EWSI 10-Q
E-WASTE SYSTEMS, INC.
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Condensed Consolidated Balance Sheets
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September 30, 2013
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December 31, 2012
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(Unaudited)
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ASSETS
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Current Assets
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Cash
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$ |
44,988 |
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$ |
139 |
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Accounts receivable, net of allowance for bad debts of $38,061 and 0, respectively
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1,484,368 |
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- |
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Inventory
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339,956 |
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- |
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Other current assets
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1,009 |
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- |
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Marketable securities, available-for-sale
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1,595,000 |
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- |
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Total Current Assets
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3,465,321 |
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139 |
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License fees receivables
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375,000 |
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- |
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Intangible assets
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345,605 |
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- |
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Investments
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285,573 |
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- |
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Other assets
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1,942 |
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- |
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Total Assets
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$ |
4,473,441 |
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$ |
139 |
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
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Current Liabilities
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Accounts payable and accrued expenses
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$ |
1,786,695 |
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$ |
339,684 |
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Accounts payable - related party
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1,216,222 |
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1,247,355 |
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Checks in excess of bank
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197,811 |
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- |
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Short-term notes payable
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360,428 |
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175,000 |
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Short-term related party convertible notes payable, net
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12,000 |
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12,000 |
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Short-term convertible notes payable, net
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35,197 |
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13,334 |
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Derivative liability on short-term convertible notes payable
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245,008 |
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61,545 |
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Total Current Liabilities
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3,853,361 |
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1,848,918 |
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Long-Term Liabilities
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Long-term convertible notes payable, net
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166,925 |
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177,187 |
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Total Long-Term Liabilities
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166,925 |
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177,187 |
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Total Liabilities
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4,020,286 |
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2,026,105 |
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Stockholders' Equity (Deficiency)
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Preferred stock, $0.001 par value; 10,000,000 shares authorized,
1,903 and 0 shares issued and outstanding, respectively
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2 |
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- |
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Preferred stock, $0.001 par value; 10,000,000 shares authorized,
195,000 and 0 shares issued and outstanding, respectively
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195 |
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- |
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Common stock, $0.001 par value; 490,000,000 shares authorized,
242,781,629 and 106,504,926 shares issued and outstanding, respectively
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242,782 |
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106,505 |
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Additional paid-in capital
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5,634,977 |
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904,032 |
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Accumulated other comprehensive income
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26,587 |
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- |
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Accumulated deficit
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(5,451,388 |
) |
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(3,036,503 |
) |
Total Stockholders' Equity (Deficiency)
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453,155 |
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(2,025,966 |
) |
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Total Liabilities and Stockholders' Equity (Deficiency)
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$ |
4,473,441 |
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$ |
139 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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E-WASTE SYSTEMS, INC.
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Condensed Consolidated Statements of Operations
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(Unaudited)
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For the Three Months Ended
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For the Nine Months Ended
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September 30, 2013
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September 30, 2012
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September 30, 2013
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September 30, 2012
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Product sales revenue
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$ |
2,076,130 |
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$ |
- |
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$ |
3,753,818 |
