PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements

Our financial statements included in this Form 10-Q are comprised of the following:

F-1	Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012

F-2	Condensed Consolidated Statements of Operations for the six months ended June 30, 2013, and 2012 (unaudited);

F-3	Condensed Consolidated Statements of Cash Flows for the six months ended June 30,  2013, and 2012 (unaudited);

F-4	Notes to Condensed Consolidated Financial Statements.

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  Operating results for the interim period ended June 30, 2013 are not necessarily indicative of the results that can be expected for the full year.

 

 

 

 

 

 

 

 

- 3 -

---

Table of Contents

 

 

 

 

E-Waste Systems, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
		June 30,				December 31,
		2013				2012
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	14,196			$	139
Accounts receivable, net			47,343				-
Related parties receivable			750				-
Inventory			6,520				-
Prepaid expenses			195,080				-
Total Current Assets			263,889				139
Security deposits			1,589				-
Intangible assets			347,369				-
TOTAL ASSETS		$	612,847			$	139
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses		$	464,211			$	339,684
Accrued expenses, related parties			1,336,584				1,247,355
Deferred revenue			1,657				-
Short-term notes payable			175,000				175,000
Short-term related party convertible notes payable, net			12,000				12,000
Short-term convertible notes payable, net			13,121				13,334
Derivative liability on short-term convertible notes payable			104,619				61,545
Total Current Liabilities			2,107,192				1,848,918
Long term portion of convertible notes payable, net			219,527				177,187
TOTAL LIABILITIES			2,326,719				2,026,105
STOCKHOLDERS' DEFICIT
Preferred stock, Series A, $0.001 par value, 10,000,000 shares authorized;
873 and 0 shares issued and outstanding, respectively			1				-
Preferred stock, Series B, $0.001 par value, 10,000,000 shares authorized;
no shares issued and outstanding, respectively			-				-
Common stock, $0.001 par value, 490,000,000 shares authorized;
186,973,353 and 106,504,926 shares issued and outstanding, respectively			186,973				106,505
Additional paid-in capital			2,880,946				904,032
Accumulated deficit			(4,781,792	)			(3,036,503	)
TOTAL STOCKHOLDERS' DEFICIT			(1,713,872	)			(2,025,966	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	612,847			$	139
The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

 

 

F - 1

---

Table of Contents

 

 

 

 

E-Waste Systems, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	For the Three Months Ended									For the Six Months Ended
	June 30,									June 30,
	2013					2012				2013				2012
NET REVENUES:
Product sales revenue		$	168,374			$	-			$	168,374			$	-
Service revenues			88,638				-				88,638				-
TOTAL REVENUES			257,012				-				257,012				-
Cost of sales			143,884				-				143,884				-
GROSS PROFIT			113,128				-				113,128				-
OPERATING EXPENSES
Officer and director compensation			84,895				179,767				224,517				367,567
Professional fees			133,362				28,257				539,094				78,966
Impairment in available for sale securities			730,000				-				730,000				-
General and administrative expenses			229,248				17,478				244,028				36,100
TOTAL OPERATING EXPENSES			1,177,505				225,502				1,737,639				482,633
LOSS FROM OPERATIONS			(1,064,377	)			(225,502	)			(1,624,511	)			(482,633	)
OTHER (EXPENSE) INCOME:
Interest expense, net			(108,839	)			(2,977	)			(169,028	)			(8,067	)
Change in derivative liability			43,074				-				43,074				7,371
Loss on settlement of contingent consideration			-				-				-				(66,672	)
TOTAL OTHER (EXPENSE) INCOME			(65,765	)			(2,977	)			(125,954	)			(67,368	)
Loss from Operations before Income Taxes			(1,130,142	)			(228,479	)			(1,750,465	)			(550,001	)
Provision for Income Taxes			-				-				-				-
NET LOSS FROM CONTINUING OPERATIONS			(1,130,142	)			(228,479	)			(1,750,465	)			(550,001	)
Income (Loss) from Discontinued Operations, net of Income Taxes			(5,416	)			(34,506	)			3,643				(58,408	)
NET LOSS		$	(1,135,558	)		$	(262,985	)		$	(1,746,822	)		$	(608,409	)
NET LOSS PER COMMON SHARE:
Basic and Diluted Loss per Share from Continuting Operations		$	(0.01	)		$	0.00			$	(0.01	)		$	(0.01	)
Basic and Diluted Loss per Share from Discontinued Operations		$	0.00			$	0.00			$	0.00			$	0.00
NET LOSS PER SHARE - BASIC AND DILUTED		$	(0.01	)		$	0.00			$	(0.01	)		$	(0.01	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic and diluted			152,493,541				101,154,926				136,837,931				100,994,057
The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

 

 

 

 

F - 2

---

Table of Contents

 

 

 

 

 

E-Waste Systems, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		For the Six Months Ended June 30,
		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations		$	(1,750,465	)		$	(550,001	)
Adjustment to reconcile net loss to net cash used in operating activities:
Bad debt provision			2,700				-
Origination interest charge			5,556				-
Convertible notes payable executed for services			117,940				-
Amortization of debt discount			86,592				-
Change in derivative liability			43,074				(7,371	)
Impairment in available for sale securities			730,000				-
Common stock issued for services			347,533				39,930
Loss on conversion of debt			52,125				-
Contributed capital			40,927				-
Provision for allowance on accounts receivable			-				40,000
Loss on settlement of contingent considerations			-				66,671
Changes in operating assets and liabilities:
Accounts receivable, net			(50,043	)			-
Related parties receivable			(750	)			-
Inventory			(6,520	)			-
Prepaid expenses			24,277				-
Accounts payable and accrued expenses			314,019				(45,567	)
Accrued expenses, related parties			226,829				378,630
Deferred revenue			1,657				-
NET CASH PROVIDED BY (USED IN) CONTINUING OPERATING ACTIVITIES			185,451				(77,708	)
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATING ACTIVITIES			3,643				(103,157	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			189,094				(180,865	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments towards security deposits			(1,589	)			-
Payments towards intangible assets			(247,198	)			-
NET CASH USED IN CONTINUING INVESTING ACTIVITIES			(248,787	)			-
NET CASH USED IN INVESTING ACTIVITIES			(248,787	)			-
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes payable			73,750				-
Proceeds from notes payable			-				175,000
Proceeeds from contributed capital			-				2,000
NET CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES			73,750				177,000
NET CASH PROVIDED BY FINANCING ACTIVITIES			73,750				177,000
Net increase (decrease) in cash and cash equivalents			14,057				(3,865	)
Cash and cash equivalents, beginning of period			139				6,493
Cash and cash equivalents, end of period		$	14,196			$	2,628
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	25,895			$	3,711
Cash paid for taxes		$	-			$	-
NON-CASH ACTIVITIES:
Issuance of common stock as payment towards accounts payable and accrued expenses, related parties		$	214,808			$	-
Intangible assets from investment in Surf		$	100,171			$	-
Convertible notes payable executed for accounts payable and accrued expenses		$	112,284			$	-
Debt discounts on convertible notes payable		$	309,550			$	-
Common stock issued for prepaid services		$	219,357			$	-
Conversions of convertible notes payable into shares of common stock		$	44,445			$	140,664
Common stock issued for conversion of preferred stock for settlement of deferred consideration		$	-			$	378,409
The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

 

 

 

F - 3

---

Table of Contents

 

 

E-WASTE SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2013 and December 31, 2012

NOTE 1 – BACKGROUND INFORMATION

 

Organization and Business

 

We were incorporated on December 19, 2008 in the State of Nevada.  Our wholly owned subsidiary, E-Waste Systems (UK) Ltd. was founded in January 2011 for the purpose of implementing our business strategy and has had limited operations. We acquired all of the issued and outstanding capital stock of EWSO on October 14, 2011. On September 20, 2012, certain of the assets and business of EWSO were physically transferred to Two Fat Greek, LLC.

Surf Investments, Ltd. (Surf)

On June 25, 2013, the Company entered into a binding agreement to acquire 100% of the shares of Surf Investments, Ltd, ("Surf") a California company in the mobile computing and e-waste recycling business. The Company acquired Surf because of it e-waste certifications in the state of California and the access to customers that will benefit the Company in expanding its sales and services. Consideration paid was the assumption of liabilities of $222,928 and the issuance of 223 shares of Series A Preferred Stock valued at $27,256 for a total consideration of $250,184. Results of operations are from the date of acquisition through the end of the period. Fair values of assets and liabilities acquired are estimates of management and the Company is currently in the process of obtaining a third-party valuation on such assets and liabilities.

On March 26, 2013, EWSI entered into a set of agreements with XuFu (Shanghai) Co, Ltd, (“XuFu”) a company incorporated in the People’s Republic of China (“PRC”) and formerly known as Yazhuo.  The interests in XuFu were initially consolidated on the Company’s interim financial statements as a Variable Interest Entity (“VIE”) as of March 31, 2013.  The Company has analyzed the controls and processes in place at XuFu and has concluded that consolidation is not proper.  To eliminate any doubt about the accounting treatment as of June 30, 2013, the Company’s Board of Directors has suspended the VIE.  Accordingly, the Company has not consolidated Xufu in the audited financial statements as of and for the six months ended June 30, 2013.  The Company will follow guidance in accordance with ASC 250 “Accounting Changes and Error Corrections” and take the necessary action as soon as practicable with respect to its interim period financial statements.

NOTE 2 – GOING CONCERN

The Company’s consolidated financial statements have been prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred net losses of $1,746,822 and $608,409 during the six months ended June 30, 2013 and 2012, respectively. Cash on hand will not be sufficient to cover debt repayments scheduled as of June 30, 2013 and operating expenses and capital expenditure requirements for at least twelve months from the consolidated balance sheet date. As of June 30, 2013 and December 31, 2012, the Company had working capital deficits of $1,843,303 and $1,848,779, respectively. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to seek equity and/or debt financing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE 3 – RESTATEMENT

On March 26, 2013, EWSI entered into a set of agreements with XuFu (Shanghai) Co, Ltd, (“XuFu”) a company incorporated in the People’s Republic of China (“PRC”) and formerly known as Yazhuo.  The interests in XuFu were initially consolidated on the Company’s interim financial statements as a Variable Interest Entity (“VIE”) as of March 31, 2013, June 30, 2013, and September 30, 2013.  Upon further analysis, prior to filing its 10-K for the year ended December 31, 2013, the Company concluded that consolidation was not proper.  Accordingly, the Company has not consolidated Xufu in the quarterly statements for the six months ended June 30, 2013.

