the related interest expense would have been anti-dilutive. The reconciliation of the number of shares used to calculate the diluted loss per share is calculated as follows: For the Year ended Ended December 31, 2008 2007 ------------ ------------ NUMERATOR Net (loss) for the period $ (7,091,252) $ (2,163,621) Interest on debentures $ 129,072 $ 171,636 Amortization of debenture fair value $ -- $ 123,803 Interest on notes to related party $ 304,146 $ 284,282 ------------ ------------ $ (6,658,034) $ (1,583,900) DENOMINATOR Weighted average number of shares outstanding 72,973,851 63,602,387 Dilutive effect of : Stock options -- -- Warrants -- -- Convertible Debt conversion -- -- Notes Payable to related party conversion -- -- ------------ ------------ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING -- -- ------------ ------------ NOTE 17 - COMPARATIVE FIGURES Certain 2007 figures have been reclassified to conform to the financial statements presentation adopted in 2008. The presentation includes Other Comprehensive Income in the Consolidated Condensed Statement of Operations and Consolidated Condensed Statement Of Changes In Stockholders Equity (Deficit). F-17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Registrant (the "Company") was advised that effective January 29, 2008, its Independent Registered Certified Accountants Mintz & Partners LLP ("Mintz") had merged with the firm of Deloitte & Touche LLP ("Deloitte"). As a result of the merger, Mintz resigned as the Company's principal independent accountants and Deloitte as the surviving firm serves as the Company's certifying public accountants. The decision to retain Deloitte as the Company's certifying public accountant following the merger was approved by the Company's Board of Directors and Audit Committee. As the merger of Mintz and Deloitte is viewed as a change in reporting accountants due to the change in legal entity, the Company's Board of Directors and Audit Committee has elected to retain Deloitte as its new certifying accountants as of January 28, 2008. ITEM 9A. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES Under the supervision and with the participation of ESW's management, including ESW's Chief Executive Officer and Chief Accounting Officer, ESW evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2008 (the "Evaluation Date"). Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that, as of the Evaluation Date, ESW's disclosure controls and procedures were effective to provide reasonable assurance to ensure that information required to be disclosed in ESW's Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures. CHANGES IN INTERNAL CONTROLS There was no significant change in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal year that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting. INTERNAL CONTROL OVER FINANCIAL REPORTING. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. ESW's management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed by, or under the supervision of, ESW's Chief Executive and Chief Accounting Officers and effected ESW's Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that ESW's receipts and expenditures are being made only in accordance with the authorizations of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on ESW's financial statements. Because of inherent limitations, 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. Also projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Under the supervision of and with the participation of management, including ESW's Chief Executive Officer and Chief Accounting Officer, ESW assessed the effectiveness of its internal control over financial reporting as of December 31, 2008. In making this assessment, management used the framework in INTERNAL CONTROL-INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, ESW's management concluded that ESW's internal control over financial reporting was effective as of December 31, 2008. This annual report does not include an attestation of ESW's registered public accounting firm regarding internal controls over financial reporting as management's report was not subject to attestation by ESW's registered public accounting firm pursuant to Securities and Exchange Commission Rule for small business issuers. 34 ITEM 9B OTHER INFORMATION Effective January 1, 2009 the February 4, 2008, employment agreement with Mr. Praveen Nair as Chief Accounting Officer has been amended and Mr. Nair's annual salary has been increased to $120,000 Canadian Dollars from $75,000 Canadian Dollars. On April 7, 2009 the Company announced that its wholly owned subsidiary ESW America Inc., has been awarded a $731,000 grant for Environment Protection Agency verification of the Company's proprietary XTRM Cat(TM) Marine/Locomotive catalyst technology from the Texas Environmental Research Consortium and the Houston Advanced Research Center. The grant allows the Company to offset a portion of the total potential expenses attributed to research and development and verification for the XTRM Cat(TM) product. 35 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE DIRECTORS AND EXECUTIVE OFFICERS Certain information concerning the directors and executive officers of the Company is set forth in the following table and in the paragraphs following. Information regarding each such directors and executive officer's ownership of voting securities of the Company appears as "Securities Ownership of Certain Beneficial Owners and Management" below. NAME POSITION DATE ELECTED/ APPOINTED - -------------------------------------------------------------------------------- Nitin Amersey Chairman January 2003 David J. Johnson Director, President and Chief September 2000 Executive Officer Michael F. Albanese Director February 2006 John D. Dunlap III Director February 2007 Bengt G. Odner Director September 2000 Joey Schwartz Director June 2005 Stefan Boekamp Vice President Of Operations February 2008 Praveen Nair Chief Accounting Officer February 2008 Set forth below is information relating to the business experience of each of the directors and executive officers of the Company. NITIN M. AMERSEY, age 57, has over thirty-five years of experience in international trade, marketing and corporate management. Mr. Amersey was elected as a director of Environmental Solutions Worldwide and has served as a member of the board since January 2003. Mr. Amersey was appointed interim Chairman of the Board in May 2004 and subsequently was appointed Chairman of the Board in December 2004. In addition to his service as a board member of Environmental Solutions Worldwide, Mr. Amersey has been Chairman of Scothalls Limited, a private trading firm since 1978. Mr. Amersey has also served as President of Circletex Corp., a financial consulting management firm since 2001 and has served as chairman of Midas Touch Global Media Corp from 2005 to the present. He is also currently the Chairman of Hudson Engineering Industries Pvt. LTD. A private company domiciled in India. From 2003 to 2006 Mr. Amersey was Chairman of RMD Entertainment Group and also served during the same period as chairman of Wide E-Convergence Technology America Corp. Mr. Amersey is also the owner of Langford Business Services LLC. Mr. Amersey has a Masters of Business Administration Degree from the University of Rochester, Rochester, N.Y. and a Bachelor of Science in Business from Miami University, Oxford, Ohio. He graduated from Miami University as a member of Phi Beta Kappa and Phi Kappa Phi. He is the sole member manager of Amersey Investment Holdings LLC a SEC Registered Investment Advisor. Mr. Amersey also holds a Certificate of Director Education from the NACD Corporate Director's Institute. DAVID J. JOHNSON, age 47, has 26 years experience in the automotive industry in various aspects of engineering, development of components and systems and as an entrepreneur. Mr. Johnson has served as the Company's Chief Operating Officer from August 2000 through November 2001 and in September 2000 was elected as a Director. In addition to serving as a director of ESW, Mr. Johnson has served as Senior Vice President of Sales and Marketing from November 2001 until May 2004 and served as acting Chief Financial Officer from December 2004 through May 2005. Mr. Johnson was appointed as the Interim Chief Executive Officer and President in May 1, 2004 and was subsequently appointed President, Chief Executive Officer in June of 2005. Mr. Johnson attended Tollgate Tech. Secondary, Mohawk College and Devry Institute of Technologies. MICHAEL F. ALBANESE, age 55, has over 32 year's financial experience including roles as Chief Financial Officer and Chief Operating Officer. Currently he is the president of Cost Reduction Solutions, a CPA consulting firm providing services to both private and public companies as well as to the banking industry. Mr. Albanese received a Bachelors of Science degree in Accounting and is a licensed CPA practicing in New Jersey. He is a member of the AICPA and NJSCPA, The Garden State Credit Association and is a registered accountant with the SEC's Public Company Accounting Oversight Board (PCAOB). 36 JOHN DUNLAP, III, 50, served as Chairman of the Board of Directors of the California Air Resources Board from 1994 to 1999. In this post, Mr. Dunlap promoted advanced technological solutions to achieve air quality and public health protection gains. During his tenure as Chairman, Mr. Dunlap oversaw the development and implementation of the most far-reaching air quality regulations in the world aimed at fuels, engines and over 200 consumer products. Prior to Mr. Dunlap's tenure at CARB, he served as the Chief Deputy Director of the California Department of Toxic's Substances Control where his responsibilities included, crafting the state's technology advancement program, serving as the lead administration official in securing congressional and U.S. Department of Defence support and funding for military base closure environmental clean-up and in creating a network of ombudsman staff to assist the regulated businesses in demystifying the regulatory process. In addition, Mr. Dunlap spent more than a decade at the South Coast Air Quality Management District in a host of regulatory, public affairs and advisory positions where he distinguished himself as the principle liaison with the business and regulatory community. Mr. Dunlap is currently the owner of a California-based advocacy and consulting firm called the Dunlap Group Mr. Dunlap has a BA degree in Political Science and Business from the University of Redlands (California) and a Master's degree in Public Policy from Claremont Graduate University (California). BENGT G. ODNER, age 56, has served as a director since September 2000. He served as the Company's Chairman from September 2000 through October 2002. Mr. Odner has also served as our Chief Executive Officer from August 1999 through September 2000 and as interim Chief Executive Officer from February 2002 to July 2002. Mr. Odner was a director of Crystal Fund Ltd., a Bermuda mutual fund, and was a director of Crystal Fund Managers, Ltd. from 1996 until January 2003. From 1990 through 1995, Mr. Odner was the Chairman of Altus Nord AB, a property holding company specializing in Scandinavian properties and a wholly owned subsidiary of Credit Lyonais Bank Paris. Mr. Odner holds a masters degree in Business Administration from Babson College. JOEY SCHWARTZ, age 48, has over 25 years experience in financial management, business strategy development and marketing. During various periods from February 2001 to September 2004, Mr. Schwartz served in various consulting positions involving organizational development, corporate compliance, legal affairs and finance for ESW and its wholly owned subsidiary ESW Canada, Inc. In May 2005 he was appointed as Chief Financial Officer (CFO) and served as CFO through February 2008. He served as a consultant to the Company on special projects and provided advice on compliance, due diligence, regulatory and business matters from February 2008 through to December 2008. Prior to his association with the Company, Mr. Schwartz consulted for several companies in different industries including Identicam Systems Canada Ltd., which was acquired under the GE Infrastructure security group of companies. He was President of Empereau Manufacturing, for over 18 years, a manufacturing company supplying products to the commercial specification and construction industry as well as government procurement. He is currently president of JMC Emerald Corp. a consulting company. Mr. Schwartz graduated on the dean's honour roll from York University where he received a Bachelor of Arts Degree in Economics and Mathematics. STEFAN BOEKAMP, age 60, joined the Company in July 2005 as the Plant Manager of the Company's wholly owned subsidiary, ESW Canada Inc. In February 2008 he was appointed as the Company's Vice President of Operations. Prior to joining the Company, Mr. Boekamp ran several machine building companies in Europe engaged in tooling and specialized equipment design and building between 1971 and 1983. From 1983 to 1992 he served as a General Manager and Vice President of Operations for Magna International. He was the President and Chief Executive Officer of Evermore Automation, an industrial magnet and automated equipment manufacturer between 1992 and 2005. Mr. Boekamp has a Masters Degree in Tool and Die Making, equivalent to a Professional Engineer Degree and a Masters in Business Administration from Handwerskammer Ostwetfalen-Lippe Zu Bielefeld, Bielefeld, Germany. PRAVEEN NAIR, age 34, was appointed Chief Accounting Officer in February 2008. He joined the Company in May 2005 and served in the position of Assistant to the Chief Financial Officer supporting the Company's Chief Financial Officer in day-to-day operations. In May 2006 he was promoted to Controller for the Company's wholly owned subsidiaries, ESW America Inc. and ESW Canada Inc. Prior to joining the Company, Mr. Nair was with e-Serve International Ltd, a Citigroup company from December 2000 through January 2005 where he served as a Deputy Manager in the Business Development and Migrations Unit and subsequently as Manager and Senior Manager. He was responsible for feasibility studies and regionalizing operations from countries in Europe, North America and Africa into processing centers in Mumbai and Chennai in India. Mr. Nair has a Bachelors Degree in Commerce with specialization in Accounting and a Masters Degree in Finance from Faculty of Management Studies, College of Materials Management, Jabalpur, India. CORPORATE GOVERNANCE GENERAL ESW's management and Board of Directors believe that good corporate governance is important to ensure that the Company is managed for the long-term benefit of its stockholders. This section describes key corporate governance practices that have been adopted. BOARD OF DIRECTORS MEETINGS AND ATTENDANCE The Board of Directors has responsibility for establishing broad corporate policies and reviewing overall performance of the Company rather than day-to-day operations. The primary responsibility of ESW's Board of Directors is to oversee the management of the Company and, in doing so, serve the best interests of the Company and its stockholders. The Board of Directors selects, evaluates and provides for the succession of executive officers and, subject to stockholder approval, the election of directors. The Board also reviews and approves corporate objectives and strategies, and evaluates significant policies and proposed major commitments of corporate resources as well as participates in decisions that have a potential major economic impact on our Company. Management keeps the directors informed of Company activity through regular communication, including written reports and presentations at Board of Directors and committee meetings. 37 We have no formal policy regarding director attendance at the annual meeting of stockholders. The Board of Directors held eleven (11) meetings in 2008, ten (10) of which were telephonic and one (1) in person. All board members were in attended at least seventy five percent (75%) of the board meetings. AUDIT COMMITTEE COMPOSITION The Company has a separately designated standing audit committee comprised of Michael F. Albanese (Chairman) and Nitin M. Amersey. Michael F. Albanese, qualifies as a "financial expert" as defined by SEC rules. The Company's Board has also determined that Michael F. Albanese meets the SEC definition of an "independent" director. The Audit Committee met 10 times during 2008. COMPENSATION COMMITTEE COMPOSITION The Compensation Committee is currently comprised of Nitin Amersey, who serves as Chairman, Bengt George Odner and Michael Albanese. In accordance with its charter, the Compensation Committee is responsible for establishing and reviewing the overall compensation philosophy of the Company, establishing and reviewing the Company's general compensation policies applicable to the chief executive officer and other officers, evaluating the performance of the chief executive officer and other officers and approving their annual compensation, reviewing and recommending the compensation of directors, reviewing and recommending employment, consulting, retirement and severance arrangements involving officers, and directors of the Corporation and reviewing and recommending proposed and existing incentive-compensation plans and equity-based compensation plans for the Corporation's directors, officers, employees and consultants. The Compensation Committee met 6 times during 2008. COMPENSATION POLICY: The objective of the Compensation Committee with respect to compensation for executive officers is to ensure that compensation packages are designed and implemented to align compensation with both short-term and long-term key corporate objectives and employee performance and to ensure that the Corporation is able to attract, motivate and retain skilled and experienced executives in an effort to enhance Environmental Solutions' success and shareholder value. The compensation policies are designed to align the interests of management with Environmental Solutions' shareholders. In order to do so, the committee take into consideration the experience, responsibility and performance of each individual over the longer term and considers a range of short-and long-term cash, and non-cash compensation elements. The Company believes that this serves the goals of compensating Environmental Solutions' executive officers competitively on a current basis, tying a significant portion of the executives' compensation to company performance, and allowing the executive officers and key employees to gain an ownership stake in Environmental Solutions commensurate with their relative levels of seniority and responsibility. Each year, a review of the executive compensation program, compensation philosophy, committee mission and performance is completed. In addition, each year the committee reviews the nature and amounts of all elements of the executive officers' compensation, both separately and in the aggregate, to ensure that the total amount of compensation is competitive with respect to Environmental Solutions' peer companies, and that there is an appropriate balance for compensation that is tied to the short- and long-term performance of the Company. NOMINATION COMMITTEE: The Company does not at present have a formal nominating committee. The full Board of Directors as a group performs the role. The Board does not assign specific weights to particular criteria and no particular criterion is a prerequisite for each prospective nominee. ESW believes that the backgrounds and qualifications of our directors, considered as a group, should provide a significant breadth of experience, knowledge and abilities that will allow its Board to fulfill its responsibilities. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Under the securities laws of the United States, the Company's directors, executive officers, and any persons holding more than ten percent of the Company's common stock are required to report their initial ownership of the Company's common stock and any subsequent changes in their ownership to the Securities and Exchange Commission. Specific due dates have been established by the Commission, and the Company is required to disclose any failure to file by those dates. Based upon (1) the copies of Section 16 (a) reports that the Company received from such persons for their 2008 fiscal year transactions, the Company believes there has been compliance with all Section 16 (a) filing requirements applicable to such officers, directors and ten-percent beneficial owners for such fiscal year. 38 CODE OF ETHICS ESW's Board of Directors has adopted a Code of Business Conduct and Ethics which provides a framework for directors, officers and employees on the conduct and ethical decision-making integral to their work. The Audit Committee is responsible for monitoring compliance with this code of ethics and any waivers or amendments thereto can only be made by the Board or a Board committee. The Code of Ethics is available on www.sec.gov as an exhibit with the Company's Form 10KSB filed with the Securities and Exchange Commission on April 3, 2006. The Company can provide a copy of such Code of Ethics, upon receipt of a written request to the attention of the CAO's Office, at ESW Inc., 335 Connie Crescent, Concord, Ontario, Canada, L4K 5R2. The written request should include the Company name, contact person and full mailing address and/or email address of the requestor. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation for each of the last two (2) fiscal years earned by the Chief Executive Officer and each of the most highly compensated executive officers (the "Named Executives").
SUMMARY COMPENSATION TABLE - ------------------------------------------------------------------------------------------------------------------------------- NON-EQUITY NON-QUALIFIED NAME OPTION INCENTIVE DEFERRED / PRINCIPAL STOCK AWARDS PLAN COMPENSATION ALL OTHER POSITION YEAR SALARY BONUS AWARDS (5) COMPENSATION EARNINGS COMPENSATION TOTAL - ------------------------------------------------------------------------------------------------------------------------------- David J. Johnson (1) 2008 $240,000 -- -- -- -- -- $37,558 $277,558 Director, Chief Executive Officer 2007 $240,000 -- -- $231,270 -- -- $30,045 $501,315 And President - ------------------------------------------------------------------------------------------------------------------------------- Joey Schwartz (2) 2008 $147,500 -- -- $4,992 -- -- $55,558 $208,050 Director and, Chief Financial Officer 2007 $120,000 -- -- $33,039 -- -- $7,910 $160,949 - ------------------------------------------------------------------------------------------------------------------------------- Stefan Boekamp (3) 2008 $95,335 -- -- $2,391 -- -- $16,140 $113,866 Vice President Of Operations 2007 -- -- -- -- -- -- -- $ -- - ------------------------------------------------------------------------------------------------------------------------------- Praveen Nair (4) 2008 $62,175 -- -- $2,391 -- -- $8,262 $72,828 Chief Accounting Officer 2007 -- -- -- -- -- -- -- $ -- - -------------------------------------------------------------------------------------------------------------------------------
1. Mr. David J. Johnson is paid at the annual rate of $240,000. In 2008 Mr. Johnson received the following compensation $240,000 as salary and fees, $20,000 pay in lieu of vacation, a car allowance of $12,000 per annum and standard medical and dental benefits provided by the Company totalling $5,558. In 2007, Mr. Johnson received the following compensation, $253,845 as salary and fees, a car allowance of $12,000 per annum and standard medical and dental benefits provided by the Company totalling $4,200. In 2008 there was no options granted to Mr. Johnson. In February 2007, Mr. Johnson received options to purchase 700,000 shares of Common Stock with a per share exercise price of $0.71 (exercise price equal to the fair market value on the date of grant). 2. Mr. Joey Schwartz currently serves as a Director for the Company. Mr. Schwartz served as the Chief Financial Officer for the Company from May 2005 through to February 2008. Effective February 4, 2008 through to December 2008, Mr. Schwartz served as a consultant per an agreement with the Company. In 2008, Mr. Schwartz received the following compensation, $147,500 as salary and consulting fees, and standard medical and dental benefits provided by the Company totalling $5,558. In February 2008, Mr. Schwartz received options for 100,000 shares of Common Stock with a per share exercise price of $1.00(exercise price greater than the fair market value on the date of grant) the compensation expense for this stock option grant was $4,992. In December 2008 as per the terms of the separation clauses under the consulting agreement with Mr. Schwartz, the Company recognised a $50,000 expenses. This separation payment is due in eight equal bi-monthly instalments from December 2008 through to April 2009. In 2007, Mr. Schwartz received the following compensation, $123,710 as salary and fees, and standard medical and dental benefits provided by the Company totalling $4,200. In February 2007, Mr. Schwartz received options for 100,000 shares of Common Stock with a per share exercise price of $0.71(exercise price equal to the fair market value on the date of grant). 3. Mr. Stefan Boekamp is paid at the annual rate of $115,000 Canadian Dollars (which translates to United State Dollar $107,770 for the year ended December 31, 2008). In 2008 Mr. Boekamp received the following compensation $95,335 as salary, $10,582 pay in lieu of vacation, and standard medical and dental benefits provided by the Company totalling $5,558. In February 2008, Mr. Boekamp received options for 50,000 shares of Common Stock with a per share exercise price of $0.71(exercise price greater than the fair market value on the date of grant) the compensation expense for this stock option grant was $2,391. In 2007, Mr. Boekamp was not an executive officer of the Company. 4. Mr. Praveen Nair is paid at the annual rate of $75,000 Canadian Dollars (which translates to United State Dollar $70,285 for the year ended December 31, 2008). In 2008 Mr. Nair received the following compensation $62,175 as salary, $2,704 pay in lieu of vacation, and standard medical and dental benefits provided by the Company totalling $5,558. In February 2008, Mr. Nair received options for 50,000 shares of Common Stock with a per share exercise price of $0.71(exercise price greater than the fair market value on the date of grant) the compensation expense for this stock option grant was $2,391. In 2007, Mr. Nair was not an executive officer of the Company. 39 5. Represents the cost of the compensation expense recorded by the Company for option grants in 2008 and 2007. EMPLOYMENT AGREEMENTS In February 2007, the Company entered into an employment agreement with Mr. Johnson as President and Chief Executive Officer. The agreement provides, among other things, for an annual salary of $240,000, as well as an award of 600,000 options exercisable for a term of five (5) years at an exercise price of $0.71 per share (fair market value of the Company's stock as of the date of grant). The agreement also provides that, other than in connection with Mr. Johnson's employment being terminated other than for death, disability, conviction of a felony or non-performance of duties, he will be paid the balance of his contract. The employment agreement provides for participation in benefit plans ESW offers to its employees, and a car allowance of $1,000 per month. Mr. Schwartz, acting as the Company's Chief Financial Officer received total compensation of $120,000 on an annual basis plus benefit plans ESW offers to its employees. Effective February 4, 2008, the Company and Mr. Schwartz entered into a consulting agreement whereby Mr. Schwartz will serve as a consultant to the Company and will no longer serve as the Company's Chief Financial Officer. Under the consulting agreement, Mr. Schwartz will receive a $12,500 monthly fee and will serve as a consultant to the Company on special projects and will provide advice on compliance, due diligence, regulatory and business matters. Effective December 2008 the consulting agreement with Mr. Schwartz has been terminated. Effective February 4, 2008, the Company entered into an employment agreement with Mr. Stefan Boekamp as Vice President of Operations. The agreement provides, among other things, for an annual salary of $115,000 Canadian, as well as an award of 50,000 options exercisable for a term of five (3) years at an exercise price of $0.71 per share (the exercise price being greater than the fair market value of the Company's stock as of the date of grant). The employment agreement also provides for participation in benefit plans ESW offers to its employees. The agreement also contains a non-disclosure and non-compete clause. The non-compete portion of the agreement is in effect for a period of three (3) months after Mr. Boekamp's departure from the Company. Effective February 4, 2008, the Company entered into an employment agreement with Mr. Praveen Nair as Chief Accounting Officer. The agreement provides, among other things, for an annual salary of $75,000 Canadian, as well as an award of 50,000 options exercisable for a term of five (3) years at an exercise price of $0.71 per share (the exercise price being greater than the fair market value of the Company's stock as of the date of grant). The employment agreement also provides for participation in benefit plans ESW offers to its employees. The agreement also contains a non-disclosure and non-compete clause. The non-compete portion of the agreement is in effect for a period of three (3) months after Mr. Nair's departure from the Company. Effective January 1, 2009, the agreement has been amended and Mr. Nair's annual salary has been increased to $120,000 Canadian Dollars from $75,000 Canadian Dollars. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following table shows certain information regarding the outstanding equity awards held by the Named Executives at the end of 2008. In February 2008 the Board of Directors granted: a) An award of 100,000 stock options to Mr. Schwartz. The options have immediate vesting with an exercise price of $1.00 per share (share price greater than fair-market value at the date of grant) with an exercise period of five years from the date of award. b) An award of 50,000 stock options to Mr. Boekamp and 50,000 stock options to Mr. Nair. The options have immediate vesting with an exercise price of $0.71 per share (share price greater than fair-market value at the date of grant) with an exercise period of three years from the date of award. In February 2007 the Board of Directors granted an award of 700,000 stock options to Mr. Johnson and 100,000 stock options to Mr. Schwartz. The options have immediate vesting with an exercise price of $0.71 per share (fair-market value at the date of grant) with an exercise period of five years from the date of award. 40 NUMBER OF SECURITIES OPTION OPTION UNDERLYING EXERCISE EXPIRATION NAME UNEXERCISED OPTIONS(#) PRICE DATE - -------------------------------------------------------------------------------- 250,000 $0.50 05/01/2009 600,000* $0.50 08/11/2009 David J. Johnson 150,000 $0.27 08/06/2009 200,000 $1.00 12/30/2010 700,000 $0.71 02/16/2012 - -------------------------------------------------------------------------------- 250,000 $0.50 05/01/2009 150,000 $0.50 12/01/2009 Joey Schwartz 200,000 $1.00 12/30/2010 100,000 $0.71 02/16/2012 100,000 $1.00 02/08/2013 - -------------------------------------------------------------------------------- 50,000 $0.71 02/16/2010 Stefan Boekamp 50,000 $1.00 12/30/2010 50,000 $0.71 02/06/2011 - -------------------------------------------------------------------------------- 50,000 $0.71 02/16/2010 Praveen Nair 20,000 $1.00 12/30/2010 50,000 $0.71 02/06/2011 - -------------------------------------------------------------------------------- * The 600,000 options are not part of a Company Stock Option Plan; however these options are currently registered under the Company's SB-2 registration statement (SEC File No 333-129579). THE 2002 STOCK OPTION PLAN On June 23, 2005, the Company, with shareholder approval, amended its 2002 Stock Option Plan (the "Plan"), to increase the underlying shares of common stock available under the plan to 5,000,000 shares. The 2002 Stock Option Plan is the successor plan to the 2000 Nonqualified Stock Option Plan. All stock options outstanding under the 2000 Nonqualified Stock Option Plan remain in effect according to their terms and conditions (including vesting requirements). Under the Company's 2002 Stock Option Plan, the compensation committee may grant equity incentive awards to directors, officers, employees and service providers of the Company, in the form of incentive stock options, non-qualified stock options, and other performance-related or non-restricted stock awards. The selection of participants in the 2002 Plan, the determination of the award vehicles to be utilized and the number of stock options or shares subject to an award are determined by the Company compensation committee, in its sole discretion, within the approved allocation of shares. The committee shall determine any service requirements and/or performance requirements pertaining to any stock awards under the 2002 Plan. The Plan permits the Company to provide its employees with incentive compensation opportunities which are motivational and which afford the most favourable tax and accounting treatments to the Company. The exercise price of any option granted under the 2002 Plan shall not be less than the fair market value of the common stock of the Company on the date of grant. COMPENSATION OF NON-MANAGEMENT DIRECTORS During the fiscal year 2007 and 2008, outside directors were compensated at the rate of $2,500 a month. The Chairman of the Board of Directors received an additional $2,000 per month and the Chair of the audit committee received an additional $1,000 per month. 41 FEES EARNED OPTIONS NAME OF OUTSIDE OR PAID IN AWARDS (1) DIRECTOR YEAR CASH $ TOTAL - -------------------------------------------------------------------------- Nitin M. Amersey 2008 $54,000 $ -- $ 54,000 2007 $54,000 $99,116 $153,116 - -------------------------------------------------------------------------- Michael F. Albanese 2008 $42,000 $ -- $ 42,000 2007 $42,000 $148,674 $190,674 - -------------------------------------------------------------------------- John D. Dunlap III 2008 $30,000 $ -- $ 30,000 2007 $26,250 $99,116 $125,366 - -------------------------------------------------------------------------- Bengt G. Odner 2008 $30,000 $ -- $ 30,000 2007 $30,000 $99,116 $129,116 - -------------------------------------------------------------------------- Joey Schwartz (2) 2008 $ 1,250 $ -- $ 1,250 2007 $ -- $ -- $ -- - -------------------------------------------------------------------------- (1) Represents the cost of the compensation expense recorded by the Company in accordance with FAS123R in 2007. In 2008 no stock option awards were issued to Outside Directors. (2) Mr. Joey Schwartz's status changed to an Outside Director in December 2008. As an Outside Director, Mr. Schwartz has not received any stock option awards. The following table shows certain information regarding the outstanding equity awards held by the outside Directors at the end of 2008. In February 2007 the Board of Directors granted an award of 300,000 stock options to each outside director and an additional 150,000 stock options to Mr. Albanese, Chair of the Audit Committee. The options have immediate vesting with an exercise price of $0.71 per share (fair-market value at the date of grant) with an exercise period of five years from the date of award. No stock awards or stock options were granted to the outside Directors in 2008. OPTION NUMBER OF EXERCISE OPTION OPTIONS (#) PRICE EXPIRATION NAME OUTSTANDING ($) DATE ------------------------------------------------------------------- 150,000* $ 0.50 08/11/2009 50,000 $ 0.27 08/06/2013 Nitin M. Amersey 150,000 $ 1.00 12/30/2010 300,000 $ 0.71 02/16/2012 ------------------------------------------------------------------- Michael F. Albanese 450,000 $ 0.71 02/16/2012 ------------------------------------------------------------------- John D. Dunlap III 300,000 $ 0.71 02/16/2012 ------------------------------------------------------------------- 850,000* $ 0.50 08/11/2009 50,000 $ 0.27 08/06/2013 Bengt G. Odner 150,000 $ 1.00 12/30/2010 300,000 $ 0.71 02/16/2012 ------------------------------------------------------------------- 250,000 $ 0.50 05/01/2009 150,000 $ 0.50 12/01/2009 Joey Schwartz (1) 200,000 $ 1.00 12/30/2010 100,000 $ 0.71 02/16/2012 100,000 $ 1.00 02/08/2013 ------------------------------------------------------------------- 42 (1) Mr. Joey Schwartz's status changed to an Outside Director in December 2008. As an Outside Director, Mr. Schwartz has not received any stock option awards. The option awards show in the table above reflect Mr. Schwartz's prior awards which are still effective until their expiration date. * These options are not part of a Stock Option Plan; however these options are currently registered under the Company's SB-2 registration statement (SEC File No 333-129579). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following table sets forth, to the best knowledge of the Company, as of March 31, 2009, certain information with respect to (1) beneficial owners of more than five percent (5%) of the outstanding common stock of the Company, (2) beneficial ownership of shares of the Company's common stock by each director and named executive, (3) beneficial ownership of shares of common stock of the Company by all directors and officers as a group. Unless otherwise noted, all shares are beneficially owned and the sole voting and investment power is held by the persons/entities indicated. Calculations are based upon the aggregate of all shares of common stock issued and outstanding as of March 31, 2009 in addition to shares issuable upon exercise of options currently exercisable or becoming exercisable within 60 days and which are held by the individuals named on the table. As a result of the debenture financing disclosed in Note 10: Convertible Debentures, the potential ownership position held by Leon D. Black , The Black Family 1997 Trust, The Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, The Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black, The Leon D. Black Trust UAD 11/30/92 FBO Joshua Black and The Leon D. Black Trust UAD 11/30/92 FBO Victoria Black has increased from 22.62 % in 2007 to 44.39% in 2008 on a fully diluted basis, however these entities disclaim beneficial ownership (see beneficial ownership table below) . Also the potential ownership position held by Mr. Bengt G. Odner, a director and shareholder of the Company has increased from 13.23 % in 2007 to 25.29% in 2008 on a fully diluted basis. 43
NAME AND ADDRESS OF BENEFICIAL PERCENT OF OWNER TOTAL BENEFICIAL OWNERSHIP (1) CLASS - -------------------------------------------------------------------------------------------------------- Nitin M. Amersey, Chairman c/o 335 Connie Crescent 805,000 (2) 1.09% Concord, ON L4K 5R2 - -------------------------------------------------------------------------------------------------------- David J. Johnson Chief Executive Officer, President and Director 1,900,000 (3) 2.54% c/o 335 Connie Crescent Concord, ON L4K 5R2 - -------------------------------------------------------------------------------------------------------- Bengt G. Odner, Director c/o 335 Connie Crescent 21,829,943 (4) 25.29% Concord, ON L4K 5R2 - -------------------------------------------------------------------------------------------------------- Joey Schwartz, Director c/o 335 Connie Crescent 810,000 (5) 1.10% Concord, ON L4K 5R2 - -------------------------------------------------------------------------------------------------------- Michael F. Albanese, Director c/o 335 Connie Crescent 450,000 (6) 0.61% Concord, ON L4K 5R2 - -------------------------------------------------------------------------------------------------------- John D. Dunlap, III, Director c/o 335 Connie Crescent 300,000 (7) 0.41% Concord, ON L4K 5R2 - -------------------------------------------------------------------------------------------------------- Stefan Boekamp, Vice President of Operations c/o 335 Connie Crescent 150,000 (8) 0.21% Concord, ON L4K 5R2 - -------------------------------------------------------------------------------------------------------- Praveen Nair, Chief Accounting Officer c/o 335 Connie Crescent 120,900 (9) 0.17% Concord, ON L4K 5R2 - -------------------------------------------------------------------------------------------------------- Black Family 1997 Trust c/o 9 West 57TH Street, Suite 4300 13,852,381 (10) 17.11% New York NY 10019 - -------------------------------------------------------------------------------------------------------- Leon D. Black c/o 9 West 57TH Street, Suite 4300 5,388,095 (11) 7.00% New York NY 10019 - -------------------------------------------------------------------------------------------------------- Leon D. Black Trust UAD 11/30/92 FBO Alexander Black 3,851,470 (12) 5.07% c/o 9 West 57TH Street, Suite 4300 New York NY 10019 - -------------------------------------------------------------------------------------------------------- Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black 3,851,470 (13) 5.07% c/o 9 West 57TH Street, Suite 4300 New York NY 10019 - -------------------------------------------------------------------------------------------------------- Leon D. Black Trust UAD 11/30/92 FBO Joshua Black 3,851,470 (14) 5.07% c/o 9 West 57TH Street, Suite 4300 New York NY 10019 - -------------------------------------------------------------------------------------------------------- Leon D. Black Trust UAD 11/30/92 FBO Victoria Black 3,851,470 (15) 5.07% c/o 9 West 57TH Street, Suite 4300 New York NY 10019 - -------------------------------------------------------------------------------------------------------- Louis E. Edmondson 5,639,516 (16) 7.73% - -------------------------------------------------------------------------------------------------------- Robert C. Fanch 6,449,668 (17) 8.84% - -------------------------------------------------------------------------------------------------------- All current directors and executive officers as 26,365,843 29.07% a group (Eight persons) - --------------------------------------------------------------------------------------------------------
(1) On the basis of 72,973,851 shares of common stock outstanding, plus, in the case of any person deemed to own shares of common stock as a result of owning options or rights to purchase common stock exercisable within 60 days of March 31, 2009. (2) Includes 155,000 shares of Common Stock and includes options to purchase 50,000 shares of common stock at $0.27 per share expiring August 6, 2013, options to purchase 150,000 shares of common stock at $0.50 per share expiring August 11, 2009, options to purchase 150,000 shares of common stock at $1.00 per share expiring December 30, 2010, and options to purchase 300,000 shares of common stock at $0.71 per share expiring February 16, 2012. 44 (3) Includes 250,000 options exercisable at $0.50, which expire May 1, 2009, options to purchase 150,000 shares of common stock at $0.27 per share expiring August 6, 2013, includes options to purchase 600,000 shares of common stock at $0.50 per share expiring August 11, 2009, includes options to purchase 200,000 shares of common stock at $1.00 per share expiring December 30, 2010 and options to purchase 700,000 shares of common stock at $0.71 per share expiring February 16, 2012. 4) Mr. Bengt George Odner is a director of Environmental Solutions Worldwide, Inc. as well as AB Odnia and the beneficiary of a trust that controls Ledelle Holdings Limited. Includes 4,745,238 shares of common stock, directly beneficially owned by AB Odnia. Also includes 1,000,000 shares of common stock directly owned by Ledelle Holdings Limited, a corporation organized under the Laws of Cyprus. Further includes: (i) 2,734,705 shares of common stock and (ii) 1,350,000 shares of common stock underlying options (iii) 12,000,000 shares of common stock issuable upon conversion of convertible debentures owned by Mr. Odner. (5) Includes 10,000 shares of Common Stock and includes 250,000 options exercisable at $0.50, which expire May 1, 2009, options to purchase 150,000 shares of common stock at $0.50 per share expiring December 1, 2009, includes options to purchase 200,000 shares of common stock at $1.00 per share expiring December 30, 2010, options to purchase 100,000 shares of common stock at $0.71 per share expiring February 16, 2012, and options to purchase 100,000 shares of common stock at $1.00 per share expiring February 8, 2013. (6) Includes 450,000 options to purchase 450,000 shares of common stock at $0.71 per share expiring February 16, 2012. (7) Includes 300,000 options to purchase 300,000 shares of common stock at $0.71 per share expiring February 16, 2012. (8) Includes options to purchase 50,000 shares of common stock at $1.00 per share expiring December 30, 2010, options to purchase 50,000 shares of common stock at $0.71 per share expiring February 16, 2010, and options to purchase 50,000 shares of common stock at $0.71 per share expiring February 3, 2011. (9) Includes 900 shares of Common Stock and includes options to purchase 20,000 shares of common stock at $1.00 per share expiring December 30, 2010, options to purchase 50,000 shares of common stock at $0.71 per share expiring February 16, 2010, and options to purchase 50,000 shares of common stock at $0.71 per share expiring February 3, 2011 (10) Includes 5,852,381 shares of Common Stock directly beneficially owned by The Black Family 1997 Trust (The "1997 Trust") and 8,000,000 shares of Common Stock issuable upon conversion of convertible debentures directly beneficially owned by The 1997 Trust. Does not include: (x) 1,388,095 shares of Common Stock directly beneficially owned, and 4,000,000 shares of Common Stock issuable upon conversion of convertible debentures directly beneficially owned, by Leon D. Black, (y) 851,470 shares of Common Stock directly beneficially owned, and 3,000,000 shares of Common Stock issuable upon conversion of convertible debentures directly beneficially owned, in each case by each of (A) The Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, (B) The Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black, (C) The Leon D. Black Trust UAD 11/30/92 FBO Joshua Black, and (D) The Leon D. Black Trust UAD 11/30/92 FBO Victoria Black. The 1997 Trust has disclaimed beneficial ownership of each of the referenced securities in the preceding sentence. (11) Includes 1,388,095 shares of Common Stock directly beneficially owned by Leon D. Black and 4,000,000 shares of Common Stock issuable upon conversion of convertible debentures directly beneficially owned by Leon D. Black. Does not include 5,852,381 shares of Common Stock directly beneficially owned by The Black Family 1997 Trust and 8,000,000 shares of Common Stock issuable upon conversion of convertible debentures directly beneficially owned by The 1997 Trust, although Mr. Black may be deemed to be the indirect beneficial owner of the securities Mr. Black disclaims beneficial ownership. Does not include: (i) 851,470 shares of Common Stock directly beneficially owned, and 3,000,000 shares of Common Stock issuable upon conversion of convertible debentures directly beneficially owned, in each case by each of (A) The Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, (B) The Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black, (C) The Leon D. Black Trust UAD 11/30/92 FBO Joshua Black, and (D) The Leon D. Black Trust UAD 11/30/92 FBO Victoria Black, Mr. Black expressly disclaims beneficial ownership of each of the referenced securities in the preceding sentence. (12) Excludes shares owned by Black Family 1997 Trust, Leon D. Black, Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black, Leon D. Black Trust UAD 11/30/92 FBO Joshua Black and Leon D. Black Trust UAD 11/30/92 FBO Victoria Black for which beneficial ownership is disclaimed. Further includes 3,000,000 shares of common stock issuable upon conversion of convertible debentures. (13) Excludes shares owned by Black Family 1997 Trust, Leon D. Black, Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, Leon D. Black Trust UAD 11/30/92 FBO Joshua Black and Leon D. Black Trust UAD 11/30/92 FBO Victoria Black for which beneficial ownership is disclaimed. Further includes 3,000,000 shares of common stock issuable upon conversion of convertible debentures. (14) Excludes shares owned by Black Family 1997 Trust, Leon D. Black, 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 Victoria Black for which beneficial ownership is disclaimed. Further includes 3,000,000 shares of common stock issuable upon conversion of convertible debentures. 45 (15) Excludes shares owned by Black Family 1997 Trust, Leon D. Black, Leon D. Black Trust UAD 11/30/92 FBO Alexander Black, Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black and Leon D. Black Trust UAD 11/30/92 FBO Joshua Black for which beneficial ownership is disclaimed. Further includes 3,000,000 shares of common stock issuable upon conversion of convertible debentures. (16) Includes (i) 3,410,198 shares of Common Stock, beneficially owned by Louis E. Edmondson. (ii) 1,176,470 shares of Common Stock (iii) 1,863,000 shares of Common Stock beneficially owned by Pinnacle Services Group Inc. (17) Includes (i) 750,000 shares of Common Stock beneficially owned by Robert C. Fanch., (ii) 4,889,516 shares of Common Stock directly beneficially owned by Robert C. Fanch Revocable Trust ("Trust"), a trust of which Robert C. Fanch is the trustee and beneficiary. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information about transactions involving related parties is assessed by the directors on ESW's Board. Related parties include directors and executive officers, as well as immediate family members of directors and officers, and beneficial owners of more than five percent of the Company's common stock. If the determination is made that a related party has a material interest in any Company transaction, then the Company's directors would review, approve or ratify it, and the transaction would be required to be disclosed in accordance with the SEC rules. If the related party at issue is a director, then that director would not participate in the review, approval or ratification process. In general, the ESW believes that some transactions with related parties are not significant to investors because they take place under the Company's standard policies and procedures, such as: the sale or purchase of products or services in the ordinary course of business and on an arm's length basis; the employment by the Company where the compensation and other terms of employment are determined on a basis consistent with the Company's human resources policies. RELATED TRANSACTIONS NOTES PAYABLE TO RELATED PARTY On January 5, 2007 the Company extended the maturity date of the unsecured subordinated promissory originally issued on June 26, 2006 in the principal amount of $1.2 million; and the August 29, 2006 unsecured subordinated promissory note in the principal amount of $1.0 million, through to January 31, 2007. On February 9, 2007, the Company's two unsecured subordinated promissory notes in the principal amount of $1.2 million and $1.0 million and accrued interest were consolidated into one unsecured subordinated demand note with principal amount of $2,308,148 (the "Consolidated Note"). The Consolidated Note was payable to Ledelle Holdings Limited a company controlled by a trust of which Mr. Bengt George Odner, a director and shareholder of the Company is a beneficiary. In accordance with the terms of the Consolidated Note in the principle amount of $2,308,148, the same will be due and payable to Holder upon demand. The Consolidated Note bears interest at a rate of 9% per annum if principal and interest are paid by the Company in cash, or if principal and interest are paid in shares of restricted common stock of the Company, the Consolidated Note will bear interest at a rate of 12% per annum. The Company may repay the Consolidated Note without penalty at any time. The holder of the Note has the option to receive payment of principal and all accrued interest in the form of restricted shares of the Company's common stock, par value ($0.001) with cost free registration rights. Under this repayment option, interest will be calculated at 12% per annum. On February 15, 2007 the Company issued a $500,000 unsecured subordinated demand promissory note to Mr. Bengt George Odner, a member of the Company's Board of Directors. On March 7, 2007 the Company issued a second $500,000 unsecured subordinated demand promissory note to Mr. Odner and consolidated this sum with the principal and accrued interest of the $500,000 unsecured demand promissory note previously issued on February 15, 2007 (the "Consolidated Subordinate Note"). The Consolidated Subordinate Note is in the principal amount of $1,002,589. The Consolidated Subordinate Note bears interest at a rate of 9% per annum and is payable upon demand. The Company may repay the Consolidated Note without penalty at any time. The Note was issued to a director and shareholder of the Company. Effective June 2, 2008 the Company entered into a Credit Facility Agreement with Mr. Bengt George Odner, a director and shareholder of the Company. Pursuant to the Agreement, the Company can request draw down(s) under the Facility of up to $1,500,000 in the aggregate with funds to be used for general working capital purposes. All request(s) to draw down under the Facility are subject to the debt holders consent and approval. An approved draw down by the Company under the Facility will be represented by a 9% unsecured subordinated demand promissory note issued by the Company to the debtor or his designee. The Company may repay the Note at anytime without penalty. At the option of the Note holder, in lieu of cash, principal and interest earned on the Note can be repaid in restricted common stock of the Company. Should the Note holder elect to receive stock of the Company, interest on principal will be calculated at a rate of 12% per annum. The number of shares of Common Stock to be issued in satisfaction of interest and principal shall be determined by dividing the principal and accrued interest by the greater of 105% of the twenty (20) day average closing price of the Company's Common Stock immediately preceding the date the Note holder elects to have the Note satisfied with Common Stock, or the Closing Price on that date. Under no circumstance can the conversion price be below the fair market price of the Company's Common Stock on the date the Note holder elects to have the Note satisfied with Common Stock. The Company may request draw down(s) under the Facility through December 31, 2008. Subsequently, from June 2008 to October 2008 a total of nine unsecured subordinated promissory notes were issued totalling to $1,253,000 in principal. These nine notes are part of a series of draw downs against a Credit Facility Agreement. Of the nine notes the Company repaid one note in the amount of $150,000 in principal and $ 4,475 interest, this note was due to Mr. Louis E. Edmondson a shareholder of the Company who by separate agreement with the above debt holder and the Company agreed to provide funding to the Company under the credit facility. 