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$ |
- |
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Service revenues
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3,254,310 |
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- |
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4,017,934 |
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- |
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Revenues from license fees
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- |
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- |
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525,000 |
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- |
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Total Revenues
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5,330,440 |
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- |
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8,296,752 |
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- |
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Cost of sales
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3,999,856 |
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- |
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6,536,621 |
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- |
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Gross Margin
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1,330,584 |
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- |
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1,760,131 |
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- |
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Operating Expenses
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Officer and director compensation
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317,709 |
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241,582 |
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556,340 |
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608,024 |
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Professional fees
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1,963,730 |
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12,436 |
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2,548,156 |
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91,402 |
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General and administrative
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616,514 |
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1,965 |
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698,599 |
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39,190 |
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Total Operating Expenses
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2,897,953 |
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255,983 |
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3,803,095 |
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738,616 |
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Loss from Operations
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(1,567,369 |
) |
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(255,983 |
) |
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(2,042,964 |
) |
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(738,616 |
) |
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Other Income/(Expenses)
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Interest expense
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(599,712 |
) |
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(19,231 |
) |
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(816,060 |
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(27,298 |
) |
Gain on derivative liability
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386,522 |
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|
2,593 |
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|
438,990 |
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|
9,964 |
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Currency exchange gain
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|
- |
|
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|
- |
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|
5,149 |
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|
- |
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Loss on settlement of contingent consideration
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- |
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|
- |
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|
- |
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(66,671 |
) |
Total Other Income/(Expenses)
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|
(213,190 |
) |
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(16,638 |
) |
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(371,921 |
) |
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(84,005 |
) |
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Loss from Operations before Income Taxes
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(1,780,559 |
) |
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(272,621 |
) |
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(2,414,885 |
) |
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(822,621 |
) |
Provision for Income Taxes
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- |
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- |
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- |
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- |
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Net Loss from Continuing Operations
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(1,780,559 |
) |
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(272,621 |
) |
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(2,414,885 |
) |
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(822,621 |
) |
Loss from Discontinued Operations, net of Income Taxes
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- |
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(30,659 |
) |
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- |
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(89,068 |
) |
Loss on disposal of discontinued operations
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- |
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(46,609 |
) |
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- |
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(46,609 |
) |
Net Loss
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$ |
(1,780,559 |
) |
|
$ |
(349,889 |
) |
|
$ |
(2,414,885 |
) |
|
$ |
(958,298 |
) |
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Other Comprehensive Income
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|
|
|
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Foreign currency translation adjustments
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|
26,073 |
|
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|
- |
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|
26,587 |
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- |
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Total Other Comprehensive Income
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$ |
(1,754,486 |
) |
|
$ |
(349,889 |
) |
|
$ |
(2,388,298 |
) |
|
$ |
(958,298 |
) |
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Basic and Diluted Loss per Share from Continuing Operations
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$ |
(0.01 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
Basic and Diluted loss per Share from Discontinued Operations
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|
$ |
- |
|
|
$ |
(0.00 |
) |
|
$ |
- |
|
|
$ |
(0.00 |
) |
Net loss per share - Basic and Diluted
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|
$ |
(0.01 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
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|
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|
|
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Weighted average number of shares outstanding during the period - Basic and Diluted