 

 

 

 

 

 

F - 4

---

Table of Contents

 

 

The following represents the changes to the restated consolidated financial statements as of and for the six months ended June 30, 2013:

Condensed Consolidated Balance Sheets
(Unaudited)
	Restated				Amended
	June 30, 2013				June 30, 2013				Differences
ASSETS
Current Assets
Cash		$	14,196			$	121,543			$	(107,347	)
Accounts receivable			47,343				1,493,490				(1,446,147	)
Prepaid assets			195,080				195,081				(1	)
Related parties receivable			750				-				750
Inventory			6,520				38,746				(32,226	)
Other current assets			-				71,893				(71,893	)
Marketable securities, available-for-sale			-				880,000				(880,000	)
Total Current Assets			263,889				2,800,753				(2,536,864	)
License fees receivables			-				375,000				(375,000	)
Security deposits			1,589				-				1,589
Intangible assets, net			347,369				347,369				-
Other assets			-				1,942				(1,942	)
Total Assets		$	612,847			$	3,525,064			$	(2,912,217	)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable and accrued expenses		$	464,211			$	2,137,146			$	(1,672,935	)
Accounts payable - related party			1,336,584				1,319,675				16,909
Deferred revenue			1,657				-				1,657
Short-term notes payable			175,000				397,928				(222,928	)
Short-term related party convertible notes payable, net			12,000				12,000				-
Short-term convertible notes payable, net			13,121				13,126				(5	)
Derivative liability on short-term convertible notes payable			104,619				131,957				(27,338	)
Total Current Liabilities			2,107,192				4,011,832				(1,904,640	)
Long-Term Liabilities
Long-term convertible notes payable, net			219,527				155,528				63,999
Total Long-Term Liabilities			219,527				155,528				63,999
Total Liabilities			2,326,719				4,167,360				(1,840,641	)
Stockholders' Deficiency
Preferred stock, $0.001 par value; 10,000,000 shares authorized, 873 and 0 shares issued and outstanding, respectively			1				2				(1	)
Common stock, $0.001 par value; 490,000,000 shares authorized, 186,973,353 and 106,504,926 shares issued and outstanding, respectively			186,973				197,198				(10,225	)
Additional paid-in capital			2,880,946				2,919,847				(38,901	)
Stock subscription receivable			-				(88,000	)			88,000
Accumulated other comprehensive income			-				(514	)			514
Accumulated deficit			(4,781,792	)			(3,670,829	)			(1,110,963	)
Total Stockholders' Deficiency			(1,713,872	)			(642,296	)			(1,071,576	)
Total Liabilities and Stockholders' Deficiency		$	612,847			$	3,525,064			$	(2,912,217	)
The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

 

 

 

F - 5

---

Table of Contents

 

 

 

 

 

Condensed Consolidated Statements of Operations
(Unaudited)
	For the Three Months Ended													For the Six Months Ended
	Restated					Amended								Restated				Amended
	June 30, 2013					June 30, 2013				Differences				June 30, 2013				June 30, 2013				Differences
Product sales revenue		$	168,374			$	1,673,684			$	(1,505,310	)		$	168,374			$	1,677,688			$	(1,509,314	)
Service revenue			88,638				763,624				(674,486	)			88,638				763,624				(674,986	)
Revenues from license fees			-				300,000				(300,000	)			-				525,000				(525,000	)
Total Revenues			257,012				2,737,308				(2,480,296	)			257,012				2,966,312				(2,709,300	)
Cost of goods sold			143,884				2,534,626				(2,390,742	)			143,884				2,536,765				(2,392,881	)
Gross Margin			113,128				202,682				(89,554	)			113,128				429,547				(316,419	)
Operating Expenses
Officer and director compensation			84,895				107,009				(22,114	)			224,517				238,631				(14,114	)
Professional fees			133,362				139,910				(6,548	)			539,094				584,426				(45,332	)
Impairment in available for sale securities			730,000				-				730,000				730,000				-				730,000
General and administrative			229,248				53,859				175,389				244,028				82,388				161,640
Total Operating Expenses			1,177,505				300,778				876,727				1,737,639				905,445				832,194
Loss from Operations			(1,064,377	)			(98,096	)			(966,281	)			(1,624,511	)			(475,898	)			(1,148,613	)
Other Income/(Expenses)
Interest expense			(108,839	)			(98,055	)			(10,784	)			(169,028	)			(216,348	)			47,320
Gain (loss) on derivative liability			43,074				48,943				(5,869	)			43,074				52,468				(9,394	)
Foreign currency transaction gain			-				-												5,149				(5,149	)
Gain (loss) on settlement of contingent consideration			-				303				(303	)			-				303				(303	)
Total Other Income/(Expenses)			(65,765	)			(48,809	)			(16,956	)			(125,954	)			(158,428	)			(32,474	)
Loss from Operations before Income Taxes			(1,130,142	)			(146,905	)			(983,237	)			(1,750,465	)			(634,326	)			(1,116,139	)
Provision for Income Taxes			-				-				-				-				-				-
Net Loss from Continuing Operations			(1,130,142	)			(146,905	)			(983,237	)			(1,750,465	)			(634,326	)			(1,116,139	)
Loss from Discontinued Operations, net of Income Taxes			(5,416	)			-				(5,416	)			3,643				-				3,643
Net Loss		$	(1,135,558	)		$	(146,905	)		$	(988,653	)		$	(1,746,822	)		$	(634,326	)		$	(1,112,496	)
Other Comprehensive Income
Foreign currency translation adjustments			-				506				(506	)			-				514				(514	)
Total Other Comprehensive Income		$	(1,135,558	)		$	(146,399	)		$	(989,159	)		$	(1,746,822	)		$	(633,812	)		$	(1,113,010	)
Basic and Diluted Loss per Share from Continuing Operations		$	(0.01	)		$	0.00			$	(0.01	)		$	(0.01	)		$	0.00			$	(0.01	)
Basic and Diluted loss per Share from Discontinued Operations		$	(0.00	)		$	0.00			$	0.00			$	0.00			$	0.00			$	0.00
Net loss per share - Basic and Diluted		$	(0.01	)		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.00	)		$	(0.01	)
Weighted average number of shares outstanding during the period - Basic and Diluted			152,493,541				168,646,462				(16,152,921	)			136,837,931				146,030,725				(9,192,794	)
The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

 

 

 

F - 6

---

Table of Contents

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows
(Unaudited)
		Restated				Amended
		June 30, 2013				June 30, 2013				Differences
Cash Flows From Operating Activities:
Net Loss		$	(1,750,465	)		$	(634,326	)		$	(1,116,139	)
Adjustments to reconcile net loss to net cash used in operations
Currency translation gain			-				-				-
Amortization of debt discounts			86,592				61,361				25,231
Origination interest on derivative liability			5,556				136,040				(130,484	)
Change in derivative liability			43,074				(52,468	)			95,542
Debt issued for services			-				17,417				(17,417	)
Common stock issued for services			347,533				612,607				(265,074	)
Bad debt provision			2,700				-				2,700
Contributed capital			40,927				-				40,927
Convertible notes payable executed for services			117,940				-				117,940
Loss on conversion of debt			52,125				-				52,125
Impairment in available for sale securities			730,000				-				730,000
Changes in operating assets and liabilities:
(Increase)/Decrease in accounts and other receivables			(50,043	)			(1,513,227	)			1,463,184
(Increase)/Decrease in related parties receivable			(750	)			-				(750	)
(Increase)/Decrease in inventory			(6,520	)			(34,989	)			28,469
(Increase)/Decrease in prepaid expenses			24,277				(195,080	)			219,357
(Increase)/Decrease in license fees receivable			-				(527,467	)			527,467
Increase/(Decrease) in accounts payable and accrued expenses			314,019				2,112,130				(1,798,111	)
Increase/(Decrease) in accrued expenses - related party			226,829				-				226,829
Increase/(Decrease) in deferred revenue			1,657				-				1,657
Net Cash Used In Continuing Operating Activities			185,451				(18,002	)			203,453
Net Cash Provided by Discontinued Operating Activities			3,643				-				3,643
Net Cash Used in Operating Activities			189,094				(18,002	)			207,096
Cash Flows From Investing Activities:
Payments towards security deposits			(1,589	)			-				(1,589	)
Cash acquired with purchase of subsidiary			-				42,549				(42,549	)
Payments towards intangible assets			(247,198	)			-				(247,198	)
Net Cash Used In Continuing Investing Activities			(248,787	)			42,549				(291,336	)
Net Cash Used In Discontinued Investing Activities			-				-				-
Net Cash Used In Investing Activities			(248,787	)			42,549				(291,336	)
Cash Flows From Financing Activities:
Proceeds from notes payable			73,750				82,500				(8,750	)
Net Cash Provided by Continuing Financing Activities			73,750				82,500				(8,750	)
Net Cash Provided by Discontinued Financing Activities			-				-				-
Net Cash Provided by Financing Activities			73,750				82,500				(8,750	)
Effects of exchange rates on cash			-				14,357				(14,357	)
Net Increase / (Decrease) in Cash			14,057				121,404				(107,347	)
Cash at Beginning of Period			139				139				-
Cash at End of Period		$	14,196			$	121,543			$	(107,347	)
Supplemental disclosure of cash flow information:
Cash paid for interest		$	25,895			$	-			$	25,895
Cash paid for taxes		$	-			$	-			$	-
Supplemental disclosure of non-cash investing and financing activities :
Debt discounts on convertible notes payable		$	309,550			$	219,841			$	89,709
Preferred stock issued for marketable securities		$	-			$	880,000			$	(880,000	)
Preferred stock issued for acquisition of subsidiary		$	-			$	250,184			$	(250,184	)
Common stock issued for intangible assets		$	100,171			$	77,185			$	22,986
Common stock issued for conversion of debt		$	44,445			$	336,281			$	(291,836	)
Contributed capital on agreement with variable interest entity			-			$	15,340			$	(15,340	)
Issuance of common stock as payment towards accounts payable and accrued expenses, related parties		$	214,808			$	-			$	214,808
Convertible notes payable executed for accounts payable and accrued expenses		$	112,284			$	-			$	112,284
Common stock issued for prepaid services		$	219,357			$	-			$	219,357
The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

 

 

F - 7

---

Table of Contents

 

 

 

 

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

 

The Financial Statements and related disclosures have been prepared pursuant to the rules and regulations of the SEC.  The Financial Statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States

Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations, and cash flows at June 30, 2013, and for all periods presented herein, have been made.

 

Beneficial Conversion Feature

 

Costs incurred with parties who are providing financing, which include the intrinsic value of beneficial conversion features associated with the underlying debt, are reflected as a debt discount.  These discounts are generally amortized over the life of the related debt.  In certain circumstances, the intrinsic value of the beneficial conversion feature may be greater than the proceeds associated to the convertible instrument.  In such situations, the amount of the discount assigned to the beneficial conversion feature is limited to the amount of the proceeds allocated to the convertible instrument.

 

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities”.

Professional standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument”.

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.

 

 

 

 

 

F - 8

---

Table of Contents

 

 

The Company evaluated the conversion option embedded in the Series A Preferred Stock and determined, in accordance with the provisions of these statements, that such conversion option does not meet the criteria requiring bifurcation of these instruments. The characteristics of the common stock that is issuable upon a holder’s exercise of the conversion option embedded in the convertible preferred stock are deemed to be clearly and closely related to the characteristics of the preferred shares. Additionally, the Company’s conversion options, if free standing, would not be considered derivatives subject to the accounting guidelines prescribed in accordance with professional standards.

ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could require net cash settlement, then the contract shall be classified as an asset or a liability.

Cash and Cash Equivalents

 

For the purpose of the financial statements cash equivalents include all highly liquid investments with maturity of three months or less. Cash and cash equivalents were $14,196 and $139 at June 30, 2013 and the year ended December 31, 2012, respectively.

 

Cash Flows Reporting

 

The Company follows ASC 230, Statement of Cash Flows , for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by ASC 230, Statement of Cash Flows , to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period.

 

Commitments and Contingencies

 

The Company follows ASC 440, Commitments and ASC 450 , Loss Contingencies , to report accounting for commitments and contingencies. 

 

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.  There were no commitments or contingencies at June 30, 2013 and December 31, 2012.

 

Earnings per Share

 

The Company computes basic and diluted earnings per share amounts in accordance with ASC Topic 260, Earnings per Share . Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. 

 

For the six months ended June 30, 2013 and 2012, the effect of common stock equivalents has been excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.

