UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549 FORM
10-Q [X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 for
the quarterly period ended - June 30, 2013 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
 13-4172059State or other jurisdiction of
  incorporation or organization
 (I.R.S. Employer Identification No.)
 200
PROGRESS DRIVE, MONTGOMERVILLE, PA, 18936 (Address
of principal executive offices, including postal code.) (905)
695-4142 and (215) 699-0730 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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the Registrant was
required to submit and post such files). YES [X] NO Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. Large
  accelerated filer
 Accelerated
  filerNon-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] There were 113,464
shares of the registrant's Common Stock outstanding as of August 19, 2013 (after
giving effect to the one-for-two thousand reverse stock split effected on May
24, 2013).


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INDEX
 DESCRIPTION
 PAGE NO.PART
  I. FINANCIAL INFORMATIONItem
  1.
 Consolidated
  Condensed Balance Sheets as of June 30, 2013 (unaudited) and December 31,
  2012
 F2Consolidated
  Condensed Statements of Operations and Comprehensive Loss for the Six and
  Three Month Periods Ended June 30, 2013 and 2012 (unaudited)
 F3Consolidated
  Condensed Statement of Changes in Stockholders' Equity for the Six Month
  Period Ended June 30, 2013 (unaudited)
 F4Consolidated
  Condensed Statements of Cash Flows for the Six Month Periods Ended June 30,
  2013 and 2012 (unaudited)
 F5Notes
  to Consolidated Condensed Financial Statements (unaudited)
 F6-F20Item
  2.
 Management's
  Discussion and Analysis of Financial Condition and Results of Operations
 2Item
  3.
 Quantitative
  and Qualitative Disclosures About Market Risk.
 9Item
  4.
 Controls
  and Procedures
 12PART
  II. OTHER INFORMATIONItem
  1A.
 RISK
  FACTORS
 13Item
  5.
 OTHER
  INFORMATION
 13Item
  6.
 EXHIBITS
 14SIGNATURES
 15


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ENVIRONMENTAL
  SOLUTIONS WORLDWIDE, INC.CONSOLIDATED CONDENSED
  BALANCE SHEETSJUNE 30,
 
 DECEMBER 31,2013
 
 2012(Unaudited)ASSETSCurrent AssetsCash and cash equivalents (Note 5)
 $2,550,537
 
 $ 253,998Accounts receivable, net of allowancefor
  doubtful accounts of $221,212 (2012 - $221,212) (Note 2)
 1,045,694
 
 1,322,320Inventory,
  net of reserve of $252,473 (2012 - $252,473)(Note 6)
 2,973,565
 
 1,962,278Prepaid expenses and sundry assets
 385,949
 
 133,438Total current assets
 6,955,745
 
 3,672,034Property, plant and equipment under construction (Note 7)
 122,827
 
 350,431Property, plant and equipment, net of accumulateddepreciation
  of $3,074,679 (2012 - $2,735,691) (Note 7)
 1,602,043
 
 1,382,653Patents and trademarks, net of accumulatedamortization
  of $0 (Note 2 and 3)
 42,000
 
 -$8,722,615
 
 $5,405,118LIABILITIES AND STOCKHOLDERS' EQUITYCurrent LiabilitiesAccounts payable (Note 15)
 $1,327,579
 
 $1,457,091Accrued
  liabilities (Note 2)
 679,431
 
 344,288Warranty
  provision (Note 2)
 1,648,158
 
 143,564Customer
  deposits
 90,810
 
 73,078Current portion of loan payable (Note 9)
 69,966
 
 68,926Total current liabilities
 3,815,944
 
 2,086,947Long-term liabilitiesPromissory notes payable (Note 10)
 1,967,335
 
 -Conversion option derivative liability (Note 11)
 4,117,424
 
 -Loan payable (Note 9)
 368,963
 
 404,207Total long-term liabilities
 6,453,722
 
 404,207Total liabilities
 10,269,666
 
 2,491,154Commitments and Contingencies (Note 16)Stockholders' Equity (Notes 13 and 14)Common stock, $0.001 par value, 250,000,000shares authorized; 113,464 (2012 - 112,049)shares issued and outstanding
 113
 
 112Additional paid-in capital
 57,201,483
 
 57,080,047Accumulated other comprehensive income
 344,183
 
 344,183Accumulated deficit
 (59,092,830)
 
 (54,510,378)Total stockholders' equity
 (1,547,051)
 
 2,913,964$8,722,615
 
 $5,405,118Going
  concern ( Note 1)Subsequent
  events (Note 20)The accompanying notes are an integral
  part of these consolidated condensed financial statements.
  F2


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ENVIRONMENTAL
  SOLUTIONS WORLDWIDE, INC.CONSOLIDATED CONDENSED STATEMENTS OF
  OPERATIONSAND COMPREHENSIVE LOSSFOR THE SIX AND THREE MONTH PERIOD
  ENDED JUNE 30,(UNAUDITED)SIX MONTHS PERIOD ENDED JUNE 30,
 
 THREE MONTHS PERIOD ENDED JUNE 30,2013
 
 2012
 
 2013
 
 2012Revenue
 $ 4,745,345
 
 $4,875,705
 
 $ 3,289,503
 
 $2,344,103Cost
  of revenue (Note 2 and 7)
 4,953,625
 
 3,199,736
 
 3,864,780
 
 1,456,810Gross
  (loss) profit
 (208,280)
 
 1,675,969
 
 (575,277)
 
 887,293Operating
  expensesMarketing,
  office and general expenses
 2,137,526
 
 1,865,510
 
 1,370,131
 
 675,060Officers'
  compensation and directors' fees (Note 15)
 435,707
 
 311,591
 
 130,494
 
 154,484Research
  and development costs (Note 2 and 7)
 240,611
 
 314,318
 
 158,871
 
 185,770Consulting
  and professional fees
 279,499
 
 135,613
 
 212,382
 
 79,629Depreciation
  and amortization (Note 7)
 112,578
 
 115,117
 
 57,458
 
 38,935Foreign
  exchange loss
 11,180
 
 43,043
 
 3,068
 
 11,612Loss
  on impairment of property, plant and equipment, net (Note 7)
 -
 
 28,945
 
 -
 
 -3,217,101
 
 2,814,137
 
 1,932,404
 
 1,145,490Loss
  from operations
 (3,425,381)
 
 (1,138,168)
 
 (2,507,681)
 
 (258,197)Gain
  on deconsolidation of subsidiary (Note 8)
 -
 
 453,900
 
 -
 
 -Interest
  on promissory notes payable (Notes 10 and 15)
 (72,311)
 
 -
 
 (68,811)
 
 -Amortization
  of discount on promissory notes payable (Note 10)
 (46,437)
 
 -
 
 (44,381)
 
 -Change
  in fair value of conversion option derivative liability (Note 11)
 (1,038,323)
 
 -
 
 (1,330,893)
 
 -Net
  loss and comprehensive loss
 $(4,582,452)
 
 $(684,268)
 
 $(3,951,766)
 
 $(258,197)Net
  loss per share (basic and diluted) (Note18)
 $(40.44)
 
 $ (6.24)
 
 $ (34.71)
 
 $ (2.35)Weighted
  average number of shares outstanding (basic and diluted)
 113,304
 
 109,725
 
 113,845
 
 109,725The accompanying notes are an integral
  part of these consolidated condensed financial statements.
 F3


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ENVIRONMENTAL
  SOLUTIONS WORLDWIDE, INC.CONSOLIDATED CONDENSED STATEMENTS OF
  CHANGES IN STOCKHOLDERS' EQUITYFOR THE SIX MONTH PERIOD ENDED JUNE
  30, 2013(UNAUDITED)Accumulated
 
 
 
 TotalCommon Stock
 
 Additional
 
 Other Comprehensive
 
 Accumulated
 
 Stockholders'Shares
 
 Amount
 
 Paid-In Capital
 
 Income
 
 Deficit
 
 EquityBalance,
  January 1, 2013
 112,049
 
 $ 112
 
 $57,080,047
 
 $ 344,183
 
 $(54,510,378)
 
 $2,913,964Net
  loss
 -
 
 -
 
 -
 
 -
 
 (4,582,452)
 
 (4,582,452)Stock-based
  compensation (Note 13)
 2,057
 
 2
 
 172,951
 
 -
 
 -
 
 172,953Repurchase
  of common stock (Note 2)
 (642)
 
 (1)
 
 (51,515)
 
 -
 
 -
 
 (51,516)Balance
  June 30, 2013
 113,464
 
 $ 113
 
 $57,201,483
 
 $ 344,183
 
 $(59,092,830)
 
 $ (1,547,051)The accompanying notes are an integral
  part of these consolidated condensed financial statements.
 F4


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ENVIRONMENTAL
  SOLUTIONS WORLDWIDE, INC.CONSOLIDATED CONDENSED STATEMENTS OF
  CASH FLOWSFOR THE SIX MONTH PERIOD ENDED JUNE
  30,2013
 
 2012(Unaudited)
 
 (Unaudited)Net
  loss
 
 
 $       (4,582,452)
 
 $          (684,268)Adjustments
  to reconcile net loss to net cashused
  in operating activities:Depreciation
  of property, plant and equipment
 
 
 339,019
 
 294,804Loss
  on impairment of property, plant and equipment
 
 -
 
 42,674Interest
  on promissory notes payable
 
 
 72,311
 
 -Amortization
  of discount on promissory notes payable
 
 46,437
 
 -Change
  in fair value of conversion option derivative liability
 1,038,323
 
 -Stock-based
  compensation
 
 
 172,953
 
 41,417Allowance
  for doubtful accounts
 
 
 -
 
 213,108Warranty
  provision
 
 
 1,504,900
 
 -Loss
  on write down of inventory
 
 
 230,002
 
 107,360Gain
  on disposal of property and equipment
 
 
 -
 
 (13,729)Gain
  on deconsolidation of subsidiary
 
 
 -
 
 (453,900)3,403,945
 
 231,734Decrease
  in cash flows from operatingactivities
  resulting from changes in:Accounts
  receivable
 
 
 276,626
 
 (547,312)Inventory
 
 
 (1,241,289)
 
 121,008Prepaid
  expenses and sundry assets
 
 
 (252,511)
 
 137,767Accounts
  payable and accrued liabilities
 
 
 133,014
 
 (264,675)Customer
  deposits
 
 
 17,732
 
 -(1,066,428)
 
 (553,212)Net
  cash used in operating activities
 
 
 (2,244,935)
 
 (1,005,746)Investing
  activities:Proceeds
  from sale of property, plant and equipment
 
 -
 
 13,729Acquisition
  of patent and trademarks
 
 
 (42,000)
 
 -Acquisition
  of property, plant and equipment
 
 
 (275,688)
 
 (148,019)Addition
  to property, plant and equipment under construction
 (55,118)
 
 (158,579)Net
  cash used in investing activities
 
 
 (372,806)
 
 (292,869)Financing
  activities:Proceeds
  from notes payable to related parties
 
 
 5,000,000
 
 -Payment
  for fractional shares
 
 
 (51,516)
 
 -Proceeds
  of loan payable
 
 
 -
 
 280,787Repayment
  of loan payable
 
 
 (34,204)
 
 (6,024)Repayment
  of capital lease obligation
 
 -
 
 (1,241)Net
  cash provided by financing activities
 
 
 4,914,280
 
 273,522Net
  change in cash and equivalents
 
 
 2,296,539
 
 (1,025,093)Cash
  and cash equivalents, beginning of period
 
 
 253,998
 
 1,103,649Cash
  and cash equivalents, end of period
 
 
 $        2,550,537
 
 $            78,556Supplemental
  disclosures:Cash
  interest paid
 
 
 $              6,884
 
 $                   -Property,
  plant and equipment included in accounts payable
 $            80,234
 
 $                   -The accompanying notes are an integral
  part of these consolidated condensed financial statements.
  F5