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218,801,511 |
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|
102,872,317 |
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170,554,213 |
|
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|
101,632,600 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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E-WASTE SYSTEMS, INC.
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Condensed Consolidated Statements of Cash Flows
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(Unaudited)
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For the Nine Months Ended
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September 30, 2013
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|
September 30, 2012
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|
Cash Flows From Operating Activities:
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|
Net Loss
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|
$ |
(2,414,885 |
) |
|
$ |
(822,621 |
) |
Adjustments to reconcile net loss to net cash used in operations
|
|
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|
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Amortization expense
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|
21,593 |
|
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|
- |
|
Provision for allowance on A/R
|
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|
(28,177 |
) |
|
|
- |
|
Currency translation (gain) loss
|
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|
(5,149 |
) |
|
|
- |
|
Loss on settlement of contingent considerations
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|
- |
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|
66,671 |
|
Amortization of debt discounts
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|
128,578 |
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|
16,223 |
|
Origination interest on derivative liability
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|
553,176 |
|
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|
- |
|
Change in derivative liability
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|
(438,990 |
) |
|
|
(9,964 |
) |
Debt issued for services
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|
17,417 |
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|
- |
|
Common stock issued for services
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|
2,143,125 |
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|
93,930 |
|
Changes in operating assets and liabilities:
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|
(Increase)/Decrease in accounts and other receivables
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|
(1,410,150 |
) |
|
|
- |
|
(Increase)/Decrease in other current assets
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|
1,028 |
|
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|
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|
(Increase)/Decrease in inventory
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|
(336,295 |
) |
|
|
- |
|
(Increase)/Decrease in license fees receivable
|
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|
(525,000 |
) |
|
|
- |
|
Increase/(Decrease) in accounts payable and accrued expenses
|
|
|
1,617,179 |
|
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|
(55,579 |
) |
Increase/(Decrease) in accrued expenses - related party
|
|
|
281,487 |
|
|
|
561,737 |
|
Increase/(Decrease) in checks in excess of bank
|
|
|
197,661 |
|
|
|
- |
|
Net Cash Used In Continuing Operating Activities
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|
|
(197,402 |
) |
|
|
(149,603 |
) |
Net Cash Provided by Discontinued Operating Activities
|
|
|
- |
|
|
|
(102,390 |
) |
Net Cash Used in Operating Activities
|
|
|
(197,402 |
) |
|
|
(251,993 |
) |
|
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Cash Flows From Investing Activities:
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|
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|
Cash acquired with purchase of subsidiary
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|
42,549 |
|
|
|
- |
|
Net Cash Used In Investing Activities
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|
42,549 |
|
|
|
- |
|
|
|
|
|
|
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Cash Flows From Financing Activities:
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|
|
|
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|
Proceeds from notes payable
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|
187,500 |
|
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|
200,000 |
|
Expenses paid on behalf of Company
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|
11,977 |
|
|
|
43,500 |
|
Proceeds from contributed capital
|
|
|
- |
|
|
|
2,000 |
|
Net Cash Provided by Continuing Financing Activities
|
|
|
199,477 |
|
|
|
245,500 |
|
Net Cash Provided by Discontinued Financing Activities
|
|
|
- |
|
|
|
- |
|
Net Cash Provided by Financing Activities
|
|
|
199,477 |
|
|
|
245,500 |
|
|
|
|
|
|
|
|
|
|
Effects of exchange rates on cash
|
|
|
225 |
|
|
|
- |
|
|
|
|
|
|
|
|
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|
Net Increase / (Decrease) in Cash
|
|
|
44,849 |
|
|
|
(6,493 |
) |
Cash at Beginning of Period
|
|
|
139 |
|
|
|
6,493 |
|
|
|
|
|
|
|
|
|
|
Cash at End of Period
|
|
$ |
44,988 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
- |
|
|
$ |
3,710 |
|
Cash paid for taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities :
|
|
|
|
|
|
|
|
|
Debt discounts on convertible notes payable
|
|
$ |
151,026 |
|
|
$ |
- |
|
Preferred stock issued for marketable securities
|
|
$ |
1,445,000 |
|
|
$ |
- |
|
Preferred stock issued for acquisition of subsidiary
|
|
$ |
27,256 |
|
|
$ |
- |
|
Preferred stock issued for cost method investment
|
|
$ |
27,273 |
|
|
$ |
- |
|
Common stock issued for cost method investment
|
|
$ |
258,300 |
|
|
$ |
- |
|
Common stock issued for intangible assets
|
|
$ |
97,014 |
|
|
$ |
- |
|
Preferred stock issued for conversion of debt
|
|
$ |
71,538 |
|
|
$ |
- |
|
Common stock issued for conversion of debt
|
|
$ |
342,865 |
|
|
$ |
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.
E-WASTE SYSTEMS, INC.
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The consolidated financial statements present the results of operations, financial position, and cash flows of E-Waste Systems, Inc. (“EWSI,” and together with its subsidiaries “we,” “us,” or the “Company”). In order to make this report easier to read, we refer throughout to (i) our Consolidated Financial Statements as our “Financial Statements,” (ii) our Consolidated Statements of Operations as our “Income Statements,” (iii) our Consolidated Balance Sheets as our “Balance Sheets,” In addition, references throughout to numbered "Footnotes" refer to the numbered Notes in these Notes to Condensed Consolidated Financial Statements, unless otherwise noted.
These condensed consolidated Financial Statements have not been audited. 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 consisting of normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2013 are not necessarily indicative of the results that can be expected for the full year. Although we believe our disclosures are adequate to make the information presented not misleading, you should read the financial statements in this report in conjunction with the consolidated financial statements and notes to those financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, (“2012 Form 10-K”). Certain terms not otherwise defined in this Form 10-Q have the meanings specified in our 2012 Form 10-K.
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 not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and 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 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain balances in previously issued financial statements have been reclassified to be consistent with current period presentation.
Recent Accounting Pronouncements
The Company has evaluated recent accounting pronouncements and their adoption has not had or is not expected to have a material impact on the Company’s financial position, or statements.