 

The Company does not have any potentially dilutive instruments as of June 30, 2013 and, thus, anti-dilution issues are not applicable.

 

At June 30, 2013, there were no stock options.

 

 

 

 

 

 

F - 9

---

Table of Contents

 

 

 

Fair Value of Financial Instruments

 

The Company follows paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments and paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.  The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3	Pricing inputs that are generally unobservable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts payable, accrued expenses and loans payable approximate their fair values because of the short maturity of these instruments. Loans payable are recorded at their issue value.

 

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

 

It is not, however, practical to determine the fair value of advances from stockholders, if any, due to their related party nature.

The following table presents assets and liabilities that are measured and recognized at fair value as of June 30, 2013 and December 31, 2012, on a recurring basis:

Assets and liabilities measured at fair value on a recurring basis June 30, 2013	Level 1				Level 2				Level 3				Total Carrying Value
Derivative liabilities			-				-				(104,619	)			(104,619	)
		$	-			$	-			$	(104,619	)		$	(104,619	)
Assets and liabilities measured at fair value on a recurring basis at December 31, 2012	Level 1				Level 2				Level 3				Total Carrying Value
Derivative liabilities			-				-				(61,545	)			(61,545	)
		$	-			$	-			$	(61,545	)		$	(61,545	)

 

 

 

 

 

 

F - 10

---

Table of Contents

 

 

 

Related Parties

 

The Company follows ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.  Related party transactions for the periods ending June 30, 2013 and the year ended December 31, 2012 are reflected in Note 7.

 

Stock Based Compensation

ASC 718, Compensation – Stock Compensation , prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired.  Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights.  Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, Equity – based Payments to Non-Employees.  Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable:  (a) the goods or services received; or (b) the equity instruments issued.  The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.  

 

Under our stock compensation plan (the “Stock Plan”) which is registered under Form S8, or through newly issued restricted common stock, we pay qualified contractors and advisors common shares in lieu of compensation for services provided including business development, management, technology development, consulting, legal services and accounting services

Share-based expense for the six months ended June 30, 2013 and 2012 was $347,533 and $0, respectively.

 

Reclassifications

Certain balances in previously issued financial statements have been reclassified to be consistent with current period presentation.

Principles of Consolidation

The accompanying consolidated financial statements for the six months ended June 30, 2013 include the accounts of the Company and its wholly-owned subsidiaries, E-Waste Systems of Ohio, Inc. and Surf Investments, Ltd. (“Surf”). All significant intercompany balances and transactions have been eliminated in consolidation.

Concentration of Credit Risk

SURF

For the six months ended June 30, 2013, Customer A accounted for 20.2% of the Surf’s net revenue and approximately 17.3% of the company’s total accounts receivables. Customer B accounted for approximately 18.5% of Surf’s net revenue and approximately 11.2% for the company’s total accounts receivables for the six months ended June 30, 2013. Customer C accounted for approximately 51.7% of the Company’s total accounts receivable for the six months ended June 30, 2013.

Accounts Receivable

Trade accounts receivables are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivables are included in net cash provided by operating activities in the consolidated cash flow statements. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers a number of factors, including historical losses, current receivables aging reports, the counter party’s current ability to pay its obligation to the Company, and existing industry. The Company reviews its allowances every month. Past due invoices over 90 days that exceed a specific amount are reviewed individually for collectability. During the six months ended June 30, 2013 and the year ended December 31, 2012, $2,700 and $0 of receivables were charged off against the allowance, respectively. The Company does not have any off-balance sheet exposure related to its customers.

 

 

 

 

 

F - 11

---

Table of Contents

 

 

Inventory

Inventory is valued at the lower of cost (on a first-in, first-out (FIFO) basis) or market. The Company purchases its inventory direct from the manufacturer and includes these costs in its Cost of Sales as well as its packaging supplies, shipping, freight and duties costs. The Company evaluates inventory for items that have become obsolete. An allowance for obsolescence is established for items that are deemed not able to be sold. Currently, there are no obsolete inventory items.

Revenue Recognition

The Company applies the provisions of ASC 605, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue related to goods and services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.

Revenue from Sales of Brand Licenses

During the year, the Company sold brand licenses to customers which allow the promotion of business under the E-Waste Systems brand names in selected jurisdictions. The license agreements call for an initial payment plus a percentage of revenues generated under the brand during term of the license agreement. The initial fees are booked to revenues of the Company in the period first sold. License fees earned from subsequent revenues of the licensee company are only booked later after periodic reviews.  The Company will recognize the licensing revenue when collected or when collectability is probable.

Segment Reporting

The Company generates  revenues from the following sources: (1) licensing of technology and management services in electronic waste disposal, development of ePlants and similar processes for electronic waste disposal systems in return for license, consulting and management fees; (2) operation of strategic business development projects and market development projects through the eVolve divisions for which the company obtains sales revenues and incurs day to day operational expenses including the cost of leases incurred through the activities, and (3) repair refurbishing and recycling of electronics for which the company receives revenues from disposal contracts, and fees for disposal plus revenues from the sale of reclaimed components or reclaimed materials such a gold, platinum and other precious metals obtained through recycling processes and incurs costs associated recycling activities.

Marketable Securities

The Company reports its investments in marketable securities under the provisions of ASC 320, Investments in Debt and Equity Securities . All the Company’s marketable securities are classified as “available for sale” securities, as the market value of the securities are readily determinable and the Company’s intention upon obtaining the securities was neither to sell them in the short term nor to hold them to maturity. Pursuant to ASC 320, securities which are classified as “available for sale” are recorded on the Company’s consolidated balance sheet at fair market value, with the resulting unrealized holding gains and losses excluded from earnings and reported as other comprehensive income until realized.

The Company evaluates securities for other-than-temporary impairment at least on a yearly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to the length of time and amount of the loss relative to cost, the nature and financial condition of the issuer and the ability and intent of the Company to hold the investment for a time sufficient to allow any anticipated recovery in fair value. Pursuant to ASC 320-5, other than temporary impairment losses are recorded as impairment expense in the statement of operations during the period in which the impairment is determined.  The Company recorded an impairment expense of $730,000 as of June 30, 2013.

 

 

 

 

 

F - 12

---

Table of Contents

 

 

Intangible Assets

Intangible assets are recorded at the costs associated with the asset. These assets are then amortized using the straight-line method over the remaining useful economic life of each asset type. At each consolidated balance sheet date, the unamortized capitalized cost of the each intangible asset will be compared to the net realizable value of that asset. If the unamortized capitalized cost exceeds the net realizable value, then the difference will be written down to the net realizable value.  The Company did not record an impairment expense as of June 30, 2013.

Cost Method Investments

Cost method investments are recorded at the costs associated with the investments in accordance with ASC 325-20. The costs are valued at the most readily available source of value with the various aspects of the transaction.  The investments are presented at the cost.  No returns are recorded on the investments unless dividends are received.

Capitalized Software Development Costs

The Company applies the provisions of ASC 985-20, which provides guidance on the recognition, presentation and disclosure of software development costs in financial statements. The costs associated with developing the software is capitalized and will be amortized using the straight-line method over the economic life of the software. At each consolidated balance sheet date, the unamortized capitalized cost of the software product will be compared to the net realizable value of that product. If the unamortized capitalized cost exceeds the net realizable value, then the difference will be written down to the net realizable value.

Long-Lived Assets

Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable from the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value.

Property and equipment are recorded at historical cost less accumulated depreciation, unless impaired. Depreciation is charged to operations over the estimated useful lives of the assets using the straight-line. Upon retirement or sale, the historical cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized. Expenditures for repairs and maintenance are charged to expense as incurred.  Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:

Computer Software

5 years

 

Foreign Currency

Monetary assets and liabilities of the Company's foreign operations are translated into U.S. dollars at period-end exchange rates.  Non-monetary assets and liabilities are translated at historical rates. Net exchange gains or losses resulting from such translation are excluded from net loss but are included in comprehensive income and accumulated in a separate component of stockholders' equity. Income and expenses are translated at weighted average exchange rates for the period. Foreign currency transactions denominated in a currency other than the US Dollar, which is the Company’s functional currency, are included in determining net income for the period.

 

 

 

 

 

 

F - 13

---

Table of Contents

 

 

 

Accumulated Other Comprehensive Income (Loss)

Comprehensive loss includes net loss as currently reported under U.S. GAAP and other comprehensive loss. Other comprehensive loss considers the effects of additional economic events, such as foreign currency translation adjustments, that are not required to be recorded in determining net loss, but rather are reported as a separate component of stockholders’ equity (deficit).

Stock-Based Compensation

Under our stock compensation plan (the “Stock Plan”) which is registered under Form S8, or through newly issued restricted common stock, we pay qualified contractors and advisors common shares in lieu of compensation for services provided including business development, management, technology development, consulting, legal services and accounting services

Income Taxes

The Company did not have deferred income tax assets as of June 30, 2013 resulting from net operating losses and future amortization deductions, which would have been fully offset by valuation allowances.  The valuation allowances would have been established equal to the full amounts of the deferred tax assets, as the Company would not have been assured that it would have been more likely than not that those benefits would be realized.

Reconciliation between the statutory United States corporate income tax rate (35%) and the effective income tax rates based on continuing operations is as follows:

 

Six months ended June 30, 2013 and the year ended December 31, 2012		2013				2012
Income tax benefit at Federal statutory rate of 35%		$	(556,480	)		$	(500,368	)
State Income tax benefit at 8.84%, net of Federal effect			(154,180	)			(138,634	)
Permanent and other differences			-				-
Change in valuation allowance			710,660				639,002
Total		$	-			$	-

Components of deferred tax assets were approximately as follows:

As at June 30, 2013 and December 31, 2012		2013				2012
Net operating loss		$	4,761,000			$	3,037,000
Asset impairment			-				-
Valuation allowance			(4,761,000	)			(3,037,000	)
Total		$	-			$	-

At June 30, 2013 the Company has available net operating losses of approximately $4,761,000 which may be carried forward to apply against future taxable income. These losses will expire in 2031. Deferred tax assets related to these losses have not been recorded due to uncertainty regarding their utilization.

The provisions of ASC 740 require companies to recognize in their consolidated financial statements the impact of a tax position if that position is more likely than not to be sustained upon audit, based upon the technical merits of the position. ASC 740 prescribes a recognition threshold and measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.

 

 

 

 

 

F - 14

---

Table of Contents

 

 

Management does not believe that the Company has any material uncertain tax positions requiring recognition or measurement in accordance with the provisions of ASC 740. Accordingly, the adoption of these provisions of ASC 740 did not have a material effect on the Company’s consolidated financial statements. The Company’s policy is to record interest and penalties on uncertain tax positions, if any, as income tax expense.

The Company has not filed its applicable Federal and State tax returns for the year ended December 31, 2012 and may be subject to penalties for noncompliance. The Company has filed an extension for the 2013 filing.

Recently Issued Accounting Pronouncements

Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification™ (“ASC”) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company.

 

We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.

 

NOTE 5– DISCONTINUED OPERATIONS

Disposition of E-Waste Systems of Ohio, Inc. (formerly Tech Disposal, Inc.)

On September 20, 2012 the Company’s wholly owned subsidiary, E-Waste Systems (Ohio), Inc. completed the physical transfer of its business and its assets to a company controlled by a minority shareholder in the Company (“the purchaser”). In connection with this transfer the purchaser has agreed to assume payments on the lease on the premises at 1033 Brentnell Avenue, Columbus, Ohio, formerly held by the Company. The value of any consideration receivable arising from the sale, including any gain on disposal, has been fully impaired as its collection is uncertain.  Accordingly, all activity related to the disposal of our Ohio business has been classified as discontinued operations.