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NOTES
TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - NATURE
OF BUSINESS AND GOING CONCERN Environmental
Solutions Worldwide, Inc. (the "Company" or "ESW") through
its wholly-owned subsidiaries is engaged in the design, development,
manufacturing and sales of emissions control technologies. ESW also provides
emissions testing and environmental certification services with its primary
focus on the North American on-road and off-road diesel engine, chassis and
after-treatment market. ESW currently manufactures and markets a line of
catalytic emission control and enabling technologies for a number of
applications focused on the medium and heavy duty diesel (“MHDD”) retrofit market. The unaudited
consolidated condensed financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP"), which contemplates continuation of the Company as a
going concern. The Company has sustained recurring operating losses. As of June
30, 2013, the Company had an accumulated deficit of $59,092,830 and has cash
and cash equivalents of $2,550,537. ESW’s history of losses and the current
prevailing economic conditions all create uncertainty in the operating results
and, accordingly, there is no assurance that the Company will be successful in
generating sufficient cash flow from operations or achieving profitability in
the near future. As a result, there is substantial doubt regarding the
Company's ability to continue as a going concern. The Company may require
additional financing to fund its continuing operations and planned capital
investments. The Company's ability to continue as a going concern is dependent
on achieving and maintaining a profitable level of operations. Effective March
22, 2013, the Company entered into a note subscription agreement, a security
agreement and issued senior secured five (5) year convertible promissory notes
(collectively the “Notes”) to certain shareholders (the “Senior Secured
Lenders”). Pursuant to the Loan Agreements, the Senior Secured Lenders made
initial loans to the Company in the principal aggregate amount of $1.4 million
on March 22, 2013. On April 23,
2013 and June 27, 2013, the Company issued additional Notes in the aggregate
principal amount $3,600,000 to the Senior Secured Lenders, which represented
the last drawdown of the $5 million loan facility.  The additional Notes were
issued on terms substantially similar to the terms set forth in the Notes
previously issued on March 22, 2013. Proceeds from the additional Notes will be
used by the Company and its subsidiaries to fund the acquisition of assets from
Cleaire Advanced Emission Controls, LLC (“Cleaire”), working capital, planned
capital investments and other general corporate purposes. These unaudited
consolidated condensed financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. All adjustments,
consisting only of normal recurring items, considered necessary for fair
presentation have been included in these unaudited consolidated condensed
financial statements.These
unaudited condensed consolidated interim financial statements have been
prepared on the same basis as the annual financial statements and should be
read in conjunction with those annual financial statements filed on Form 10-K
for the year ended December 31, 2013. NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES BASIS OF
CONSOLIDATION The unaudited
consolidated condensed financial statements include the accounts of the Company
and its wholly-owned subsidiaries, ESWA, ESW Technologies Inc. (“ESWT”), ESW
Canada Inc. (“ESWC”), ESW CleanTech Inc (“ESWCT”) and Technology Fabricators
Inc. (“TFI”). All inter-company transactions and balances have been eliminated
on consolidation. Amounts in the unaudited consolidated condensed financial
statements are expressed in U.S. dollars. On April 18,
2013, ESW formed ESWCT, a wholly owned subsidiary. ESWCT, a Delaware
corporation, is the entity that houses ESW’s San Diego manufacturing operations.
ESWCT is located 7706 Trade Street, San Diego, CA, 92121. REVERSE
STOCK-SPLIT On May 24, 2013,
ESW affected a one-for-two thousand reverse stock split of its common stock. As
a result all outstanding common stock, and per share amounts contained in theunaudited
consolidated condensed financial statements and related notes have been
retroactively adjusted to reflect this reverse stock-split for all periods
presented. No fractional shares were issued resulting in a decrease to the
outstanding shares on a post-split basis. In lieu of fractional shares, holders
were paid cash equal to the number of shares of common stock held by any such
holder immediately prior to the reverse stock split that were not combined into
whole shares, multiplied by the fair market value of one pre-reverse stock
split share.  In lieu of issuing fractional shares, the Company paid holders cash
in aggregate of $51,516. F6


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ESTIMATES The preparation
of unaudited consolidated condensed financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the unaudited consolidated condensed financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates. Significant estimates
include amounts for inventory valuation, elements of an asset acquisition as of
the date of acquisition, impairment of and useful lives of property plant and
equipment, share-based compensation, conversion option derivative liability, warranty
provision, accrued liabilities and accounts receivable exposures. ALLOWANCE FOR
DOUBTFUL ACCOUNTS The Company
extends unsecured credit to its customers in the ordinary course of business
but mitigates the associated credit risk by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
estimated and recorded based on management's assessment of the credit history
with the customer and the current relationships with them. On this basis
management has determined that an allowance for doubtful accounts of $221,212
was appropriate as of both June 30, 2013 and December 31, 2012, respectively. INVENTORY Inventory is
stated at the lower of cost or market determined using the first-in, first-out
method. Inventory is periodically reviewed for use and obsolescence, and
adjusted as necessary. Inventory consists of raw materials, work-in-process,
finished goods and parts. PROPERTY, PLANT
AND EQUIPMENT UNDER CONSTRUCTION The Company
capitalizes customized equipment built to be used in the future day to day
operations at cost. Once complete and available for use, the cost for
accounting purposes is transferred to property, plant and equipment, where
normal depreciation rates apply. PROPERTY, PLANT
AND EQUIPMENT Property, plant
and equipment are recorded at cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the assets, generally 5 to 7 years.
Maintenance and repairs are charged to operations as incurred. Significant
renewals and betterments are capitalized. IMPAIRMENT OF
LONG-LIVED ASSETS The Company
follows the Accounting Standards Codification (“ASC”) Topic 360, which requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the assets' carrying amounts may not be
recoverable. In performing the review for recoverability, if future
undiscounted cash flows (excluding interest charges) from the use and ultimate
disposition of the assets are less than their carrying values, an impairment
loss represented by the difference between its fair value and carrying value,
is recognized. Properties held for sale are recorded at the lower of the
carrying amount or the expected sales price less costs to sell. Management
reviewed certain assets for impairment in the first quarter of 2012 (see Note 7
for details). PATENTS AND
TRADEMARKS Patents and
trademarks are measured at the cost incurred to acquire them from an
independent third party (see Note 3). Topic 350-20, Goodwill, and 350-30, General
Intangibles Other than Goodwill, in the Accounting Standards Codification ("ASC")
requires intangible assets with a finite life be tested for impairment whenever
events or circumstances indicate that the carrying amount of an asset (or asset
group) may not be recoverable. An impairment loss would be recognized when the
carrying amount of an asset exceeds the estimated discounted cash flow used in
determining the fair value of the asset. Future impairment tests for Patent and
Trademarks will be performed annually in the fiscal fourth quarter, or sooner
if warranted. Patents and
trademarks will be amortized on a straight-line basis over their estimated
useful lives of five years. Amortization expense was $0 for the six and three
month periods ended June 30, 2013 and 2012. F7


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FAIR
VALUE OF FINANCIAL INSTRUMENTS ASC Topic 820
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. Included in the ASC Topic
820 framework is a three level valuation inputs hierarchy with Level 1 being
inputs and transactions that can be effectively fully observed by market
participants spanning to Level 3 where estimates are unobservable by market
participants outside of the Company and must be estimated using assumptions
developed by the Company. The Company discloses the lowest level input
significant to each category of asset or liability valued within the scope of
ASC Topic 820 and the valuation method as exchange, income or use. The Company
uses inputs which are as observable as possible and the methods most applicable
to the specific situation of each company or valued item. The carrying
amounts of cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities approximate fair value because of their short-term nature.
Per ASC Topic 820 framework these are considered Level 2 inputs where inputs
other than Level 1 that are observable, either directly or indirectly, such as
quoted prices in active markets for similar assets or liabilities, quoted
prices for identical or similar assets or liabilities in markets that are not
active, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities. Our conversion
option derivative liability, which is measured at fair value on a recurring
basis, is measured using Level 3 inputs. Interest rate
risk is the risk that the value of a financial instrument might be adversely
affected by a change in the interest rates. The promissory notes payable and
loan payable both have fixed interest rates therefore the Company is exposed to
interest rate risk in that they could not benefit from a decrease in market
interest rates. In seeking to minimize the risks from interest rate
fluctuations, the Company manages exposure through its normal operating and
financing activities. DERIVATIVE
FINANCIAL INSTRUMENTS The Company does
not use derivative instruments to hedge exposures to cash flow, market, or
foreign currency risks. The Company
reviews the terms of convertible debt, equity instruments and other financing
arrangements to determine whether there are embedded derivative instruments,
including embedded conversion options that are required to be bifurcated and
accounted for separately as a derivative financial instrument. Also, in
connection with the issuance of financing instruments, the Company may issue
freestanding options or warrants to employees and non-employees in connection
with consulting or other services. These options or warrants may, depending on
their terms, be accounted for as derivative instrument liabilities, rather than
as equity. Derivative
financial instruments are initially measured at their fair value. For
derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income. To the extent that the initial fair values of the
freestanding and/or bifurcated derivative instrument liabilities exceed the
total proceeds received an immediate charge to income is recognized in order to
initially record the derivative instrument liabilities at their fair value. The discount
from the face value of the convertible debt or equity instruments resulting
from allocating some or all of the proceeds to the derivative instruments,
together with the stated rate of interest on the instrument, is amortized over
the life of the instrument through periodic charges to income, using the
effective interest method. The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is reassessed at the end of
each reporting period. If reclassification is required, the fair value of the
derivative instrument, as of the determination date, is reclassified. Any
previous charges or credits to income for changes in the fair value of the
derivative instrument are not reversed. Derivative instrument liabilities are
classified in the unaudited consolidated condensed balance sheet as current or
non-current based on whether or not net-cash settlement of the derivative
instrument could be required within twelve months of the balance sheet date. REVENUE RECOGNITION The Company
derives revenue primarily from the sale of its catalytic products. In
accordance with Staff Accounting Bulletin No. 104, revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the amount
is fixed or determinable and collection is reasonably assured. The Company also
derives revenue (approximately 8.5% and 8.4% of total revenue during the six
month period ended June 30, 2013 and 2012, respectively) from providing air
testing and environmental certification services. Revenues are recognized upon
delivery of testing services when persuasive evidence of an arrangement exists
and collection of the related receivable is reasonably assured.


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F8


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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 period. Common stock equivalents are
excluded from the computation of diluted loss per share when their effect is
anti-dilutive. INCOME TAXES Income taxes are
computed in accordance with the provisions of ASC Topic 740, which requires,
among other things, a liability approach to calculating deferred income taxes.
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in its financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
The Company is required to make certain estimates and judgments about the
application of tax law, the expected resolution of uncertain tax positions and other
matters. In the event that uncertain tax positions are resolved for amounts
different than the Company's estimates, or the related statutes of limitations
expire without the assessment of additional income taxes, the Company will be
required to adjust the amounts of the related assets and liabilities in the
period in which such events occur. Such adjustments
may have a material impact on ESW's income tax provision and results of
operations. SHIPPING AND
HANDLING COSTS The Company’s
shipping and handling costs of $48,277 and $47,062 are included in cost of
sales for the six month periods ended June 30, 2013 and 2012, respectively. For
the three month periods ended June 30, 2013 and 2012 shipping and handling
costs amounted to $27,417 and $20,519, respectively. Additionally, the Company
has recorded recoveries of these costs amounting to $40,377 and $35,997, which
are included in revenues for the six month periods ended June 30, 2013 and
2012, respectively.For the three
month periods ended March 31, 2013 and 2012 shipping and handling revenues
amounted to, $25,944 and $13,496, respectively. RESEARCH AND
DEVELOPMENT The Company is
engaged in research and development work. Research and development costs are
charged as operating expense of the Company as incurred. Any grant money
received for research and development work is used to offset these
expenditures. For the six month periods ended June 30, 2013 and 2012, the
Company expensed $240,611 and $314,318, net of grant revenues, respectively,
towards research and development costs.For the three
month periods ended June 30, 2013 and 2012, the Company expensed $158,871 and
$185,770, net of grant revenues, respectively, towards research and development
costs.For the six month periods ended
June 30, 2013 and 2012, gross research and development expense, excluding any
offsetting grant revenues, amounted to $281,557 and $314,318, respectively, and
grant money amounted to $40,946 and $0, respectively. For the three month
periods ended June 30, 2013 and 2012, gross research and development expense,
excluding any offsetting grant revenues, amounted to $199,817 and $185,770,
respectively, and grant money amounted to $40,946 and $0, respectively. FOREIGN CURRENCY
TRANSLATION The functional
currency of the Company and its foreign subsidiaries is the U.S. dollar. All of
the Company’s revenue and materials purchased from suppliers are denominated
in, or linked to, the U.S. dollar. Transactions denominated in currencies other
than the functional currency are converted to the functional currency on the
transaction date, and any resulting assets or liabilities are further
translated at each reporting date and at settlement. Gains and losses
recognized upon such translations are included within foreign exchange gain
(loss) in the unaudited consolidated condensed statements of operations and
comprehensive loss. PRODUCT
WARRANTIES The Company
provides for estimated warranty costs at the time of sale and accrues for
specific items at the time their existence is known and the amounts are
determinable. The Company estimates warranty costs using standard quantitative
measures based on industry warranty claim experience and evaluation of specific
customer warranty issues. The Company currently estimates warranty costs as 2%
of revenue. With the recent re-verification of the LongMile-STM, HorizonTM
PhoenixTM and LonestarTM products, ESW has estimated a one-time charge of
$1,000,000 related to its assumption of warranties for legacy Cleaire products in
the field. ESW has also estimated a one-time charge of $504,900 as a potential
one-off warranty expenses associated with the ThermaCat, the warranty charges are
based on estimating number of operational units, average remaining life and
cost of warrantable failure. These amounts,as well as the 2% provision have been
included in warranty provision as of June 30, 2013. F9