46 In November 2008 the Company recorded $275,922 in the Consolidated Statements Of Changes In Stockholders' Equity (Deficit) towards loss on extinguishment of debt as a payment to Mr. Bengt George Odner a director and shareholder of the Company to surrender the right to convert the existing notes payable into common stock of the Company. Also, on November 7, 2008 the February 9, 2007 Consolidated Note with principal amount of $2,308,148, the March 7, 2007 Consolidated Subordinate Note with principal amount of $1,002,589 and all notes issued under the Credit Facility Agreement of June 2, 2008 in the principal amount of 1,103,000 have been extinguished through a repayment of $2,200,000 the principal portion only of the $2,308,148 Consolidated Note and $48,214 as taxes withholding to Ledelle Holdings Limited a company controlled by a trust of which Mr. Bengt George Odner, a director and shareholder of the Company is a beneficiary. The balance of principal and interest has been converted into a convertible debenture. As at December 31, 2008, principal and interest accrued on notes payable to related party was $nil. As at December 31, 2007, $258,885 of interest payable has been accrued on the $1,002,589, and the $2,308,148 notes payable to related party. CONTRACTS AND AGREEMENTS Mr. Amersey the Company's Chairman of the Board is the owner of Langford Business Services LLC, a company that is party to a sales representative agreement dated March 15, 2002, with the Company's wholly owned subsidiary, ESW Canada, Inc. whereby Langford and its subagent, Hudson Engineering Industries Pvt. Ltd. (Bombay), also owned by Mr. Amersey and his family, serve as ESW Canada's exclusive representative in India for the sale and after sale support of certain products of the Company in India. To date, no sales transactions have taken place under the agreement between ESW Canada and Langford. Mr. Joey Schwartz a director and shareholder of the Company, provides consulting services to the Company under a consulting agreement. The agreement provides for a monthly retainer of $12,500 per month. For the year ended December 31, 2008 $137,500 was paid as per the agreement for consulting services. In December 2008 the Company and the consultant mutually decided to end the agreement, as per the separation terms of the agreement which calls for four monthly retainer payments, the Company recorded an additional $50,000 of expenses payable to the consultant over the period of four (4) months subsequent to the separation. In August 2007 the Company paid $15,000 to Circletex Corporation, a company controlled by Mr. Amersey, one of our directors and shareholders for various services. CONVERTIBLE DEBENTURE ISSUED TO RELATED PARTY On November 3, 2008, the Company completed a transaction whereby it issued $6.0 million of 9% convertible debentures to six accredited investors Based on the beneficial ownership position The Leon Black 1997 Family Trust is included as a related party all other entities disclaim beneficial ownership (see beneficial ownership table ITEM 12). The Leon Black 1997 Family Trust participated in the November convertible debenture offering with a principal investment of $2,000,000. (See Note 10 - CONVERTIBLE DEBENTURES). From the proceeds of the $6.0 million convertible debentures, the Company elected to repay $2.2 million, the principal portion only, of a previously issued Consolidated Note in the principal amount of $2,308,148 to Ledelle Holdings Limited a company controlled by a trust to which Mr. Bengt George Odner, a director and shareholder of the Company is the beneficiary. The debt holder has agreed to have the remaining amount of $433,923, due under the note, to be applied to a subscription to a Debenture under the November 3, 2008 offering. Concurrently, the Company has agreed to repay a Consolidated Subordinate Note that it had previously issued to Mr. Bengt George Odner, a director and shareholder of the Company, in the principal amount of $1,002,589. The Mr. Bengt George Odner has agreed to have the full amount of principal and accumulated interest, in the amount of $1,158,024 due under the note, applied to a subscription of a Debenture under the November 3, 2008 offering. Additionally the Company's $1.5 million credit facility also provided by Mr. Odner, from which the Company had drawn down the sum of $1,103,000 as of November 3, 2008, will also be satisfied by way of issuance of Debentures under the November 3, 2008 offering. With the agreement to settle all the notes previously issued, the Debt holder Mr. Bengt George Odner is subscribing to an aggregate of $2,566,077 of Debentures under the offering. The Debentures are for a term of three (3) years and are convertible into shares of the Company's common stock at the option of the holder anytime after six (6) months of the date of issuance by dividing the principal amount of the Debenture to be converted by $0.25. The Debentures earn 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 elects to receive interest in shares of common stock, the number of shares of common stock to be issued for interest shall be determined by dividing accrued interest by $0.25. Subject to the holder's right to convert, the Company has 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 is payable in cash or common stock at the option of the Holder. The Debentures contain customary price adjustment protections. As at December 31, 2008 the principal amount on Convertible Debenture due to related party amounted to $5,000,000 with a corresponding interest of $68,548. As at December 31, 2007 Convertible Debentures due to related party and corresponding interest were Nil. 47 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES AUDIT FEES: The Company paid its principal accountant Deloitte $45,156 to date in audit fees for the audit of the Company's annual financial statements for 2008. The Company paid its principal accountant Deloitte $19,704 in audit fees for review of the financial statements included in its Form 10-QSB for the three quarterly reports in 2008 The Company paid its principal accountant Deloitte $64,493 to date in audit fees for the audit of the Company's annual financial statements for 2007. The Company paid its former accountant Mintz & Partners LLP $18,000 in audit fees for review of the financial statements included in its Form 10-QSB for the each of the three quarterly reports in 2007. TAX AND OTHER FEES: The Company paid its principal accountant Deloitte $Nil for tax compliance services for 2008 and 2007 respectively. The Company paid its former accountant Mintz & Partners LLP $ 4,850 for tax compliance services for 2007. 48 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE The Company has filed the following documents as part of this Form 10-K: 1. CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm - Page F1 Financial Statements Consolidated Balance Sheets - Page F2 Consolidated Statements of Income - Page F3 Consolidated Statements of Stockholders' Equity - Page F4 Consolidated Statements of Cash Flows - Page F5 Notes to Consolidated Financial Statements - Page F6-F17 2. FINANCIAL STATEMENT SCHEDULE All schedules have been omitted because they are not required, not applicable, or the required information is otherwise included. 3. EXHIBITS. Exhibits are incorporated by reference to the Index of Exhibits provided at the end of this Report on Form 10-K. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf of the undersigned; thereunto duly authorized this 9th day of April 2009 in the city of Concord, Province of Ontario. ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. (Registrant) BY: /S/ DAVID J. JOHNSON ------------------------ DAVID J. JOHNSON PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below, by the following persons on behalf of the Registrant and in the capacities indicated. SIGNATURES TITLE DATE /S/ NITIN M. AMERSEY CHAIRMAN APRIL 9, 2009 - ---------------------------- NITIN M. AMERSEY /S/ DAVID J. JOHNSON PRESIDENT, CHIEF APRIL 9, 2009 - ---------------------------- EXECUTIVE OFFICER, DAVID J. JOHNSON AND DIRECTOR /S/ MICHAEL F. ALBANESE DIRECTOR APRIL 9, 2009 - ---------------------------- MICHAEL F. ALBANESE /S/ JOHN DUNLAP III DIRECTOR APRIL 9, 2009 - ---------------------------- JOHN DUNLAP /S/ BENGT G. ODNER DIRECTOR APRIL 9, 2009 - ---------------------------- BENGT G. ODNER /S/ JOEY SCHWARTZ DIRECTOR APRIL 9, 2009 - ---------------------------- JOEY SCHWARTZ /S/ PRAVEEN NAIR CHIEF ACCOUNTING APRIL 9, 2009 - ---------------------------- OFFICER PRAVEEN NAIR 50 INDEX OF EXHIBITS EXHIBIT NUMBER DESCRIPTION 3.1 Articles of Incorporation of the Company. (1) 3.2 Bylaws of the Company. (1) 3.3 Articles of Incorporation of the Company, as amended as of November 29, 2001. (Originally filed as exhibit 3.2) (5) 3.4 Articles of Incorporation of the Company as amended July 20, 2005 (Originally filed as exhibit 3.3) (13) 3.5 Bylaws of the Company as amended January 3, 2006 (15) 4.1 Form of Warrant Certificate issued April, 1999. (1) 4.2 Form of Warrant Certificate for 2002 Unit Private Placement (7) 4.3 Form of three (3) year Warrant Certificate exercisable at $0.90 per share issued on April and July 2005. (13) 4.4 Form of three (3) year Warrant Certificate exercisable at $2.00 per share issued on April and July 2005. (13) 4.5 Form of three (3) year Warrant Certificate exercisable at $3.00 per share issued on April and July 2005. (13) 4.6 Form of Specimen of Common Stock Certificate. (Originally filed as exhibit 4.1) 10.1 Form of Agreement dated January 29, 1999 by and between the shareholders BBL Technologies, Inc. and the Company. (1) 10.2 Form of Consulting Agreement dated March 31, 1999 by and between May Davis Group and the Company. (1) 10.3 Form of Commission Agreement dated March 31, 1999 by and between May Davis Group and the Company. (1) 10.4 Form of Option Agreement dated June 21, 1999, between David Coates o/a Fifth Business and the Company. (1) 10.5 Form of Option Agreement dated June 21 1999 between Zoya Financial Corp. and the Company. (1) 10.6 Form of Consulting Agreement with Bruno Liber dated January 29, 2000. (2) 10.7 Form of Office Offer to Lease for Environmental Solutions Worldwide Inc. dated October 6, 1999. (2) 10.8 Form of Financial relations agreement with Continental Capital & Equity Corporation dated December 5, 2000. (4) 10.9 Form of Employment Agreement between John A. Donohoe, Jr. and the Company dated as of September 10, 2003. (6) 10.10 Form of Employment Agreement between Robert R. Marino and the Company dated as of September 10, 2003. (6) 10.11 Form of Employment Agreement between David J. Johnson and the Company dated as of September 10, 2003. (6) 10.12 Form of Subscription Agreement for 2001 Common Stock Placement. (7) 51 EXHIBIT NUMBER DESCRIPTION 10.13 Form of Subscription Agreement for 2002 Unit Private Placement and related representation letters. (7) 10.14 Form of unsecured subordinated promissory note issued by the Company to AB Odinia, dated August 27, 2004. (Originally filed as exhibit 10.1) (8) 10.15 Form of Securities Subscription Agreement between the Company and Investor for the purchase of 4% Convertible Debentures and three (3) year warrant exercisable at $1.00 per share dated September, 2004. (Originally filed as exhibit 10.1) (9) 10.16 Form of 4% Three (3) Year Debenture issued by the Company dated September, 2004. (Originally filed as exhibit 10.2) (9) 10.17 Form of Three (3) Year Warrant to purchase the Company's Common Stock at $1.00 a share dated September, 2004.(Originally filed as exhibit 10.3) (9) 10.18 Form of Registration Rights Agreement dated September, 2004. (Originally filed as exhibit 10.4) (9) 10.19 Form of Lease agreement and amended lease agreement between the Company's wholly owned subsidiary ESW America Inc. and Nappen & Associates dated on November 16, 2004. (12)* 10.20 Form of Subscription Agreement dated April and July 2005 for Common Stock at $0.85 and Warrants exercisable at $0.90, $2.00 and $3.00 per share. (13) 10.21 Form of Registration rights Agreement dated April and July 2005. (13) 10.22 Form of $1.2 Million Unsecured Subordinated Promissory Note dated June 30, 2006. (16) 10.23 Form of $1 Million Unsecured Subordinated Promissory Note dated September 7, 2006. (17) 10.24 Form of Separation Agreement and Release of Claims by and between the Company and Stan Kolaric dated October 12, 2006. (20) 10.25 Form of $500,000 Unsecured Subordinated Promissory Note dated November 17, 2006. (18) 10.26 Form of Contract for Investor Relations Service by and between the Company and Delta 2005 AG dated December 12, 2006. (20) 10.27 Form of Consolidated $2.3 Million Unsecured Subordinated Demand Promissory Note dated February 9, 2007. (20) 10.28 Form of $500,000 Unsecured Subordinated Demand Promissory Note by and between the Company and Mr. Bengt Odner, dated February 15, 2007. (20) 10.29 Form of Employment Agreement between David J. Johnson and the Company dated as of January 1, 2007. (20) 10.30 Form of Assignment by Inventor by and between the Company and David Johnson dated February 16, 2007. (20) 10.31 Form of Consolidated 1.002 Million Note by and between the Company and Mr. Bengt Odner dated March 13, 2007. (20) 10.32 Form of $2.5 Million Financing Loan Agreement by and between ESW Canada Inc and Royal Bank of Canada dated March 5, 2007 (20) 10.33 Letter Agreement dated October 11, 2007 and effective November 2, 2007 by and between the Company's wholly owned subsidiary ESW Canada Inc and Royal Bank of Canada amending the terms of the Credit Facility Agreement dated as of March 2, 2007. (21) 52 EXHIBIT NUMBER DESCRIPTION 10.34 Form of Employment Agreement between Stefan Boekamp and the Company dated as of February 4, 2008. (23) 10.35 Form of Employment Agreement between Praveen Nair and the Company dated as of February 4, 2008. (23) 10.36 Form of Credit Facility Agreement between the Company and Mr. Bengt Odner Dated June 2, 2008 (24) 10.37 Form of $500,000 Unsecured Subordinated Demand Promissory Note by and between the Company and Mr. Bengt Odner, dated June 2, 2008 (24) 10.38 Form of Securities Subscription Agreement between the Company and Investor for the purchase of 9% three (3) year Convertible Debentures (25) 10.39 Form of 9% Three (3) Year Debenture issued by the Company dated November 3, 200. (25) 10.40 Form of Registration Rights Agreement dated November 3, 2008. (25) 10.41 Form of Consulting Agreement between Joey Schwartz and the Company dated as of February 4, 2008 10.42 Form of Securities Subscription Agreement between the Company and Investor Ledelle Holdings Ltd. for the purchase of 9% three (3) year Convertible Debentures dated November 7, 2008. 10.43 Form of 9% Three (3) Year Debenture issued by the Company to Investor Ledelle Holdings Ltd. dated November 7, 2008. 10.44 Form of Registration Rights Agreement between the Company and Investor Ledelle Holdings Ltd. for the purchase of 9% three (3) year Convertible Debentures (25) 10.45 Form of Securities Subscription Agreement between the Company and Investor Mr. Bengt Odner. for the purchase of 9% three (3) year Convertible Debentures dated November 7, 2008. 10.46 Form of 9% Three (3) Year Debenture issued by the Company to Investor Mr. Bengt George Odner dated November 7, 2008. 10.47 Form of Registration Rights Agreement between the Company and Investor Ledelle Holdings Ltd. for the purchase of 9% three (3) year Convertible Debentures (25) 10.48 Form of Amendment to Employment Agreement between Praveen Nair and the Company effective as of January 1, 2009. 14.1 Code of ethics adopted March 28, 2005 by the Company's Board Of Directors. (12) 14.2 Code of ethics as amended March 28, 2006 by the Company's Board Of Directors. (15) 16.1 Letter from James E. Scheifley & Associates, P. C. (1) 16.2 Letter from Daren, Martenfeld, Carr, Testa and Company LLP dated February 2001. (3) 16.3 Letter of resignation from Goldstein and Morris Certified Public Account P.C. dated October 20, 2004 (10) 16.4 Letter from Goldstein and Morris Certified Public Account P.C. dated November 23, 2004 (11) 53 16.5 Deloitte & Touche LLP News Release dated December 12, 2007 announcing Merger of the Accounting firms of Mintz & Partners and Deloitte (22) 21.1 List of subsidiaries. (1) 31.1 Certification Pursuant To Section 302 of the Sarbanes-Oxley Act Of 2002 31.2 Certification Pursuant To Section 302 of the Sarbanes-Oxley Act Of 2002 32.1 Certification Pursuant To 18 U.S. C. Section 1350 as Adopted Pursuant To Section 906 of The Sarbanes- Oxley Act Of 2002 32.2 Certification Pursuant To 18 U. S. C. Section 1350 as Adopted Pursuant To Section 906 of The Sarbanes- Oxley Act Of 2002 99.1 Form of Compensation Committee Charter dated February 14, 2007. (19) 54 NOTES (1) Incorporated herein by reference from the Registrant's Form 10 Registration Statement (SEC File No. 000-30392) filed with the Securities and Exchange Commission of November 18, 1999 (2) Incorporated herein by reference from the Registrant's 10-K filed with the Securities and Exchange Commission on March 30, 2000. (3) Incorporated herein by reference from the Registrant's Form 8-K/A filed with the Securities and Exchange Commission on March 14, 2001. (4) Incorporated herein by reference from the Registrant's 10-KSB filed with the Securities and Exchange Commission on April 16, 2001. (5) Incorporated herein by reference from the Registrants Form 10-KSB filed with the Securities and Exchange Commission on April 01, 2002. (6) Incorporated herein by reference from the Registrant's Form 10-QSB/A filed with the Securities and Exchange Commission on November 26, 2003. (7) Incorporated by reference from an exhibit filed with the Registrant's Registration Statement on Form S-2 (File No. 333-112125) filed on January 22, 2004. (8) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on September 2, 2004. (9) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on September 17, 2004. (10) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on October 22, 2004. (11) Incorporated herein by reference from the Registrants Form 8-K/A filed with the Securities and Exchange Commission on December 2, 2004. (12) Incorporated by reference to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005. (13) Incorporated herein by reference from the Registrants Form 10-QSB filed with the Securities and Exchange Commission on August 15, 2005. (14) Incorporated herein by reference from the Registrants Form S-8 Registration Statement SEC File No. 333-127549) filed on August 15, 2005. (15) Incorporated herein by reference from the Registrants Form 10-KSB filed with the Securities and Exchange Commission on April 3, 2006. (16) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on June 30, 2006. (17) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on September 7, 2006. (18) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on November 17, 2006. (19) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on February 14, 2007. (20) Incorporated herein by reference from the Registrants Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2007. (21) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on November 8, 2007. (22) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on February 1, 2008. (23) Incorporated herein by reference from the Registrants Form 10-KSB/A filed with the Securities and Exchange Commission on April 29, 2008. (24) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on June 2, 2008. (25) Incorporated herein by reference from the Registrants Form 8-K filed with the Securities and Exchange Commission on November 7, 2008. * Confidential treatment requested for a portion of this exhibit ** PREVIOUSLY FILED WITH FORM SB-2. 55 EX-10.41 2 ex10-41.txt EXHIBIT 10.41 CONSULTING AGREEMENT AGREEMENT, effective as of the [ ] day of February, 2008, between ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC., a Florida Corporation (the "Company"), with its principal address at 335 Connie Crescent, Ontario Canada L4K 5R2, and offices at 200 Progress Drive, Montgomeryville, PA 18936 and Joey Schwartz, c/o JMC Emerald Corp.; ("Consultant"). W I T N E S S E T H: WHEREAS, the Company and Consultant desire to enter into a consulting agreement for certain consulting services. NOW THEREFORE, IN CONSIDERATION OF THE PREMISES AND THE MUTUAL PROMISES SET FORTH HEREIN, THE PARTIES HERETO AGREE AS FOLLOWS: 1. Consultant shall provide services to the Company on general corporate matters, including but not limited to compliance and regulatory matters as well as due diligence on various Company matters in addition to providing management consulting services with respect to the Company's organizational and business structure, and other projects as may be assigned by the Company's Board of Directors or Chief Executive Officer on an as needed basis The Term of this Agreement will be month to month and may be terminated upon written notice on the part of either party subject to the terms herein. 2. (a) The Company shall be entitled to Consultant's services for reasonable times when and to the extent requested by, and subject to the direction of either its Chairman of the Board and/or the Company's Chief Executive Officer. It is expressly understood that Consultant will not perform services or work with another Company or independently if said services conflict with the business of the Company. The Board of Directors of the Company will have sole discretion in determining if any conflict exists. In the event of a conflict, the Company shall provide notice in accordance with Section 18 of this Agreement, and Consultant will be required to immediately discontinue any activities deemed to conflict with this Agreement and the services to be provided hereunder or the Agreement may be terminated for cause. (b) All services required to be provided hereunder shall be rendered exclusively by the Consultant. 3. Consultant shall provide Company periodic written reports as required concerning the status of various projects assigned to Consultant. 4. Upon written approval by the Company, expenses necessarily incurred by Consultant to render such services such as reasonable travel, accommodation and other shall be reimbursed by the Company promptly upon receipt of proper statements, including appropriate documentation, with regard to the nature and amount of those expenses. Company shall pay all verified and approved expenses in the next consulting pay period. 5. In consideration for the services to be performed by Consultant, Consultant will receive the sum of $12,500 U.S. per month (or prorated amount) plus GST ("the Monthly Retainer"). The Monthly Retainer will be paid in equal bi-monthly instalments. 6. (a) Except in cases of this Agreement being terminated by Consultant or if this Agreement is terminated by the Company for cause including but not limited to Consultant being convicted of a felony or Consultant's incapacity (as more fully set forth herein) or death of Consultant, the Company will pay to Consultant four (4) Monthly Retainers in accordance with Section 5 of this Agreement or upon terms mutually agreeable in writing to Consultant and Company. (b) In the event this Agreement is terminated by Consultant or if the Company terminates this Agreement "for cause", then in that event the Company's obligation to pay Consultant under this agreement will immediately cease with no further financial obligation. (c) In the event that the Company constructively terminates this Agreement, then the Company will make the payment required under paragraph (a) above. 7. In the event Consultant should die during the term of this Agreement or becomes disabled so that he can not perform under this Agreement for a period exceeding one (1) month, Consultant or the Consultant's estate, as the case may be, will be entitled to three (3) months of Monthly Retainer payments under this Agreement in the case of disability and four (4) months of Monthly Retainers payable as the case may be in accordance with Section 4 of this Agreement upon occurrence of the applicable event. 8. It is the express intention of the parties that Consultant is an independent contractor and not an agent of the Company and that Consultant is not an employee of the Company. The Consultant can not bind the Company. Nothing in this agreement shall be interpreted or construed as creating or establishing the relationship of employer and employee between the Consultant and the Company. All parties acknowledge that the Consultant is not an employee of the Company for any purpose, including but not limited to tax purposes. In accordance with the terms of this Agreement, Consultant shall retain the right to perform services for others during the term of this agreement. 9. For purposes of this Agreement, Intellectual Property will mean (i) works, ideas, discoveries, or inventions eligible for copyright, trademark, patent or trade secret protection; and (ii) any applications for trademarks or patents, issued trademarks or patents, or copyright registrations regarding such items. Any items of Intellectual Property discovered or developed by Consultant during the term of this Agreement and with respect to the services provided hereunder will be the property of the Company. Any and all textual and/or graphic content of materials created by Consultant under this Agreement (as opposed to the form or format of such materials) will be, and hereby are, deemed to be "works made for hire" and will be the exclusive property of the Company. Each party agrees to execute such documents as may be necessary to perfect and preserve the rights of either party with respect to such Intellectual Property. 10. This agreement supersedes any and all agreements, either oral or written, between Consultant, Company and any of Company's subsidiaries with respect to the rendering of services by Consultant for the Company and or its subsidiaries and contains all the covenants and agreements between the parties with respect to the rendering of such services in any manner whatsoever. For the avoidance of doubt, it is agreed and understood that Consultant releases any and all claims Consultant may have against the Company and its affiliates that may be asserted or be connected with any prior agreements between the Consultant and or the Company or its affiliates. Each party to this agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which is not embodied herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding. Any modification of this Agreement will be effective only if it is in writing signed by the party to be charged. 11. The written, printed, graphic, or electronically recorded materials furnished by the Company for use by the Consultant are Proprietary Information and are the property of the Company. Proprietary Information includes, but is not limited to, product specifications and/or designs, pricing information, specific customer requirements, customer and potential customer lists, and information on Company's employees, agent, or divisions. The Consultant shall maintain in confidence and shall not, directly or indirectly, disclose or use, either during or after the term of this agreement, any Proprietary Information, confidential information, or know-how belonging to the Company, whether or not is in written form, except to the extent necessary to perform services under this agreement. On termination of Consultant's services to the Company, or at the request of the Company before termination, the Consultant shall deliver to the Company all material in Consultant's possession relating to the Company's business. 12. The obligations regarding Proprietary Information extend to information belonging to customers and suppliers of the Company about which Consultant may have gained knowledge as a result of performing services hereunder. 13. The Company will indemnify and hold harmless Consultant from any claims or damages, legal costs or other financial liability consistent with the indemnification granted to officers and directors of the Company under the Company's by-law in this regard as amended from time to time. 14. Monthly Retainer payments to Consultant under this Agreement may be assigned by Consultant subject to the prior written consent of the Company which will not be unreasonably withheld provided that services hereunder shall still be rendered exclusively by the Consultant. 15. Consultant and Company have each had an opportunity to consult with legal and or financial advisors prior to entering into this Agreement. 16. The within Agreement has been approved by the Board of Directors of the Company. 17. Any notices to be given hereunder by either party to the other may be given either by personal delivery in writing or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses appearing in the introductory paragraph of this agreement, but each party may change the address by written notice in accordance with the paragraph. Notices delivered personally will be deemed communicated as of actual receipt; mailed notices will be deemed communicated as of two business days after mailing. 18. This agreement will be governed by and construed in accordance with the laws of the State of New York, without regard to its conflicts of laws provisions; and the parties agree that the proper venue for the resolution of any disputes will be the American Arbitration Association in the City of New York. Company: ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. By: --------------------------------- Nitin Amersey, Chairman of Board and Compensation Committee Consultant: ------------------------- JOEY SCHWARTZ EX-10.42 3 ex10-42.txt EXHIBIT 10.42 SECURITIES SUBSCRIPTION AGREEMENT THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY STATE SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D ("REGULATION D") PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND THOSE LAWS. THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND THE RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED OR DETERMINED THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Securities Subscription Agreement (the "Agreement" or the "Subscription Agreement") is executed by Ledelle Holdings Limited (the "Subscriber") in connection with the subscription by the Subscriber for 9% Convertible Debentures (the "Convertible Debentures") of Environmental Solutions Worldwide, Inc., a Florida corporation (the "Company"). The Company is offering an aggregate face amount of up to $15 million (U.S.) of Convertible Debentures convertible into common stock $0.001 par value per share, of the Company ("Shares"). The terms of the Convertible Debentures, including the terms on which the Convertible Debentures may be converted into Shares, are set forth in the form of Convertible Debentures attached hereto as Exhibit A. The solicitation of this Subscription and, if accepted by the Company, the offer and sale of Convertible Debentures are being made in reliance upon the provisions of the Securities Act of 1933, as amended (the "Act"). The Convertible Debentures and the Shares issuable upon conversion or exercise thereof are sometimes referred to herein as the "Securities". The Subscriber wishes to subscribe for the principal amount of the Convertible Debentures set forth in Section 19 in accordance with the terms and conditions of this Agreement. It is agreed as follows: 1. OFFER TO SUBSCRIBE; PURCHASE PRICE The Subscriber hereby offers to purchase and subscribe for the principal amount of Convertible Debentures and at the price, set out in Section 19 of this Agreement. The Closing shall be deemed to occur when this Agreement has been executed by both of the Subscriber and the Company (the "Closing") and payment shall have been made by the Subscriber to the Company on the day so directed, against the Company's delivery of Convertible Debentures subscribed for. 2. SUBSCRIBER REPRESENTATIONS; ACCESS TO INFORMATION INDEPENDENT INVESTIGATION The Subscriber represents and warrants to, and covenants with, the Company, on its own behalf and on behalf of each person or entity for which the Subscriber is acting as a fiduciary, as follows: 2.1 Exempt Transaction. The Subscriber represents and warrants to the Company that (i) the Subscriber is an accredited investor as the term is defined in Rule 501(a) under the Act and (ii) the Subscriber is purchasing the Securities for its own account and not with a view of reselling the Securities in violation of the Securities Act. 2.2 Independent Investigation. The Subscriber, in offering to subscribe for the Securities hereunder, has relied upon an independent investigation made by it and has, prior to the date hereof, been given access to and the opportunity to examine all books and records of the Company, and all material contracts and documents of the Company; provided, that such investigation shall not affect the Subscriber's ability to rely on the accuracy of the representations and warranties of the Company set forth herein. The Subscriber will keep confidential all non-public information regarding the Company that the Subscriber receives from the Company unless disclosure of such information is compelled by a court or other administrative body or, in the opinion of the Subscriber's counsel, to comply with applicable law. In making the investment decision to purchase the Convertible Debentures the Subscriber is not relying on any oral or written representations or assurances from the Company or any other person or any representation of the Company or any other person other than as set forth in this Agreement, public filings of the Company or in a document executed by a duly authorized representative of the Company making reference to this Agreement. The Subscriber has such experience in business and financial matters that it is capable of evaluating the risk of its investment and determining the suitability of its investment. The Subscriber is a sophisticated investor, and an accredited investor as defined in Rule 501 of Regulation D. The Subscriber has obtained and reviewed the copies of the Company's Form 10-KSB Annual Report for the most recent year ended December 31, 2007, and Form 10-Q for the most recent fiscal quarter ended and copies of all Form 8-K Reports from the beginning of the past fiscal year to the date hereof and is aware that the Company has continued to sustain losses. 