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 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.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation
The accompanying consolidated financial statements for the period ended September 30, 2013 include the accounts of the Company and its wholly-owned subsidiary, E-Waste Systems of Ohio, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements also include the accounts of Shanghai YaZhuo Jiudian Guanli ("YaZhou"), a consolidated variable interest entity. On March 26, 2013, EWSI entered into a set of agreements with YaZhou, a company incorporated in the People’s Republic of China (“PRC”), wherein EWSI will provide management services in relation to the current and proposed operations of YaZhou’s business in the PRC. The management services include general business operation, human resources, business development, and such other advice and assistance as may be agreed upon by the parties. In consideration, YaZhou will pay a management services fee, payable each quarter, equivalent to all of YaZhou’s net income for such quarter. All intercompany balances and transactions have been eliminated.
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 and People’s Republic of China (“PRC”) economic data. 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 three and nine month periods ended September 30, 2013 and 2012, $65,000 and $0 of receivables were charged off against the allowance, respectively. During the three and nine month periods ended September 30, 2013 and 2012, $36,823 and $0 was added to the allowance as an estimate of bad debts on current accounts receivable, respectively. The Company does not have any off-balance sheet exposure related to its customers.
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 Operating Leases
The Company recognizes revenue for its operating leases in the following three categories:
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Concrete forms are produced to customer specifications. Deposits paid prior to the completion of the product are deferred until the product is delivered. Once the product is delivered, the Company recognizes product sales.
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Services for product acquisition are recognized when commissions are received as determined by contract.
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We recognize base management fees as revenue when we earn them under the contracts.
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E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Revenue from Sales of Brand Licenses
During the nine month period, 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.
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 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.
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 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.
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.
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 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.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets (Continued)
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.
Basic and Diluted Loss Per Common Share
Basic loss per common share is computed by dividing the loss available to common stockholders by the weighted average number of common shares outstanding during the period of computation. Diluted loss per share gives effect to all potential dilutive common shares outstanding during the period of compensation. The computation of diluted loss per share does not assume conversion, exercise or contingent exercise of securities that would have an antidilutive effect on earnings. As of September 30, 2013, the Company had 72,374,299 potentially dilutive securities that would affect the loss per share if they were to be dilutive.
Foreign Currency
Assets and liabilities of the Company's foreign operations are translated into U.S. dollars at period-end exchange 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.
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
The Company measures and recognizes stock-based compensation expense using a fair value-based method for all share-based awards made to employees and nonemployee directors, including grants of stock options and other stock-based awards. The application of this standard requires significant judgment and the use of estimates, particularly with regard to Black-Scholes assumptions such as stock price volatility and expected option lives to value equity-based compensation. We recognize stock compensation expense using a straight line method over the vesting period of the individual grants.
Under our stock compensation plan (the “Stock Plan”) which is registered under Form S8, or through newly issued restricted common stock, we pay qualified employees, 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 utilizes the balance sheet method of accounting for income taxes. Accordingly, The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of the process of preparing its consolidated financial statements. This process involves estimating the Company’s actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Due to the evolving nature and complexity of tax rules, it is possible that the Company’s estimates of its tax liability could change in the future, which may result in additional tax liabilities and adversely affect the results of operations, financial condition and cash flows.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 4 – MARKETABLE SECURITIES
During the nine months ended September 30, 2013 the Company received marketable securities in exchange for shares of preferred stock of the Company. The Company’s marketable securities are classified as “available for sale” because it is managements’ intent neither to sell them in the short-term nor to hold them until maturity. All of the Company’s available for sale securities are equity securities. Accordingly, the Company originally records the shares at the market value of the shares on the contracted sale date. The shares are evaluated quarterly using the specific identification method. Any unrealized holding gains or losses are reported as Other Comprehensive Income (Loss) and as a separate component of stockholder’s equity. Realized gains and losses and other-than-temporary impairments are included in earnings.