---



As
of June 30, 2013 and December 31, 2012, $1,648,158 and $143,564, respectively,
were accrued as warranty provisions on the balance sheet. For the six month
periods ended June 30, 2013 and 2012, the total warranty, service, service
travel and installation costs included in cost of revenue were $1,581,834 and
$142,434, respectively. For the three month periods ended June 30, 2013 and
2012, the total warranty, service, service travel and installation costs
included in cost of revenue were $1,562,722 and $95,824, respectively. SEGMENT
REPORTING ASC 280-10,
"Disclosures about Segments of an Enterprise and Related Information”,
establishes standards for the way that public business enterprises report
information about operating segments in the Company’s unaudited consolidated
condensed financial statements. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. ESW operates in two reportable
segments; medium and heavy duty diesel retrofit operations and air testing
services (see Note 17). ESW’s chief operating decision maker is the Company’s
Executive Chairman. COMPARATIVE
FIGURES Certain 2012
figures have been reclassified to conform to the current consolidated condensed
financial statement presentation. NOTE 3 – ASSET ACQUISITION On April 18,
2013, ESW through a new wholly owned subsidiary ESWCT, completed the
transactions contemplated by the Asset Purchase Agreement, dated April 1, 2013with David
P. Stapleton (the “Receiver”), as the receiver for Cleaire Advanced Emission
Controls, LLC, a Delaware limited liability company.  Prior to shutdown of its
operations in January 2013, Cleaire was engaged in the design, development and
manufacturing of retrofit emission control systems for diesel engines. Subject
to the terms and conditions of the asset purchase agreement, the Company was
selected as (and agreed to act as) the “stalking horse bidder” to buy certain
of Cleaire’s assets for a purchase price of $1.4 million plus a portion of
gross profit realized on a certain purchase order. The purchased assets
included inventory, machinery and equipment and patents and trademarks. Upon
the completion of the Asset Purchase Agreement and in accordance with FASB ASC
805 Business Combinations, the Company determined that the above noted Asset
Purchase Agreement transaction does not constitute a business combination, and
accordingly has accounted for it as an asset acquisition. The total consideration
paid was $1.4 million in cash, plus a portion of gross profit realized on a
certain purchase order. The
purchase price allocation is allocated based on the relative fair value of the
assets acquired at the asset acquisition date: Assets acquired
 
 April 18, 2013Inventory
 $
 1,260,000Machinery and
  equipment
 
 98,000Patents
  and trademarks
 
 42,000$
 1,400,000
 NOTE 4 – RECENTLY
ISSUED ACCOUNTING STANDARDS AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS There are no
recently adopted accounting pronouncements that impact the Company’s financial
statements. Management does
not believe that any recently issued, but not yet effective accounting
pronouncements, if adopted, would have a material effect on the accompanying
consolidated condensed financial statements. NOTE 5 - CASH
AND CASH EQUIVALENTS Cash and cash
equivalents include cash and highly liquid investments purchased with original
maturities of generally 90 days or less at the date of purchase. At June 30,
2013 and December 31, 2012, all of the Company's cash and cash equivalents
consisted of cash.  F10


---



NOTE
6 - INVENTORY Inventory
consists of: June
  30,
 
 December 31,Inventory
 
 2013
 
 2012Raw materials
 $
 862,368
 $
 914,310Work-in-process
 
 2,502,102
 
 1,234,375Finished
  goods
 
 46,535
 
 28,660Parts
 
 45,035
 
 37,4063,226,038
 
 2,214,751Less:
  reserve for inventory obsolescence
 
 (252,473)
 
 (252,473)Total
 $
 2,973,565
 $
 1,962,278
 During the six
and three month period ended June 30, 2013, $230,002 ESW recorded a write down
on inventory amounting to $230,002 relating to obsolete inventory in ESWCT
which was included in the cost of revenue.  (Six and three month period ended
June 30, 2012 - $0) NOTE 7 -
PROPERTY, PLANT AND EQUIPMENT Property, plant
and equipment consist of the following: June 30,
 
 December 31,Classification
 
 2013
 
 2012Plant,
  machinery and equipment
 $
 3,569,104
 $
 3,164,175Office
  equipment
 
 130,914
 
 75,572Furniture
  and fixtures
 
 1,063
 
 2,893Vehicles
 
 17,038
 
 -Leasehold
  improvements
 
 958,603
 
 875,7044,676,722
 
 4,118,344Less:
  accumulated depreciation
 
 (3,074,679)
 
 (2,735,691)$
 1,602,043
 $
 1,382,653
 Depreciation expense
recognized in the unaudited consolidated condensed statements of operations and
comprehensive loss was included in the following captions: For the six months periods endedJune 30,
 
 June 30,Depreciation Expense
 
 2013
 
 2012Depreciation
  expense included in cost of revenue
 $
 223,400
 $
 179,687Depreciation
  expense included in operating expenses
 
 112,578
 
 115,117Depreciation
  expense included in research and development costs
 
 3,041
 
 -Total
  depreciation expense
 $
 339,019
 $
 294,804For the three month periods endedJune 30,
 
 June 30,Depreciation Expense
 
 2013
 
 2012Depreciation
  expense included in cost of revenue
 $
 110,961
 $
 103,432Depreciation
  expense included in operating expenses
 
 57,458
 
 38,935Depreciation
  expense included in research and development costs
 
 -
 
 -Total
  depreciation expense
 $
 168,419
 $
 142,367
 At June 30, 2013
and December 31, 2012, the Company had $122,827 and $350,431, respectively, of
customized equipment under construction. F11


---



Certain
property and equipment are used as collateral for borrowings under the Machinery
and Equipment Loan Fund (“MELF”) facility (Note 9). All other property and
equipment are used as collateral for borrowing under the senior secured
convertible promissory notes payable (Note 10). At March 31,
2012, the Company recognized an impairment loss for furniture, fixtures and
office equipment located at its Canadian facility. The estimated recovery from
the sale of furniture, fixtures and office equipment was expected to be nominal
and, accordingly, the Company valued these assets as $0 and recorded an
impairment loss equal to the full amount of their carrying value. The details of
impairment losses recognized are summarized in the following table: For the six month period endedAsset grouping
 June 30, 2013
 June 30, 2012Furniture
  & fixtures (Abandonment)
 $ -
 $ 1,800Office
  equipment (Abandonment)
 -
 2,132Computer
  hardware (Abandonment)
 -
 18,475Computer
  software (Abandonment)
 -
 20,267Total
  impairment loss recognized
 -
 42,674Gain
  on disposal of plant and equipment
 -
 (13,729)Total
  impairment loss recognized
 $ -
 $28,945
 For the three
month periods ended June 30, 2013 and 2012impairment
losses recognized was $0. NOTE 8 – GAIN ON
DECONSOLIDATION OF SUBSIDIARY Effective
February 3, 2012 BBL Technologies Inc. (“BBL”), a non-operating subsidiary,
filed for bankruptcy in the Province of Ontario, Canada. At the time of filing,
BBL had no assets but had issued and outstanding redeemable Class A special
shares. The Company did not provide any guarantee in relation to these
redeemable Class A special shares. As a result of BBL’s filing for bankruptcy,
the Company lost its control over BBL and has deconsolidated BBL from the
unaudited consolidated condensed financial statements on the filing date. The
Company recorded a $453,900 gain in the unaudited consolidated condensed
statement of operations and comprehensive loss for the six and three month
period ended June 30, 2012, upon deconsolidation of BBL. NOTE 9 - LOAN
PAYABLE On April 25,
2012, the Company’s wholly-owned subsidiary ESWA entered into the MELF Facility
with the Commonwealth of Pennsylvania for up to $500,000 for the purchase of
equipment and related purchases. Two (2) draw-downs were permitted under the
MELF Facility by ESWA. The first draw-down of $280,787 was made under the MELF
Facility in connection with equipment purchased by ESWA on April 25, 2012 (the
“Closing Date”). ESWA made one (1) additional draw-down of $219,213 on November
13, 2012 per the terms of the MELF Facility so that the aggregate amount
borrowed under the MELF Facility amounts to $500,000. Terms of the MELF
Facility include initial interest at three (3%) percent per annum with monthly
payments and full repayment of the MELF Facility on or before the first day of
the eighty fifth (85) calendar month following the Closing Date. As part of the
loan agreement, within three years from the Closing Date ESWA is required to
create, or retain, at its current location a certain number of jobs that is specified
in the loan application. A breach by ESWA in the creation or maintenance of
these jobs shall be considered an event of default under the MELF Facility. In
the event ESWA defaults on any payments, the MELF Facility may be accelerated
with full payment due along with certain additional modifications including the
increase in interest to twelve and one half (12 1/2%) percent. The loan is
secured by certain property and equipment and a corporate guarantee of the
Company. As of June 30,
2013 and December 31, 2012, the loan payable amounted to $438,929 and $473,133,
respectively. For the six
month periods ended June 30, 2013 and 2012, the Company paid interest amounting
to $6,884 and $842 on the loan and also repaid principal in the amount of $34,204
and $6,024, respectively. For the three
month periods ended June 30, 2013 and 2012, the Company paid interest amounting
to $3,378 and $842 on the loan and also repaid principal in the amount of $17,167
and $3,008, respectively. As at June 30,
2013, $69,966 (December 31, 2013 - $68,926) of the loan is repayable in the
next 12 months with the remaining $368,963 (December 31, 2012 - $404,207)
repayable thereafter.