2.3 Economic Risk. The Subscriber understands and acknowledges that an investment in the Convertible Debentures involves a high degree of risk, including a possible total loss of investment. The Subscriber represents that it is able to bear the economic risk of the investment. In making this statement, the Subscriber hereby represents and warrants that the Subscriber has adequate means of providing for the Subscriber's current needs and contingencies; the Subscriber is able to afford to hold the Securities for an indefinite period and the Subscriber further represents that the Subscriber has such knowledge and experience in financial and business matters that the Subscriber is capable of evaluating the merits and risks of the investment in the Securities to be received by the Subscriber. Further, the Subscriber represents that it has no present need for liquidity in such Convertible Debentures. 2.4 No Government Recommendation or Approval. The Subscriber understands that no United States federal or state agency or similar agency of any other country has passed upon or made any recommendation or endorsement of the Company, this transaction or the subscription of the Securities. 2.5 No Registration. The Subscriber understands that the Securities and the common stock issuable upon conversion of the Convertible Debentures have not been registered under the Act and are being offered and sold pursuant to an exemption from registration contained in the Act based in part upon the representations of the Subscriber contained herein. The Shares issuable upon conversion of the Convertible Debentures do, however, carry certain registration rights as set forth in the Registration Rights Agreement executed by the parties hereto in the form attached hereto as Exhibit C (the "Registration Rights Agreement"). 2.6 No Public Solicitation. Without conducting any independent investigation, the Subscriber knows of no public solicitation or advertisement of an offer in connection with the proposed issuance and sale of the Securities. 2.7 Investment Intent. The Subscriber is acquiring the Securities to be issued and sold hereunder (and the Shares issuable upon conversion or exercise as the case may be) for the Subscriber's own account (or for beneficiaries' accounts over which the Subscriber has investment discretion). The Subscriber has made no predetermined arrangements to sell the Convertible Debentures or Shares other than as provided in the Registration Rights Agreement and that the offering by the Company of the Securities to the Subscriber, as contemplated in this Subscription Agreement (the "Offering"), together with any subsequent resale by the Subscriber of the Convertible Debentures or the Shares, is not part of a plan or scheme to evade the registration provisions of the Act by the Subscriber. The Subscriber currently has no short position in the Shares. 2.8 Incorporation and Authority. The Subscriber has the full power and authority to execute, deliver and perform this Agreement and to perform its obligations hereunder. This Agreement has been duly approved by all necessary action of the Subscriber, including any necessary shareholder approval (if necessary), has been executed by persons duly authorized by the Subscriber, and constitutes a valid and legally binding obligation of the Subscriber, enforceable in accordance with its terms. 2.9 No Reliance on Tax Advice. The Subscriber has reviewed with his, her or its own tax advisors the foreign, federal, state and local tax consequences of this investment, where applicable, and the transactions contemplated by this Agreement. The Subscriber is relying solely on such advisors and not on any statements or representations of the Company or any of its agents and understands that the Subscriber (and not the Company) shall be responsible for the Subscriber own income tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 2.10 Independent Legal Advice. The Subscriber and the Company acknowledge that each has had the opportunity to review this Agreement and the transactions contemplated by this Agreement and has consulted with its own legal counsel, and other advisors prior to execution of the within Agreement, and that the Company will pay the fees and expenses with respect to the Offering, including all filing fees. 2.11 Acknowledgment. The Subscriber understands that the Securities are being offered and sold to it in reliance of specific exemptions from the registration requirements of Federal and State Securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of the Subscriber to acquire the Securities. 3. RESALES The Subscriber acknowledges and agrees that the Securities may and will only be resold (a) pursuant to a Registration Statement under the Act; or (b) pursuant to an exemption from registration under the Act. 4. LEGENDS; SUBSEQUENT TRANSFER OF SECURITIES 4.1 Legends. The certificate(s) representing the Convertible Debentures shall bear a legend similar to the legend set forth below and any other legend, if such legend or legends are reasonably required to comply with state, federal or foreign law. Assuming that there are no changes in the material facts set forth in Section 2 of this Agreement or applicable law from the date hereof until the date of conversion, and subject to the Company's transfer agent's receipt of a legal opinion from legal counsel, all certificates representing the Shares into which the Convertible Debentures are converted shall bear a legend. 2 "THE CONVERTIBLE DEBENTURES OF ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. (THE "ISSUER") REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED PURSUANT TO REGULATION D, PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND HAVE NOT BEEN REGISTERED UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SHARES MAY NOT BE OFFERED OR SOLD EXCEPT WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES OR AN APPLICABLE EXEMPTION UNDER THE SECURITIES ACT." 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY The Company represents and warrants to, and covenants with, the Subscriber as follows: 5.1 Organization, Good Standing, and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to so qualify would not, individually or in the aggregate, have a material adverse effect on the business, condition (financial or otherwise), earnings, properties, prospects or results of operations of the Company taken as a whole (a "Material Adverse Effect"). The Company is not the subject of any pending or, to its knowledge, threatened investigation or administrative or legal proceeding by the Internal Revenue Service, the taxing authorities of any state or local jurisdiction, or the Securities and Exchange Commission (the "Commission") which have not been disclosed in the reports referred to in Section 5.5 below. 5.2 Corporate Condition. None of the Company's filings made with the Commission (such filings, the "SEC Reports"), including, but not limited to, those reports referenced in Section 5.5 below, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. There have been no material adverse changes in the Company's business, properties, results of operations, condition (financial or otherwise) or prospects since the date of those reports which have not been disclosed to the Subscriber in writing; provided, that the Subscriber is aware that the Company has continued to sustain losses since the date of the most recent Report on Form 10-Q. Further, all material non-public information (other than the specific information respecting the sale of the Securities themselves) respecting the Company, its business and its financial condition, as the same would be required to be disclosed in an SEC Report or registration statement (or corresponding prospectus) if the Securities were otherwise being registered for sale by the Company, has been so publicly reported or disclosed prior to the sale of the Securities as contemplated herein. 5.3 Authorization. Except for the possible need to obtain shareholder approval to increase available Shares in treasury for issuance, all corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of the Transaction Documents (as hereinafter defined), and the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance (or reservation for issuance) and delivery of the Shares (except as set forth herein) issuable upon conversion of the Convertible Debentures have been taken, and the Transaction Documents constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms. It is expressly understood that in the event the Company should have insufficient shares available in treasury upon conversion of a Debenture, it will use its best efforts to obtain shareholder approval to increase its authorized and unissued Shares. "Transaction Documents" means, collectively, this Agreement, the Registration Rights Agreement, the Escrow Agreement and the Convertible Debentures and each of the other documents entered into or delivered by the parties hereto in connection with the transactions contemplated by this Agreement. 5.4 Valid Issuance of Convertible Debenture and Common Stock. When executed and delivered in accordance with the terms hereof for the consideration expressed herein, the Convertible Debentures will have been issued in compliance with all applicable U.S. federal and state securities laws. Upon issue, the Subscriber will acquire good and marketable title to the Convertible Debentures, free and clear of all liens, claims, encumbrances and pre-emptive rights. The Shares issuable upon conversion of the Convertible Debentures, when issued in accordance with the respective terms thereof, shall be duly and validly issued and outstanding, fully paid and non-assessable, free and clear of any, liens claims, encumberances and pre-emptive rights, and will have been issued in compliance with all applicable U.S. federal and state securities laws. Subject in part to the truth and accuracy of the Subscriber's representations set forth in the Subscription Agreement, the offer, sale and issuance of the Securities contemplated by this Agreement are exempt from the registration of any applicable state and federal securities laws, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 5.5 Current Public Information. The Company represents and warrants to the Subscriber that the Company is a "reporting issuer" and it has a class of securities registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and has filed all the materials required to be filed as reports pursuant to the Exchange Act for a period of at least twelve months preceding the date hereof (or for such shorter period as the Company was required by law to file such material). All such reports (including, without limitation, the SEC Reports) complied in all material respects with all applicable requirements of Federal securities laws and the rules and regulations promulgated thereunder. The Subscriber has obtained copies of the Company's Form 10-KSB Annual Report for the most recent year ended December 31, 2007 and Form 10-Q for the most recent fiscal quarter ended, copies of all Form 8-K Reports from the beginning of the Company's past fiscal year to the date of execution of the within Agreement as well as all press releases. 3 5.6 No Directed Selling Efforts in Regard to this Transaction. The Company has not, and, to the best of the Company's knowledge, neither the Subscriber nor any distributor, if any, participating in the offering of the Securities nor any person acting for the Company or any such distributor has conducted any "directed selling efforts" as that term is defined under the Act. Such activity includes, without limitation, the making of printed material to investors, the holding of promotional seminars, the placement of advertisements with radio or television stations which discuss the offering of the Securities. 5.7 No Conflicts. The execution and delivery of this Agreement and the consummation of the issuance of the Securities and the transactions contemplated by this Agreement do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under, the Certificate of Incorporation or bylaws of the Company, or any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or any of its or any of its subsidiaries' properties or assets are bound, or any existing applicable decree, judgment or order of any court, Federal or State regulatory body, administrative agency or other governmental body having jurisdiction over the Company or any of its subsidiaries or any of its or any of its subsidiaries' properties or assets. 5.8 Issuance of Securities. The Company will issue one or more certificates representing the Convertible Debentures in the name of the Subscriber in such denominations to be specified by the Subscriber prior to closing. Upon conversion of the Convertible Debentures in accordance with their terms, the Company will issue one or more certificates representing Shares in the name of the Subscriber and in such denominations to be specified by the Subscriber prior to conversion. The Shares to be issued upon conversion of the Convertible Debentures shall bear restrictive legends unless subject to an effective registration or exemption under the Act. Nothing in this section shall affect in any way the Subscriber's obligations and agreement to comply with all applicable securities laws upon resale of the Securities. 5.9 No Action. The Company has not taken and will not take any action that will affect in any way the Subscriber's ability to resell the Securities in accordance with applicable securities laws. 5.10 Compliance with Laws. As of the date hereof and for the two year period prior to the date hereof, the conduct of the business of the Company complies (and has complied) in all material respects with all material statutes, laws, regulations, ordinances, rules, judgments, orders or decrees applicable thereto. The Company has not received notice of any alleged violation of any statute, law, regulations, ordinance, rule, judgment, order or decree from any governmental authority. The Company shall comply with all applicable securities laws with respect to the sale of the Securities, including, but not limited to, the filing of all reports required to be filed in connection therewith with the Commission or any other regulatory authority. Further, assuming the accuracy of the representations of the Subscriber, the offer and sale by the Company of the Securities (including, without limitation, the Shares issuable upon conversion of the Convertible Debentures) is exempt from registration under the Securities Act. 5.11 Litigation. Except as disclosed in the Company's Annual Report on Form 10-KSB its Form 8-K Reports, or any Quarterly Reports on Form 10-Q filed since the date of such Form 10-KSB, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending or, to the knowledge of the Company, threatened, against or affecting the Company, or any of its properties, which could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. 5.12 Disclosures. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been disclosed in writing to the Subscriber that (a) could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect or (b) could reasonably be expected, individually or in the aggregate, to materially and adversely affect the ability of the Company to perform its obligations pursuant the Transaction Documents and the issuance of the Convertible Debentures hereunder. 5.13 Capitalization. The Company, as of the date of the Closing, will have authorized the number of shares of Common Stock as set forth on Exhibit D and outstanding the number of shares of Common Stock, Convertible Debentures as set forth on Exhibit D. All of the issued and outstanding shares of capital stock of the Company and each of its subsidiaries have been duly authorized and are validly issued, fully paid and non-assessable. No personal liability attaches to the registered holders of the Common Stock by reason of their being registered holders thereof. Except as set forth on Exhibit D, (i) no subscription, warrant, option, convertible security or other right (contingent or otherwise) to purchase or acquire any shares of capital stock of the Company or any of its subsidiaries is authorized or outstanding, (ii) neither the Company nor any of its subsidiaries has any obligation (contingent or otherwise) to issue any subscription, warrant, option, convertible security or other such right or to issue or distribute to holders of any shares of its capital stock or other equity securities any evidences of indebtedness or assets of the Company or such subsidiary, (iii) neither the Company nor any of its subsidiaries has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock (or other equity securities) or any interest therein or to pay any dividend or make any other distribution in respect thereof, and (iv) there are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to the Company or any of its subsidiaries. 26,325,989 shares of Common Stock are reserved for issuance upon the exercise of any subscription, warrant, option, convertible security or other right (contingent or otherwise) to purchase or acquire any shares of capital stock of the Company that are referenced on Exhibit D. All of the issued and outstanding shares of the Company's and its subsidiaries' capital stock (or other equity securities) have been offered, issued and sold by the Company and such subsidiaries in compliance with applicable federal and state securities Laws. 4 5.14. Material Changes. Except as disclosed in the SEC Reports, since December 31, 2007: (i) the Company and its subsidiaries have not incurred any material liabilities or obligations, indirect, or contingent, or entered into any material oral or written agreement or other transaction which is not in the ordinary course of business or which could reasonably be expected to result in a material reduction in the future earnings or prospects of the Company and its subsidiaries; (ii) each of the Company and its subsidiaries have not sustained any material loss or interference with its businesses or properties from fire, flood, windstorm, accident or other calamity not covered by insurance; (iii) except as described in the SEC Reports, the Company and its subsidiaries have not paid or declared any dividends or other distributions with respect to its capital stock and neither the Company nor any of its subsidiaries is in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock of the Company or any of its subsidiaries other than the sale of the Securities hereunder, shares or options issued pursuant to stock option plans or purchase plans approved by the Company's Board of Directors and repurchases of shares or options pursuant to repurchase plans already approved by the Company's Board of Directors, or indebtedness material to the Company or any of its subsidiaries (other than in the ordinary course of business); and (v) there has not been any other event or change that would have, individually or in the aggregate, a Material Adverse Effect. 5.15 Financial Statements. The consolidated financial statements of the Company and the related notes contained in the SEC Reports present fairly, in accordance with generally accepted accounting principles, the consolidated financial position of the Company and its subsidiaries as of the dates indicated, and the results of their operations, cash flows and the changes in shareholders' equity for the periods therein specified, subject, in the case of unaudited financial statements for interim periods, to normal year-end audit adjustments. Such consolidated financial statements (including the related notes) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods therein specified, except that unaudited financial statements may not contain all footnotes required by generally accepted accounting principles. The Company has fully complied with the Sarbanes-Oxley Act of 2002. 5.16 Stabilization. Neither the Company nor any of its subsidiaries has taken, directly or indirectly, any action which was designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities, the Convertible Debentures and the Shares issuable upon exercise of the Convertible Debentures. 5.17 Brokers. The Company has taken no action which would give rise to any claim by any person for brokerage commissions, finders' fees or similar payments by the Subscriber relating to this Subscription Agreement or the transactions contemplated hereby. 5.18 Consents. Except as to filings which may be required under applicable state securities regulations, no consent, authorization, approval, order, license, certificate, or permit of or from, or declaration or filing with, any federal, state, local, or other governmental authority or of any court or other tribunal is required by the Company in connection with the transactions contemplated hereby. No consent of any party to any contract, agreement, instrument, lease, license, arrangement, or understanding to which the Company is a party, or by which any of its properties or assets is bound, is required for the execution, delivery, or performance by the Company of the transactions contemplated by the Transaction Documents. 5.19 Intellectual Property. To the Company's knowledge, the Company owns, or has the right to use, all patents, trademarks, service marks, trade names, copyrights, licenses, trade secrets or other proprietary rights necessary to its business as now conducted without conflicting with or infringing upon the right or claimed right of any person under or with respect to any of the foregoing. Except for hardware and software licenses entered into in the ordinary course of business, the Company is not bound by or a party to any options, licenses or agreements of any kind with respect to patents, trademarks, service marks, trade names, copyrights, licenses, trade secrets or other proprietary rights of any other person or entity. The Company has not received any communications alleging that the Company has violated the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. The Company is not aware of any violation by a third party of any of the Company's patents, trademarks, service marks, trade names, copyrights, trade secrets or other proprietary rights. 5.20 Foreign Corrupt Practices Act. Neither the Company nor any director, officer, agent, or other person acting on behalf of the Company has, in the course of his or its actions for or on behalf of the Company violated any provision of the United States Foreign Corrupt Practices Act of 1977, as amended, or the regulations there under. 5.21 Other Subscription Agreements. The Company is simultaneously, with the execution of this Subscription Agreement, entering into one or more subscription agreements with other purchasers of Securities (the "Other Purchasers") with substantially the same terms and conditions as this Subscription Agreement; and no Other Purchaser is subscribing for any securities of the Company on the Closing with terms and conditions different from the terms and conditions of this Subscription Agreement. 5.22 Dilutive Effect. The Company understands and acknowledges that the number of Shares issuable upon conversion of the Convertible Debentures will increase in certain circumstances. Except as provided in the Convertible Debentures, the Company further acknowledges that its obligation to issue Shares upon conversion of the Convertible Debentures in accordance with this Agreement and the Convertible Debentures is not conditioned on the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company. 5 6. ADDITIONAL COVENANTS OF COMPANY 6.1 Corporate Existence and Taxes. For as long as any Convertible Debentures remain outstanding, the Company shall, maintain its corporate existence in good standing, and shall pay all its taxes when due except for taxes which the Company disputes in good faith and for which adequate reserves are established on the Company's books and records. 6.2 Reserved Shares and Listings; Exchange Act. For so long as any Convertible Debentures remain outstanding: (a) the Company will reserve or undertake to obtain shareholders approval (to be completed within 30 days of the date hereof) to increase the available number of authorized but unissued shares of Common Stock, par value $0.001 per share ("Common Stock"), to permit the conversion in full of the outstanding principal and interest amount of Convertible Debentures (unless the appropriate Standstill Agreements are in place); and (b) the Company will maintain the listing of its Shares on the Over the Counter Bulletin Board or other exchange; and (c) the Company shall timely file all reports required to be filed with the Commission pursuant to the Exchange Act and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination. 6.3 Use of Proceeds. The Company shall use all of the net proceeds from the sale of all Securities for general corporate purposes, to obtain product certification, and to repay a portion of existing debt. 6.4 Escrow Account. The Company shall not take any action to cause the release of any monies from the escrow account until the Company has received net proceeds into the escrow account established with Baratta, Baratta & Aidala (the "Escrow Agent") pursuant to the terms of the Escrow Agreement (the "Escrow Agreement"), among the Company, the Subscriber and Baratta, Baratta & Aidala of a minimum of an aggregate of $3,000,000. 6.5 Further Financings. If within six months from the date of Closing, the Company enters into or closes another financing or other transaction (which for securities law purposes would be integral with the offer and sale of the Securities) on terms and conditions more favourable to another purchaser than this Subscription Agreement, the Convertible Debentures and the Registration Rights Agreement (in each case, such determination to be made by the Subscriber), then the terms and conditions of this Offering shall be adjusted to reflect the more favourable terms to such purchaser (including, at the Subscriber's option, the issuance of additional Securities or other securities of the Company). The foregoing shall apply to successive financings or successive other transactions within six months of the date of the Closing. 6.6 Publicity. Except as may be required by applicable law or regulation, the Company shall not use, directly or indirectly, the Subscriber's name or the name of any of its affiliates in any advertisement, announcement, press release or other similar communication unless it has received the prior written consent of the Subscriber for the specific use contemplated or as otherwise required by applicable law or regulation. 7. CONDITIONS TO CLOSING; DELIVERIES AT CLOSING 7.1 Conditions to Subscriber's Obligations to Close. The obligations of the Subscriber to purchase the Convertible Debentures offered hereunder are conditioned on the fulfillment or waiver of the following: (a) the execution and delivery of the Transaction Documents and such other documents, opinions, certificates and instruments that the Subscriber may reasonably request; (b) all the representations and warranties of the Company in this Agreement as of the date hereof shall be true and correct at the Closing as if made on such date, and the Company shall have performed all actions required hereunder; (c) the Company shall have performed in all material respects all agreements which the Transaction Documents provide shall be performed on or before the date of the Closing; (d) no event shall have occurred and be continuing or would result from the consummation of the transactions contemplated by the Transaction Documents which would, individually or in the aggregate, constitute a Material Adverse Effect; (e) no order, judgment or decree of any court, arbitrator or governmental authority shall enjoin or restrain the Subscriber from purchasing the Securities or consummating the transactions contemplated by the Transaction Documents and there shall not be existing, or, to the knowledge of the Company, threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting the Company or any of its subsidiaries which would reasonably be expected to result in such an order, judgment or decree; and (f) the Company shall not have defaulted on any long-term debt (including, but not limited to, any other series of convertible debentures or the Convertible Debentures). 