Marketable Securities-Available for Sale is as follows:
Balance, December 31, 2012
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$
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-
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Marketable securities received in exchange for preferred stock
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1,595,000
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Unrealized gains or losses
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Other-than-temporary impairment
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-
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Balance, September 30, 2013
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$
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1,595,000
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Amortized
Cost
Basis
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Gross
Unrealized
Gains
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Gross
Unrealized
Loss
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Net
Market
Value
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Available-for-sale Securities
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$
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1,595,000
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$
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-
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$
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-
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$
|
1,595,000
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NOTE 5 – INTANGIBLE ASSETS
Intangible assets consist of the unamortized portion of software development costs, certification costs and customer lists. The software development costs asset is still in the developmental stage. No amortization has been recorded on this product. Certification costs and customer lists will be amortized over the remaining economic useful lives. The following table presents the detail of intangible assets for September 30, 2013:
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Gross Carrying Amount
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Accumulated Amortization
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Net Carrying Amount
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Weighted Average Remaining Life
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September 30, 2013
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Software Development Costs
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$ |
97,014 |
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$ |
(8,084 |
) |
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$ |
88,930 |
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3 Years
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Certification Costs
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200,000 |
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(10,000 |
) |
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190,000 |
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3 Years
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Customer Lists
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70,184 |
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(3,509 |
) |
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66,675 |
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3 Years
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Total
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$ |
367,198 |
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$ |
(21,593 |
) |
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$ |
345,605 |
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Amortization expense was $21,593 and $0 for the nine months ended September 30, 2013 and 2012.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 6 – INVENTORIES
Inventories by major categories are summarized as follows:
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September 30, 2013
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December 31, 2012
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Finished goods
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$ |
339,956 |
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|
$ |
- |
|
Less: allowances for slow moving items
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- |
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- |
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Total
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$ |
339,956 |
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|
$ |
- |
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NOTE 7 – 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.
NOTE 8 - RELATED PARTY TRANSACTIONS
Transactions Involving Officers and Directors
During the nine month period ended September 30, 2013, the Company issued 10,000,000 shares of common stock to the Company’s Chief Executive Officer and Director at $0.0088 per share for accrued officer compensation of $125,000. The Company also issued 1,800,000 shares of S-8 registered shares at $.004355 per share valued at $7,839 and 2,500,000 shares of S-8 registered shares at $.003315 per share valued at $8,288 for accrued officer compensation to the Company’s Chief Executive Officer and Director. The Company also issued 195,000 shares of preferred stock series B at $1.00 per share valued at $195,000 for accrued officer compensation to the Company’s Chief Executive Officer and Director. The Company issued 3,685,341 shares of common stock to the Company’s former interim Chief Financial Officer at $0.013 per share for compensation expense of $40,154. The Company also recorded $261,532 of additional officer compensation along with a gain on currency translation loss for an officer contract denominated in British Pounds (“GBP”), leaving an ending balance of $1,187,999 in accrued officer and director compensation at September 30, 2013.
NOTE 9 –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 percent 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 $1,077 and $252 of interest
expense on the related party convertible note payable leaving a balance in accrued interest of $2,774 and $1,697 as of September 30, 2013 and December 31, 2012, respectively. The note has been extended for an additional year and all default terms have been recognized in the presentation of the note payable.
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 percent, are unsecured and are due on demand. During the quarter ended September 30, 2013, the Company recognized $7,853 of interest expense on these notes payable leaving balances in accrued interest of $2,738 and $403, respectively as of September 30, 2013 and December 31, 2012.
Effective April 3, 2013 the Company entered into a settlement agreement with the 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 $13,657 was made in the form of 1,029,479 shares of Rule 144 Unrestricted common stock.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 9 –NOTES PAYABLE (CONTINUED)
Further to this, it was agreed that the principal amount of the combined Notes would be paid on a monthly basis in the amounts of $5,833.33 for the $35,000 Note and $6,666.67 for the $40,000 Note. Interest will continue to accrue at the agreed upon 14% per annum on each note until the principal balance has been retired. During the nine months ending September 30, 2013, the Company made three of the required aggregate monthly payments to the Note Holder in the form of the Company’s Unrestricted Common Stock. The aggregate payment for both Notes for the month of May 2013 resulted in a share issuance of 1,543,210 at a price per share of $0.0081. The aggregate payment for both Notes for the month of June 2013 resulted in a share issuance of 1,344,086 at a price per share of $0.0093. The aggregate payment for both Notes for the month of July 2013 resulted in a share issuance of 828,912 at a price per share of $0.001508.