---



F12


---



Principal
on the loan is repayable as follows:  Year Ending December 31,
 Amount2013 (excluding 6 months ended June 30, 2013)
 $ 34,7212014
 71,0222015
 73,1822016
 75,408Thereafter
 184,596Total
 $438,929
 NOTE
10 – SENIOR SECURED CONVERTIBLE PROMISSORY NOTES On
March 22, 2013, the Company entered into a note subscription agreement, a
security agreement (the “Agreements”) and issued senior secured convertible
promissory notes (the “Notes”) to four accredited investors who are currently
shareholders (the “Holders”) and may be deemed affiliates of the Company.
Pursuant to the Agreements and Notes, the Holders made initial loans of
$1,400,000 to the Company. On
April 23, 2013 and June 27, 2013, the Company issued additional Notes in the
principal amount of $1,600,000 and $2,000,000, respectively, to the Senior
Secured Lenders. The Notes are due on March 22, 2018. The Notes are a part of a
senior secured convertible loan facility of up to $5,000,000 which is now fully
drawn down. The
Notes bear interest at a rate of 10% per annum compounded quarterly. Interest
is payable semi-annually in arrears in cash and at the Company’s election,
during the term of the Notes, up to two accrued and unpaid semi-annual interest
payments can be payable in the Company’s common stock valued at the lesser of $80
per share, subject to adjustment (“Conversion Price”), or the market value of
the Company’s common stock, with interest payments commencing September 30,
2013. At
the option of the Holders, all principal, and interest amounts outstanding
under all of the Notes may be exchanged for shares of the Company’s common
stock at the Conversion Price. The Conversion Price is subject to anti-dilution
adjustment in the event the Company at any time, while the Notes are
outstanding, issues equity securities including common stock or any security
convertible or exchangeable for shares of common stock for no consideration or
for consideration less than $80 per share. The anti-dilution protection
excludes shares of common stock issuable upon the exercise of options or other
securities granted to directors, officers, bona fide consultants and employees
of the Company issued pursuant to a board approved option or incentive plan or
stock, warrants or other securities issued to a bank or other financial
institution. The
Notes are secured by a lien on and a security interest in all assets of the
following wholly owned subsidiaries of the Company: TFI, ESWCT, ESWA and ESWT,
excluding certain collateral subject to pre-existing liens. The
Company further agreed to conduct a rights offering to all of its holders of
common stock, offering the right to purchase up to their pro-rata Company
ownership amount of senior secured convertible promissory notes. On
March 22, 2013,April 23, 2013
and June 27, 2013, the Company recorded a discount on the Notes equal to the
fair value of the conversion option derivative liability. This discount is
amortized using the effective interest rate method at an interest rate of 9.6%,
17.3% and 38.3% for the March 22, April 23 and June 27 Notes, respectively,
over the term of the Notes. Six months ended June 30, 2013
 
 Year ended
  December 31, 2012Face
  value of March 22, 2013 notes payable
 $
 1,400,000
 $Face
  value of April 23, 2013 notes payable
 
 1,600,000Face
  value of June 27, 2013 notes payable
 
 2,000,000
 
 -Total
  face value of promissory notes payable
 
 5,000,000Discount
  on promissory notes payable
 
 (3,079,102)
 
 -Amortization
  of discount on promissory notes payable
 
 46,437
 
 -$
 1,967,335
 $
 -
  During the six month periods ended June
30, 2013 and 2012, interest expense on the Notes amounted to $72,311 and $0,
respectively. During the three month periods ended June 30, 2013 and 2012,
interest expense on Notes amounted to $68,811 and $0, respectively.  F13


---



NOTE 11 – CONVERSION OPTION DERIVATIVE
LIABILITY The Company’s
Notes are subject to anti-dilution adjustments that allow for the reduction in
the Conversion Price in the event the Company subsequently issues equity
securities including common stock or any security convertible or exchangeable
for shares of common stock for no consideration or for consideration less than
$80 per share. Simultaneously with any reduction to the Conversion Price,
the number of shares of common stock that may be converted increases
proportionately. The Company accounted for the conversion option in accordance
with ASC Topic 815. Accordingly, the conversion option is not considered to be
solely indexed to the Company’s own stock and, as such, recorded as a
liability. The Company’s
conversion option derivative liability for the $1.4 million Notes was measured
at fair value at March 22, 2013 and subsequently at March 31, 2013 and June 30,
2013 using a binomial model. The Company’s conversion option derivative
liability for the $1.6 million Notes was measured at fair value at April 23,
2013 and June 30, 2013 using a binomial model.The Company’s conversion option
derivative liability for the $2 million Notes was measured at fair value at
June 27, 2013 and June 30, 2013 using a binomial model. Since the Conversion Price contains an
anti-dilution adjustment, the probability that the Conversion Price of the
Notes would decrease as the share price decreased was incorporated into the
valuation calculation. The
inputs into the binomial model are as follows: March 22, 2013
 April 23, 2013
 June 27, 2013
 June 30, 2013Closing
  share price
 $40
 $54
 $80
 $80Conversion
  price
 $80
 $80
 $80
 $80Risk
  free rate
 0.80%
 0.71%
 1.38%
 1.41%Expected
  volatility
 110%
 126%
 114%
 114%Dividend
  yield
 0%
 0%
 0%
 0%Expected
  life
 5 years
 4.92 years
 4.75 years
 4.75 years
  The fair value of the conversion option
derivative liability was $4,117,424
at June 30, 2013 and $0 at December 31, 2012. The change in the fair value of
the conversion option derivative liability of $1,038,323 was recorded as a loss
in the unaudited consolidated condensed statement of operations for the six
months ended June 30, 2013. The change in the fair value of the conversion option
derivative liability of $1,330,893 was recorded as a loss in the unaudited
consolidated condensed statement of operations for the three months ended June
30, 2013. Six months ended June 30, 2013
 
 Year ended December 31,
  2012Beginning
  balance: Conversion option derivative liability
 $
 -
 $
 -Origination
  of conversion option derivative liability on March 22, 2013
 
 526,810
 
 -Gain
  on change in fair value of conversion option derivative liability
 
 (292,570)
 
 -Ending
  balance: Conversion option derivative liability on March 31, 2013
 $
 234,240
 $
 -Origination
  of conversion option derivative liability on April 23, 2013
 
 905,569
 
 -Origination
  of conversion option derivative liability on June 27, 2013
 
 1,646,723
 
 -Loss
  on change in fair value of conversion option derivative liability
 
 1,330,893
 
 -Ending
  balance: Conversion option derivative liability on June 30, 2013
 $
 4,117,424
 $
 -
 NOTE
12 - INCOME TAXES The
Company calculates its income tax expense by estimating the annual effective
tax rate and applying that rate to the year-to-date ordinary income at the end
of the period. The Company records a tax valuation allowance when it is
more likely than not that it will not be able to recover the value of its deferred
tax assets. As of June 30, 2013 and 2012, the Company calculated its estimated
annualized effective tax rate at 0% and 0%, respectively, for both the United
States and Canada. The Company had no income tax expense on its $4,582,452
pre-tax loss for the six months ended June 30, 2013. The Company
recognized no income tax expense based on its $684,268 pre-tax loss for the six
months ended June 30, 2012. The Company
recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement with the relevant tax authority. The
Company recognizes interest accrued on uncertain tax positions as well as
interest received from favorable tax settlements within interest
expense. The Company recognizes penalties accrued on unrecognized tax
benefits within general and administrative expenses. As of June 30, 2013
and 2012, the Company had no uncertain tax positions. F14


---



The Company does not anticipate any significant
changes to the total amounts of unrecognized tax benefits in the next twelve
months. 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 June 30, 2013: United States
  – Federal
 2009
  – presentUnited States
  – State
 2009
  – presentCanada –
  Federal
 2010
  – presentCanada –
  Provincial
 2010
  – present
 NOTE 13 -
STOCKHOLDERS' EQUITY Effective
November 6, 2011, the Board approved restricted stock grants to 7 Board members
under the 2010 stock incentive plan. As per the terms of the grant each of the
7 Board members will receive 75 shares vesting in equal parts on December 31,
2011, December 31, 2012 and December 31, 2013 subject to the execution of the
requisite grant agreements. Stock-based compensation expense will be recorded
based on the vesting terms of the grants. Of the vested shares 350 restricted
shares of common stock have been issued as of June 30, 2013. Effective
December 10, 2012, the Board approved a one-time grant of 4,114 shares of
restricted common stock from treasury to a member of the Company’s Board for
services rendered as Executive Chairman, 2,057 shares of which were issued upon
the date of grant, and 2,057 shares of which were issued on February 28, 2013.
The shares of common stock were issued from treasury not under the Company’s
2010 stock incentive plan. Shares of
restricted common stock issued above were valued at the quoted market price on
the dates of grant. During the six month periods ended June 30, 2013 and 2012,
$152,243 and $0, respectively, has been recorded in officers’ compensation and
directors’ fees in the condensed consolidated statements of operations and
comprehensive loss for the fair value of each grant of restricted common
shares. These amounts along with stock option expense (Note 14) have been
included as stock-based compensation in the consolidated condensed statement of
changes in stockholders equity. NOTE 14 - STOCK
OPTIONS AND WARRANT GRANTS A
summary of option transactions, including those granted pursuant to the terms
of certain employment and other agreements is as follows: Stock
 WeightedPurchase
 AverageDetails
 Options
 Exercise PriceOUTSTANDING,
  JANUARY 1, 2012
 1,788
 $1,200Expired
 (1,200)
 (1,300)OUTSTANDING,
  DECEMBER 31, 2012
 588
 $1,000Expired
 (50)
 (2,000)OUTSTANDING,
  JUNE 30, 2013
 538
 $901
  At June 30, 2013
and December 31, 2012, the outstanding options have a weighted average
remaining life of 19 months and 23 months, respectively. No stock options
were granted during the six month periods ended June 30, 2013 and 2012. The
Black-Scholes option-pricing model used by the Company to calculate options and
warrant values was developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock purchase options and warrants. The model also
requires highly subjective assumptions, including future stock price volatility
and expected time until exercise, which greatly affect the calculated values.  F15


---



During the six month period ended June 30, 2013 and
2012, $20,708and$41,417
respectively, of stock option expense has been recorded in officers’
compensation and directors’ fees in the unaudited consolidated condensed
statements of operations and comprehensive loss. At
June 30, 2013, the Company had outstanding options as follows: Number
  of
 ExerciseOptions
 Price
 Expiration
  Date125
 $540
 August
  6, 2013300
 $1,300
 April
  15, 2015113
 $240
 June
  30, 2016538
 Warrants issued
in connection with various private placements of equity securities are treated
as a capital transaction and no income statement recognition is required. No warrants were
issued during the six month periods ended June 30, 2013 and 2012. NOTE 15 -
RELATED PARTY TRANSACTIONS In addition to
fees and salaries as well as reimbursement of business expenses, transactions
with related parties include: ·On April 19,
2011, the Company's Board ratified a Services Agreement (the "Orchard
Agreement") between the Company and Orchard Capital Corporation
("Orchard") which was approved by the Company's Compensation
Committee and was effective January 30, 2011. Under the Orchard Agreement,
Orchard agreed to provide services that may be mutually agreed to by and
between Orchard and the Company including those duties customarily performed by
the Chairman of the Board and executive of the Company as well as providing advice
and consultation on general corporate matters and other projects as may be
assigned by the Company's Board as needed. Orchard is controlled by Richard
Ressler. Certain affiliated entities of Orchard as well as Richard Ressler own
shares of the Company. During the six month periods ended June 30, 2013 and
2012, management fees charged to operations amounted to $150,000 and $150,000,
respectively. During the three month periods ended June 30, 2013 and 2012,
management fees charged to operations amounted to $75,000 and $75,000,
respectively. At June 30, 2013, $75,000 (December 31, 2012 - $75,000) is
included in accounts payable. ·Mr. Nitin
Amersey, a director of the Company, is listed as a control person with the
Securities and Exchange Commission of Bay City Transfer Agency Registrar Inc.,
the Company's transfer agent, and of Freeland Venture Resources Inc., which
provides Edgar filing services to the Company. During the six month periods
ended June 30, 2013 and 2012, the Company incurred fees to these entities
controlled by Mr. Amersey amounting to $58,029 and $2,351, respectively. During
the three month periods ended June 30, 2013 and 2012, the Company incurred fees
to these entities amounting to $8,595 and $1,050, respectively. ·Mr. John Dunlap,
a director of the Company, is the President of Dunlap Group, which provides
consulting services to the Company related to regulatory and regulatory
compliance matters. During the six month periods ended June 30, 2013 and 2012,
the Company paid fees to Dunlap Group amounting to $20,996 and $0,
respectively.During
the three month period ended June 30, 2013 and 2012, the Company paid fees to
Dunlap Group amounting to $8,683 and $0, respectively. ·At June 30,
2013, accounts payable includes $25,360 (December 31, 2012 - $0) due to
directors and companies controlled by directors of the Company. ·On March 22,
2013,April
23, 2013 and June 27, 2013, the Company issued an aggregate amount of $5,000,000
unsecured convertible promissory notes to certain shareholders and deemed
affiliates of certain members of the Board of Directors. During the six month
periods ended June 30, 2013 and 2012, interest expense on the Notes amounted to
$72,311 and $0, respectively. During the three month periods ended June 30,
2013 and 2012, interest expense on the Notes amounted to $68,811 and $0,
respectively.  F16