7.2 Conditions to the Company's Obligations to Close. The obligations of the Company to issue the Convertible Debentures offered hereunder are conditioned on the fulfillment or waiver of the following: 6 (a) the execution and delivery of this Agreement, the Registration Rights Agreement and the Escrow Agreement by the Subscriber; (b) all representations and warranties of the Subscriber made in this Agreement as of the date hereof shall be true and correct at the Closing as if made on such date, and the Subscriber shall have performed all actions required hereunder; and 8. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applicable to agreements made in and wholly to be performed in that jurisdiction with regards to the choice of law rules of such state, except for matters arising under the Act or the Exchange Act which matters shall be construed and interpreted in accordance with such laws. Any action brought to enforce, or otherwise arising out of, this Agreement shall be heard and determined in either a Federal or state court sitting in the County of New York, State of New York, and the parties consent to jurisdiction in the State of New York. 9. ENTIRE AGREEMENT; AMENDMENT This Agreement, the Transaction Documents and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be able or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 10. NOTICES, ETC. Any notice, demand or request required or permitted to be given by either the Company or the Subscriber pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or by facsimile, with a hard copy to follow by two day courier addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. 11. INDEMNIFICATION 11. 1 Company Indemnification. In consideration of the Subscriber's execution and delivery of the Transaction Documents to which it is a party and acquiring the Securities hereunder and thereunder and in addition to all of the Company's other obligations under the Transaction Documents to which it is a party, the Company shall defend, protect, indemnify and hold harmless the Subscriber and each other holder of the Securities and all of their shareholders, trustees, partners, members, officers, directors, employees and direct or indirect investors and any of the foregoing persons' agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Subscriber Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages (other than consequential damages), and expenses in connection therewith (irrespective of whether any such Subscriber Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Subscriber Indemnified Liabilities"), incurred by any Subscriber Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents, or (c) any cause of action, suit or claim brought or made against such Subscriber Indemnitee by a third party (including for these purposes a derivative action brought on behalf of the Company) and arising out of or resulting from (i) other than those arising from or resulting from a misrepresentation or breach of any representation or warranty made by such Subscriber Indemnitee contained in the Transaction Documents to which it is a party, the execution, delivery, performance or enforcement of the Transaction Documents, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Securities, or (iii) the status of the Subscriber or holder of the Securities as an investor in the Company. 11.2 Contribution; Mechanics and Procedures. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. Except as otherwise set forth herein, the mechanics and procedures with respect to the rights and obligations under this Section 11 shall be the same as those set forth in Section 4(c) of the Registration Rights Agreement. 12. NO STRICT CONSTRUCTION The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. 7 13. NO THIRD PARTY BENEFICIARIES This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person or entity. 14. SURVIVAL All covenants, agreements, representations and warranties made by the Company and the Subscriber herein the Transaction Documents shall survive the execution of this Subscription Agreement, the delivery to the Subscriber of the Convertible Debentures being purchased and the payment therefor. 15. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Convertible Debentures. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Subscriber, including by merger or consolidation, except in accordance with the applicable provisions of the Convertible Notes with respect to which the Company is in compliance with such respective provisions of the Convertible Debentures. The Subscriber may assign, without the consent of the Company, some or all of its rights hereunder to any person to whom the Subscriber assigns or transfers Securities, or the right to acquire Securities, in accordance herewith; provided, that such transferee agrees in writing to be bound with respect to the transferred Securities to the provisions hereof that apply to the transferring Subscriber, in which event such assignee shall be deemed to be a Subscriber hereunder with respect to such assigned rights. 16. COUNTERPARTS This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided, that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature. 17. HEADINGS The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. 18. SEVERABILITY If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. 19. AMOUNT The undersigned Subscriber hereby subscribes for a Convertible Debenture in the principal amount of $433,923.00. 20. COSTS AND EXPENSES The Company shall pay or provide credit for all costs and expenses incurred by Subscriber in connection with this Agreement and the transactions contemplated hereby and all legal and other professional fees of the Subscriber. The undersigned Subscriber acknowledges that this subscription shall not be effective unless accepted by the Company as indicated below. This Subscription Is Accepted by the Company on the [ ]th day of November, 2008. Environmental Solutions Worldwide, Inc. By: _______________________________ Print Name: _______________________ Title: ____________________________ Subscriber: Ledelle Holdings Limited Name: Title 8 EX-10.43 4 ex10-43.txt EXHIBIT 10.43 DEBENTURE THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY STATE SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D ("REGULATION D") PROMULGATED UNDER THE SECURITIES ACT. THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND THOSE LAWS. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY, ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. No. [ ] U.S.$433,923 Issuance Date: November 7, 2008 ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. 9% CONVERTIBLE DEBENTURE DUE NOVEMBER 7, 2011 THIS 9% CONVERTIBLE DEBENTURE, issued this 7th day of November 2008, is one of duly authorized issue of 9% Convertible Debentures (including all 9% Convertible Debentures issued in exchange, transfer or replacement hereof, this "Debenture") of Environmental Solutions Worldwide, Inc., a corporation duly organized and existing under the law of the State of Florida (the "Company"), designated as its 9% Convertible Debentures Due November 7, 2011, in an aggregate principal amount of U.S.$[433,923] (collectively, the "Debentures" and such other Debentures, the "Other Debentures"). FOR VALUE RECEIVED, the Company promises to pay to Ledelle Holdings Limited, the registered holder hereof (the "Holder"), the principal sum of $433,923, on or prior to November 7, 2011 (the "Maturity Date"), and to pay interest on the principal sum outstanding time to time on the yearly anniversary of the issuance date set forth above (the "Issuance Date") of this Debenture (each an "Interest Payment Date"), commencing November 7, 2009, up to and including the Maturity Date, at the rate of 9% per annum, and shall be computed on the basis of a 365-day year and actual days elapsed. Accrual of interest on this Debenture shall commence on the Issuance Date and shall continue to accrue until the next Interest Payment Date. The interest so payable will be paid on each Interest Payment Date to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register") on the first business day prior to such Interest Payment Date. Notwithstanding the foregoing, the Company may elect to forego paying interest until such time as this Debenture matures, is converted or redeemed, as the case may be. All accrued and unpaid interest shall bear interest at the same rate of 9% per annum from the date hereof until the date of payment. The principal of this Debenture is payable in coin or currency of the United States of America as at the time of payment is legal tender for public and private debts or, at the option of the Holder, in shares of Common Stock, par value $0.001 per share (the "Common Stock"), under the same conversion formula as stated herein at the address of the Holder last appearing on the Debenture Register of the Company as designated in writing by the Holder from time to time. The Debenture Register shall represent the record of ownership and right to receive principal and interest payments on this Debenture. Interest and principal shall be payable only to the registered Holder as reflected in the Debenture Register. At the option of the Holder (as provided for in Section 4), interest on the within Debenture will be payable in cash or shares of Common Stock under the conversion formulas as stated herein. The right to receive principal and interest payments under this Debenture shall be transferable only through an appropriate entry in the Debenture Register as provided herein. This Debenture is subject to the following additional provisions: 1. Debentures. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holders surrendering the same, but shall not be issuable in denominations less than integral multiples of ten thousand dollars ($10,000). No service charge will be made for such registration of transfer or exchange. 2. [Intentionally Deleted] 3. Transfer. This Debenture has been issued subject to investment representations of the original purchaser hereof and may be transferred, assigned or exchanged only in compliance with the Securities Act of 1933, as amended (the "Securities Act"), including Regulation D promulgated under the Securities Act. Any Holder of this Debenture, by acceptance hereof, agrees to the representations, warranties and covenants herein. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the person in whose name this Debenture is duly registered on the Company's Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. 4. Conversion; Other Agreements. The record Holders of this Debenture shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. The record Holder of this Debenture shall be entitled, at the option of the Holder, to convert any or all of the aggregate principal and accrued and unpaid interest of Debentures held by such Holder, at any time six (6) months after the date of issuance of this Debenture, at the office of the Company or any transfer agent for the Debentures, into that number of fully-paid and non-assessable shares of Common Stock of the Company calculated in accordance with the following formula (the "Conversion Rate"): The number of shares of Common Stock to be issuable upon conversion of any principal amount shall be determined by dividing (x) the principal amount of this Debenture to be converted by (y) the Fixed Conversion Price (as defined herein). The number of shares of Common Stock to be issuable upon conversion of any accrued and unpaid interest amount on this Debenture to be converted by (y) the Fixed Conversion Price. The term "Fixed Conversion Price" means $0.25, subject to adjustment as provided herein. (b) Mechanics of Conversion. In order to convert Debentures into shares of Common Stock, the Holder shall surrender the certificate or certificates therefor, duly endorsed, by either overnight courier or 2-day courier, to the office of the Company or of any transfer agent for the Debentures, and shall give written notice to the Company at such office with a copy to Chief Financial (Accounting) Officer, tel 905-695-4142, facsimile 905-695-5013, that such Holder elects to convert the same, the amount of principal and/or interest of the Debentures to be so converted and a calculation of the number of shares of Common Stock to be issued upon conversion; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless either the certificates evidencing such Debentures are delivered to the Company or its transfer agent as provided above, or the Holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such certificates. The Company shall issue and deliver to the Holder within five (5) business days after delivery to the Company of such Debenture certificates, or after such agreement and indemnification, to such Holder of Debentures at the address of the Holder on the books of the Company, a certificate or certificates for the number of shares of Common Stock to which the Holder shall be entitled as aforesaid. The date on which notice of conversion is given (the "Date of Conversion") shall be deemed to be the date in such notice of conversion is received by the Company; provided, that the original Debentures to be converted are received by the transfer agent or the Company within five (5) business days thereafter, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the original Debentures to be converted are not received by the transfer agent or the Company within five (5) business days after the Date of Conversion, the notice of conversion shall become null and void. Following conversion of a Debenture, or a portion thereof, the principal and, upon payment thereof of the interest owed on that Debenture or portion of the Debenture so converted, will be deemed paid in full and satisfied and such Debenture or portion thereof will no longer be outstanding. If this Debenture should be converted in part only, the Company shall promptly, upon surrender of this Debenture, execute and deliver a new Debenture. Whenever the Company is required to issue a new Debenture pursuant to the terms of this Debenture, such new Debenture (i) shall be of like tenor with this Debenture, (ii) shall represent, as indicated on the face of such new Debenture, the principal amount remaining outstanding, (iii) shall have an issuance date, as indicated on the face of such new Debenture, which is the same as the Issuance Date of this Debenture, (iv) shall have the same rights and conditions as this Debenture, and (v) shall represent the proportionate amount of accrued interest on the principal amount and interest of this Debenture that correspond to the principal of the new Debenture, from the Issuance Date. (c) Reservation of Stock Issuable Upon Conversion. The Company shall use its best efforts to keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Debentures, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding Debentures. In the event the Company shall have insufficient shares it undertakes to obtain shareholder approval as soon as reasonably possible to increase its authorized shares of Common Stock to insure there are sufficient shares upon conversion of the Debenture. The Company covenants that all shares of Common Stock to be issued upon conversion of this Debenture will be validly authorized and reserved for issuance and, if and when this Debenture is converted in whole or in part the shares of Common Stock issued will be duly and validly issued, fully paid, nonassessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive or other rights of shareholders. (d) Mandatory Payment or Conversion on Maturity Date. Each Holder of a Debenture outstanding on the Maturity Date, shall have the right to payment of all principal (and any accrued and unpaid interest thereon) on this Debenture paid to such Holder in cash or in immediately available funds or, at the option of each Holder of a Debenture, in shares of Common Stock computed in accordance with Section 4 above. On the Maturity Date, the Company shall pay to the Holder an amount in cash, in immediately available funds or, at the option of each Holder of a Debenture, in shares of Common Stock computed in accordance with Section 4 above an amount equal to the then outstanding principal amount (and any accrued and unpaid interest thereon) on this Debenture. (e) Adjustment to Conversion Price. (x) If, prior to the conversion of all of the Debentures, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend or other similar event, then the Fixed Conversion Price shall be proportionately reduced. If prior to conversion of all the Debentures, the number of outstanding shares of Common Stock is decreased by a reverse stock split, combination or reclassification of shares, or other similar event, the Fixed Conversion Price shall be proportionately increased. (y) In case the Company shall at any time after the date this Debenture is first issued, sell additional shares of Common Stock or equivalents thereto, including by way of example, pursuant to options, warrants, rights or other securities convertible into shares of Common Stock (for purposes hereof respecting such equivalent securities, such determination to be made at the time of sale, grant or award of the equivalent security irrespective of the ultimate conversion or 2 exercise thereof) (other than pursuant to qualified or non-qualified employee stock option plans approved by the Board of Directors or option grants to consultants for bona fide services provided to the Company) in a private transaction (as contrasted with a public sale registered with the Securities and Exchange Commission) at prices (including with respect to equivalent securities, exercise, grant or conversion prices) less than the then current Fixed Conversion Price, then the then current Fixed Conversion Price shall be reduced to equal the sale, issuance, exercise or conversion price, as applicable, of the Common Stock or equivalent thereto. Such adjustment shall be made successively whenever any event listed above shall occur. (z) No adjustment need be made if it would result in a change of less than 1% of the Conversion Price. Any adjustments required to be made by this subsection shall be rounded up to the right to acquire the nearest whole number of shares of Common Stock. (f) No Charges or Taxes. The issuance of certificates for shares of Common Stock upon conversion of this Debenture shall be made without charge to Holder or the purchaser of any issuance tax in respect thereof or other cost incurred by the Company in connection with such conversion and the related issuance of shares of Common Stock issuable upon conversion. (g) No Interference. The Company shall not close its books against the transfer of this Debenture or of any shares of Common Stock issued or issuable upon the conversion of this Debenture in any manner which interferes with the timely conversion of this Debenture. (h) Assistance. The Company shall assist and cooperate with any reasonable request by the Holder or any purchaser which is required to make any governmental filings or obtain any governmental approvals prior to or in connection with any conversion of this Debenture. (i) Contingent Conversion. Notwithstanding any other provision hereof, if a conversion of any portion of this Debenture is to be made in connection with a public offering or sale of the Company (pursuant to a merger, sale of stock or otherwise), such exercise may at the election of the Holder be conditioned upon the consummation of such transaction, in which case such exercise shall not be deemed to be effective until immediately prior to consummation of such transaction. (j) Certain Actions. The Company shall take all such actions as may be necessary to ensure that all shares of Common Stock that may be issued without violation by the Company of any applicable law or governmental regulation or any requirements of any domestic securities exchange or quotation system upon which shares of Common Stock or other securities constituting securities that may be issuable upon conversion of this Debenture may be listed or quoted (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). The Company will use its best efforts to cause the shares of Common Stock issued upon conversion of this Debenture, immediately upon such conversion, to be listed on any domestic national securities exchange or quotation system upon which shares of Common Stock or other securities issuable upon conversion of this Debenture are listed or quoted at the time of such exercise. (k) Non-Circumvention. The Company shall not, and shall not permit its subsidiaries to, directly or indirectly, by any action avoid or seek to avoid the observance or performance of any terms of this Debenture or impair or diminish its value, but shall at all times in good faith assist in carrying out of all such terms of this Debenture. (l) Authority. The Company has all requisite corporate power and authority to enter into and perform its obligations under this Debenture and to issue and deliver the Debenture to the Holder. The execution, delivery, and performance by the Company of its obligations under this Debenture, including the issuance and delivery of the Debenture to the Holder, have been duly authorized by all necessary corporate action on the part of the Company. This Debenture has been duly executed and delivered by the Company and is a legal, valid and binding obligation of the Company and is enforceable against the Company in accordance with its terms. (m) Governmental Actions. Without limiting the generality of the foregoing, the Company shall obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Debenture. (n) Registration Rights. The Holder shall have the registration rights and be subject to the same obligations and undertakings with respect to the shares issuable upon exercise of this Debenture as are granted pursuant to the Registration Rights Agreement, dated as of November 7, 2008 (the "Registration Rights Agreement"), as amended or supplemented from time to time, providing registration rights to the Holder. 5. Redemption. (a) Right to Redeem. Except as provided in Sections 5(b) and (d) herein, the Company may at its sole option elect to redeem this Debenture in accordance with Section 5(c). (b) Right to Redeem on Conversion. The Company shall not have the right, after receipt of a notice of conversion pursuant to Section 4, to redeem in whole or in part any Debentures submitted for conversion. If the Company wishes to redeem some, but not all, of the Debentures previously submitted for conversion, the Company shall notify the Holder on five (5) days written notice, and it will be the option of the Holder to elect to have the Debenture redeemed. (c) Mechanics of Redemption on Conversion. The Company shall effect each such redemption by giving notice of its election to redeem, by facsimile to Holder. Such redemption notice shall indicate whether the Company will redeem all or part of the Debentures. The Company shall not be entitled to send any notice of redemption and begin the redemption procedure unless it has the full amount of the redemption price, in cash, available in a demand or other immediately available account in a bank or similar financial institution on the date the redemption notice is sent to Holder. (d) Mechanics of Conversion on Redemption. The Holder may within three (3) business days of receipt of the Notice of Redemption elect to send Notice of Conversion to the Company should Holder wish for the Debenture to be converted rather than redeemed by the Company. (e) Redemption Price. The redemption price per Debenture shall equal one hundred and ten percent (110%) multiplied by the then outstanding principal amount plus unpaid interest to the date of redemption. 3 The redemption price shall be paid in cash to the Holder of Debentures redeemed within ten (10) business days of the delivery of the notice of such redemption to such Holder; provided, however, that the Company shall not be obligated to deliver any portion of such redemption price unless either the certificates evidencing the Debentures redeemed are delivered to the Company or its transfer agent as provided in Section 4(b), or the Holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such certificates. 6. No Impairment. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time, place, and rate, and in the coin or currency, or Common Stock herein prescribed. This Debenture and all other Debentures now and hereafter issued of similar terms are direct obligations of the Company. 7. Termination. After this Debenture shall have been surrendered for conversion as herein provided or notice of redemption shall have been given by the Company pursuant to Section 5(c) herein, this Debenture shall no longer be deemed to be outstanding and all rights with respect to this Debenture, including, without limitation, the right to receive interest hereon and the principal hereof, shall forthwith terminate as of the Date of Conversion, except, as applicable, as otherwise provided herein, the right of the Holder hereof to receive shares of Common Stock in exchange therefor or the right to be paid pursuant to the provisions of Section 5. Notwithstanding anything to the contrary herein, if the Holder or the Company, as applicable, is converting less than the outstanding principal amount and/or less than the amount of unpaid interest accrued thereon, then the rights and obligations under this Debenture shall terminate only with respect to the principal and/or interest being so converted. 8. [Intentionally Deleted] 9. Costs and Expenses. The Company agrees to pay all costs and expenses, including reasonable attorney's fees, which may be incurred by the Holder in collecting any amount due under this Debenture. 