As of September 30, 2013, the principal amount of the combined notes is now $37,500. The interest accruing for each month beginning on June 1, 2013 and continuing until the principal amount of both Notes has been retired will be paid in the month following the retirement of the principal amounts of both Notes. Subsequent to September 30, 2013, the Company received notification from the lender that they desired to convert the remaining balance and the accrued interest. The Company has made the
aggregate payments on the loan for the months of August, 2013 resulting in 644,330 shares issued at a price of $.0194 per share; September, 2013 resulting in 256,674 shares issued at a price of $.0487 per share and October, 2013 resulting in 352,113 shares issued at a price of $.0355. In addition, the interest that had accrued from June 1, 2013 through and including November 4, 2013 was paid in full by issuing 91,270 shares of stock at a price per share of $.0355. Pursuant to the issuance of these shares these Notes have been paid in full and no longer appear on the books of EWSI.
Effective February 24, 2012, the Company borrowed $100,000 from an unrelated third party in the form of a promissory note. 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 percent 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 and interest will continue to accrue on the note beginning with June 1, 2013 through the time the note is completely retired. During the nine months ended September 30, 2013 the Company recognized $8,132 of interest expenses and made no payments on this promissory note leaving a balance in accrued interest of $4,680 as of September 30, 2013
Effective August 27, 2012, the Company executed a 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 $95,000 through the period ended September 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 $10,556 for the nine months ended September 30, 2013.
Effective February 28, 2013, the note holder elected to convert $7,350 and of the principal balance at $0.0049 per share 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 and of the principal balance at $0.0064 per share 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 $8,962 of the principal balance at a price per share of $0.004355 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 $3,658 to interest expense.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 9 –NOTES PAYABLE (CONTINUED)
Effective May 6, 2013, the note holder elected to convert $8,450 of the principal balance at a price per share of $0.003380 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 $4,384 to interest expense.
Effective June 13, 2013, the note holder elected to convert $8,217 of the principal balance at a price per share of $0.003315 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 $4,639 to interest expense.
Effective September 3, 2013, the note holder elected to convert $27,778 of the principal balance at a price per share of $0.0065 resulting in the issuance of 4,700,856 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 $11,415 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 $404,254 and $105,556 for the period ended September 30, 2013. As of September 30, 2013 and December 31, 2012, the Company had recognized amortization on debt discounts on these notes of $30,854 and $37,814 leaving unamortized debt discounts of $65,586 and $31,111, respectively. See Note 10 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 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 $25,313. 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 September 30, 2013 and December 31, 2012, the Company had recognized amortization on the debt discounts on this note of $8,622 and $-0- of the total outstanding debt discounts leaving an unamortized debt discounts $9,832and $25,313, respectively.
Effective March 18, 2013, the note holder elected to convert $64,000 of the principal balance at $0.0064 per share into 10,000,000 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 $7,438 to interest expense.
Effective August 24, 2013, the note holder elected to convert $11,000 of the principal balance and accrued interest of $435 at $0.0064 per share into 1,786,641 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 $1,109 to interest expense.
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 September 30, 2013, the Company had recognized amortization on the debt discounts on this note of $9,679 of the total outstanding debt discounts leaving an unamortized debt discounts $31,879.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 9 –NOTES PAYABLE (CONTINUED)
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 $115,400 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 September 30, 2013, the Company had recognized amortization on the debt discounts on this note of $34,726 of the total outstanding debt discounts leaving an unamortized debt discounts $127,774.
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$15,784. 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 September 30, 2013, the Company has amortized $3,010 of the total outstanding debt discounts leaving an unamortized debt discount of $12,565.
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 $60,352 and debt discount of $32,500 on the payment dates of the note for the period ended September 30, 2013. As of September 30, 2013, the Company had recognized amortization on debt discounts on these notes of $10,538 leaving unamortized debt discounts of $21,962. See Note 10 for treatment of derivative liability associated with convertible notes payable.