---



NOTE
16 - COMMITMENTS AND CONTINGENCIES LEASES Effective
November 24, 2004, the Company's wholly-owned subsidiary, ESWA, entered into a
lease agreement for approximately 40,220 square feet of leasehold space at 200
Progress Drive, Montgomeryville, Pennsylvania. The leasehold space houses the
Company's research and development facilities and also houses ESW’s
manufacturing operations. The lease commenced on January 15, 2005. Effective
October 16, 2009, the Company's wholly-owned subsidiary ESWA entered into a
lease renewal agreement with Nappen & Associates for the leasehold property
in Pennsylvania. There were no modifications to the original economic terms of
the lease under the lease renewal agreement. Under the terms of the lease
renewal, the lease term was extended to February 28, 2013. Effective September
24, 2012, ESWA entered into a second lease amendment agreement with Nappen
& Associates for the leasehold property in Pennsylvania, whereby ESWA
extended the term of the lease agreement by an additional 5 years. There were
no modifications to the original economic terms of the lease. Under the terms
of the second lease renewal, the lease will expire on February 28, 2018. On June 7, 2013,
the Company's wholly-owned subsidiary, ESWCT, entered into a commercial real
estate lease with Trepte Industrial Park, Ltd., a California limited
partnership.  ESWCT leased approximately 18,000 square feet of commercial
property located in San Diego, California, to be used primarily for housing
ESWCT’s manufacturing and diesel particulate filter cleaning operations. The
Lease provides for a 37-month lease term (commencing July 1, 2013), with an option
exercisable by ESWCT to extend the lease term for two additional 36-month
periods. The current base rent under the Lease is $15,300 per month.
Concurrently with the signing of the Lease and pursuant to the terms thereof,
ESWCT paid to the Lessor an amount equal to $155,600, which amount reflects the
first month’s base rent, the security deposit, the funding required for
improvements done by the Lessor at ESWCT’s request, and pre-paid rent. The
amount will be credited against monthly base rent payable by ESWCT beginning in
January 2014 and each month thereafter, provided that ESWCT shall not have
defaulted under the Lease. The following is
a summary of the minimum annual lease payments for the Pennsylvania and San
Diego leases: Year
  Ending December 31,
 
 Amount2013
  (excluding the six months ended June 30, 2013)
 $
 182,2952014
 
 242,3442015
 
 372,9352016
 
 279,7992017
 
 180,9902018
 
 30,165Total
 $
 1,288,528
 LEGAL MATTERS From time to
time, the Company may be involved in a variety of claims, suits, investigations
and proceedings arising from the ordinary course of our business, collections
claims, breach of contract claims, labor and employment claims, tax and other
matters. Although claims, suits, investigations and proceedings are inherently
uncertain and their results cannot be predicted with certainty, ESW believes
that the resolution of current pending matters will not have a material adverse
effect on its business, consolidated financial position, results of operations
or cash flow. Regardless of the outcome, litigation can have an adverse impact
on ESW because of legal costs, diversion of management resources and other
factors. The Company is
pursuing a lawsuit in New York for collection of unpaid invoices related to
goods delivered to a former distributor. The Company was notified of a revised
claim filed in the Ontario, Canada Superior Court of Justice on a dispute with
a past vendor of ESWC, this claim was previously deemed settled, due to
inaction by the vendor. That motion is pending: the Court has not ruled upon
it. The Company cannot predict the outcome of this matter at this time. The Company is
also exposed to contingencies on its various warranty programs related to the
products produced by TFI and ESWCT. The Company has recorded a provision for
these as disclosed in Note 2; however, the actual amount of loss could be
materially different. NOTE 17 –
OPERATING SEGMENTS The Company has
two principal operating segments, air testing services and catalyst
manufacturing for MHDD retrofits. These operating segments were determined
based on the nature of the products and services offered. Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. The Company’s Executive Chairman has been identified as the chiefoperating decision-maker, and directs the allocation of
resources to operating segments based on the profitability and cash flows of
each respective segment.


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F17


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The
Company evaluates performance based on several factors, of which the primary
financial measure is net income. The accounting policies of the business
segments are the same as those described in “Note 2: Summary of Accounting
Policies.” No intersegment sales were recorded for the six month periods ended
June 30, 2013 and 2012. The following tables show the operations and certain
assets of the Company’s reportable segments: For
  the six months period ended June 30, 2013MHDD Retrofit
 
 Air Testing
 
 Unallocated
 
 TotalRevenue
 $
 4,344,324
 $
 401,021
 $
 -
 $
 4,745,345Net loss
 $
 (1,770,395)
 $
 (483,936)
 $
 (2,328,121)
 $
 (4,582,452)For the three months
  period ended June 30, 2013MHDD Retrofit
 
 Air Testing
 
 Unallocated
 
 TotalRevenue
 $
 3,105,196
 $
 184,307
 $
 -
 $
 3,289,503Net loss
 $
 (1,592,915)
 $
 (287,573)
 $
 (2,071,278)
 $
 (3,951,766)As of June 30, 2013MHDD Retrofit
 
 Air Testing
 
 Unallocated
 
 TotalTotal assets
 $
 4,904,410
 $
 1,417,512
 $
 2,400,693
 $
 8,722,615Property, plant and equipmentunder construction
 $
 -
 $
 122,827
 $
 -
 $
 122,827Property, plant and equipment
 $
 433,108
 $
 1,168,935
 $
 -
 $
 1,602,043Accounts receivable
 $
 990,229
 $
 55,465
 $
 -
 $
 1,045,694Inventories
 $
 2,966,343
 $
 7,222
 $
 -
 $
 2,973,565Patents
 $
 42,000
 $
 -
 $
 -
 $
 42,000For the six months period
  ended June 30, 2012MHDD Retrofit
 
 Air Testing
 
 Unallocated
 
 TotalRevenue
 $
 4,464,541
 $
 411,164
 $
 -
 $
 4,875,705Net loss
 $
 (324,884)
 $
 (450,135)
 $
 90,751
 $
 (684,268)For the three months
  period ended June 30, 2012MHDD Retrofit
 
 Air Testing
 
 Unallocated
 
 TotalRevenue
 $
 2,083,458
 $
 260,645
 $
 -
 $
 2,344,103Net (loss) income
 $
 422,006
 $
 63,109
 $
 (743,312)
 $
 (258,197)As of December 31, 2012MHDD Retrofit
 
 Air Testing
 
 Unallocated
 
 TotalTotal assets
 $
 3,614,649
 $
 1,776,344
 $
 14,125
 $
 5,405,118Property, plant and equipmentunder construction
 $
 1,399
 $
 349,032
 $
 -
 $
 350,431Property, plant and equipment
 $
 205,135
 $
 1,177,518
 $
 -
 $
 1,382,653Accounts receivable
 $
 1,203,355
 $
 118,965
 $
 -
 $
 1,322,320Inventories
 $
 1,952,276
 $
 10,002
 $
 -
 $
 1,962,278
 All of the
Company’s revenue for the six and three month periods ended June 30, 2013 and
2012 was derived from the United States. Net property, plant and equipment
(including property, plant and equipment under construction) located outside of
the United States are less than 10% of total assets at June 30, 2013 and 2012. F18


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NOTE
18 - LOSS PER SHARE Potential common
shares of 538 related to ESW's outstanding stock options and 0 shares related
to ESW's outstanding warrants, were excluded from the computation of diluted
loss per share for the six and three month period ended June 30, 2013 because
the inclusion of these shares would be anti-dilutive. We have also excluded 62,500
common shares that would be issuable based on an exercise price of $80 per
share related to the senior secured convertible promissory notes, as well as
the additional shares issuable if the holders elect to convert interest or if the
conversion option derivative liability is triggered by a future financing, from
the computation of diluted loss per share as their effect would be
anti-dilutive. Potential common
shares of 712 related to ESW's outstanding stock options and 772 shares related
to ESW's outstanding warrants, were excluded from the computation of diluted
loss per share for the six and three month period ended June 30, 2012 because
the inclusion of these shares would be anti-dilutive. NOTE 19 - RISK
MANAGEMENT CONCENTRATIONS
OF CREDIT RISK AND ECONOMIC DEPENDENCE The Company's
cash balances are maintained in various banks in Canada and the United States.
Deposits held in banks in the United States are insured up to $250,000 per
depositor for each bank by the Federal Deposit Insurance Corporation. Deposits
held in banks in Canada are insured up to $100,000 Canadian per depositor for
each bank by The Canada Deposit Insurance Corporation, a federal crown
corporation. Actual balances at times may exceed these limits. Accounts
Receivable and Concentrations of Credit Risk: The Company performs on-going
credit evaluations of its customers' financial condition and generally does not
require collateral from its customers. Three of its customers accounted for
26.8%, 14.5% and 10.1%, respectively, of the Company's revenue during the six
month period ended June 30, 2013 and 36.3%, 27.1% and 6.1%, respectively, of
its accounts receivable as of June 30, 2013. Three of its
customers accounted for 19.5%, 11.4% and 10.6%, respectively, of the Company's
revenue during the six month period ended June 30, 2012 and 26.9%, 21.0% and
13.1%, respectively, of its accounts receivable as of June 30, 2012. For the six
month period ended June 30, 2013, the Company purchased approximately 13.4% and
11.1% of its inventory from two vendors. For the six month period ended June
30, 2012, the Company purchased approximately 20.1% and 15.1% of its inventory
from two vendors. The accounts payable to these vendors aggregated $466,433 and
$334,575 as of June 30, 2013 and 2012, respectively. NOTE 20 -
SUBSEQUENT EVENTS CHANGES IN
MANAGEMENT On August 1,
2013, Environmental Solutions Worldwide, Inc. (the “Company”) appointed Brian
Webster to the position of Chief Operating Officer.  The terms of Mr. Webster’s
employment were not materially amended in connection with this appointment. Virendra
Kumar, the Company’s previous Vice President of Operations, was promoted to
Chief Commercial Officer on August 1, 2013.  Concurrently on August 1, 2013,
Frank Haas’s title was changed from Chief Regulatory and Technology Officer of
the Company to Director of Engineering. CHANGES IN AGREEMENTS On August 1,
2013, the Company's Board ratified a change to the compensation terms under Services
Agreement between the Company and Orchard Capital Corporation. Compensation
under the agreement was increased to $430,000 from $300,000 per annum effective
August 1, 2013. CHANGES IN EXECUTIVE
COMPENSATION On August 1,
2013, upon the recommendation of the Compensation Committee the Company's Board
ratified a change to the compensation for the Chief Commercial Officer and
Chief Financial Officer. Compensation for both positions was increased to $180,000
from $150,000 per annum effective August 1, 2013. For 2013 the Non-equity
incentive plan opportunity was ratified at $65,000 for the two positions, non-equity
incentive compensation is calculated by assigning 70% weight to quantitative
financial goals (35% to each of revenue and EBITDA) and 30% to non-quantitative
goals. F19


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CHANGES IN BOARD
COMPENSATION On August 1,
2013, the Company's Board ratified a change to the board fee composition. The
Chairman of the Audit Committee and Chairman of the Compensation Committee each
earn a fee equated to $70,000 per annum, the board approved amendment to the
payout of the fees with up to $36,000 paid in cash ($3,000 per month), and
$34,000 paid in restricted stock at $80 per share with a 3 year vesting period.
For other board members (excluding Executive Chairman, Chairman of the Audit
Committee, and Chairman of the Compensation Committee), each board member earns
a fee of $40,000 per annum, the board approved amendment to the payout of the
fees with up to $20,000 per annum, payable in cash at the board members
election, and the remaining portion in stock issued at $80 per share, with a
three year vesting period from the time of issuance. On August 1,
2013, the Company's Board approved a one-time issuance to each board member
(excluding Executive Chairman) 500 shares of restricted stock, with 167 shares
vested at the time of issuance and with a remaining 2 years vesting period from
the time of issuance. The shares are related to compensation for 2012
restricted stock issuance that was not completed in 2012. F20