NOTE 6 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of June 30, 2013 and December 31, 2012:

		2013				2012
Computer Software		$	2,424			$	-
Less:  accumulated depreciation			(2,424	)			-
Property and Equipment, Net		$	-			$	-

Depreciation expense for the six months ended June 30, 2013 and 2012 was $0 and $0, respectively.

 

 

 

 

F - 15

---

Table of Contents

 

 

 

NOTE 7 - RELATED PARTY TRANSACTIONS

Transactions Involving Non-Officers and Directors

Effective October 28, 2011 the Company received $12,000 in cash from a related party in exchange for a convertible note payable. The note accrues interest at 12% and is due twelve months from the date of origination or October 28, 2012. The principal balance of the note along with accrued interest is convertible at any time, at the option of the note holder, into the Company's common stock on or before the maturity date at a price of $0.25 per share. The Company recognized $714 and $714 of interest expense for the six months ended June 30, 2013 and 2012 on the related party convertible note payable leaving a balance in accrued interest of $2,411 and $1,697 as of June 30, 2013 and December 31, 2012, respectively. The note has been extended and has a maturity date of October 28, 2014.

On May 1, 2013, the Company issued 1,500,000 shares of common stock to an employee for past obligations due.

During the six months ended June 30, 2013, the Company had receivables from related parties totaling $750.  These receivables are expected to be paid back in full in the subsequent months.

Transactions Involving Officers and Directors

During the six months ended June 30, 2013, the Company issued 1,000,000 shares of common stock to the Company’s Chief Executive Officer and Director at $0.008 per share for officer compensation of $8,000.  The Company also issued 10,000,000 shares of common stock to the Company’s Chief Executive Officer and Director at $0.0125 per share for accrued officer compensation of $125,000.  The Company also issued 1,800,000 shares of S-8 registered shares at $.0070 per share valued at $12,600 for accrued officer compensation to the Company’s Chief Executive Officer and Director.  The Company also recorded $172,554 of additional officer compensation leaving an ending balance of $1,254,084 in accrued officer and director compensation at June 30, 2013.

NOTE 8 – NOTES AND LOANS PAYABLE

Effective October 28, 2011 the Company received $12,000 in cash from a related party in exchange for a convertible note payable. The note accrues interest at 12% and is due twelve months from the date of origination or October 28, 2012. The principal balance of the note along with accrued interest is convertible at any time, at the option of the note holder, into the Company's common stock on or before the maturity date at a price of $0.25 per share. The Company recognized $714 and $714 of interest expense on the related party convertible note payable for the six months ended June 30, 2013 and 2012, respectively. Leaving a balance in accrued interest of $2,411 and $1,697 as of June 30, 2013 and the year ended December 31, 2012, respectively.

Effective February 3, 2012 and February 21, 2012 the Company borrowed $40,000 and $35,000, respectively, from an unrelated third party entity in the form of two promissory notes. The notes bear interest at 14%, are unsecured and are due on demand. During the six months ended June 30, 2013, the Company recognized $5,207 of interest expense on these notes payable leaving balances in accrued interest of $14,516 and $9,309, respectively as of June 30, 2013 and December 31, 2012.

Effective April 3, 2013 the Company entered into a settlement agreement with a note holder whereby the Company would pay interest to the note holder from inception of the two notes through and including May 31, 2013. Payment of the interest due of $13,653 was made in the form of 2,185,879 shares of Rule 144 Unrestricted common stock.

Effective February 24, 2012, the Company borrowed $100,000 from an unrelated third party in the form of a Line of Credit. The funds were to support the working capital requirements of E-Waste Systems (Ohio) and specifically, the procurement of electronic waste for refurbishment or recycling. The promissory note accrues interest at 14% and is due on March 24, 2013. On April 22, 2013 the Company issued 1,029,479 shares of the Company’s common stock in payment of all interest from inception of the note through May 31, 2013. The note holder has agreed to accept no payment on the principal amount of the note for the present time, and interest will continue to accrue on the note beginning with June 1, 2013 through the time the note is completely retired. During the period ended June 30, 2013 the Company recognized $8,972 of interest expense and made no payments on this promissory note leaving a balance of $1,167 accrued interest of as of June 30, 2013.

 

 

 

 

 

F - 16

---

Table of Contents

 

 

Effective August 27, 2012, the Company executed a convertible promissory note in the principal sum of $150,000. The consideration to be provided by the note holder is no more than $135,000. A $13,500 (10%) original issue discount (“OID”) applies to the principal sum. The note holder made payments to the Company of $25,000 and $15,000 of the total consideration during the year ended December 31, 2012, and $50,000 through the six months ended June 30, 2013. The principal sum due to the note holder is to be prorated based on the consideration actually paid together with the 10% original issue discount that will also be prorated based on the amount of consideration actually paid as well as any other interest or fees. The maturity date is one year from the date of each payment of consideration and is the date upon which the principal sum, as well as any unpaid interest and other fees, shall be due and payable. The OID in respect of the consideration received on the date of execution equaled $4,445 for the year ended December 31, 2012, and $5,556 for the six months ended June 30, 2013.

Effective February 28, 2013, the note holder elected to convert $7,350 of the principal balance into 1,500,000 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $3,625 to interest expense.

Effective March 20, 2013, the note holder elected to convert an additional $11,466 of the principal into 1,800,000 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $5,026 to interest expense.

Effective April 16, 2013, the note holder elected to convert $9,931 of the principal balance resulting in the issuance of 2,695,650 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $3,265 to interest expense.

Effective May 6, 2013, the note holder elected to convert $8,341 of the principal balance resulting in the issuance of 2,500,000 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $4,062 to interest expense.

Effective June 13, 2013, the note holder elected to convert $7,357 of the principal balance resulting in the issuance of 2,981,397 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $168 to interest expense.

The note contains a conversion feature wherein the note may be converted to shares of the Company’s common stock at a conversion price of the lesser of $0.01 or 70% of the lowest trade price in the 25 trading days prior to the conversion date. Unless otherwise agreed in writing by both parties, at no time will the holder of the note convert any amount outstanding into common stock that would result in it owning more than 4.99% of the total common stock outstanding. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $58,646 and debt discounts of $44,445 on the payment dates of the note for the year ended December 31, 2012, and $124,097 and $55,556 for the six months ended June 30, 2013. As of June 30, 2013 and December 31, 2012, the Company had recognized amortization on debt discounts on these notes of $41,841 and $37,814, leaving unamortized debt discounts of $44,826 and $31,111, respectively. See Note 9 for treatment of derivative liability associated with convertible notes payable.

Effective December 31, 2012, the Company negotiated the forgiveness of accounts payable of $50,000 owed to a Company consultant in exchange for the execution of a convertible note payable with a face value of $162,500. On the same date and under the same terms, the Company executed two other convertible notes payable with face values of $11,000 and $29,000 in exchange for services provided to the Company. The notes are unsecured, bear interest at 6% per annum and are due on December 31, 2015. The notes are also convertible, at the option of the holder, into shares of the Company’s common stock at a share price of the lower of $0.0064 or the average of the three lowest volume weighted-average prices per share during the 30 calendar day period immediately prior to the date of conversion

The intrinsic value of the beneficial conversion features and the debt discounts associated with the equity issued in connection with these convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $25,313. The discount will be amortized and recorded to the statement of operations over the stated term of the notes and is included within interest expense. As of June 30, 2013 and December 31, 2012, the Company had recognized amortization on the debt discounts on these note of $12,321 and $-0- of the total outstanding debt discounts leaving an unamortized debt discounts of $12,992 and $25,313, respectively.

 

 

 

 

 

 

F - 17

---

Table of Contents

 

 

On January 18, 2013, the Company executed a convertible note payable with a face value of $41,557 in exchange for services provided to the Company. This note is unsecured, bears interest at 6% per annum and is due January 18, 2016. The note is convertible, at the option of the holder, into shares of the Company’s common stock at a share price of the lower of $0.0064 or the average of the three lowest volume weighted-average prices per share during the 30 calendar day period immediately prior to the date of conversion. The intrinsic value of the beneficial conversion features and the debt discounts associated with the equity issued in connection with the convertible debt was recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $41,557. The discount will be amortized and recorded to the statement of operations over the stated term of the note and is included within as interest expense. As of June 30, 2013, the Company had recognized amortization on the debt discounts on this note of $6,206 of the total outstanding debt discounts leaving an unamortized debt discount $35,371.

Effective February 8, 2013, the Company executed a convertible note payable with a face value of $162,500 in exchange for services provided to the Company in the amount of $115,440 and forgiveness of accounts payable of $47,060. The intrinsic value of the beneficial conversion features and the debt discounts associated with the equity issued in connection with the convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $162,500. The discount will be amortized and recorded to the statement of operations over the stated term of the note and is included within as interest expense. As of June 30, 2013, the Company had recognized amortization on the debt discounts on this note of $21,073 of the total outstanding debt discounts leaving an unamortized debt discounts $141,427.

This note is unsecured, bears interest at 6% per annum and is due February 8, 2016. The note is convertible, at the option of the holder, into shares of the Company’s common stock at a share price of the lower of $0.0064 or the average of the three lowest volume weighted-average prices per share during the 30 calendar day period immediately prior to the date of conversion.

Effective March 5, 2013, the Company executed a convertible note payable with a face value of $17,417 in exchange for services provided to the Company. This note is unsecured, bears interest at 6% per annum and is due March 5, 2016. The note is convertible, at the option of the holder, into shares of the Company’s common stock at a share price of the lower of $0.0064 or the average of the three lowest volume weighted-average prices per share during the 30 calendar day period immediately prior to the date of conversion.

The intrinsic value of the beneficial conversion features and the debt discounts associated with equity issued in connection with the convertible debts has been recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $15,371. The discount will be amortized and recorded to the statement of operations over the stated term of the note and is included within as interest expense. As of June 30, 2013, the Company has amortized $2,760 the total outstanding debt discounts leaving an unamortized debt discount of $14,657

Effective June 3, 2013, the Company executed a convertible note payable with a face value of $32,500. This note is unsecured, bears interest at 8% per annum and is due June 2, 2014. The note is convertible, at the option of the holder, into shares of the Company’s common stock at a share price of the average of the three lowest volume weighted-average prices per share during the 10 calendar day period immediately prior to the date of conversion times 55 percent. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $51,382 and debt discount of $32,500 on the payment dates of the note for the period ended June 30, 2013.  As of June 30, 2013, the Company had recognized amortization on debt discounts on these notes of $2,391 leaving unamortized debt discounts of $30,109. See Note 9 for treatment of derivative liability associated with convertible notes payable.