Effective July 15, 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 April 17, 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 $90,207 and debt discount of $32,500 on the payment dates of the note for the period ended September 30, 2013. As of September 30, 2013, the Company had recognized amortization on debt discounts on these notes of $9,067 leaving unamortized debt discounts of $23,433. See Note 10 for treatment of derivative liability associated with convertible notes payable.
Effective August 27, 2013, the Company executed a convertible note payable with a face value of $27,500. This note is unsecured, bears interest at 8% per annum and is due May 29, 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 $116,312 and debt discount of $27,500 on the payment dates of the note for the period ended September 30, 2013. As of September 30, 2013, the Company had recognized amortization on debt discounts on these notes of $3,400 leaving unamortized debt discounts of $24,100. See Note 10 for treatment of derivative liability associated with convertible notes payable.
On June 25, 2013, the Company assumed loans payable with the acquisition of Surf Investments, Ltd. in the amount of $222,928. These loans are non-interest bearing and due upon demand.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 9 –NOTES PAYABLE (CONTINUED)
The components of notes payable are summarized in the table below:
|
|
September 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
|
|
|
37,500 |
|
|
|
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 |
|
Notes payable to unrelated parties, bearing no interest,
unsecured, and due on demand
|
|
|
222,928 |
|
|
|
- |
|
Convertible note payable to an unrelated party, bearing interest at 10%,
unsecured, due on June 12, 2014
|
|
|
27,778 |
|
|
|
- |
|
Convertible note payable to an unrelated party, bearing interest at 10%,
unsecured, due on August 14, 2014
|
|
|
27,778 |
|
|
|
- |
|
Convertible note payable to an unrelated party, bearing interest at 10%,
unsecured, due on September 26, 2014
|
|
|
22,222 |
|
|
|
- |
|
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 8%,
unsecured, due on June 2, 2014
|
|
|
32,500 |
|
|
|
- |
|
Convertible note payable to an unrelated party, bearing interest at 8%,
unsecured, due on April 17, 2014
|
|
|
32,500 |
|
|
|
- |
|
Convertible note payable to an unrelated party, bearing interest at 8%,
unsecured, due on May 29, 2014
|
|
|
27,500 |
|
|
|
- |
|
Discounts on short-term convertible notes payable
|
|
|
(135,081 |
) |
|
|
(31,111 |
) |
Total short-term debt
|
|
$ |
407,625 |
|
|
$ |
200,334 |
|
|
|
|
|
|
|
|
|
|
Derivative liability on short-term convertible notes
|
|
$ |
245,008 |
|
|
$ |
61,545 |
|
|
|
|
|
|
|
|
|
|
Convertible note payable to an unrelated party, bearing interest at 6%,
unsecured, due on December 31, 2015
|
|
$ |
- |
|
|
$ |
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
|
|
|
98,500 |
|
|
|
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 |
|
|
|
- |
|
Unamortized debt discounts on issuances of convertible debt
|
|
|
(182,049 |
) |
|
|
(25,313 |
) |
Total long-term debt
|
|
$ |
166,925 |
|
|
$ |
177,187 |
|
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 10 – 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, June 11, 2013, July 15, 2013, August 14, 2013, August 27, 2013 and September 26, 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.
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.
At September 30, 2013, the Company revalued the conversion features using the following assumptions: dividend yield of zero, years to maturity of between 0.55 and 0.99 years, risk free rates of between 0.10 percent and 0.63 percent, and annualized volatility of between 22 and 217 percent and determined that, during the nine months ended September 30, 2013, the Company’s derivative liability decreased by $446,488 to $245,008. The Company recognized a corresponding gain on derivative liability in conjunction with this revaluation.
The Company recognized a pro rata portion of the derivative liability of $71,665 to additional paid-in capital as a result of six conversions of the notes payable on February 28, 2013, March 20, 2013, April 18, 2013, May 6, 2013, June 14, 2013 and September 3, 2013.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
As of the date of this filing, the Company is not aware of any current or pending legal actions.