---



ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS The following
discussion should be read in conjunction with ESW's consolidated condensed
financial statements and Notes thereto included elsewhere in this Report. This Form 10-Q
contains certain forward-looking statements regarding, among other things, the
anticipated financial and operating results of ESW's business. Investors are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. ESW undertakes no obligation to
publicly release any modifications or revisions to these forward-looking
statements to reflect events or circumstances occurring after the date hereof
or to reflect the occurrence of unanticipated events. In connection with the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995,
ESW cautions investors that actual financial and operating results may differ
materially from those projected in forward-looking statements made by, or on
behalf of, ESW. Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors that may cause the actual results,
performance, or achievements to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. This report should be read in conjunction with
ESW's Annual Report on Form 10-K, for the year ended December 31, 2012 as filed
with the Securities and Exchange Commission. GENERAL OVERVIEW Environmental
Solutions Worldwide Inc. ("we," "us," "ESW" or
the "Company") is a publicly traded company engaged through its
wholly-owned subsidiaries ESW Canada Inc. (“ESWC”), ESW America Inc. (“ESWA”),
Technology Fabricators Inc. (“TFI”), ESW CleanTech Inc (“ESWCT”) and ESW
Technologies Inc. (“ESWT”), (together the "ESW Group® of Companies")
in the design, development, manufacture and sale of emission technologies and
services. ESW is currently focused on the medium and heavy duty diesel engine
market for on-road and off-road vehicles as well as the utility engine, mining,
marine, locomotive and military industries. ESW also offers engine and after
treatment emissions verification testing and certification services. ESW
was incorporated in the State of Florida in 1987. Our principal executive
offices are located at 200 Progress Drive, Montgomeryville, PA, 18936. Our
telephone number is (905) 695-4142 and (215) 699-0730. Our website is
www.eswgroup.com. Information contained on our website does not constitute a
part of this 10-Q report. ESW's focus is
to be a leading player in the environmental emissions market by providing
leading-edge catalyst technology as well as best-in-class engine, motorcycle /
ATV and vehicle emissions testing services. The Company's strategy is centered
on identifying and deploying resources against its "sweet-spot"
products, where ESW has identified its core competencies and differentiation in
the marketplace. ESW's core geographical focus is North America, and the
Company will opportunistically explore business development opportunities in
other markets if accretive to the Company in the short term. By focusing
financial, human and intellectual capital on ESW's core competencies and
markets, the Company is targeting profitable growth in the short term and value
creation for its shareholders over the long term. In 2013, ESW is
executing on the following items to succeed in its business strategy: •
 Deliver
  value derived from the purchase of the Cleaire assets.•
 Increase
  the revenue and margin opportunities from its on-road and off-road retrofit
  product lines by identifying and focusing resources on its “sweet-spots”.•
 Expand
  its North American distribution network and increase its “share of wallet”
  with the funding agencies by becoming the supplier of choice of emissions
  compliance solutions to the market.•
 Seek
  complementary partnerships that provide growth opportunities for its core
  businesses.•
 Invest
  in new product and process technologies to broaden its array of products
  available to distributors and end-users.•
 Act
  as a trusted emissions solution provider to regulators and clients.•
 Capitalize
  on ESW America's unique geographical presence and perform engine emissions
  verification test protocols to provide value-added services in the testing
  verification /certification for ESW as well as third party products.•
 Implement
  a continuous improvement and performance based culture, focused on
  identifying product design improvements, streamlining processes and
  optimizing manufacturing capabilities.•
 Focus
  on delivering exceptional product quality and customer service.
 ESW
continues to focus on optimizing the Company's operations around its
"sweet spots" and capturing a greater market share in the catalytic
converter retrofit and emissions testing markets whilst ensuring steps towards
profitable growth. The key factors that are in ESW's favor are: (a) continued
regulatory push for emissions reductions in the United States, (b) funding
available from public agencies, (c) market-leading Level III active catalytic
converter technologies and an established distribution network in North
America, and (d) CARB and EPA certification and verification capable emissions
and durability testing services. 2