 

 

 

 

F - 18

---

Table of Contents

 

 

The components of notes payable are summarized in the table below:

		June 30, 2013				December 31, 2012
Convertible note payable to a related party, bearing interest     at 12%, unsecured, due on October 28, 2012 (note is in default)		$	12,000			$	12,000
Notes payable to an unrelated party, bearing interest at 14%,     unsecured, due on demand			75,000				75,000
Note payable to an unrelated party, bearing interest at 14%, unsecured,     due on March 24, 2013 (note is in default)			100,000				100,000
Convertible note payable to an unrelated party, bearing interest at 10%, unsecured,     due on August 27, 2013 and due on October 10, 2013.			-				44,445
Convertible note payable to an unrelated party, bearing interest at 10%, unsecured,     due on February 27, 2014 and due on June 12, 2014			55,556				-
Convertible note payable to an unrelated party, bearing interest at 8%,     unsecured, April 14, 2014			32,500				-
Discounts on short-term convertible notes payable			(74,935	)			(31,111	)
Total short-term debt		$	200,121			$	200,334
Derivative liability on short-term convertible notes		$	104,619			$	61,545
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on December 31, 2015		$	11,000			$	11,000
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on December 31, 2015			29,000				29,000
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on December 31, 2015			162,500				162,500
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on January 18, 2016			41,557				-
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on February 8, 2016			162,500				-
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on March 5, 2016			17,417				-
Discounts on long term portion of convertible notes payable			(204,447	)			(25,313	)
Total long-term debt		$	219,527			$	177,187

 

NOTE 9 – DERIVATIVE LIABILITY

Effective July 31, 2009, the Company adopted ASC 815 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. The conversion terms of the convertible notes executed on June 3, 2013, and June 11, 2013 (total unpaid face value of $170,278) are subject to “reset” provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than conversion price of these notes. If these provisions are triggered, the conversion price of the note will be reduced. As a result, the Company has determined that the conversion features imbedded in the notes are not considered to be solely indexed to the Company’s own stock and are therefore not afforded equity treatment. In accordance with ASC 815, the Company has bi-furcated the conversion feature of the note and recorded a derivative liability.

ASC 815 requires Company management to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value as another income or expense item. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with convertible notes payable.

 

 

 

 

 

F - 19

---

Table of Contents

 

At origination, the Company valued the conversion features using the following assumptions: dividend yield of zero, years to maturity of 0.75 to 1.00 year, average risk free rates over between 0.11 and 0.18 percent, and annualized volatility of between 5 and 230 percent to record derivative liabilities of $752,749. At December 31, 2012, the Company revalued the conversion features using the following assumptions: dividend yield of zero, years to maturity of between 0.65 and 0.78 years, risk free rate of 0.16 percent, and annualized volatility of between 234 and 251 percent and determined that, during the year ended December 31, 2012, the Company’s derivative liability decreased by $2,899 to $61,545. The Company recognized a corresponding loss on derivative liability in conjunction with this revaluation in the statement of operations.

At June 30, 2013, the Company revalued the conversion features using the following assumptions: dividend yield of zero, years to maturity of between 0.66 and 0.95 years, a risk free rate of 0.15%, and annualized volatility of 232.29% and determined that, during the six months ended June 30, 2013, the Company’s derivative liability increased by $43,074 to $104,619. The Company recognized a corresponding loss on derivative liability in conjunction with this revaluation.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

As of the date of this filing, the Company is not aware of any current or pending legal actions expected to have a material impact.

Occupancy Leases

The Company leased office and warehouse space in Columbus, Ohio under an operating lease. The lease provided for a lease payment of $4,200 per month from December 1, 2012 through November 30, 2013, and a lease payment of $4,400 per month from December 1, 2013 through November 30, 2014, and lease payments thereafter on a month-to-month basis at a rate of $4,568 per month. On September 20, 2012, this lease was assigned to the purchaser as part of the transfer of the Company’s assets and business on September 20, 2012. As such, the Company has no ongoing minimum lease payments associated with the lease.

Effective February 12, 2013 the Company entered into a Lease Agreement with Evotech Capital Ltd in a commercial building in Shanghai, China. The term of the lease runs from February 12, 2013 through February 12, 2015. The terms of the lease calls for the Company to issue Evotech Capital 250,000 shares of common stock within 180 days of the beginning of the lease term. This represents the only payment required during the term of the lease. The Company has not issued those shares.

Operating Leases

The Company has entered into three operating agreements to operate businesses on behalf of property and business owners. The agreements require facility and equipment payments and personnel payments along with other possible payments in the course of operating these businesses. These agreements are on a quarter-to-quarter basis and can be terminated upon agreement of both parties.

Contingent Consideration

In connection with the acquisition of E-Waste Systems of Ohio, Inc. (formerly Tech Disposal, Inc.), this was disclosed in our annual filing with the SEC on Form 10-K, filed April 16, 2013 and incorporated by reference herein.

 

 

 

 

F - 20

---

Table of Contents

 

 

 

 

NOTE 11 – STOCKHOLDERS’ EQUITY

Preferred Stock

The Company is authorized to issue 10,000,000 shares of Preferred Stock, of which there are 200,000 shares set aside as Series A Convertible Preferred Stock with a par value of $0.001.  As of June 30, 2013, and December 31, 2012, there were 873 and 0 shares of Series A Convertible Preferred Stock issued and outstanding, respectively.

The Series A Preferred Shares have the following provisions:

Dividends

 

Series A convertible preferred stockholders’ are entitled to receive dividends when declared. As of June 30, 2013 and December 31, 2012 no dividends have been declared or paid.

Liquidation Preferences

 

In the event of liquidation, following the sale or disposition of all or substantially all of the Company’s assets, the holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of the common stock by reason of their ownership thereof, an amount equal to $1,000 per share.

Voting Rights

 

Each holder of shares of the Series A Preferred Stock is entitled to the number of votes equal to the number of shares of common stock into which the preferred shares are convertible.

Conversion

 

Each share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock which is equal to $1,100 divided by the greater of (i) $0.001 or (ii) 90 percent of the volume weighted average closing price for the Company’s common stock during the ten trading days immediately prior to conversion.

Redemption

 

The Series A Preferred Stock shares are redeemable for cash, at the option of the Company any time after the date of issuance, plus all accrued but unpaid dividends, on the following basis:

(i)	110 percent of the purchase price of each share of Series A Preferred Stock if redeemed any time before the first twelve months of the date of issuance; and

(ii)	105 percent of the purchase price of each share of Series A Preferred Stock on or after the first twelve months of the date of issuance.

Preferred Stock Activity for the six months ended June 30, 2013

Effective February 6, 2013, as part of a master license agreement signed with an unrelated third party, the Company issued 650 shares of Series A and in exchange received marketable securities valued at $730,000. The fair value of the preferred stock transferred was based on the trading price on the date of transfer of the marketable securities into which the shares received may be converted based on the conversion terms of the preferred stock.

On June 24, 2013, the Company issued 223 shares of Series A Preferred Stock valued at $27,256 and assumed liabilities of $222,928 in the acquisition of a subsidiary.

Common Stock

The Company’s board of directors and majority shareholder approved an amendment to the Articles of Incorporation for the purpose of increasing the authorized common stock from 190,000,000 shares to 490,000,000 shares. The Company’s authorized shares of preferred stock were not affected in this corporate action. As of June 30, 2013 and December 31, 2012, there were 186,973,353 and 106,504,926 shares of common stock issued and outstanding, respectively.

 

 

 

 

F - 21

---

Table of Contents

 

 

 

Common Stock Activity for the six months ended June 30, 2013

During the six months ended June 30, 2013, the Company issued 23,172,301 shares of common stock at prices ranging from $0.006 to $0.019 per share for services valued at $347,534. The value of the shares issued for services was based on the trading price of the Company’s common stock on the date of issuance.

During the six months ended June 30, 2013, the Company issued 30,733,664 shares of common stock at $0.0049 to $0.0164 per share for settlement of all accounts payable, accrued expense, accrued interest and debt transactions valued at $311,444. The value of shares issued for settlement of debt was based on the trading price of the Company’s common stock on the date of issuance or the face value of the debt extinguished.

During the six months ended June 30, 2013, the Company recorded $309,550 to additional paid-in capital for debt discounts recorded on convertible notes payable, and $39,327 as permanent equity in connection with convertible notes.

During the six months ended June 30, 2013, the Company issued 5,396,462 shares of common stock for intangible assets in connection with the acquisition of Surf at $0.009 to $0.01 per share valued at $52,916.

During the six months ended June 30, 2013, the Company issued 21,166,000 shares of common stock for prepaid services at $0.006 to $0.015 per share valued at $219,357.  All prepaid expenses are to be realized in the subsequent quarter.

 

 

 

 

 

 

F - 22

---

Table of Contents

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution Regarding Forward-Looking Statements

 

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements.  These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control.  Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs.  There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.

With respect to this discussion, the terms “EWSI,” the “Company,” “we,” “us,” and “our” refer to E-Waste Systems, Inc. and the term “EWSO” refers to E-Waste Systems (Ohio), Inc. (formerly known as Tech Disposal, Inc.)  This discussion and analysis should be read in conjunction with the financial statements and notes, and other financial information included in this quarterly report.

Company Overview

We were incorporated in the State of Nevada on December 19, 2008.  In May 2011, we changed our name to “E-Waste Systems, Inc.” to reflect the strategy we are now operating.

This discussion should be read in conjunction with the other sections of this Current Report, including “Risk Factors,” “Business” and the Financial Statements attached hereto as Exhibits 99.1 and the related exhibits.  The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Current Report.  See “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results may differ materially.

 

Background

 

2013 Operations

EWSI completed two transactions in US during 2013: Surf/CPU and 2TRG

Surf is located in Los Angeles, California. The company was rebranded EW California but is doing business also through the former name to maintain a market position with the existing customers.

The management as well as all the employees (7 people) maintained their place and Julie Peterson, President at Surf, became President of EW California and Manager for EWSI’s operations in the US.

In the first year of business under EWSI’s wings, the company implemented and expanded its operations for a red $200,000 for 2012 to a black $10,000 for 2013 and still growing.

Subsidiary

The operative units such as EW California and EW Cincinnati are involved into directly recycling/refurbishing operations. The other ones such as EW Ltd, EWS Italy, EW Mediterranean and EWS Bharat are focused on the commercial expansion of the business through new ventures and of the brand through licenses.

 

 

 

 

 

- 4 -

---

Table of Contents

 

Looking for new ways for an efficient and effective use of technology, EWSI is developing with its tech partners miniaturized recycling equipment to be provided to local partners in order to achieve a more efficient transportation.

Further efforts have been put into expanding implementation of equipment for recycling of air conditioning hardware and refrigerators. Those two specific home appliances are becoming a sensitively big number in the ewaste stream and providing a complete recycling solution, including insulation,

Recent developments with a US R&D firm brought into signing a letter of interest to test a Rare Earths Elements sorting technology into one of the EWSI’s operational sites in the US. REE are sorting is one of the last step into achieving the 100% no-landfill policy that EWSI is voluntarily committed to.

In the first quarter of 2013, EWSI began a focused operation to enter into the market in China and signed a series of agreements designed to increase revenues. Those agreements provided for EWSI to ‘manage’ the companies leasing and operating the business assets. This business model is becoming more and more popular since most of the companies in China do not support their accounting with auditing. The commercial strategy behind this is that an healthy financial audited company has more possibilities to raise capital or become target for an acquisition.

History and background

Mission Statement

Create a market-leading, integrated business group in the emerging electronic waste (“ewaste”) and reverse logistics industry, in the advisory for compliant management and in the development of new commercial and technological ventures by offering customers global, seamless, and expanded custom services.

 

Company History

After 5 years of research, planning and operating various companies in the industry, Martin Nielson founded E-Waste Systems as a wholly owned subsidiary of a US public company shell, specifically to grow by completing a series of acquisitions as its basis for operations. EWSI has three operating units in US, UK and China, corresponding to the first geographies in which EWSI is completing acquisitions.