10. Events of Default; Remedies. If one or more of the following described "Events of Default" shall occur: (a) The Company shall default in the payment of principal or interest on these Debentures; or (b) Any of the representations or warranties made by the Company herein, in the Securities Subscription Agreement, dated as of the date hereof, relating to these Debentures (the "Subscription Agreement") or in any certificate or financial or other written statements heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Debenture or the Subscription Agreement shall be false or misleading in a any material respect at the time made; or (c) The Company shall fail to perform or observe, in any material respect, any other covenant, term, provision, condition, agreement or obligation of the Company under this Debenture or the Subscription Agreement and such failure shall continue uncured for a period of fifteen (15) business days after notice from Holder of such failure; or (d) The Company or any of its subsidiaries shall (1) admit in writing its inability to pay its debts generally as they mature; (2) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (3) apply for or consent to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property or business; or (e) A trustee, liquidator or receiver shall be appointed for the Company, any of its subsidiaries or for a substantial part of their respective property or business without their consent and shall not be discharged within forty five (45) business days after such appointment; or (f) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company or any of its subsidiaries and shall not be dismissed within forty five (45) business days thereafter; or (g) Bankruptcy, reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company or any of its subsidiaries and, if instituted against the Company or any of its subsidiaries shall not be dismissed within forty five (45) business days after such instruction or if the Company or any of its subsidiaries shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any proceeding; or (h) The Common Stock shall not be traded on an exchange or over the counter market. Then, or at any time thereafter, and in each and every such case, unless such Event or Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default) at the option of the Holder and in the Holder's sole discretion, the principal (and any accrued interest) amount of this Debenture shall become immediately due and payable, without presentment, demand protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and the Holder may immediately, and with expiration of any period of grace, enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law. 11. Mergers, Consolidations, Change of Control, etc. (a) Change of Control. Each of the following events shall constitute a "Change of Control": (i) the consolidation, merger or other business combination (including, without limitation, a reorganization or recapitalization) of the Company with or into another person or entity (other than (A) a consolidation, merger or other business combination (including, without limitation, reorganization or recapitalization) in which holders of the Company's voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities, or (B) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company); 4 (ii) the sale or transfer of all or substantially all of the Company's or its subsidiaries' assets (as determined on a consolidated basis); or (iii) a purchase, tender or exchange offer made to and accepted by the holders of more than the 50% of the outstanding shares of Common Stock. No sooner than 21 days nor later than 15 days prior to the consummation of a Change of Control the Company shall deliver written notice thereof via facsimile and overnight courier to the Holder (a "Change of Control Notice"). Notwithstanding anything herein to the contrary, (x) no Change of Control Notice shall be made prior to the public announcement of a Change of Control and (y) no Change of Control Notice shall be made prior to the public announcement of the Change of Control described in (a)(iii) above as long as the terms of the underlying Change of Control transaction will permit the Holder to participate in such transaction on the same per share terms as the other participating holders of Common Stock in the event the Holder elects to convert all or a portion of this Debenture into Common Stock as herein provided. Notwithstanding anything herein to the contrary, the Change of Control Notice shall be delivered no later than one Business Day following the events described in (x) and (y) of the preceding sentence. (b) Assumption. Prior to the consummation of any Change of Control, the Company will secure from any person or entity purchasing the Company's assets or Common Stock or any successor resulting from such Change of Control (in each case, an "Acquiring Entity") a written agreement (in form and substance satisfactory to the holders of Debentures representing at least a majority of the aggregate principal amount of the Debentures then outstanding) to deliver to each holder of Debentures in exchange for such Debentures, a security of the Acquiring Entity evidenced by a written instrument substantially similar in form and substance to the Debentures, including, without limitation, having a principal amount and interest rate equal to the principal amounts and the interest rates of the Debentures held by such holder, and satisfactory to the holders of Debentures representing at least a majority of the aggregate principal amount of the Debentures then outstanding. In the event that an Acquiring Entity is directly or indirectly controlled by a company or entity whose common stock or similar equity interest is listed, designated or quoted on a securities exchange or trading market, the holders of Debentures representing at least a majority of the aggregate principal amount of the Debentures then outstanding may elect to treat such person or entity as the Acquiring Entity for purposes of this Section 11(b). (c) Other Corporate Events. Prior to the consummation of any recapitalization, reorganization, consolidation, merger, spin-off or other business combination (other than a Change of Control) pursuant to which holders of Common Stock are entitled to receive securities or other assets with respect to or in exchange for Common Stock (a "Corporate Event"), the Company shall make appropriate provision to insure that the Holder will thereafter have the right to receive upon a conversion of this Debenture, (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which the Holder would have been entitled with respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon the consummation of such Corporate Event or (ii) in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of Common Stock in connection with the consummation of such Corporate Event in such amounts as the Holder would have been entitled to receive had this Debenture initially been issued with conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the Conversion Rates. Provision made pursuant to the preceding sentence shall be in a form and substance satisfactory to the holders of Debentures representing at least a majority of the aggregate principal amount of the Debentures then outstanding. 12. Lost or Destroyed Debenture. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership thereof, and indemnity and bond, if requested, all reasonably satisfactory to the Company. 13. [INTENTIONALLY DELETED] 14. Governing Law. This Debenture shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws. 15. Business Day Definition. For purposes hereof, the term "business day" shall mean any day on which banks are generally open for business in the State of New York, USA and excluding any Saturday and Sunday. 16. Notices. Any notice, demand or request required or permitted to be given by either the Company or the Holder pursuant to the terms of this Debenture shall be in writing and shall be deemed given when delivered personally, or by facsimile (with a hard copy to follow by two day courier), addressed to the Company attention Chief Financial/Accounting Officer at 335 Connie Crescent, Ontario, LAK 52 Canada, tel. 905-695-4142, facsimile 905-695-5013 with a copy to Baratta, Baratta & Aidala attn: Joseph Baratta, Esq., or the Holder at [ ] , or such other addresses as a party may request by notifying the other in writing. 5 17. Waiver. Any waiver by the Company or the Holder hereof of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder hereof to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. 18. Notices of Certain Actions. In case at any time the Company shall propose to: (a) pay any dividend or make any distribution on shares of Common Stock in shares of Common Stock or equivalents thereto or make any other distribution; or (b) issue any rights, warrants or other Common Stock to all holders of Common Stock entitling them to purchase any additional shares of Common Stock or any other rights, debentures, warrants or other Common Stock; or (c) effect any reclassification or change of outstanding shares of Common Stock, or any consolidation, merger, sale, lease or conveyance of property, described in Sections 4 or 11 hereof; or (d) effect any liquidation, dissolution or winding-up of the Company; or (e) take any other action which would cause an adjustment to the Fixed Conversion Price; or (f) provide to its shareholders any information which is regularly provided to shareholders, then, and in any one or more of such cases (a) through (f), the Company shall, subject to any other Sections of this Debenture, give written notice thereof, by certified mail, postage prepaid, to the Holder at the Holder's address as it shall appear in the Debenture Register, mailed at least fifteen (15) days prior to (i) the date as of which the holders of record of shares of securities to be entitled to receive any such dividend, distribution, rights, debentures, warrants or other securities are to be determined, (ii) the date on which any such reclassification, change of outstanding shares of Common Stock, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution or winding-up is expected to become effective, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, change of outstanding shares, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution or winding-up, or (iii) the date of such other action which would require an adjustment to the Fixed Conversion Price. In the case of subsection (f) above, written notice to the Holder may be given by regular mail. 19. Unenforceable Provisions. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. 20. Restriction on Redemption and Dividends. Until all of the Debentures have been converted, redeemed or otherwise satisfied in accordance with their terms, the Company shall not, directly or indirectly, (A) repurchase, redeem, or declare or pay any cash dividend or distribution on, the Common Stock or (B) distribute any material property or assets of any kind to holders of the Common Stock in respect of the Common Stock. 21. Rank. Obligations under this Debenture, including payments of principal and interest and other payments due under this Debenture, shall rank pair passe with all Other Debentures. 22. Vote to Issue, or Change the Terms of, Debentures. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting of the holders of Debentures representing not less than a majority of the aggregate principal amount of the then outstanding Debentures shall be required for any change or amendment to this Debenture or the Other Debentures; provided, that the Holder of this Debenture may waive any term or provision of this Debenture without such vote or written consent. 23. Payment of Collection, Enforcement and Other Costs. If (a) this Debenture is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Debenture or to enforce the provisions of this Debenture or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors' rights and involving a claim under this Debenture, then the Company shall pay the reasonable costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, reasonable attorneys' fees and disbursements. 24. Construction; Headings. This Debenture shall be deemed to be jointly drafted by the Company and the Holder and shall not be construed against any person as the drafter hereof. The headings of this Debenture are for convenience of reference and shall not form part of, or affect the interpretation of, this Debenture. 25. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Debenture shall be cumulative and in addition to all other remedies available under this Debenture and any of the other Transaction Documents (as defined in the Subscription Agreement), at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Debenture. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. 6 26. Waiver of Notice. To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Debenture and the Subscription Agreement. 27. Further Acknowledgement. The Company will, at the time of each conversion of this Debenture, upon the request of the Holder hereof, acknowledge in writing its continuing obligation to afford to such Holder all rights (including, without limitation, any rights to registration, pursuant to the Registration Rights Agreement, of the shares of Common Stock issued upon such conversion) to which such Holder shall continue to be entitled after such conversion in accordance with its terms of this Debenture; PROVIDED, that if the Holder of this Debenture shall fail to make any such requests, such failure shall not affect the continuing obligation of the Company to afford such rights to such Holder. IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by an officer thereof duly authorized. Environmental Solutions Worldwide, Inc. By: ------------------------------------ Title: 7 EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby elects to convert the attached Debenture into shares of common stock, $0.001 par value per share (the "Common Stock"), of Environmental Solutions Worldwide, Inc. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: -------------------------------------------------- Date to Effect Conversion -------------------------------------------------- Principal Amount of Debentures to be Converted Payment of Interest in Kind |_| Yes |_| No -------------------------------------------------- Interest Accrued on Account of Conversion at Issue -------------------------------------------------- Number of shares of Common Stock to be Issued -------------------------------------------------- Signature -------------------------------------------------- Name -------------------------------------------------- Address 8 EX-10.45 5 ex10-45.txt EXHIBIT 10.45 SECURITIES SUBSCRIPTION AGREEMENT THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY STATE SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D ("REGULATION D") PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND THOSE LAWS. THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND THE RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED OR DETERMINED THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Securities Subscription Agreement (the "Agreement" or the "Subscription Agreement") is executed by Bengt G. Odner (the "Subscriber") in connection with the subscription by the Subscriber for 9% Convertible Debentures (the "Convertible Debentures") of Environmental Solutions Worldwide, Inc., a Florida corporation (the "Company"). The Company is offering an aggregate face amount of up to $15 million (U.S.) of Convertible Debentures convertible into common stock $0.001 par value per share, of the Company ("Shares"). The terms of the Convertible Debentures, including the terms on which the Convertible Debentures may be converted into Shares, are set forth in the form of Convertible Debentures attached hereto as Exhibit A. The solicitation of this Subscription and, if accepted by the Company, the offer and sale of Convertible Debentures are being made in reliance upon the provisions of the Securities Act of 1933, as amended (the "Act"). The Convertible Debentures and the Shares issuable upon conversion or exercise thereof are sometimes referred to herein as the "Securities". The Subscriber wishes to subscribe for the principal amount of the Convertible Debentures set forth in Section 19 in accordance with the terms and conditions of this Agreement. It is agreed as follows: 1. OFFER TO SUBSCRIBE; PURCHASE PRICE The Subscriber hereby offers to purchase and subscribe for the principal amount of Convertible Debentures and at the price, set out in Section 19 of this Agreement. The Closing shall be deemed to occur when this Agreement has been executed by both of the Subscriber and the Company (the "Closing") and payment shall have been made by the Subscriber to the Company on the day so directed, against the Company's delivery of Convertible Debentures subscribed for. 2. SUBSCRIBER REPRESENTATIONS; ACCESS TO INFORMATION INDEPENDENT INVESTIGATION The Subscriber represents and warrants to, and covenants with, the Company, on its own behalf and on behalf of each person or entity for which the Subscriber is acting as a fiduciary, as follows: 2.1 Exempt Transaction. The Subscriber represents and warrants to the Company that (i) the Subscriber is an accredited investor as the term is defined in Rule 501(a) under the Act and (ii) the Subscriber is purchasing the Securities for its own account and not with a view of reselling the Securities in violation of the Securities Act. 2.2 Independent Investigation. The Subscriber, in offering to subscribe for the Securities hereunder, has relied upon an independent investigation made by it and has, prior to the date hereof, been given access to and the opportunity to examine all books and records of the Company, and all material contracts and documents of the Company; provided, that such investigation shall not affect the Subscriber's ability to rely on the accuracy of the representations and warranties of the Company set forth herein. The Subscriber will keep confidential all non-public information regarding the Company that the Subscriber receives from the Company unless disclosure of such information is compelled by a court or other administrative body or, in the opinion of the Subscriber's counsel, to comply with applicable law. In making the investment decision to purchase the Convertible Debentures the Subscriber is not relying on any oral or written representations or assurances from the Company or any other person or any representation of the Company or any other person other than as set forth in this Agreement, public filings of the Company or in a document executed by a duly authorized representative of the Company making reference to this Agreement. The Subscriber has such experience in business and financial matters that it is capable of evaluating the risk of its investment and determining the suitability of its investment. The Subscriber is a sophisticated investor, and an accredited investor as defined in Rule 501 of Regulation D. The Subscriber has obtained and reviewed the copies of the Company's Form 10-KSB Annual Report for the most recent year ended December 31, 2007, and Form 10-Q for the most recent fiscal quarter ended and copies of all Form 8-K Reports from the beginning of the past fiscal year to the date hereof and is aware that the Company has continued to sustain losses. 2.3 Economic Risk. The Subscriber understands and acknowledges that an investment in the Convertible Debentures involves a high degree of risk, including a possible total loss of investment. The Subscriber represents that it is able to bear the economic risk of the investment. In making this statement, the Subscriber hereby represents and warrants that the Subscriber has adequate means of providing for the Subscriber's current needs and contingencies; the Subscriber is able to afford to hold the Securities for an indefinite period and the Subscriber further represents that the Subscriber has such knowledge and experience in financial and business matters that the Subscriber is capable of evaluating the merits and risks of the investment in the Securities to be received by the Subscriber. Further, the Subscriber represents that it has no present need for liquidity in such Convertible Debentures. 2.4 No Government Recommendation or Approval. The Subscriber understands that no United States federal or state agency or similar agency of any other country has passed upon or made any recommendation or endorsement of the Company, this transaction or the subscription of the Securities. 2.5 No Registration. The Subscriber understands that the Securities and the common stock issuable upon conversion of the Convertible Debentures have not been registered under the Act and are being offered and sold pursuant to an exemption from registration contained in the Act based in part upon the representations of the Subscriber contained herein. The Shares issuable upon conversion of the Convertible Debentures do, however, carry certain registration rights as set forth in the Registration Rights Agreement executed by the parties hereto in the form attached hereto as Exhibit C (the "Registration Rights Agreement"). 2.6 No Public Solicitation. Without conducting any independent investigation, the Subscriber knows of no public solicitation or advertisement of an offer in connection with the proposed issuance and sale of the Securities. 2.7 Investment Intent. The Subscriber is acquiring the Securities to be issued and sold hereunder (and the Shares issuable upon conversion or exercise as the case may be) for the Subscriber's own account (or for beneficiaries' accounts over which the Subscriber has investment discretion). The Subscriber has made no predetermined arrangements to sell the Convertible Debentures or Shares other than as provided in the Registration Rights Agreement and that the offering by the Company of the Securities to the Subscriber, as contemplated in this Subscription Agreement (the "Offering"), together with any subsequent resale by the Subscriber of the Convertible Debentures or the Shares, is not part of a plan or scheme to evade the registration provisions of the Act by the Subscriber. The Subscriber currently has no short position in the Shares. 2.8 Incorporation and Authority. The Subscriber has the full power and authority to execute, deliver and perform this Agreement and to perform its obligations hereunder. This Agreement has been duly approved by all necessary action of the Subscriber, including any necessary shareholder approval (if necessary), has been executed by persons duly authorized by the Subscriber, and constitutes a valid and legally binding obligation of the Subscriber, enforceable in accordance with its terms. 2.9 No Reliance on Tax Advice. The Subscriber has reviewed with his, her or its own tax advisors the foreign, federal, state and local tax consequences of this investment, where applicable, and the transactions contemplated by this Agreement. The Subscriber is relying solely on such advisors and not on any statements or representations of the Company or any of its agents and understands that the Subscriber (and not the Company) shall be responsible for the Subscriber own income tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 2.10 Independent Legal Advice. The Subscriber and the Company acknowledge that each has had the opportunity to review this Agreement and the transactions contemplated by this Agreement and has consulted with its own legal counsel, and other advisors prior to execution of the within Agreement, and that the Company will pay the fees and expenses with respect to the Offering, including all filing fees. 2.11 Acknowledgment. The Subscriber understands that the Securities are being offered and sold to it in reliance of specific exemptions from the registration requirements of Federal and State Securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of the Subscriber to acquire the Securities. 3. RESALES The Subscriber acknowledges and agrees that the Securities may and will only be resold (a) pursuant to a Registration Statement under the Act; or (b) pursuant to an exemption from registration under the Act. 4. LEGENDS; SUBSEQUENT TRANSFER OF SECURITIES 4.1 Legends. The certificate(s) representing the Convertible Debentures shall bear a legend similar to the legend set forth below and any other legend, if such legend or legends are reasonably required to comply with state, federal or foreign law. Assuming that there are no changes in the material facts set forth in Section 2 of this Agreement or applicable law from the date hereof until the date of conversion, and subject to the Company's transfer agent's receipt of a legal opinion from legal counsel, all certificates representing the Shares into which the Convertible Debentures are converted shall bear a legend. 2 "THE CONVERTIBLE DEBENTURES OF ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. (THE "ISSUER") REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED PURSUANT TO REGULATION D, PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND HAVE NOT BEEN REGISTERED UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SHARES MAY NOT BE OFFERED OR SOLD EXCEPT WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES OR AN APPLICABLE EXEMPTION UNDER THE SECURITIES ACT." 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY The Company represents and warrants to, and covenants with, the Subscriber as follows: 5.1 Organization, Good Standing, and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to so qualify would not, individually or in the aggregate, have a material adverse effect on the business, condition (financial or otherwise), earnings, properties, prospects or results of operations of the Company taken as a whole (a "Material Adverse Effect"). The Company is not the subject of any pending or, to its knowledge, threatened investigation or administrative or legal proceeding by the Internal Revenue Service, the taxing authorities of any state or local jurisdiction, or the Securities and Exchange Commission (the "Commission") which have not been disclosed in the reports referred to in Section 5.5 below. 5.2 Corporate Condition. None of the Company's filings made with the Commission (such filings, the "SEC Reports"), including, but not limited to, those reports referenced in Section 5.5 below, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. There have been no material adverse changes in the Company's business, properties, results of operations, condition (financial or otherwise) or prospects since the date of those reports which have not been disclosed to the Subscriber in writing; provided, that the Subscriber is aware that the Company has continued to sustain losses since the date of the most recent Report on Form 10-Q. Further, all material non-public information (other than the specific information respecting the sale of the Securities themselves) respecting the Company, its business and its financial condition, as the same would be required to be disclosed in an SEC Report or registration statement (or corresponding prospectus) if the Securities were otherwise being registered for sale by the Company, has been so publicly reported or disclosed prior to the sale of the Securities as contemplated herein. 5.3 Authorization. Except for the possible need to obtain shareholder approval to increase available Shares in treasury for issuance, all corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of the Transaction Documents (as hereinafter defined), and the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance (or reservation for issuance) and delivery of the Shares (except as set forth herein) issuable upon conversion of the Convertible Debentures have been taken, and the Transaction Documents constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms. It is expressly understood that in the event the Company should have insufficient shares available in treasury upon conversion of a Debenture, it will use its best efforts to obtain shareholder approval to increase its authorized and unissued Shares. "Transaction Documents" means, collectively, this Agreement, the Registration Rights Agreement, the Escrow Agreement and the Convertible Debentures and each of the other documents entered into or delivered by the parties hereto in connection with the transactions contemplated by this Agreement. 5.4 Valid Issuance of Convertible Debenture and Common Stock. When executed and delivered in accordance with the terms hereof for the consideration expressed herein, the Convertible Debentures will have been issued in compliance with all applicable U.S. federal and state securities laws. Upon issue, the Subscriber will acquire good and marketable title to the Convertible Debentures, free and clear of all liens, claims, encumbrances and pre-emptive rights. The Shares issuable upon conversion of the Convertible Debentures, when issued in accordance with the respective terms thereof, shall be duly and validly issued and outstanding, fully paid and non-assessable, free and clear of any, liens claims, encumberances and pre-emptive rights, and will have been issued in compliance with all applicable U.S. federal and state securities laws. Subject in part to the truth and accuracy of the Subscriber's representations set forth in the Subscription Agreement, the offer, sale and issuance of the Securities contemplated by this Agreement are exempt from the registration of any applicable state and federal securities laws, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 5.5 Current Public Information. The Company represents and warrants to the Subscriber that the Company is a "reporting issuer" and it has a class of securities registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and has filed all the materials required to be filed as reports pursuant to the Exchange Act for a period of at least twelve months preceding the date hereof (or for such shorter period as the Company was required by law to file such material). All such reports (including, without limitation, the SEC Reports) complied in all material respects with all applicable requirements of Federal securities laws and the rules and regulations promulgated thereunder. The Subscriber has obtained copies of the Company's Form 10-KSB Annual Report for the most recent year ended December 31, 2007 and Form 10-Q for the most recent fiscal quarter ended, copies of all Form 8-K Reports from the beginning of the Company's past fiscal year to the date of execution of the within Agreement as well as all press releases. 3 5.6 No Directed Selling Efforts in Regard to this Transaction. The Company has not, and, to the best of the Company's knowledge, neither the Subscriber nor any distributor, if any, participating in the offering of the Securities nor any person acting for the Company or any such distributor has conducted any "directed selling efforts" as that term is defined under the Act. Such activity includes, without limitation, the making of printed material to investors, the holding of promotional seminars, the placement of advertisements with radio or television stations which discuss the offering of the Securities. 5.7 No Conflicts. The execution and delivery of this Agreement and the consummation of the issuance of the Securities and the transactions contemplated by this Agreement do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under, the Certificate of Incorporation or bylaws of the Company, or any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or any of its or any of its subsidiaries' properties or assets are bound, or any existing applicable decree, judgment or order of any court, Federal or State regulatory body, administrative agency or other governmental body having jurisdiction over the Company or any of its subsidiaries or any of its or any of its subsidiaries' properties or assets. 5.8 Issuance of Securities. The Company will issue one or more certificates representing the Convertible Debentures in the name of the Subscriber in such denominations to be specified by the Subscriber prior to closing. Upon conversion of the Convertible Debentures in accordance with their terms, the Company will issue one or more certificates representing Shares in the name of the Subscriber and in such denominations to be specified by the Subscriber prior to conversion. The Shares to be issued upon conversion of the Convertible Debentures shall bear restrictive legends unless subject to an effective registration or exemption under the Act. Nothing in this section shall affect in any way the Subscriber's obligations and agreement to comply with all applicable securities laws upon resale of the Securities. 