---



ESW
believes that it can improve and achieve profitability and grow its business by
continuing to pursue the following strategy: ·Focus on
delivering controlled growth to its shareholders. Provide integrated solutions to the
     emissions market by leveraging its product development, testing and
     certification services, and distribution and post-sale services
     capabilities.
 Center the Company's sales strategy
     around identified “sweet-spots” that will allow manufacturing efficiency
     gains and optimized resource allocation. ·Educate
the end customers and regulatory agencies about the technology as a supplier of
choice emissions compliance solutions in the market. ·Enhance
customer service functions. ·Work with
vendors to optimize ESW's material buys and lead times. ·Constantly
review operations, processes and products under a Continuous Improvement /
Performance Based culture. With this growth
strategy in focus, ESW had entered into an asset purchase agreement with the
acting receiver for Cleaire. Cleaire was engaged in the design, development and
manufacturing of retrofit emission control systems for diesel engines. On April
18, 2013, the Court issued the sale order to consummate the transactions
contemplated by the Asset Purchase Agreement for a purchase price of $1.4
million plus a portion of gross profit realized on a certain purchase order. Upon the
completion of the Asset Purchase Agreement and in accordance with FASB ASC 805
Business Combinations, the Company determined that the above noted Asset
Purchase Agreement transaction does not constitute a business combination, and
accordingly has accounted for the transaction as an asset acquisition. Effective April
18, 2013 the Company established a new wholly owned Subsidiary, ESWCT, a
Delaware corporation, which houses the assets purchased from Cleaire. ESWCT will
operate out of San Diego, California. On May 17, 2013,
ESW received notification from California Air Resource Board (“CARB”) that
ESWCT has met the requirements under Verification Procedure, Warranty, and In-Use
Compliance Requirements for In-Use Strategies to Control Emissions from Diesel
Engines, and the verifications of the LongMile-STM and HorizonTM products have
been transferred to ESWCT from Cleaire. On June 18, 2013, CARB notified ESW
that the verifications of the VistaTM and LongviewTM products have been
transferred to ESWCT form Cleaire. Effective June
7, 2013, ESWCT entered into a commercial real estate lease with Trepte
Industrial Park, Ltd., a California limited partnership. ESWCT leased
approximately 18,000 square feet of commercial property located in San Diego,
California, for housing ESWCT manufacturing and diesel particulate filter
cleaning operations. The Lease has a 37-month lease term (commencing on July 1,
2013), with an option to extend the lease term for two additional 36-month
periods. The current base rent under the Lease is $15,300 per month. ESWCT
operations in San Diego California will currently produce the LongMile-STM,
HorizonTM,VistaTM
and LongviewTM, in the longer term both locations in Pennsylvania and California
will be synergized and be used to produce all products or related components. ESW has made
significant investments in research and development and obtaining regulatory
approvals for its technologies. ESW's XtrmCat
product designed for locomotive, Tier 0, turbocharged EMD 645 and 710 engines
was tested at an EPA recognized facility for certification during March and
April 2011 along with the marine product together with a partner company. We
are exploring opportunities to obtain certifications for the aforementioned
locomotive engines. ESW is currently
pursuing regulatory verifications of the ThermaCat-e, PhoenixTM and SkylineTM Level
III Plus Diesel Particulate Filter System for off-road engines. ESW is also
pursuing the verification of two other passive off road level III products. ESW believes
that with the current and additional verification of products, ESW covers a
significant portion of the market and gives ESW the competitive advantage to be
the trusted supplier of emissions compliance solution in retrofit market. The cost of
developing a complete range of products to meet regulations is substantial. ESW
believes that it possesses a competitive advantage in ensuring regulatory
compliance by leveraging its testing and research facility in Montgomeryville,
Pennsylvania to support its certification and verification efforts.
Historically, ESW has also managed to offset some of these development costs
through the application of research grants and tax refunds. In the first
quarter of 2013, ESW experienced a seasonal reduction in demand for its
ThermaCat, in addition to a growth in market demand for passive-regeneration
retrofit products. Additionally, the shutdown of Cleaire’s operations in
January 2013 created a level of uncertainty in the retrofit market further
affecting sales of the ThermaCat. In the second quarter of 2013 ThermaCat sales
improved primarily due to seasonality and increased enforcement action by CARB. 3    Our
ESW America Air Testing business revenue has remained consistent in the first
half of 2013 as compared to the same period in 2012.  ESWA contributed a total
of $401,021 of revenue during the first half of 2013. During the first
half of 2013 ESW entered into a senior secured convertible loan facility of $5
million with certain shareholders of the Company.  As of June 30, 2013 the loan
facility has been fully funded. Proceeds of the Loan have funded and will fund
the purchase of the Cleaire assets, working capital, planned capital
investments and other general corporate purposes. On January 23,
2013, ESW’s Board of Directors approved a one-for-two thousand reverse split of
the Company’s common stock. Upon the completion of the reverse stock split,
which was effective on May 24, 2013, there was no change to the Company’s
authorized shares of common stock, which remained 250,000,000 shares, par value
$0.001 per share. Issued and outstanding common stock was reduced from
228,213,173 shares to approximately 113,464 shares.  4     COMPARISON
OF THE SIX MONTH PERIOD ENDED JUNE 30, 2013 TO THE SIX MONTH PERIOD ENDED JUNE
30, 2012 RESULTS OF
OPERATIONS The following
management's discussion and analysis of financial condition and results of
operations (MD&A) should be read in conjunction with the MD&A included
in ESW's Annual Report on Form 10-K, for the year ended December 31, 2012. Revenues
for the six month period ended June 30, 2013, decreased by 2.7 percent, to $4,745,345
from $4,875,705 for the comparable period in 2012. The decrease in revenue is
related to reduced sales of military product in 2013 versus prior year, the
growth in market demand for passive-regeneration retrofit products in the first
half of 2013, and uncertainty in the retrofit market with the shutdown of
Cleaire’s operations. Cost of revenue
as a percentage of revenues for the six month period ended June 30, 2013 was 104.4
percent compared to 65.6 percent for the six month period ended June 30, 2012.
Cost of revenue for the period ended June 30, 2013 increased by $1,753,889 or 54.8
percent. The primary reason for the increase in the cost of revenue during the six
month period ended June 30, 2013 was the inclusion of an estimated one-time
warranty charge of $1,000,000 related to the assumption of warranties for
legacy Cleaire products in the field as well as an additional one-time warranty
charge of $504,900 related topotential one-off warranty expenses associated with
the ThermaCat. ESW also recorded a one-time write down on inventory amounting
to $230,002 relating to obsolete inventory in ESWCT which was included in the
cost of revenue. Consequently, gross margin for the six month period ended June
30, 2013 was negative 4.4 percent compared to 34.4 percent for the six month
period ended June 30, 2012. Marketing,
office and general expenses for the six month period ended June 30, 2013 increased
14.6 percent to $2,137,526 from $1,865,510 for the same period in 2012. The increase
is primarily due to: (a) increase in factory expense of $173,994 mainly
resulting from setup expenses for ESWCT, (b) an increase in general
administration expenses of $97,303 primarily due to increased business
insurance expenses and ESWCT related expenses, (c) increase in administration
salaries and wages of $144,112 mainly attributed to start of operations for
ESWCT, and (d) increase in investor relation costs of $195,982 related to costs
in connection with corporate actions including the 2000:1 reverse split. The
increases were offset by (a) decrease in customer service, sales and marketing
and wages and selling expenses of $273,310 mainly related to a 2012 bad debt
provision which was not incurred in 2013, and (b) decrease in facility expenses
of $66,065 resulting from rent and cost savings related to the release of the
Canadian facility in 2012. Officers’
compensation and directors’ fees for the six month period ended June 30, 2013
increased by $124,116, or 39.8 percent, to $435,707 from $311,591 for six month
period ended June 30, 2012. The increase is mainly related to stock based
compensation expense incurred on issuance of shares of restricted common stock
to a member of the Company’s Board. Research and
development ("R&D") expenses for the six month period ended June
30, 2013 decreased by $73,707, or 23.4 percent, to $240,611 versus the six
month period ended June 30, 2012. The primary driver of R&D expenses for
the six month period ended June 30, 2013 was related to ESW's pursuit of the
verification expansion of its Level III productand transfer of verifications for
new products related to ESWCT. ESW benefitted during the first six month period
of 2013 from research and development tax credits amounting to $40,946. During six
month period ended June 30, 2012 there was no grant funding or tax credit to
offset R&D cost. Consulting
and professional fees for the six month period ended June 30, 2013 increased by
$143,886, or 106.1 percent, to $279,499 from $135,613 for six month period
ended June 30, 2012. The increase is mainly due to legal and consulting fees in
connection with corporate actions including the setup of the ESWCT subsidiary
and acquisition of certain assets from Cleaire. Depreciation
and amortization expense for the six month period ended June 30, 2013 decreased
by $2,539, or 2.2 percent to $112,578 from $115,117 for the six month period
ended June 30, 2012. Foreign
exchange loss for the six month period ended June 30, 2013, was $11,180 as
compared to a loss of $43,043 for the six month period ended June 30, 2012.
This is a result of the fluctuation in the exchange rate of the Canadian Dollar
to the United States Dollar. Impairment
loss for the six month period ended June 30, 2013 was $0. For the six month
period ended June 30, 2012, ESW had valued the impairment loss at $28,945 for
the balance of the office equipment, furniture and fixtures of ESW Canada Inc.
The former landlord of the Canadian property terminated the lease for the
facility as of May 1, 2012. Loss
from operations for the six month period ended June 30, 2013 increased by $2,287,213
to $3,425,381 from $1,138,168 for the six month period ended June 30, 2012.
ESW’s loss from operations for the six month period ended June 30, 2013
included the following non-cash items: a one-time warranty provision of
$1,504,900, depreciation expenses of $339,019, loss on write down of inventory of
$230,002 and stock based compensation expense of $172,951.  In addition, loss
from operations was higher in the six month period ended June 30, 2013 as
compared to June 30, 2012 due to expenses related to the set-up of ESWCT operations
in San Diego. 5    Effective February 3, 2012 ESW’s wholly-owned
non-operational subsidiary BBL Technologies Inc., (“BBL”) filed for bankruptcy
in the Province of Ontario, Canada. Due to the insolvency of BBL, the
redeemable Class A special shares were cancelled and the Company recorded a
$453,900 gain on the consolidated condensed statement of operations and
comprehensive loss. During the six
month period ended June 30, 2013, the Company recorded the following costs and
gain related to a senior secured convertible loan facility: •
 $71,311
 -
 Interest
  on notes payable to related parties•
 $46,437
 -
 Debt
  related discount amortization•
 $1,038,323
 -
 Loss
  on convertible derivative
 No
costs related to financing and debt transactions were incurred in the six month
period ended June 30, 2012. COMPARISON
OF THE THREE MONTH PERIOD ENDED JUNE 30, 2013 TO THE THREE MONTH PERIOD ENDED
JUNE 30, 2012 RESULTS OF
OPERATIONS The following
management's discussion and analysis of financial condition and results of
operations (MD&A) should be read in conjunction with the MD&A included
in ESW's Annual Report on Form 10-K, for the year ended December 31, 2012. Revenues for the
three month period ended June 30, 2013, increased by 40.3 percent, to $3,289,503
from $2,344,103 for the comparable period in 2012. In the second quarter of
2013, sales of the ThermaCat significantly rose relative to a slow first
quarter. Cost of revenue
as a percentage of revenues for the three month period ended June 30, 2013 was
117.5 percent compared to 62.1 percent for the three month period ended June
30, 2012. Cost of revenue for the period ended June 30, 2013 increased by $2,407,970
or 165.3 percent. The primary reason for the increase in the cost of revenue
during the three month period ended June 30, 2013 was the inclusion of an
estimated one-time warranty charge of $1,504,900 related to the assumption
of warranties for legacy Cleaire products in the field as well as potential
one-off warranty expenses associated with the ThermaCat. ESW also
recorded a one-time write down on inventory amounting to $230,002 which was included
in the cost of revenue. Consequently, gross margin for the three month period
ended June 30, 2013 was negative 17.5 percent compared to 37.9 percent for the three
month period ended June 30, 2012. Marketing,
office and general expenses for the three month period ended June 30, 2013
increased 103.0 percent to $1,370,131 from $675,060 for the same period in
2012. The increase is primarily due to: (a) increase in factory expense of $208,141
mainly resulting from setup expenses for ESWCT, (b) increase in general
administration expenses of $193,411 primarily due to the increased business
insurance expenses and ESWCT related expenses, (c) increase in administration
salaries and wages of $135,937 mainly attributed to start of operations for ESWCT,
(d) increase in investor relation costs of $76,548 related to costs in
connection with corporate actions, (e) increase in customer service, sales and
marketing and wages and selling expenses of $2,458, and (f) increase in
facility expenses of $78,576 resulting from rent expenses for ESWCT. Officers’
compensation and directors’ fees for the three month period ended June 30, 2013
decreased by $23,990, or 15.5 percent, to $130,494 from $154,484 for the three
month period ended June 30, 2012. Research and
development ("R&D") expenses for the three month period ended
June 30, 2013 decreased by $26,899, or 14.5 percent, to $158,871 versus $185,770
for the three month period ended June 30, 2012. The primary driver of R&D
expenses for the three month period ended June 30, 2013 was related to ESW's
pursuit of the verification expansion of its Level III product and transfer of
verifications for new products related to ESW CleanTech Inc. During the three
month period ended June 30, 2013 and 2012 there was no grant funding or tax
credit to offset R&D cost. Consulting
and professional fees for the three month period ended June 30, 2013 increased
by $132,753, or 166.7 percent, to $212,382 from $79,629 for the three month
period ended June 30, 2012. The increase is mainly due to legal and consulting
fees in connection with corporate actions including the setup of the ESWCT
subsidiary and acquisition of certain assets from Cleaire. Depreciation
and amortization expense for the three month period ended June 30, 2013 increased
by $18,523, or 47.6 percent to $57,458 from $38,935 for the three month period
ended June 30, 2012. Foreign
exchange loss for the three month period ended June 30, 2013, was $3,068 as
compared to a loss of $11,612 for the three month period ended June 30, 2012.
This is a result of the fluctuation in the exchange rate of the Canadian Dollar
to the United States Dollar. 6    Loss from operations for the three month period
ended June 30, 2013 increased by $2,249,484, to $2,507,681 from $258,197 for
the three month period ended June 30, 2012. ESW’s loss from operations for the
three month period ended June 30, 2013 included the following non-cash items: a
one-time warranty provision of $1,504,900, depreciation expenses of $168,418
and loss on write down of inventory of $230,002. In addition loss from
operations was higher in the three month period ended June 30, 2013 as compared
to June 30, 2012 due to expenses related to the set-up of ESWCT operations in
San Diego. During the three
month period ended June 30, 2013, the Company recorded the following costs and
gain related to a senior secured convertible loan facility: •
 $68,811
 -
 Interest
  on notes payable to related parties•
 $44,381
 -
 Debt
  related discount amortization•
 $1,330,893
 -
 Loss
  on convertible derivative
 No
costs related to financing and debt transactions were incurred in the six month
period ended June 30, 2012. LIQUIDITY AND
CAPITAL RESOURCES ESW's principal
sources of operating capital have been the proceeds from its various financing
transactions. During the six month period ended June 30, 2013, the Company used
$2,244,937 of cash to sustain operating activities compared with $1,005,746 for
the six month period ended June 30, 2012. As of June 30, 2013 and 2012, the
Company had cash and cash equivalents of $2,550,537 and $78,556, respectively. Net cash used in
operating activities for the six month period ended June 30, 2013 amounted to $2,244,937.
This amount was attributable to the net loss of $4,582,452, plus non-cash
expenses such as depreciation, stock based compensation, conversion option
derivative liability, discount on promissory notes payable, warranty provisions
and others of $3,403,943, less a decrease in net operating assets and
liabilities of $1,066,428. Net cash used in
operating activities for the six month period ended June 30, 2012 amounted to $1,005,746.
This amount was attributable to the net loss of $684,268, plus non-cash
expenses such as stock based compensation, gain on deconsolidation of BBL and
others of $231,734, less a decrease in net operating assets and liabilities of
$553,212. Net cash used in
investing activities was $372,805 for the six month period ended June 30, 2013,
as compared to $292,869 used in investing activities for the six month period
ended June 30, 2012. Net cash
provided by financing activities totaled $4,914,281 through a loan payable
repayment of $34,204 in principal and $5,000,000 proceeds from notes payable to
related parties and re-purchase of common stock of $51,515 for the six month
period ended June 30, 2013, as opposed to net cash provided by financing
activities of $273,522 for the six month period ended June 30, 2012. In the
prior year period of 2012, $280,787 was provided from proceeds of a loan
payable, $6,024 used in loan payable principal repayment and $1,241 was used
for repayment under capital lease obligation.  ESW
operates in a capital intensive and highly regulated industry, where a long
lead time to bring new products into market is considered normal. ESW continues
to invest in research and development to improve its technologies and bring
them to the point where its customers have a high confidence level to purchase
our products.  During
the six month period ended June 30, 2013 and in 2012, ESW did not produce
sufficient cash from operations to support its expenditures, prior and current
financings supported the Company's operations during the period. ESW's
principal use of liquidity relates to the Company's working capital needs and
to finance any further capital expenditures or tooling needed for production
and/or its testing facilities.  ESW
anticipates certain capital expenditures during the remainder of 2013 related
to the general operation of its business as well as to upgrade the Air Testing
Services facilities in Montgomeryville, Pennsylvania according to a board
approved capital expenditure plan.  Overall,
capital adequacy is monitored on an ongoing basis by our management and
reviewed quarterly by the Board of Directors.The Company has sustained
recurring operating losses. As of June 30, 2013, the Company had an accumulated
deficit of $59,092,830 and cash and cash equivalents of $2,550,537. ESW’s history
of losses and the current prevailing economic conditions all create uncertainty
in the operating results and, accordingly, there is no assurance that the
Company will be successful in generating sufficient cash flow from operations
or achieving profitability in the near future. The Company may require
additional financing to fund its continuing operations and planned capital
investments. 7    DEBT STRUCTURE At June 30,
2013, ESW had $6,523,688 (December 31, 2012 - $473,133) of debt on the
consolidated condensed balance sheet, of this amount $69,966 (December 31, 2012
- $68,926) is repayable in the next 12 months. On April 25,
2012, the Company’s wholly-owned subsidiary ESWA entered into a Machinery and
Equipment Loan Fund (“MELF Facility”) with the Commonwealth of Pennsylvania for
up to $500,000 for the purchase of equipment and related purchases. Two (2)
draw-downs were permitted under the MELF Facility by ESWA. The first draw-down
of $280,787 was made under the MELF Facility in connection with equipment
purchased by ESWA on April 25, 2012 (the “Closing Date”).ESWA made one (1)
additional draw-down of $219,213 on November 13, 2012 per the terms of the MELF
Facility so that the aggregate amount borrowed under the MELF Facility amounts
to $500,000. Terms
of the MELF Facility include initial interest at three (3%) percent per annum
with monthly payments and full repayment of the MELF Facility on or before the
first day of the eighty fifth (85) calendar month following the Closing Date.
As part of the loan agreement, within three years from the Closing Date ESWA is
required to create, or retain, at its current location a certain number of jobs
that is specified in the loan application. A breach by ESWA in the creation or
maintenance of these jobs shall be considered an event of default under the
MELF Facility. In the event ESWA defaults on any payments, the MELF Facility
may be accelerated with full payment due along with certain additional
modifications including the increase in interest to twelve and one half (12
1/2%) percent. In connection with the MELF Facility, the Company entered into a
Guaranty and a Loan and Security Agreement on behalf of its wholly-owned
subsidiary ESWA. On
March 22, 2013, the Company entered into a note subscription agreement and a
security agreement and issued senior secured five (5) year convertible
promissory notes (collectively the “Loan Agreements”) to Black Family Partners
LP, John J. Hannan, Orchard Investments, LLC and Richard Ressler (each
individually a “Senior Secured Lender” or “Holder” and collectively the “Senior
Secured Lenders” or “Holders”) who are current shareholders and may be deemed
affiliates of the Company. The Loan Agreements are a part of a senior secured
convertible loan facility of up to $5 million (the “Senior Secured Loan
Facility”) wherein the Senior Secured Lenders agreed that at any time prior to
March 22, 2014, upon approval of the Company’s board of directors, additional
closings can take place for up to the $5 million of the facility in which each
Holder will be required to purchase additional Notes allocated among the
Holders as agreed to in the Loan Agreements (each a “Subsequent Closing” or
“Subsequent Closings”).The Loan Agreements and the Senior Secured Loan Facility
were approved by the independent directors of the Company. Pursuant
to the Loan Agreements, the Senior Secured Lenders made loans to the Company in
the principal aggregate amount of $5 million (the “Loan”), subject to the terms
and conditions set forth in the Loan Agreements and represented by senior
secured convertible promissory notes (the “Notes”), dated March 22, 2013,April 23,
2013 and June 27, 2013. Proceeds of the
Loan were directed at the purchase of the Cleaire assets, as well as to fund
working capital, planned capital investments and other general corporate
purposes of the Company and/or its subsidiaries. The Notes are
secured by a lien on and a security interest in all assets of the following
wholly owned subsidiaries of the Company: Technology Fabricators, Inc., ESW
America, Inc., ESW CleanTech Inc., and ESW Technologies, Inc., excluding
certain collateral subject to pre-existing liens. The Notes bear interest at a
rate of 10% per annum compounded quarterly. Interest is payable semi-annually
in arrears in cash and at the Company’s election, during the term of the Notes,
up to two accrued and unpaid semi-annual interest payments can be payable in
the form of the Company’s common stock, $0.001, par value (the “Common Stock”)
valued at the lesser of $80, subject to adjustment (the “Conversion Price”) or
the market value of the Company’s Common Stock with interest payments
commencing September 30, 2013. At the option of the holders of the Notes
representing a majority of the then-outstanding principal balance of the Notes,
all principal, and interest amounts then outstanding under all of the Notes may
be exchanged for shares of the Company’s Common Stock at the Conversion Price.
The Conversion Price is subject to anti-dilution adjustment in the event the
Company at any time while the Notes are outstanding issues equity securities
including Common Stock or any security convertible or exchangeable for shares
of Common Stock for no consideration or for consideration less than $80 a
share. The anti-dilution protection excludes shares of Common Stock issuable
upon the exercise of options or other securities granted to directors,
officers, bona fide consultants and employees of the Company issued pursuant to
a board approved option or incentive plan or stock, warrants or other securities
issued to a bank or other financial institution in connection. As a part of the
Senior Secured Loan Facility, the Company further agreed to conduct a rights
offering to all of its holders of Common Stock, offering all such holders the
right to purchase up to their pro-rata Company ownership amount of senior
secured five (5) year convertible promissory notes that will be similar to the
Notes (the “Rights Offering”). 8     CONTRACTUAL
OBLIGATIONS LEASES Effective
November 24, 2004, the Company's wholly-owned subsidiary, ESWA, entered into a
lease agreement for approximately 40,220 square feet of leasehold space at 200
Progress Drive, Montgomeryville, Pennsylvania. The leasehold space houses the
Company's research and development facilities and also houses ESW’s
manufacturing operations. The lease commenced on January 15, 2005. Effective
October 16, 2009, the Company's wholly-owned subsidiary ESWA entered into a
lease renewal agreement with Nappen & Associates for the leasehold property
in Pennsylvania. There were no modifications to the original economic terms of
the lease under the lease renewal agreement. Under the terms of the lease
renewal, the lease term was extended to February 28, 2013. Effective September
24, 2012, ESWA entered into a second lease amendment agreement with Nappen
& Associates for the leasehold property in Pennsylvania, whereby ESWA
extended the term of the lease agreement by an additional 5 years. There were
no modifications to the original economic terms of the lease. Under the terms
of the second lease renewal, the lease will expire on February 28, 2018. On
June 7, 2013, the Company's wholly-owned subsidiary, ESWCT, entered into a
commercial real estate lease with Trepte Industrial Park, Ltd., a California
limited partnership, pursuant to which ESWCT leased approximately 18,000 square
feet of commercial property located in San Diego, California, from the Lessor
to be used primarily for housing ESWCT’s manufacturing and diesel particulate
filter cleaning operations. The Lease provides for a 37-month lease term
(commencing July 1, 2013), subject to ESWCT’s option to extend the lease term
for two additional 36-month periods. The current base rent under the Lease is
$15,300 per month. Concurrently with the signing of the Lease and pursuant to
the terms thereof, ESWCT paid to the Lessor an amount equal to $155,600, which
amount reflects the first month’s base rent, the security deposit, the funding
required for improvements done by the Lessor at ESWCT’s request, and pre-paid
rent. The amount will be credited against monthly base rent payable by ESWCT
beginning in January 2014 and each month thereafter, provided that ESWCT shall
not have defaulted under the Lease. The following is a summary of the minimum annual
lease payments for the Pennsylvania and San Diego leases: Year Ending
  December 31,
 