 

In earlier ventures in this industry, Nielson previously received State of California certification as an e-waste collector and was subsequently awarded a subcontract for the City of San Jose, California (the tenth-largest city in the US) to process certain electronic waste collected from curbside and drop-off sites. While initial quantities were relatively small, this contract enabled him to begin developing and refining the knowledge and processes necessary for bringing together different operations. Under a previous company in the UK, he oversaw the processing of over 7,000 tonnes of e-waste, and secured a contract with a major engineering firm to recycle nearly 400 electronic sortation plants throughout the country.

 

Financial Strategy

Execution of the Company’s Business Plan requires a foundation capable of sustaining rapid growth.  This foundation consists of a global brand, proprietary technologies and substantial revenues.  In addition, the Company’s financial plan needs to support the potential for very rapid quarter to quarter growth over the next few years, which could be 50% or more.

 

This Strategic Financial Plan represents the broad financial concepts and some guiding principles regarding what are likely, in management’s opinion, to be the most efficient financial methods of implementing the Company’s objectives of becoming a global leader in the industry through the brand affiliations and selective acquisitions as a complement to its organic internal growth.

 

 

 

 

 

- 5 -

---

Table of Contents

 

Management believes that to be a successful business, we must demonstratively prove to investors through our business performance (in the form of growing sales and earnings) that the value of the business will continue to grow over the foreseeable future.   Our objective therefore is: To build a fundamentally solid public company from fundamentally sound businesses.

 

Key Elements

The total value of our Company’s economic resources is capital invested in our equity plus debt we assume. The Company must make efficient use of a combination of debt and equity in our operations to fuel growth.  Equity is the portion of our Company’s economic resources that our shareholders own and debt will be used to leverage equity by using borrowed money to obtain additional economic resources.  Leverage, while increasing investment returns, must be used wisely. Accordingly, the basic elements of our financing strategy are the following:

 

1.

Balance Sheet Strengthening .  We will strengthen our balance sheet and the balance sheets of our subsidiaries and key affiliates by acquiring tangible and intellectual assets.  We will also convert certain liabilities into equity, eliminate debt of high burden, and avoid both short term liabilities that cannot be managed and unsustainable long term liabilities.

2.

Financing for ePlant™ and other Technology .  We will seek friendly third party financing for new capital equipment, such as ePlant™ and other eWaste™ systems in order to improve the operating performance of our business units. We will invest in developing our proprietary technologies using equity wherever possible.

3.

Financing for our Subsidiaries and Affiliates.   The growth of our subsidiaries and affiliates directly contributes to our company growth. We will provide financial support to our subsidiaries and affiliates in a manner in which the investment can lead to superior returns and within manageable and acceptable risks.

4.

Manage a Sustainable Capitalization Structure .  The Company has presently authorized 500 Million shares of equity, of which 490 Million are Common Shares and 10 Million are Preferred. During 2013 the share price ranged from $0.01 to $0.1 bringing the Market Capital to an average of $8M with average volumes of 1.99M. As of January 31, 2014, the closing share price is $0.041, the issued and outstanding was 262,699,762 and its market value was $10,770,690. As the Company’s value increases with its performance, the market capitalization value should increase.  It is in the best interest of the Company to have a high market capitalization, higher share prices, and strong liquidity to obtain sufficient capital for our growth and for acquisitions.  Maintaining a balance of sensible debt alongside a robust market capitalization is targeted.

5.

Use of Performance-Based Incentives.   The Company believes in creating an atmosphere that encourages and motivates our people to out-perform the competition.  Disciplined and hard-working management, professionals, and other individuals can help us meet or exceed our company’s objectives and are fundamental to the growth we seek.  Incentive compensation plans tied to equity will be a key element of our compensation packages and our officers must set the example by accepting equity as a primary component of their compensation.

6.

Equity as Growth Capital. Preferred shares will be increasingly used to increase asset values, to minimize current dilution of common stock and to enhance overall shareholder equity while providing for attractive means to maintain sensible voting and conversion features.  Alongside preferred equity instruments, registered shares will be used to compensate qualified individuals to grow the company.  Wherever possible, we will also use equity as a currency for acquisitions.

 

 

 

 

 

- 6 -

---

Table of Contents

 

 

7.

Debt Financing.   Debt can leverage our equity and capital.  We will selectively obtain debt financing, even paying premium interest rates if necessary so that we can avoid toxic convertible debt.  And, we will establish plans to buy out potentially toxic liabilities by using loyal and long term investors.

8.

Investor Relations, Communication and Awareness.   We intend to have a strong and comprehensive investor communications plan using regular press releases, information 8K filings with the SEC, social media programs, frequent website updates; and an increasing use of CEO and management interviews and media relations programs.  These are all designed to make the investing public and our other constituents fully aware our plans, accomplishments, and developments as they occur.

9.

Secondary Public Offering and Upgrade Listing. The company will seek to raise capital from a public offering to fuel its growth and, at the proper time, consider migration to a national exchange like NASDAQ or NYSE to have access to higher quality and quantity of capital to fuel its desire for expansive growth.

The EWSI strategy for growth and achievement of these three goals comprises the following key elements:

●

Market Leading Brand : The market does not have a leading e-waste brand, especially not at the global level.  Our brand is unique and is promoted aggressively and globally to attain maximum awareness aligned with the highest compliance standards in the world (including those of the WEEE directive). Our commitment is to achieve and continuously enhance the best brand in the industry.

●

Global Reach : EWSI recognizes that e-waste is a global problem that requires a global solution.  We are therefore committed to developing and managing a worldwide presence, with primary focus on the Americas, Europe, and Asia. EWSI now has a presence in the USA, UK, Australia, China, India, Mexico and the Caribbean.

●

Proprietary Technology : We are committed to developing and deploying a portfolio of proprietary engineering and technologies that can extract maximum value from end-of-life assets while minimizing environmental impact. This includes software solutions as well as high-end separation, enrichment, and processing technologies applied to component materials and output streams such as plastics, precious metals, glass, carbon, and bio-materials.

●	Franchising and Affiliations : We have and will continue to develop affiliations with quality companies that share our business and environmental principles.  Franchising and affiliation are among the quickest and most capital efficient ways to expand the geographic and service coverage of EWSI.

●

Management Services : We offer our expertise in professional management practices and modern systems to our expanding affiliate network. The e-waste industry is highly fragmented with need for high level management.  Simultaneously, compliance and certification across all platforms are critical issues as national and international regulations expand and become enforced.

●

Joint Ventures and Acquisitions : Carefully selected acquisitions and joint ventures in the Americas, Europe, and Asia remain part of our strategy. The acquisitions will be done opportunistically in a separate division in order to focus EWSI management on its main task of building its eWaste™ brand globally. Each joint venture and acquisition must be a profit center with local brand value, an experienced management team, and solid commercial relationships with clients of strategic interest to EWSI. We completed one acquisition in the USA during 2012 and two acquisitions in 2013.

●	Thought-Leading Business Development Initiatives : Leveraging our network of contacts and affiliates, we target key customer and market segments with the most innovative and customized e-waste solutions.

●

Fair Trade : EWSI is committed to the principles of Fair Trade. Opportunities to process end-of-life materials in countries with access to low cost of labor will be deployed to the fullest but only under the principles of at least living wages, the highest standards of environmental compliance, and corporate social responsibility suitably applied.

 

 

 

 

 

- 7 -

---

Table of Contents

 

 

Company Structure

●     EWS International

 

The publicly traded company holding the group. It is fully reporting to the SEC and works on fully auditable open book bases. Provides centralized organization even though each company branch maintains its statutory independency.

The processes performed are referred to tree main functions:

●   Compliance

●    Finance

●   Governance

●      eWaste

 

The business unit’s mission is to  integrate the industry worldwide under a quality brand: namely, EWSI’s eWaste™ brand. Through its broad network of subsidiaries and affiliates, EWSI offers customized end-to-end solutions in IT Asset Recovery, E-Waste Management, and Electronics Reverse Logistics. EWSI leverages its affiliates’ complementary geographies, technical capabilities, and strong supplier relationships to expand the services offered to customers, cross-fertilize best management practices, streamline logistics, aggregate volumes, offer state-of-the-art engineering, and provide a truly global e-waste solution. The expertise, experience, and relationships of the EWSI senior management team, particularly in the application of scale cost reductions, business development, and technology implementation is a key differentiator.

eWaste’s primary customer targets are organizations facing a mix of regulatory, environmental, and price pressures, as well as an increasing need to protect their brand names and safeguard their data in the management of their e-waste. eWaste Systems’s adherence to the principles of Fair Trade and the requirements of the WEEE Directive provides these customers with reassurance that end-of-life e-waste management is not only fully compliant and certified but is also done with social and environmental responsibility at the forefront.

●     eVolve

 

This unit provides best   practices management and business lease agreements to companies that want to become compliant to US GAAP. The agreements entitle eVolve to become responsible to execution of activities related to sales, accounting, advisory, training and business development.

The strategy behind the lease and management agreements provide growth acceleration with lower capital costs than acquisition and strategic industry penetration with synergies between the companies. In support of the eWaste branch, the agreements will include full commitment to the environmental compliance providing eco-friendly initiatives and services.

eVolve primary customers targets are companies that wish to grow their business and to enhance the management, accounting and operations of their business to such high standards that they may potentially become a public company or become attractive for investing/acquiring purposes. All companies under this type of agreement report directly for balance sheet purposes.

●      eIncubator

 

eIncubator takes in consideration different forms of investments and ventures directly and indirectly related to the e-waste market by which business can experience future growth by developing new products or processes to improve and expand operations and market opportunities. The companies involved in Joint Ventures with eIncubator benefit of added credibility and visibility through the wide network of affiliates of the group nevertheless of the expertise and know-how to develop and improve the business.

The ideal candidates for Joint Venture investments with eIncubator are companies that have developed innovative technologies or other compelling businesses. eIncubator promotes and supports also social and environmental no-profit ventures.

 

 

 

 

- 8 -

---

Table of Contents

 

E-Waste (Ohio)

 

Founded in March 2010 and headquartered in Columbus, Ohio, EWSO’s business provided repair, refurbishment and end-of life processing of electronic equipment to customers who are primarily located in or around Columbus, Ohio.

 

Notwithstanding the decision to dispose of part of our operations in EWSO, management continues to focus on the execution of the business strategy and to pursue acquisition targets suitable for this operation.

 

Surf Investments

 

Surf Investments, Ltd dba CPU Computer Repair has just completed 2013 with a profit, the first time in 5 years utilizing a strategy of taking the company back to its core strengths of customer service and computer repair. Surf is focused on value add services such as corporate imaging services and custom solutions.

 

E-Waste Systems Cincinnati, Inc

 

E-Waste Systems Cincinnati acquired the new location in Springdale, OH on February 3, 2014 and was open for business March 20. The core business is pick-up of e-waste from local business and processing the commodities for a profit. Our primary focus is to secure our R2/e-Steward certifications and refine our procedures/processes so they can be replicated for additional locations. Our Geneva NY location will be standardizing by May 20. We would like to acquire or team with 3 other locations by the end of the year to achieve not less tna five locations with centralized management to achieve maximum profitability.

 

Factors impacting EWSI’s Consolidated Results of Operations

 

The principal factors that impact our past and future results of operations include:

 

●

Availability of feedstock volumes . We do not have any formal contracts with suppliers of feedstock batches. There is no mechanism in place that effectively underpins our access to a regular, predictable volume of feedstock each week/month. Our revenue streams are all dependent on batches of used electronic equipment being available to fuel the repair, refurbishment and spare parts recovery processes from which the revenue base is derived.