5.9 No Action. The Company has not taken and will not take any action that will affect in any way the Subscriber's ability to resell the Securities in accordance with applicable securities laws. 5.10 Compliance with Laws. As of the date hereof and for the two year period prior to the date hereof, the conduct of the business of the Company complies (and has complied) in all material respects with all material statutes, laws, regulations, ordinances, rules, judgments, orders or decrees applicable thereto. The Company has not received notice of any alleged violation of any statute, law, regulations, ordinance, rule, judgment, order or decree from any governmental authority. The Company shall comply with all applicable securities laws with respect to the sale of the Securities, including, but not limited to, the filing of all reports required to be filed in connection therewith with the Commission or any other regulatory authority. Further, assuming the accuracy of the representations of the Subscriber, the offer and sale by the Company of the Securities (including, without limitation, the Shares issuable upon conversion of the Convertible Debentures) is exempt from registration under the Securities Act. 5.11 Litigation. Except as disclosed in the Company's Annual Report on Form 10-KSB its Form 8-K Reports, or any Quarterly Reports on Form 10-Q filed since the date of such Form 10-KSB, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending or, to the knowledge of the Company, threatened, against or affecting the Company, or any of its properties, which could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. 5.12 Disclosures. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been disclosed in writing to the Subscriber that (a) could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect or (b) could reasonably be expected, individually or in the aggregate, to materially and adversely affect the ability of the Company to perform its obligations pursuant the Transaction Documents and the issuance of the Convertible Debentures hereunder. 5.13 Capitalization. The Company, as of the date of the Closing, will have authorized the number of shares of Common Stock as set forth on Exhibit D and outstanding the number of shares of Common Stock, Convertible Debentures as set forth on Exhibit D. All of the issued and outstanding shares of capital stock of the Company and each of its subsidiaries have been duly authorized and are validly issued, fully paid and non-assessable. No personal liability attaches to the registered holders of the Common Stock by reason of their being registered holders thereof. Except as set forth on Exhibit D, (i) no subscription, warrant, option, convertible security or other right (contingent or otherwise) to purchase or acquire any shares of capital stock of the Company or any of its subsidiaries is authorized or outstanding, (ii) neither the Company nor any of its subsidiaries has any obligation (contingent or otherwise) to issue any subscription, warrant, option, convertible security or other such right or to issue or distribute to holders of any shares of its capital stock or other equity securities any evidences of indebtedness or assets of the Company or such subsidiary, (iii) neither the Company nor any of its subsidiaries has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock (or other equity securities) or any interest therein or to pay any dividend or make any other distribution in respect thereof, and (iv) there are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to the Company or any of its subsidiaries. 26,325,989 shares of Common Stock are reserved for issuance upon the exercise of any subscription, warrant, option, convertible security or other right (contingent or otherwise) to purchase or acquire any shares of capital stock of the Company that are referenced on Exhibit D. 4 All of the issued and outstanding shares of the Company's and its subsidiaries' capital stock (or other equity securities) have been offered, issued and sold by the Company and such subsidiaries in compliance with applicable federal and state securities Laws. 5.14. Material Changes. Except as disclosed in the SEC Reports, since December 31, 2007: (i) the Company and its subsidiaries have not incurred any material liabilities or obligations, indirect, or contingent, or entered into any material oral or written agreement or other transaction which is not in the ordinary course of business or which could reasonably be expected to result in a material reduction in the future earnings or prospects of the Company and its subsidiaries; (ii) each of the Company and its subsidiaries have not sustained any material loss or interference with its businesses or properties from fire, flood, windstorm, accident or other calamity not covered by insurance; (iii) except as described in the SEC Reports, the Company and its subsidiaries have not paid or declared any dividends or other distributions with respect to its capital stock and neither the Company nor any of its subsidiaries is in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock of the Company or any of its subsidiaries other than the sale of the Securities hereunder, shares or options issued pursuant to stock option plans or purchase plans approved by the Company's Board of Directors and repurchases of shares or options pursuant to repurchase plans already approved by the Company's Board of Directors, or indebtedness material to the Company or any of its subsidiaries (other than in the ordinary course of business); and (v) there has not been any other event or change that would have, individually or in the aggregate, a Material Adverse Effect. 5.15 Financial Statements. The consolidated financial statements of the Company and the related notes contained in the SEC Reports present fairly, in accordance with generally accepted accounting principles, the consolidated financial position of the Company and its subsidiaries as of the dates indicated, and the results of their operations, cash flows and the changes in shareholders' equity for the periods therein specified, subject, in the case of unaudited financial statements for interim periods, to normal year-end audit adjustments. Such consolidated financial statements (including the related notes) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods therein specified, except that unaudited financial statements may not contain all footnotes required by generally accepted accounting principles. The Company has fully complied with the Sarbanes-Oxley Act of 2002. 5.16 Stabilization. Neither the Company nor any of its subsidiaries has taken, directly or indirectly, any action which was designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities, the Convertible Debentures and the Shares issuable upon exercise of the Convertible Debentures. 5.17 Brokers. The Company has taken no action which would give rise to any claim by any person for brokerage commissions, finders' fees or similar payments by the Subscriber relating to this Subscription Agreement or the transactions contemplated hereby. 5.18 Consents. Except as to filings which may be required under applicable state securities regulations, no consent, authorization, approval, order, license, certificate, or permit of or from, or declaration or filing with, any federal, state, local, or other governmental authority or of any court or other tribunal is required by the Company in connection with the transactions contemplated hereby. No consent of any party to any contract, agreement, instrument, lease, license, arrangement, or understanding to which the Company is a party, or by which any of its properties or assets is bound, is required for the execution, delivery, or performance by the Company of the transactions contemplated by the Transaction Documents. 5.19 Intellectual Property. To the Company's knowledge, the Company owns, or has the right to use, all patents, trademarks, service marks, trade names, copyrights, licenses, trade secrets or other proprietary rights necessary to its business as now conducted without conflicting with or infringing upon the right or claimed right of any person under or with respect to any of the foregoing. Except for hardware and software licenses entered into in the ordinary course of business, the Company is not bound by or a party to any options, licenses or agreements of any kind with respect to patents, trademarks, service marks, trade names, copyrights, licenses, trade secrets or other proprietary rights of any other person or entity. The Company has not received any communications alleging that the Company has violated the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. The Company is not aware of any violation by a third party of any of the Company's patents, trade marks, service marks, trade names, copyrights, trade secrets or other proprietary rights. 5.20 Foreign Corrupt Practices Act. Neither the Company nor any director, officer, agent, or other person acting on behalf of the Company has, in the course of his or its actions for or on behalf of the Company violated any provision of the United States Foreign Corrupt Practices Act of 1977, as amended, or the regulations there under. 5.21 Other Subscription Agreements. The Company is simultaneously, with the execution of this Subscription Agreement, entering into one or more subscription agreements with other purchasers of Securities (the "Other Purchasers") with substantially the same terms and conditions as this Subscription Agreement; and no Other Purchaser is subscribing for any securities of the Company on the Closing with terms and conditions different from the terms and conditions of this Subscription Agreement. 5.22 Dilutive Effect. The Company understands and acknowledges that the number of Shares issuable upon conversion of the Convertible Debentures will increase in certain circumstances. Except as provided in the Convertible Debentures, the Company further acknowledges that its obligation to issue Shares upon conversion of the Convertible Debentures in accordance with this Agreement and the Convertible Debentures is not conditioned on the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company. 5 6. ADDITIONAL COVENANTS OF COMPANY 6.1 Corporate Existence and Taxes. For as long as any Convertible Debentures remain outstanding, the Company shall, maintain its corporate existence in good standing, and shall pay all its taxes when due except for taxes which the Company disputes in good faith and for which adequate reserves are established on the Company's books and records. 6.2 Reserved Shares and Listings; Exchange Act. For so long as any Convertible Debentures remain outstanding: (a) the Company will reserve or undertake to obtain shareholders approval (to be completed within 30 days of the date hereof) to increase the available number of authorized but unissued shares of Common Stock, par value $0.001 per share ("Common Stock"), to permit the conversion in full of the outstanding principal and interest amount of Convertible Debentures (unless the appropriate Standstill Agreements are in place); and (b) the Company will maintain the listing of its Shares on the Over the Counter Bulletin Board or other exchange; and (c) the Company shall timely file all reports required to be filed with the Commission pursuant to the Exchange Act and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination. 6.3 Use of Proceeds. The Company shall use all of the net proceeds from the sale of all Securities for general corporate purposes, to obtain product certification, and to repay a portion of existing debt. 6.4 Escrow Account. The Company shall not take any action to cause the release of any monies from the escrow account until the Company has received net proceeds into the escrow account established with Baratta, Baratta & Aidala (the "Escrow Agent") pursuant to the terms of the Escrow Agreement (the "Escrow Agreement"), among the Company, the Subscriber and Baratta, Baratta & Aidala of a minimum of an aggregate of $3,000,000. 6.5 Further Financings. If within six months from the date of Closing, the Company enters into or closes another financing or other transaction (which for securities law purposes would be integral with the offer and sale of the Securities) on terms and conditions more favorable to another purchaser than this Subscription Agreement, the Convertible Debentures and the Registration Rights Agreement (in each case, such determination to be made by the Subscriber), then the terms and conditions of this Offering shall be adjusted to reflect the more favorable terms to such purchaser (including, at the Subscriber's option, the issuance of additional Securities or other securities of the Company). The foregoing shall apply to successive financings or successive other transactions within six months of the date of the Closing. 6.6 Publicity. Except as may be required by applicable law or regulation, the Company shall not use, directly or indirectly, the Subscriber's name or the name of any of its affiliates in any advertisement, announcement, press release or other similar communication unless it has received the prior written consent of the Subscriber for the specific use contemplated or as otherwise required by applicable law or regulation. 7. CONDITIONS TO CLOSING; DELIVERIES AT CLOSING 7.1 Conditions to Subscriber's Obligations to Close. The obligations of the Subscriber to purchase the Convertible Debentures offered hereunder are conditioned on the fulfillment or waiver of the following: (a) the execution and delivery of the Transaction Documents and such other documents, opinions, certificates and instruments that the Subscriber may reasonably request; (b) all the representations and warranties of the Company in this Agreement as of the date hereof shall be true and correct at the Closing as if made on such date, and the Company shall have performed all actions required hereunder; (c) the Company shall have performed in all material respects all agreements which the Transaction Documents provide shall be performed on or before the date of the Closing; (d) no event shall have occurred and be continuing or would result from the consummation of the transactions contemplated by the Transaction Documents which would, individually or in the aggregate, constitute a Material Adverse Effect; (e) no order, judgment or decree of any court, arbitrator or governmental authority shall enjoin or restrain the Subscriber from purchasing the Securities or consummating the transactions contemplated by the Transaction Documents and there shall not be existing, or, to the knowledge of the Company, threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting the Company or any of its subsidiaries which would reasonably be expected to result in such an order, judgment or decree; and (f) the Company shall not have defaulted on any long-term debt (including, but not limited to, any other series of convertible debentures or the Convertible Debentures). 6 7.2 Conditions to the Company's Obligations to Close. The obligations of the Company to issue the Convertible Debentures offered hereunder are conditioned on the fulfillment or waiver of the following: (a) the execution and delivery of this Agreement, the Registration Rights Agreement and the Escrow Agreement by the Subscriber; (b) all representations and warranties of the Subscriber made in this Agreement as of the date hereof shall be true and correct at the Closing as if made on such date, and the Subscriber shall have performed all actions required hereunder; and 8. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applicable to agreements made in and wholly to be performed in that jurisdiction with regards to the choice of law rules of such state, except for matters arising under the Act or the Exchange Act which matters shall be construed and interpreted in accordance with such laws. Any action brought to enforce, or otherwise arising out of, this Agreement shall be heard and determined in either a Federal or state court sitting in the County of New York, State of New York, and the parties consent to jurisdiction in the State of New York. 9. ENTIRE AGREEMENT; AMENDMENT This Agreement, the Transaction Documents and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be able or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 10. NOTICES, ETC. Any notice, demand or request required or permitted to be given by either the Company or the Subscriber pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or by facsimile, with a hard copy to follow by two day courier addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. 11. INDEMNIFICATION 11. 1 Company Indemnification. In consideration of the Subscriber's execution and delivery of the Transaction Documents to which it is a party and acquiring the Securities hereunder and thereunder and in addition to all of the Company's other obligations under the Transaction Documents to which it is a party, the Company shall defend, protect, indemnify and hold harmless the Subscriber and each other holder of the Securities and all of their shareholders, trustees, partners, members, officers, directors, employees and direct or indirect investors and any of the foregoing persons' agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Subscriber Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages (other than consequential damages), and expenses in connection therewith (irrespective of whether any such Subscriber Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Subscriber Indemnified Liabilities"), incurred by any Subscriber Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents, or (c) any cause of action, suit or claim brought or made against such Subscriber Indemnitee by a third party (including for these purposes a derivative action brought on behalf of the Company) and arising out of or resulting from (i) other than those arising from or resulting from a misrepresentation or breach of any representation or warranty made by such Subscriber Indemnitee contained in the Transaction Documents to which it is a party, the execution, delivery, performance or enforcement of the Transaction Documents, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Securities, or (iii) the status of the Subscriber or holder of the Securities as an investor in the Company. 11.2 Contribution; Mechanics and Procedures. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. Except as otherwise set forth herein, the mechanics and procedures with respect to the rights and obligations under this Section 11 shall be the same as those set forth in Section 4(c) of the Registration Rights Agreement. 12. NO STRICT CONSTRUCTION The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. 7 13. NO THIRD PARTY BENEFICIARIES This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person or entity. 14. SURVIVAL All covenants, agreements, representations and warranties made by the Company and the Subscriber herein the Transaction Documents shall survive the execution of this Subscription Agreement, the delivery to the Subscriber of the Convertible Debentures being purchased and the payment therefor. 15. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Convertible Debentures. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Subscriber, including by merger or consolidation, except in accordance with the applicable provisions of the Convertible Notes with respect to which the Company is in compliance with such respective provisions of the Convertible Debentures. The Subscriber may assign, without the consent of the Company, some or all of its rights hereunder to any person to whom the Subscriber assigns or transfers Securities, or the right to acquire Securities, in accordance herewith; provided, that such transferee agrees in writing to be bound with respect to the transferred Securities to the provisions hereof that apply to the transferring Subscriber, in which event such assignee shall be deemed to be a Subscriber hereunder with respect to such assigned rights. 16. COUNTERPARTS This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided, that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature. 17. HEADINGS The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. 18. SEVERABILITY If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. 19. AMOUNT The undersigned Subscriber hereby subscribes for a Convertible Debenture in the principal amount of $2,566,077.00. 20. COSTS AND EXPENSES The Company shall pay or provide credit for all costs and expenses incurred by Subscriber in connection with this Agreement and the transactions contemplated hereby and all legal and other professional fees of the Subscriber. The undersigned Subscriber acknowledges that this subscription shall not be effective unless accepted by the Company as indicated below. This Subscription Is Accepted by the Company on the 7th day of November, 2008. Environmental Solutions Worldwide, Inc. By: ------------------------------------ Print Name: ---------------------------- Title: --------------------------------- Subscriber: --------------------------------------- Name: Bengt G. Odner 8 EX-10.46 6 ex10-46.txt EXHIBIT 10.46 DEBENTURE THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY STATE SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D ("REGULATION D") PROMULGATED UNDER THE SECURITIES ACT. THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND THOSE LAWS. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY, ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. No. [ ] U.S.$2,566,077 Issuance Date: November 7, 2008 ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. 9% CONVERTIBLE DEBENTURE DUE NOVEMBER 7, 2011 THIS 9% CONVERTIBLE DEBENTURE, issued this 7th day of November 2008, is one of duly authorized issue of 9% Convertible Debentures (including all 9% Convertible Debentures issued in exchange, transfer or replacement hereof, this "Debenture") of Environmental Solutions Worldwide, Inc., a corporation duly organized and existing under the law of the State of Florida (the "Company"), designated as its 9% Convertible Debentures Due November 7, 2011, in an aggregate principal amount of U.S. $[2,566,077] (collectively, the "Debentures" and such other Debentures, the "Other Debentures"). FOR VALUE RECEIVED, the Company promises to pay to Bengt G. Odner, the registered holder hereof (the "Holder"), the principal sum of $2,566,077, on or prior to November 7, 2011 (the "Maturity Date"), and to pay interest on the principal sum outstanding time to time on the yearly anniversary of the issuance date set forth above (the "Issuance Date") of this Debenture (each an "Interest Payment Date"), commencing November 7, 2009, up to and including the Maturity Date, at the rate of 9% per annum, and shall be computed on the basis of a 365-day year and actual days elapsed. Accrual of interest on this Debenture shall commence on the Issuance Date and shall continue to accrue until the next Interest Payment Date. The interest so payable will be paid on each Interest Payment Date to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register") on the first business day prior to such Interest Payment Date. Notwithstanding the foregoing, the Company may elect to forego paying interest until such time as this Debenture matures, is converted or redeemed, as the case may be. All accrued and unpaid interest shall bear interest at the same rate of 9% per annum from the date hereof until the date of payment. The principal of this Debenture is payable in coin or currency of the United States of America as at the time of payment is legal tender for public and private debts or, at the option of the Holder, in shares of Common Stock, par value $0.001 per share (the "Common Stock"), under the same conversion formula as stated herein at the address of the Holder last appearing on the Debenture Register of the Company as designated in writing by the Holder from time to time. The Debenture Register shall represent the record of ownership and right to receive principal and interest payments on this Debenture. Interest and principal shall be payable only to the registered Holder as reflected in the Debenture Register. At the option of the Holder (as provided for in Section 4), interest on the within Debenture will be payable in cash or shares of Common Stock under the conversion formulas as stated herein. The right to receive principal and interest payments under this Debenture shall be transferable only through an appropriate entry in the Debenture Register as provided herein. This Debenture is subject to the following additional provisions: 1. Debentures. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holders surrendering the same, but shall not be issuable in denominations less than integral multiples of ten thousand dollars ($10,000). No service charge will be made for such registration of transfer or exchange. 2. [Intentionally Deleted] 3. Transfer. This Debenture has been issued subject to investment representations of the original purchaser hereof and may be transferred, assigned or exchanged only in compliance with the Securities Act of 1933, as amended (the "Securities Act"), including Regulation D promulgated under the Securities Act. Any Holder of this Debenture, by acceptance hereof, agrees to the representations, warranties and covenants herein. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the person in whose name this Debenture is duly registered on the Company's Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. 