 Amount2013
  (excluding the six months ended June 30, 2013)
 $
 182,2952014
 
 242,3442015
 
 372,9352016
 
 279,7992017
 
 180,9902018
 
 30,165Total
 $
 1,288,528
 LEGAL MATTERS From time to
time, the Company may be involved in a variety of claims, suits, investigations
and proceedings arising from the ordinary course of our business, collections
claims, breach of contract claims, labor and employment claims, tax and other
matters. Although claims, suits, investigations and proceedings are inherently
uncertain and their results cannot be predicted with certainty, ESW believes
that the resolution of current pending matters will not have a material adverse
effect on its business, consolidated financial position, results of operations
or cash flow. Regardless of the outcome, litigation can have an adverse impact
on ESW because of legal costs, diversion of management resources and other
factors. The Company is
pursuing a lawsuit in New York for collection of unpaid invoices related to
goods delivered to a former distributor. The Company was notified of a revised
claim filed in the Ontario, Canada Superior Court of Justice on a dispute with
a past vendor of ESWC, this claim was previously deemed settled, due to
inaction by the vendor. That motion is pending: the Court has not ruled upon
it. The Company cannot predict the outcome of this matter at this time. The Company is
also exposed to contingencies on its various warranty programs related to the products
produced by TFI and ESWCT. The Company has recorded a provision for these as
disclosed in Note 2; however, the actual amount of loss could be materially different.  RECENTLY
ISSUED ACCOUNTING STANDARDS AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS There are no
recently adopted accounting pronouncements that impact the Company’s financial
statements. Management
does not believe that any recently issued, but not yet effective accounting
pronouncements, if adopted, would have a material effect on the accompanying
consolidated condensed financial statements.    9    SIGNIFICANT
ACCOUNTING POLICIES AND ESTIMATES ESW's
significant accounting policies are summarized in Note 2 to the consolidated
condensed financial statements included in its quarterly reports and its 2012
Annual Report to Shareholders. In preparing the consolidated condensed
financial statements, we make estimates and assumptions that affect the
expected amounts of assets and liabilities and disclosure of contingent assets
and liabilities. We apply our accounting policies on a consistent basis. As
circumstances change, they are considered in our estimates and judgments, and
future changes in circumstances could result in changes in amounts at which
assets and liabilities are recorded. FOREIGN CURRENCY
TRANSACTIONS The functional
currency of the Company and its foreign subsidiaries is the U.S. dollar. All of
the Company’s revenue and materials purchased from suppliers are denominated in
or linked to the U.S. dollar. Transactions denominated in currencies other than
a functional currency are converted to the functional currency on the
transaction date, and any resulting assets or liabilities are further
translated at each reporting date and at settlement. Gains and losses
recognized upon such translations are included within foreign exchange gain
(loss) in the unaudited consolidated condensed statements of operations and
comprehensive loss.  10     ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ESW is exposed
to financial market risks, including changes in currency exchange rates and
interest rates. The Company 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 exposure
to foreign currency translation gains and losses also arises from the
translation of the assets and liabilities of its subsidiaries to U.S. dollars
during consolidation. These risks have been significantly mitigated by the move
of ESW’s manufacturing operations to Pennsylvania, USA. In the
consolidated condensed statements of operations and comprehensive loss for the
six month period ended June 30, 2013, ESW has recognized a translation loss of
$11,180 as compared to a loss of $43,043 for the six month period ended June
30, 2012. For the three month period ended June 30, 2013 and 2012, ESW has
recognized a translation loss of $3,068 and $11,612 respectively, the losses
are a result of exchange rate differences between the U.S. dollar and the
Canadian dollar. INTEREST RATE
RISK ESW currently
has no variable-rate long-term debt that exposes ESW to interest rate risk.  11    ITEM 4. CONTROLS
AND PROCEDURES (a) EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURE EVALUATION OF
THE COMPANY'S DISCLOSURE AND INTERNAL CONTROLS The Company
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" as of the end of the period covered by this
report. This evaluation was done with the participation of management, under
the supervision of the Executive Chairman ("EC") and Chief Financial
Officer ("CFO"). LIMITATIONS ON
THE EFFECTIVENESS OF CONTROLS A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost
effective control system, misstatements due to error or fraud may occur and not
be detected. The Company conducts periodic evaluations of its internal controls
to enhance, where necessary, its procedures and controls. CONCLUSIONS Based on our
evaluation, the EC and CFO concluded that the registrant's disclosures,
controls and procedures are effective to ensure that information required to be
disclosed in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms. (c) CHANGES IN
INTERNAL CONTROLS Not applicable.  12     PART II OTHER INFORMATION ITEM 1A. RISK
FACTORS In evaluating an
investment in our common stock, investors should consider carefully, among
other things, the risk factors previously disclosed in Part I, Item 1 of our
Annual Report on Form 10-K for the year ended December 31, 2012, as well as the
information contained in this report and our other reports and registration
statements filed with the Securities and Exchange Commission. ITEM 5. OTHER
INFORMATION None.  13    ITEM 6. EXHIBITS EXHIBITS: 3.1
 Articles of Amendment to the Articles
  of Incorporation of Environmental Solutions Worldwide, Inc. (incorporated by
  reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on
  May 24, 2013)4.1
 Form of Senior Secured Promissory Note
  issued on April 23, 2013 by Environmental Solutions Worldwide, Inc. in favor
  of the Senior Secured Lenders (incorporated by reference to Exhibit 4.1 to
  the Company’s Current Report on Form 8-K filed on April 29, 2013)4.2
 Form of Senior Secured Promissory Note
  issued on June 27, 2013 by Environmental Solutions Worldwide, Inc. in favor
  of the Senior Secured Lenders (incorporated by reference to Exhibit 4.1 to
  the Company’s Current Report on Form 8-K filed on July 1, 2013)10.1
 Asset Purchase Agreement, dated April
  1, 2013, by and between David P. Stapleton, as the receiver for Cleaire
  Advanced Emission Controls, LLC, and Environmental Solutions Worldwide, Inc.
  (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report
  on Form 10-Q for the quarter ended March 31, 2013)31.1
 Certification
  of Executive Chairman pursuant to the Sarbanes-Oxley Act of 2002.31.2
 Certification
  of Chief Financial Officer, pursuant to the Sarbanes-Oxley Act of 2002.32.1
 Certification
  pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.32.2
 Certification
  pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.99.1
 Temporary
  Hardship Exemption Provided by Rule 201101.ins*
 XBRL Instance101.xsd*
 XBRL Schema101.cal*
 XBRL
  Calculation101.def*
 XBRL
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  Presentation
  * To
be furnished by amendment per Temporary Hardship Exemption under Regulation S-T. 14     SIGNATURES Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this Report to be signed on its behalf by the undersigned thereunto duly
authorized. DATED: AUGUST 19,
2013
Montgomeryville, PA, USA ENVIRONMENTAL
SOLUTIONS WORLDWIDE, INC.  BY:/S/ MARK YUNGMARK YUNG
EXECUTIVE CHAIRMAN /S/ PRAVEEN NAIRPRAVEEN NAIR
CHIEF FINANCIAL OFFICER  15