 

●

Demand for second-hand electronic equipment . Our revenue, operating results and investment in working capital depend on the level of demand for second-hand electronic equipment that has been repaired and/or refurbished together with a requirement for recovered spare parts that can be used in repair and refurbishment operations.  We will usually have concluded an agreement or be in advanced negotiations to sell our repaired and refurbished units before we commit to buying feedstock batches. This careful management of the profits and cash cycles will be disrupted if demand for used electronics were to sharply decline for any reason including businesses and consumers curtailing their investment in new equipment in response to changes in economic conditions.

 

●

Market prices for certain commodities . Our business is affected by changes in the market prices of certain traded commodities, notably those precious metals that are used to manufacture key components found in electronic equipment today. Movements in the prices at which these commodities are traded influences the prices at various stages of the reverse supply chain for electronic goods, including the prices that we negotiate to acquire our feedstock volumes and the value we are able to extract from the residual scrap remaining at the end of our repair, refurbishment and spare parts recovery processes.

 

 

 

 

- 9 -

---

Table of Contents

 

 

 

 

●

Regulatory changes . The businesses that derive their revenue and profits from handling electronic waste in the United States are exposed to increasingly pervasive legislative and regulatory regimes at both Federal and State levels of government. Each time the legal or regulatory backcloth changes it is likely that incremental cost is added to the reverse supply chain, which in turn implies that all participants in that supply chain will observe an increase in their operating cost base, which depending on their leverage may, or may not, be capable of being passed on downstream.

 

●

General and administrative costs . Our business is still very young and at the beginning of its pursuit of organic and external growth. In order to execute on any strategy for growth, we expect to have to further increase its general and administrative overheads cost base. Our results from operations will be adversely impacted if these additional overhead costs are incurred before the growth in revenue is received.

Consolidated Results of Operations for E-Waste Systems, Inc.

 

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

 

Revenues – Continuing Operations

 

We generated revenue of $257,012 during the six months ended June 30, 2013, compared with $0 for the six months ended June 30, 2012.  

 

Cost of Sales – Continuing Operations

 

Cost of sales was $143,884 for the six months   ended June 30, 2013 compared with $0 for the six months ended June 30, 2012.  

 

Gross Profit – Continuing Operations

 

Gross profit for the six months ended June 30, 2013 was $113,128, compared to gross profit of $0 for the six months ended June 30, 2012.  

 

Operating Expenses – Continuing Operations

 

We incurred operating expenses of $1,737,639 and $482,633 for the six months ended June 30, 2013 and 2012, respectively.  Our operating expenses for the year   ended June 30, 2013 and 2012 consisted of directors’ and officers’ accrued compensation, professional fees, impairment in available for sale securities, and general and administrative expenses.

 

Operating Expense – Discontinued Operations

 

We incurred operating expenses of $3,643 for the six months   ended June 30, 2013, as compared to operating expenses of $58,408 in the six months ended June 30, 2012 .  The reason for the negative operating expenses is due to write offs of debt.

 

Other Expenses – Continuing Operations

 

We incurred net other expenses of $125,954 and $67,368 for the six months   ended June 30, 2013 and 2012, respectively.  

 

Other Expenses – Discontinued Operations

 

We incurred net other expenses of $8,972 for the six months ended June 30, 2013, as compared with net other expenses of $0 for the six months ended June 30, 2012.  

 

 

 

 

 

- 10 -

---

Table of Contents

 

 

 

Net Loss – Continuing Operations

 

As a result of the above, we reported a net loss from continuing operations of $1,750,465 and $550,001 for the six months ended June 30, 2013 and 2012, respectively.

 

Net Loss – Discontinued Operations

 

As a result of the above, for the six months ended June 30, 2013 and 2012, we reported net income from discontinued operations of $ 3,643 and $(58,408), respectively.

 

Liquidity and Capital Resources

 

As of June 30, 2013, our consolidated balance sheet presented total current assets of $263,889 and total current liabilities of $2,107,192 which resulted in a working capital deficit of $1,843,303.  

 

To date, we have relied upon issuances of unsecured notes to finance our operations and help us meet our short-term obligations.  There is no assurance that we will be able to continue to issue notes to finance our short-term obligations.  Our present capital resources are insufficient to implement our business plan.  The operating expenses for the year will consist primarily of compensation for senior management, professional fees for the audit and legal work relating to our regulatory filings throughout the year, as well as transfer agent fees, travel and general office expenses.  Our current cash on hand is insufficient to make our planned expenditures and to pay for our general operating expenses over the next twelve months.  Accordingly, we must obtain additional financing in order to continue to implement our business plan during and beyond the next twelve months.

 

We are working on debt financing based upon our growth of available collateral and expanded operations and in addition, we anticipate that additional funding will be in the form of equity financing from the sale of our common stock.  We are currently seeking additional funding in the form of equity financing from the sale of our common stock, but cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock to implement our business plan. Additional equity financings could result in significant dilution to our stockholders.  In the absence of such financing, we will not be able to implement our business plan or pursue any acquisition.  If we are unable to raise additional capital in the near future, we will experience liquidity problems and management expects that we will need to curtail operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other remedial measures.

 

Contractual Obligations

 

Notes Payable

 

Effective October 28, 2011 the Company received $12,000 in cash from a related party in exchange for a convertible note payable. The note accrues interest at 12% and is due twelve months from the date of origination or October 28, 2012. The principal balance of the note along with accrued interest is convertible at any time, at the option of the note holder, into the Company's common stock on or before the maturity date at a price of $0.25 per share. The Company recognized $714 and $714 of interest expense on the related party convertible note payable for the six months ended June 30, 2013 and 2012, respectively. Leaving a balance in accrued interest of $2,411 and $1,697 as of June 30, 2013 and the year ended December 31, 2012, respectively.

 

Effective February 3, 2012 and February 21, 2012 the Company borrowed $40,000 and $35,000, respectively, from an unrelated third party entity in the form of two promissory notes. The notes bear interest at 14%, are unsecured and are due on demand. During the six months ended June 30, 2013, the Company recognized $5,207 of interest expense on these notes payable leaving balances in accrued interest of $14,516 and $9,309, respectively as of June 30, 2013 and December 31, 2012.

 

Effective April 3, 2013 the Company entered into a settlement agreement with a note holder whereby the Company would pay interest to the note holder from inception of the two notes through and including May 31, 2013. Payment of the interest due of $13,653 was made in the form of 2,185,879 shares of Rule 144 Unrestricted common stock.

 

 

 

 

- 11 -

---

Table of Contents

 

 

 

 

Effective February 24, 2012, the Company borrowed $100,000 from an unrelated third party in the form of a Line of Credit. The funds were to support the working capital requirements of E-Waste Systems (Ohio) and specifically, the procurement of electronic waste for refurbishment or recycling. The promissory note accrues interest at 14% and is due on March 24, 2013. On April 22, 2013 the Company issued 1,029,479 shares of the Company’s common stock in payment of all interest from inception of the note through May 31, 2013. The note holder has agreed to accept no payment on the principal amount of the note for the present time, and interest will continue to accrue on the note beginning with June 1, 2013 through the time the note is completely retired. During the period ended June 30, 2013 the Company recognized $8,972 of interest expense and made no payments on this promissory note leaving a balance of $1,167 accrued interest of as of June 30, 2013.

 

Effective August 27, 2012, the Company executed a convertible promissory note in the principal sum of $150,000. The consideration to be provided by the note holder is no more than $135,000. A $13,500 (10%) original issue discount (“OID”) applies to the principal sum. The note holder made payments to the Company of $25,000 and $15,000 of the total consideration during the year ended December 31, 2012, and $50,000 through the six months ended June 30, 2013. The principal sum due to the note holder is to be prorated based on the consideration actually paid together with the 10% original issue discount that will also be prorated based on the amount of consideration actually paid as well as any other interest or fees. The maturity date is one year from the date of each payment of consideration and is the date upon which the principal sum, as well as any unpaid interest and other fees, shall be due and payable. The OID in respect of the consideration received on the date of execution equaled $4,445 for the year ended December 31, 2012, and $5,556 for the six months ended June 30, 2013.

 

Effective February 28, 2013, the note holder elected to convert $7,350 of the principal balance into 1,500,000 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $3,625 to interest expense.

 

Effective March 20, 2013, the note holder elected to convert an additional $11,466 of the principal into 1,800,000 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $5,026 to interest expense.

 

Effective April 16, 2013, the note holder elected to convert $9,931 of the principal balance resulting in the issuance of 2,695,650 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $3,265 to interest expense.

 

Effective May 6, 2013, the note holder elected to convert $8,341 of the principal balance resulting in the issuance of 2,500,000 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $4,062 to interest expense.

 

Effective June 13, 2013, the note holder elected to convert $7,357 of the principal balance resulting in the issuance of 2,981,397 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $168 to interest expense.

 

The note contains a conversion feature wherein the note may be converted to shares of the Company’s common stock at a conversion price of the lesser of $0.01 or 70% of the lowest trade price in the 25 trading days prior to the conversion date. Unless otherwise agreed in writing by both parties, at no time will the holder of the note convert any amount outstanding into common stock that would result in it owning more than 4.99% of the total common stock outstanding. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $58,646 and debt discounts of $44,445 on the payment dates of the note for the year ended December 31, 2012, and $124,097 and $55,556 for the six months ended June 30, 2013. As of June 30, 2013 and December 31, 2012, the Company had recognized amortization on debt discounts on these notes of $41,841 and $37,814, leaving unamortized debt discounts of $44,826 and $31,111, respectively. See Note 9 for treatment of derivative liability associated with convertible notes payable.

 

 

 

 

 

- 12 -

---

Table of Contents

 

 

 

Effective December 31, 2012, the Company negotiated the forgiveness of accounts payable of $50,000 owed to a Company consultant in exchange for the execution of a convertible note payable with a face value of $162,500. On the same date and under the same terms, the Company executed two other convertible notes payable with face values of $11,000 and $29,000 in exchange for services provided to the Company. The notes are unsecured, bear interest at 6% per annum and are due on December 31, 2015. The notes are also convertible, at the option of the holder, into shares of the Company’s common stock at a share price of the lower of $0.0064 or the average of the three lowest volume weighted-average prices per share during the 30 calendar day period immediately prior to the date of conversion

 

The intrinsic value of the beneficial conversion features and the debt discounts associated with the equity issued in connection with these convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $25,313. The discount will be amortized and recorded to the statement of operations over the stated term of the notes and is included within interest expense. As of June 30, 2013 and December 31, 2012, the Company had recognized amortization on the debt discounts on these note of $12,321 and $-0- of the total outstanding debt discounts leaving an unamortized debt discounts of $12,992 and $25,313, respectively.

On January 18, 2013, the Company executed a convertible note payable with a face value of $41,557 in exchange for services provided to the Company. This note is unsecured, bears interest at 6% per annum and is due January 18, 2016. The note is convertible, at the option of the holder, into shares of the Company’s common stock at a share price of the lower of $0.0064 or the average of the three lowest volume weighted-average prices per share during the 30 calendar day period immediately prior to the date of conversion. The intrinsic value of the beneficial conversion features and the debt discounts associated with the equity issued in connection with the convertible debt was recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $41,557. The discount will be amortized and recorded to the statement of operations over the stated term of the note and is included within as interest expense. As of June 30, 2013, the Company had recognized amortization on the debt discounts on this note of $6,206 of the total outstanding debt discounts leaving an unamortized debt discount $35,371.