4. Conversion; Other Agreements. The record Holders of this Debenture shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. The record Holder of this Debenture shall be entitled, at the option of the Holder, to convert any or all of the aggregate principal and accrued and unpaid interest of Debentures held by such Holder, at any time six (6) months after the date of issuance of this Debenture, at the office of the Company or any transfer agent for the Debentures, into that number of fully-paid and non-assessable shares of Common Stock of the Company calculated in accordance with the following formula (the "Conversion Rate"): The number of shares of Common Stock to be issuable upon conversion of any principal amount shall be determined by dividing (x) the principal amount of this Debenture to be converted by (y) the Fixed Conversion Price (as defined herein). The number of shares of Common Stock to be issuable upon conversion of any accrued and unpaid interest amount on this Debenture to be converted by (y) the Fixed Conversion Price. The term "Fixed Conversion Price" means $0.25, subject to adjustment as provided herein. (b) Mechanics of Conversion. In order to convert Debentures into shares of Common Stock, the Holder shall surrender the certificate or certificates therefor, duly endorsed, by either overnight courier or 2-day courier, to the office of the Company or of any transfer agent for the Debentures, and shall give written notice to the Company at such office with a copy to Chief Financial (Accounting) Officer, tel 905-695-4142, facsimile 905-695-5013, that such Holder elects to convert the same, the amount of principal and/or interest of the Debentures to be so converted and a calculation of the number of shares of Common Stock to be issued upon conversion; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless either the certificates evidencing such Debentures are delivered to the Company or its transfer agent as provided above, or the Holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such certificates. The Company shall issue and deliver to the Holder within five (5) business days after delivery to the Company of such Debenture certificates, or after such agreement and indemnification, to such Holder of Debentures at the address of the Holder on the books of the Company, a certificate or certificates for the number of shares of Common Stock to which the Holder shall be entitled as aforesaid. The date on which notice of conversion is given (the "Date of Conversion") shall be deemed to be the date in such notice of conversion is received by the Company; provided, that the original Debentures to be converted are received by the transfer agent or the Company within five (5) business days thereafter, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the original Debentures to be converted are not received by the transfer agent or the Company within five (5) business days after the Date of Conversion, the notice of conversion shall become null and void. Following conversion of a Debenture, or a portion thereof, the principal and, upon payment thereof of the interest owed on that Debenture or portion of the Debenture so converted, will be deemed paid in full and satisfied, and such Debenture or portion thereof will no longer be outstanding. If this Debenture should be converted in part only, the Company shall promptly, upon surrender of this Debenture, execute and deliver a new Debenture. Whenever the Company is required to issue a new Debenture pursuant to the terms of this Debenture, such new Debenture (i) shall be of like tenor with this Debenture, (ii) shall represent, as indicated on the face of such new Debenture, the principal amount remaining outstanding, (iii) shall have an issuance date, as indicated on the face of such new Debenture, which is the same as the Issuance Date of this Debenture, (iv) shall have the same rights and conditions as this Debenture, and (v) shall represent the proportionate amount of accrued interest on the principal amount and interest of this Debenture that correspond to the principal of the new Debenture, from the Issuance Date. (c) Reservation of Stock Issuable Upon Conversion. The Company shall use its best efforts to keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Debentures, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding Debentures. In the event the Company shall have insufficient shares it undertakes to obtain shareholder approval as soon as reasonably possible to increase its authorized shares of Common Stock to insure there are sufficient shares upon conversion of the Debenture. The Company covenants that all shares of Common Stock to be issued upon conversion of this Debenture will be validly authorized and reserved for issuance and, if and when this Debenture is converted in whole or in part the shares of Common Stock issued will be duly and validly issued, fully paid, nonassessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive or other rights of shareholders. (d) Mandatory Payment or Conversion on Maturity Date. Each Holder of a Debenture outstanding on the Maturity Date, shall have the right to payment of all principal (and any accrued and unpaid interest thereon) on this Debenture paid to such Holder in cash or in immediately available funds or, at the option of each Holder of a Debenture, in shares of Common Stock computed in accordance with Section 4 above. On the Maturity Date, the Company shall pay to the Holder an amount in cash, in immediately available funds or, at the option of each Holder of a Debenture, in shares of Common Stock computed in accordance with Section 4 above an amount equal to the then outstanding principal amount (and any accrued and unpaid interest thereon) on this Debenture. (e) Adjustment to Conversion Price. (x) If, prior to the conversion of all of the Debentures, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend or other similar event, then the Fixed Conversion Price shall be proportionately reduced. If prior to conversion of all the Debentures, the number of outstanding shares of Common Stock is decreased by a reverse stock split, combination or reclassification of shares, or other similar event, the Fixed Conversion Price shall be proportionately increased. (y) In case the Company shall at any time after the date this Debenture is first issued, sell additional shares of Common Stock or equivalents thereto, including by way of example, pursuant to options, warrants, rights or other securities convertible into shares of Common Stock (for purposes hereof respecting such equivalent securities, such determination to be made at the time of sale, grant or award of the equivalent security irrespective of the ultimate conversion or 2 exercise thereof) (other than pursuant to qualified or non-qualified employee stock option plans approved by the Board of Directors or option grants to consultants for bona fide services provided to the Company) in a private transaction (as contrasted with a public sale registered with the Securities and Exchange Commission) at prices (including with respect to equivalent securities, exercise, grant or conversion prices) less than the then current Fixed Conversion Price, then the then current Fixed Conversion Price shall be reduced to equal the sale, issuance, exercise or conversion price, as applicable, of the Common Stock or equivalent thereto. Such adjustment shall be made successively whenever any event listed above shall occur. (z) No adjustment need be made if it would result in a change of less than 1% of the Conversion Price. Any adjustments required to be made by this subsection shall be rounded up to the right to acquire the nearest whole number of shares of Common Stock. (f) No Charges or Taxes. The issuance of certificates for shares of Common Stock upon conversion of this Debenture shall be made without charge to Holder or the purchaser of any issuance tax in respect thereof or other cost incurred by the Company in connection with such conversion and the related issuance of shares of Common Stock issuable upon conversion. (g) No Interference. The Company shall not close its books against the transfer of this Debenture or of any shares of Common Stock issued or issuable upon the conversion of this Debenture in any manner which interferes with the timely conversion of this Debenture. (h) Assistance. The Company shall assist and cooperate with any reasonable request by the Holder or any purchaser which is required to make any governmental filings or obtain any governmental approvals prior to or in connection with any conversion of this Debenture. (i) Contingent Conversion. Notwithstanding any other provision hereof, if a conversion of any portion of this Debenture is to be made in connection with a public offering or sale of the Company (pursuant to a merger, sale of stock or otherwise), such exercise may at the election of the Holder be conditioned upon the consummation of such transaction, in which case such exercise shall not be deemed to be effective until immediately prior to consummation of such transaction. (j) Certain Actions. The Company shall take all such actions as may be necessary to ensure that all shares of Common Stock that may be issued without violation by the Company of any applicable law or governmental regulation or any requirements of any domestic securities exchange or quotation system upon which shares of Common Stock or other securities constituting securities that may be issuable upon conversion of this Debenture may be listed or quoted (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). The Company will use its best efforts to cause the shares of Common Stock issued upon conversion of this Debenture, immediately upon such conversion, to be listed on any domestic national securities exchange or quotation system upon which shares of Common Stock or other securities issuable upon conversion of this Debenture are listed or quoted at the time of such exercise. (k) Non-Circumvention. The Company shall not, and shall not permit its subsidiaries to, directly or indirectly, by any action avoid or seek to avoid the observance or performance of any terms of this Debenture or impair or diminish its value, but shall at all times in good faith assist in carrying out of all such terms of this Debenture. (l) Authority. The Company has all requisite corporate power and authority to enter into and perform its obligations under this Debenture and to issue and deliver the Debenture to the Holder. The execution, delivery, and performance by the Company of its obligations under this Debenture, including the issuance and delivery of the Debenture to the Holder, have been duly authorized by all necessary corporate action on the part of the Company. This Debenture has been duly executed and delivered by the Company and is a legal, valid and binding obligation of the Company and is enforceable against the Company in accordance with its terms. (m) Governmental Actions. Without limiting the generality of the foregoing, the Company shall obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Debenture. (n) Registration Rights. The Holder shall have the registration rights and be subject to the same obligations and undertakings with respect to the shares issuable upon exercise of this Debenture as are granted pursuant to the Registration Rights Agreement, dated as of November 7, 2008 (the "Registration Rights Agreement"), as amended or supplemented from time to time, providing registration rights to the Holder. 5. Redemption. (a) Right to Redeem. Except as provided in Sections 5(b) and (d) herein, the Company may at its sole option elect to redeem this Debenture in accordance with Section 5(c). (b) Right to Redeem on Conversion. The Company shall not have the right, after receipt of a notice of conversion pursuant to Section 4, to redeem in whole or in part any Debentures submitted for conversion. If the Company wishes to redeem some, but not all, of the Debentures previously submitted for conversion, the Company shall notify the Holder on five (5) days written notice, and it will be the option of the Holder to elect to have the Debenture redeemed. (c) Mechanics of Redemption on Conversion. The Company shall effect each such redemption by giving notice of its election to redeem, by facsimile to Holder. Such redemption notice shall indicate whether the Company will redeem all or part of the Debentures. The Company shall not be entitled to send any notice of redemption and begin the redemption procedure unless it has the full amount of the redemption price, in cash, available in a demand or other immediately available account in a bank or similar financial institution on the date the redemption notice is sent to Holder. (d) Mechanics of Conversion on Redemption. The Holder may within three (3) business days of receipt of the Notice of Redemption elect to send Notice of Conversion to the Company should Holder wish for the Debenture to be converted rather than redeemed by the Company. 3 (e) Redemption Price. The redemption price per Debenture shall equal one hundred and ten percent (110%) multiplied by the then outstanding principal amount plus unpaid interest to the date of redemption. The redemption price shall be paid in cash to the Holder of Debentures redeemed within ten (10) business days of the delivery of the notice of such redemption to such Holder; provided, however, that the Company shall not be obligated to deliver any portion of such redemption price unless either the certificates evidencing the Debentures redeemed are delivered to the Company or its transfer agent as provided in Section 4(b), or the Holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such certificates. 6. No Impairment. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time, place, and rate, and in the coin or currency, or Common Stock herein prescribed. This Debenture and all other Debentures now and hereafter issued of similar terms are direct obligations of the Company. 7. Termination. After this Debenture shall have been surrendered for conversion as herein provided or notice of redemption shall have been given by the Company pursuant to Section 5(c) herein, this Debenture shall no longer be deemed to be outstanding and all rights with respect to this Debenture, including, without limitation, the right to receive interest hereon and the principal hereof, shall forthwith terminate as of the Date of Conversion, except, as applicable, as otherwise provided herein, the right of the Holder hereof to receive shares of Common Stock in exchange therefor or the right to be paid pursuant to the provisions of Section 5. Notwithstanding anything to the contrary herein, if the Holder or the Company, as applicable, is converting less than the outstanding principal amount and/or less than the amount of unpaid interest accrued thereon, then the rights and obligations under this Debenture shall terminate only with respect to the principal and/or interest being so converted. 8. [Intentionally Deleted] 9. Costs and Expenses. The Company agrees to pay all costs and expenses, including reasonable attorney's fees, which may be incurred by the Holder in collecting any amount due under this Debenture. 10. Events of Default; Remedies. If one or more of the following described "Events of Default" shall occur: (a) The Company shall default in the payment of principal or interest on these Debentures; or (b) Any of the representations or warranties made by the Company herein, in the Securities Subscription Agreement, dated as of the date hereof, relating to these Debentures (the "Subscription Agreement") or in any certificate or financial or other written statements heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Debenture or the Subscription Agreement shall be false or misleading in a any material respect at the time made; or (c) The Company shall fail to perform or observe, in any material respect, any other covenant, term, provision, condition, agreement or obligation of the Company under this Debenture or the Subscription Agreement and such failure shall continue uncured for a period of fifteen (15) business days after notice from Holder of such failure; or (d) The Company or any of its subsidiaries shall (1) admit in writing its inability to pay its debts generally as they mature; (2) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (3) apply for or consent to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property or business; or (e) A trustee, liquidator or receiver shall be appointed for the Company, any of its subsidiaries or for a substantial part of their respective property or business without their consent and shall not be discharged within forty five (45) business days after such appointment; or (f) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company or any of its subsidiaries and shall not be dismissed within forty five (45) business days thereafter; or (g) Bankruptcy, reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company or any of its subsidiaries and, if instituted against the Company or any of its subsidiaries shall not be dismissed within forty five (45) business days after such instruction or if the Company or any of its subsidiaries shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any proceeding; or (h) The Common Stock shall not be traded on an exchange or over the counter market. Then, or at any time thereafter, and in each and every such case, unless such Event or Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default) at the option of the Holder and in the Holder's sole discretion, the principal (and any accrued interest) amount of this Debenture shall become immediately due and payable, without presentment, demand protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and the Holder may immediately, and with expiration of any period of grace, enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law. 4 11. Mergers, Consolidations, Change of Control, etc. (a) Change of Control. Each of the following events shall constitute a "Change of Control": (i) the consolidation, merger or other business combination (including, without limitation, a reorganization or recapitalization) of the Company with or into another person or entity (other than (A) a consolidation, merger or other business combination (including, without limitation, reorganization or recapitalization) in which holders of the Company's voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities, or (B) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company); (ii) the sale or transfer of all or substantially all of the Company's or its subsidiaries' assets (as determined on a consolidated basis); or (iii) a purchase, tender or exchange offer made to and accepted by the holders of more than the 50% of the outstanding shares of Common Stock. No sooner than 21 days nor later than 15 days prior to the consummation of a Change of Control the Company shall deliver written notice thereof via facsimile and overnight courier to the Holder (a "Change of Control Notice"). Notwithstanding anything herein to the contrary, (x) no Change of Control Notice shall be made prior to the public announcement of a Change of Control and (y) no Change of Control Notice shall be made prior to the public announcement of the Change of Control described in (a)(iii) above as long as the terms of the underlying Change of Control transaction will permit the Holder to participate in such transaction on the same per share terms as the other participating holders of Common Stock in the event the Holder elects to convert all or a portion of this Debenture into Common Stock as herein provided. Notwithstanding anything herein to the contrary, the Change of Control Notice shall be delivered no later than one Business Day following the events described in (x) and (y) of the preceding sentence. (b) Assumption. Prior to the consummation of any Change of Control, the Company will secure from any person or entity purchasing the Company's assets or Common Stock or any successor resulting from such Change of Control (in each case, an "Acquiring Entity") a written agreement (in form and substance satisfactory to the holders of Debentures representing at least a majority of the aggregate principal amount of the Debentures then outstanding) to deliver to each holder of Debentures in exchange for such Debentures, a security of the Acquiring Entity evidenced by a written instrument substantially similar in form and substance to the Debentures, including, without limitation, having a principal amount and interest rate equal to the principal amounts and the interest rates of the Debentures held by such holder, and satisfactory to the holders of Debentures representing at least a majority of the aggregate principal amount of the Debentures then outstanding. In the event that an Acquiring Entity is directly or indirectly controlled by a company or entity whose common stock or similar equity interest is listed, designated or quoted on a securities exchange or trading market, the holders of Debentures representing at least a majority of the aggregate principal amount of the Debentures then outstanding may elect to treat such person or entity as the Acquiring Entity for purposes of this Section 11(b). (c) Other Corporate Events. Prior to the consummation of any recapitalization, reorganization, consolidation, merger, spin-off or other business combination (other than a Change of Control) pursuant to which holders of Common Stock are entitled to receive securities or other assets with respect to or in exchange for Common Stock (a "Corporate Event"), the Company shall make appropriate provision to insure that the Holder will thereafter have the right to receive upon a conversion of this Debenture, (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which the Holder would have been entitled with respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon the consummation of such Corporate Event or (ii) in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of Common Stock in connection with the consummation of such Corporate Event in such amounts as the Holder would have been entitled to receive had this Debenture initially been issued with conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the Conversion Rates. Provision made pursuant to the preceding sentence shall be in a form and substance satisfactory to the holders of Debentures representing at least a majority of the aggregate principal amount of the Debentures then outstanding. 12. Lost or Destroyed Debenture. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership thereof, and indemnity and bond, if requested, all reasonably satisfactory to the Company. 13. [INTENTIONALLY DELETED] 14. Governing Law. This Debenture shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws. 15. Business Day Definition. For purposes hereof, the term "business day" shall mean any day on which banks are generally open for business in the State of New York, USA and excluding any Saturday and Sunday. 16. Notices. Any notice, demand or request required or permitted to be given by either the Company or the Holder pursuant to the terms of this Debenture shall be in writing and shall be deemed given when delivered personally, or by facsimile (with a hard copy to follow by two day courier), addressed to the Company attention Chief Financial/Accounting Officer at 335 Connie Crescent, Ontario, LAK 52 Canada, tel. 905-695-4142, facsimile 905-695-5013 with a copy to Baratta, Baratta & Aidala attn: Joseph Baratta, Esq., or the Holder at [ ] , or such other addresses as a party may request by notifying the other in writing. 5 17. Waiver. Any waiver by the Company or the Holder hereof of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder hereof to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. 18. Notices of Certain Actions. In case at any time the Company shall propose to: (a) pay any dividend or make any distribution on shares of Common Stock in shares of Common Stock or equivalents thereto or make any other distribution; or (b) issue any rights, warrants or other Common Stock to all holders of Common Stock entitling them to purchase any additional shares of Common Stock or any other rights, debentures, warrants or other Common Stock; or (c) effect any reclassification or change of outstanding shares of Common Stock, or any consolidation, merger, sale, lease or conveyance of property, described in Sections 4 or 11 hereof; or (d) effect any liquidation, dissolution or winding-up of the Company; or (e) take any other action which would cause an adjustment to the Fixed Conversion Price; or (f) provide to its shareholders any information which is regularly provided to shareholders, then, and in any one or more of such cases (a) through (f), the Company shall, subject to any other Sections of this Debenture, give written notice thereof, by certified mail, postage prepaid, to the Holder at the Holder's address as it shall appear in the Debenture Register, mailed at least fifteen (15) days prior to (i) the date as of which the holders of record of shares of securities to be entitled to receive any such dividend, distribution, rights, debentures, warrants or other securities are to be determined, (ii) the date on which any such reclassification, change of outstanding shares of Common Stock, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution or winding-up is expected to become effective, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, change of outstanding shares, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution or winding-up, or (iii) the date of such other action which would require an adjustment to the Fixed Conversion Price. In the case of subsection (f) above, written notice to the Holder may be given by regular mail. 19. Unenforceable Provisions. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. 20. Restriction on Redemption and Dividends. Until all of the Debentures have been converted, redeemed or otherwise satisfied in accordance with their terms, the Company shall not, directly or indirectly, (A) repurchase, redeem, or declare or pay any cash dividend or distribution on, the Common Stock or (B) distribute any material property or assets of any kind to holders of the Common Stock in respect of the Common Stock. 21. Rank. Obligations under this Debenture, including payments of principal and interest and other payments due under this Debenture, shall rank pair passe with all Other Debentures. 22. Vote to Issue, or Change the Terms of, Debentures. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting of the holders of Debentures representing not less than a majority of the aggregate principal amount of the then outstanding Debentures shall be required for any change or amendment to this Debenture or the Other Debentures; provided, that the Holder of this Debenture may waive any term or provision of this Debenture without such vote or written consent. 23. Payment of Collection, Enforcement and Other Costs. If (a) this Debenture is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Debenture or to enforce the provisions of this Debenture or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors' rights and involving a claim under this Debenture, then the Company shall pay the reasonable costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, reasonable attorneys' fees and disbursements. 24. Construction; Headings. This Debenture shall be deemed to be jointly drafted by the Company and the Holder and shall not be construed against any person as the drafter hereof. The headings of this Debenture are for convenience of reference and shall not form part of, or affect the interpretation of, this Debenture. 25. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Debenture shall be cumulative and in addition to all other remedies available under this Debenture and any of the other Transaction Documents (as defined in the Subscription Agreement), at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Debenture. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be 6 received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. 26. Waiver of Notice. To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Debenture and the Subscription Agreement. 27. Further Acknowledgement. The Company will, at the time of each conversion of this Debenture, upon the request of the Holder hereof, acknowledge in writing its continuing obligation to afford to such Holder all rights (including, without limitation, any rights to registration, pursuant to the Registration Rights Agreement, of the shares of Common Stock issued upon such conversion) to which such Holder shall continue to be entitled after such conversion in accordance with its terms of this Debenture; PROVIDED, that if the Holder of this Debenture shall fail to make any such requests, such failure shall not affect the continuing obligation of the Company to afford such rights to such Holder. IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by an officer thereof duly authorized. Environmental Solutions Worldwide, Inc. By: ------------------------------------ Title: 7 EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby elects to convert the attached Debenture into shares of common stock, $0.001 par value per share (the "Common Stock"), of Environmental Solutions Worldwide, Inc. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: -------------------------------------------------- Date to Effect Conversion -------------------------------------------------- Principal Amount of Debentures to be Converted Payment of Interest in Kind |_| Yes |_| No -------------------------------------------------- Interest Accrued on Account of Conversion at Issue -------------------------------------------------- Number of shares of Common Stock to be Issued -------------------------------------------------- Signature -------------------------------------------------- Name -------------------------------------------------- Address 8 EX-10.48 7 ex10-48.txt EXHIBIT 10.48 ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. 335 Connie Crescent Concord Ontario L4K 5R2 February 5, 2009 Mr. Praveen Nair Re: Amendment to Employment Agreement Dear Praveen: Reference is made to your employment agreement dated as of February 4, 2008, between you and Environmental Solutions Worldwide, Inc. (the "Original Employment Agreement"). Terms not otherwise defined herein shall have the definition set forth in the Original Employment Agreement. This confirms our agreement to continue and amend the Original Employment Agreement effective January 1, 2009 as follows: 1. Exhibit A of the Original Employment Agreement is amended and restated as follows: "(a) Salary. The Company shall pay employee a base salary (the "BASE SALARY") of one hundred twenty thousand dollars ($120,000.00 CN) per annum, payable in accordance with the Company's payroll practices and subject to all legally required or customary withholdings." Except as otherwise amended hereby, the Original Employment Agreement shall continue in full force and effect in accordance with its terms. Please indicate your acceptance of and agreement with the foregoing amendments to the Original Employment Agreement by signing and returning a copy of this letter. Sincerely, ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC. David Johnson President and Chief Executive Officer Accepted and Agreed: - --------------------------- Praveen Nair Dated: EX-31.1 8 ex31-1.txt EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, David J. Johnson, certify that: 1. I have reviewed this annual report on Form 10-K of Environmental Solutions Worldwide, Inc; 2. Based on my knowledge, this annual 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 annual 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 annual 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 fourth fiscal quarter of 2008 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; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATE: APRIL 9, 2009 /S/ DAVID J. JOHNSON ------------------------------------- DAVID J. JOHNSON CHIEF EXECUTIVE OFFICER AND PRESIDENT EX-31.2 9 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 annual report on Form 10-K of Environmental Solutions Worldwide, Inc; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 fourth fiscal quarter of 2008 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; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATE: APRIL 9, 2009 /S/ PRAVEEN NAIR ----------------------- PRAVEEN NAIR CHIEF ACCOUNTING OFFICER EX-32.1 10 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 Annual Report of Form 10-K of Environmental Solutions Worldwide, Inc. (the "Company") for the fiscal year ended December 31, 2008 (the "Report"), David J. Johnson, Chief Executive Officer, and President 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: APRIL 9, 2009 /S/ DAVID J. JOHNSON -------------------- DAVID J. JOHNSON CHIEF EXECUTIVE OFFICER AND PRESIDENT 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 11 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 Annual Report of Form 10-K of Environmental Solutions Worldwide, Inc. (the "Company") for the fiscal year ended December 31, 2008 (the "Report"), Praveen Nair Chief Accounting 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: APRIL 9, 2009 /S/ PRAVEEN NAIR ----------------------- PRAVEEN NAIR CHIEF ACCOUNTING 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. -----END PRIVACY-ENHANCED MESSAGE-----