 

Effective February 8, 2013, the Company executed a convertible note payable with a face value of $162,500 in exchange for services provided to the Company in the amount of $115,440 and forgiveness of accounts payable of $47,060. The intrinsic value of the beneficial conversion features and the debt discounts associated with the equity issued in connection with the convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $162,500. The discount will be amortized and recorded to the statement of operations over the stated term of the note and is included within as interest expense. As of June 30, 2013, the Company had recognized amortization on the debt discounts on this note of $21,073 of the total outstanding debt discounts leaving an unamortized debt discounts $141,427.

 

This note is unsecured, bears interest at 6% per annum and is due February 8, 2016. The note is convertible, at the option of the holder, into shares of the Company’s common stock at a share price of the lower of $0.0064 or the average of the three lowest volume weighted-average prices per share during the 30 calendar day period immediately prior to the date of conversion.

 

Effective March 5, 2013, the Company executed a convertible note payable with a face value of $17,417 in exchange for services provided to the Company. This note is unsecured, bears interest at 6% per annum and is due March 5, 2016. The note is convertible, at the option of the holder, into shares of the Company’s common stock at a share price of the lower of $0.0064 or the average of the three lowest volume weighted-average prices per share during the 30 calendar day period immediately prior to the date of conversion.

 

The intrinsic value of the beneficial conversion features and the debt discounts associated with equity issued in connection with the convertible debts has been recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $15,371. The discount will be amortized and recorded to the statement of operations over the stated term of the note and is included within as interest expense. As of June 30, 2013, the Company has amortized $2,760 the total outstanding debt discounts leaving an unamortized debt discount of $14,657

 

Effective June 3, 2013, the Company executed a convertible note payable with a face value of $32,500. This note is unsecured, bears interest at 8% per annum and is due June 2, 2014. The note is convertible, at the option of the holder, into shares of the Company’s common stock at a share price of the average of the three lowest volume weighted-average prices per share during the 10 calendar day period immediately prior to the date of conversion times 55 percent. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $51,382 and debt discount of $32,500 on the payment dates of the note for the period ended June 30, 2013.  As of June 30, 2013, the Company had recognized amortization on debt discounts on these notes of $2,391 leaving unamortized debt discounts of $30,109. See Note 9 for treatment of derivative liability associated with convertible notes payable.

 

 

 

 

 

- 13 -

---

Table of Contents

 

 

 

The components of notes payable are summarized in the table below:

 

		June 30, 2013				December 31, 2012
Convertible note payable to a related party, bearing interest at 12%,     unsecured, due on October 28, 2012 (note is in default)		$	12,000			$	12,000
Notes payable to an unrelated party, bearing interest at 14%,     unsecured, due on demand			75,000				75,000
Note payable to an unrelated party, bearing interest at 14%,     unsecured, due on March 24, 2013 (note is in default)			100,000				100,000
Convertible note payable to an unrelated party, bearing interest at 10%,     unsecured, due on August 27, 2013 and due on October 10, 2013.			-				44,445
Convertible note payable to an unrelated party, bearing interest at 10%,     unsecured, due on February 27, 2014 and due on June 12, 2014			55,556				-
Convertible note payable to an unrelated party, bearing interest at 8%,     unsecured, April 14, 2014			32,500				-
Discounts on short-term convertible notes payable			(74,935	)			(31,111	)
Total short-term debt		$	200,121			$	200,334
Derivative liability on short-term convertible notes		$	104,619			$	61,545
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on December 31, 2015		$	11,000			$	11,000
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on December 31, 2015			29,000				29,000
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on December 31, 2015			62,500				162,500
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on January 18, 2016			41,557				-
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on February 8, 2016			162,500				-
Convertible note payable to an unrelated party, bearing interest at 6%,     unsecured, due on March 5, 2016			17,417				-
Discounts on long term portion of convertible notes payable			(204,447	)			(25,313	)
Total long-term debt		$	219,527			$	177,187

Lease Commitments .

 

We also have month-month variable access to a warehouse in Columbus, OH but have not entered into a lease obligation.  We entered into a variable lease agreement in the People’s Republic of China, at 302 Golden Finance Tower, 58 Yan'an East Road, Shanghai, China 200040.  We also have a building in Cincinnati, Ohio at 12075 Northwest Blvd, Building 300.  In addition, we have a facility in Irvine, California at 17981 Skypark Circle, Suite K.

 

 

 

 

 

- 14 -

---

Table of Contents

 

 

 

Consolidated Cash From Operating Activities

 

Continuing operating activities of the Company in the six months ended June 30, 2013 provided cash of $185,451, which is a reflection of the corresponding period’s operating results.  Our consolidated net loss from continuing operations reported for the six months ended June 30, 2013 of $1,750,465 had a negative impact on operating cash flow.  The impact of consolidated net loss from continuing operations on our consolidated operating cash flow was substantially offset by convertible notes executed for services of $117,940, impairment in available for sale securities of $730,000, common stock issued for services of $347,533, and change in accounts payable and accrued expenses of $314,019, and accrued expenses, related party of $226,829.

 

For the six months ended June 30, 2013 and 2012, net cash provided by (used in) discontinued operating activities were $3,643 and $(103,157), respectively.

 

Consolidated Cash From Investing Activities

 

We had used cash totaling $248,787 for investing activities from continuing operations for the six months ended June 30, 2013.  This consisted of $1,589 used towards security deposits, and $247,198 used to develop the Company through intangible assets.

 

We did not use any cash for discontinued investing activities in June 30, 2013 or 2012.

 

Consolidated Cash From Financing Activities

 

We have financed our operations primarily from loans made to the Company.  Consolidated net cash provided by continuing financing activities for the six months ended June 30, 2013 was $73,750, which fully consisted of proceeds from convertible notes payable, compared to $177,000 of net cash provided by continuing financing activities, which consisted of $175,000 if proceeds from notes payable, and $2,000 of proceeds from contributed capital.

 

We did not use any cash for discontinued financing activities in June 30, 2013 or 2012.

 

Off Balance Sheet Arrangements

 

As of June 30, 2013, there were no off balance sheet arrangements.

 

Going Concern

 

Our financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have not yet established an on-going source of revenues sufficient to cover our operating costs and allow us to continue as a going concern. Our ability to continue as a going concern is dependent on us obtaining adequate capital to fund operating losses until we become profitable. If we are unable to obtain adequate capital, we could be forced to cease operations.

 

In order to continue as a going concern, we will need, among other things, additional capital resources. Management’s plan is to obtain such resources for us by obtaining capital from management and significant shareholders sufficient to meet our minimal operating expenses and seeking equity and/or debt financing. However management cannot provide any assurances that we will be successful in accomplishing any of our plans.

 

Our ability to continue as a going concern is dependent upon our ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

 

 

 

 

- 15 -

---

Table of Contents

 

 

 

Critical Accounting Policies

 

Our financial statements have been prepared in conformity with GAAP. For a full description of our accounting policies as required by GAAP, refer to our consolidated financial statements for the year ended December 31, 2013, that are included in the Annual Report on Form 10-K. We consider certain accounting policies to be critical to an understanding of our consolidated financial statements because their application requires significant judgment and reliance on estimations of matters that are inherently uncertain. The specific risks related to these critical accounting policies are described in our consolidated financial statements for the year ended December 31, 2013.

 

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

(Not Applicable)

 

Item 4.     Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2013.  This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Mr. Martin Nielson and our Interim Chief Financial Officer, Mr. David Severson.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2013, our disclosure controls and procedures are not effective.  Our conclusion is based primarily on our failure to timely disclose in our reports filed or submitted under the Exchange Act certain material direct financial obligations resulting from the issuance of demand promissory notes and unregistered convertible notes,  We are in the process of considering changes in our disclosure controls and procedures.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Changes in Internal Control over Financial Reporting

Since the start of this year there have been changes to our internal controls and financial reporting that have materially improved, or are reasonably likely to materially affect, our financial reporting.  These changes include implementing a more rigorous process of approval of financial agreements; reducing the number of people with access to our bank accounts; implementing new accounting systems in our Shanghai office, and replacing our previous interim Chief Financial Officer position with the appointment of Now CFO, through their Utah office.

  

Limitations on the Effectiveness of Internal Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal 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 internal 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

 

 

 

 

- 16 -

---

Table of Contents

PART II – OTHER INFORMATION

Item 1.     Legal Proceedings

 As of the filing of this document, the Company is not aware of any material current or pending litigation.

Item 1A – Risk Factors

Not Required

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

Effective April 5, 2013 E-Waste Systems, Inc. (the “Company”) entered into a Series A Convertible Callable Preferred Stock Purchase Agreement (“the Agreement”) pursuant to the Master License Agreement entered into with Tanke, Inc. (“TNKE”) on February 6, 2013 whereby the Company granted TNKE a master license for the People’s Republic of China and TNKE agreed to make an investment into the Company.  This agreement was previously filed with the SEC on Form 8K on April 8, 2013 and incorporated herein by reference.

 

The Agreement is for the purchase of Six Hundred Fifty (650) shares of the Company’s Series A Convertible Callable Preferred Stock at a price of One Thousand Dollars ($1,000) per share.

For the offer and sale of the preferred stock described above, we have relied upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D and/or Regulation S.

Effective June 18, 2013 E-Waste Systems, Inc. (the “Company”) entered into a Series A Convertible Callable Preferred Stock Purchase Agreement (the “Agreement”) pursuant to the Master License Agreement entered into with Tanke, Inc. (“TNKE”) on February 6, 2013 whereby the Company granted TNKE a master license for the People’s Republic of China and TNKE agreed to make an investment into the Company.

The agreement is for the purchase of Eight Hundred (800) shares of the Company’s Series A Convertible Callable Preferred Stock at a price of One Thousand Dollars ($1,000) per share.

TNKE a master license for the People’s Republic of China and TNKE agreed to make an investment into the Company

Item 3.     Defaults upon Senior Securities

Note 9 to our condensed consolidated financial statements record our current defaults on the terms of loan notes that we have issued since October 2011.

Item 4.     Removed and Reserved

Item 5.     Other Information

Item 6.      Exhibits

See the Exhibit Index following the signatures page of this report, which is incorporated herein by reference.

 

 

 

 

- 17 -

---

Table of Contents

SIGNATURES

In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	E-Waste Systems, Inc.
Date:	August 5, 2014
By:	/s/   Martin Nielson
	Martin Nielson
Title:	President, Chief Executive Officer.          Chief Financial Officer and Director

 

 

 

 

 

- 18 -

---

Table of Contents

E-Waste Systems, Inc.

(the “Registrant”)

(Commission File No. 000-54657)

Exhibit Index

To Quarterly Report on Form 10-Q/A

for the Quarter Ended June 30, 2013

Exhibit Number		Description		Incorporated by Reference to:		Filed Herewith
31.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X
31.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				X
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				X

 

101.INS †		XBRL Instance Document				X
101.SCH †		XBRL Taxonomy Extension Schema Document				X
101.CAL †		XBRL Taxonomy Extension Calculation Linkbase Document				X
101.DEF †		XBRL Taxonomy Extension Definition Linkbase Document				X
101.LAB †		XBRL Extension Labels Linkbase Document				X
101.PRE †		XBRL Taxonomy Extension Presentation Linkbase Document				X

 

†	In accordance with SEC rules, this interactive data file is deemed “furnished” and not “filed” for purposes of Sections 11 or 12 of the Securities Act of 1933 and Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under those sections or acts.

 

 

 

 

 

 

 

- 19 -

---