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 plans to issue these shares during the fourth quarter of 2013.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Effective November 30, 2012 the Company was accepted as a sponsored company with the Los Angeles Cleantech Incubator and maintains an office there. No lease payments are due until the Company raises at least $1.5 million in investment.
Operating Leases
The Company has entered three operating agreements to operate businesses in behalf of property 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.
NOTE 12 – 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 with a par value of $0.001. As of September 30, 2013, and December 31, 2012, there were 1,903 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 $100 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 $110 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.
|
The Company is authorized to issue 10,000,000 shares of Preferred Stock, of which there are 500,000 shares set aside as Series B Convertible Preferred Stock with a par value of $0.001. As of September 30, 2013, and December 31, 2012, there were 195,000 and 0 shares of Series B Convertible Preferred Stock issued and outstanding, respectively.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 12 – PREFERRED STOCK (CONTINUED)
The Series B Preferred Shares have the following provisions:
Dividends
Dividends: Initially, there will be no dividends due or payable on the Series B Preferred Stock. Any future terms with respect to dividends shall be determined by the Board consistent with the Corporation’s Certificate of Incorporation. Any and all such future terms concerning dividends shall be reflected in an amendment to this Certificate, which the Board shall promptly file or cause to be filed.
Liquidation Preferences
If, upon the occurrence of a Liquidation Event, the assets and funds available for distribution among the Holders of the Series B Preferred Stock and Holders of Pari Passu Securities shall be insufficient to permit the payment to such holders of the preferential amounts payable thereon, then the entire assets and funds of the Corporation legally available for distribution to the Series B Preferred Stock and the Pari Passu Securities shall be distributed ratably among such shares in proportion to the ratio that the
Liquidation Preference payable on each such share bears to the aggregate Liquidation Preference payable on all such shares.
Voting Rights
Each holder of shares of the Series B Preferred Stock is entitled to 1,000 votes per share held.
Conversion
The Conversion Price for each share of Series B Preferred Stock in effect on any Conversion Date shall be the greater of $0.20 or (i) Eighty-Five percent (85%) of the average closing bid price of the Common Stock over the Twenty (20) trading days immediately preceding the date of conversion, (ii) but no less than Par Value of the Common Stock. For purposes of determining the closing bid price on any day, reference shall be to the closing bid price for a share of Common Stock on such date on the NASD OTC Bulletin Board, as reported on Bloomberg, L.P. (or similar organization or agency succeeding to its functions of reporting prices).
Redemption
The Series B Preferred Stock shares are only redeemable for cash by mutual agreement.
Preferred Stock Activity for the Period Ended September 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 and in exchange received marketable securities valued at $880,000. 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. During the period ended September 30, 2013, no unrealized gains or losses were recorded with respect to the preferred shares.
During the quarter ended June 30, 2013, the Company issues 223 in Series A Preferred Stock valued at $27,256 and assumed liabilities of $222,928 in the acquisition of a subsidiary.
During the quarter ended June 30, 2013, the Company entered into a subscription agreement with an unrelated third party to issue 800 shares of Series A Preferred Shares. The transaction has been recorded at a value or $88,000, which was based on the trading price on date of transfer of the marketable securities into which the share received may be converted based on the conversion terms of the preferred stock and is currently recorded as a subscription receivable on the Company’s balance sheet. During the three months ended September 30, 2013, the Company received marketable securities valued at $715,000 in satisfaction of the subscription receivable. 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. During the period ended September 30, 2013, no unrealized gains or losses were recorded with respect to the preferred shares.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 12 – PREFERRED STOCK (CONTINUED)
On August 21, 2013, the Company issued 20,000 in Series B Preferred Stock valued at $20,000 for accrued officer compensation to the Company’s Chief Executive Officer and Director.
On September 3, 2013, the Company issued 230 in Series A Preferred Stock valued at $27,273 in the acquisition of a subsidiary.
On September 6, 2013, the Company issued 175,000 in Series B Preferred Stock valued at $175,000 for accrued officer compensation to the Company’s Chief Executive Officer and Director.
NOTE 13 – 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 September 30, 2013 and December 31, 2012, there were 242,781,629 and 106,504,926 shares of common stock issued and outstanding, respectively.
Common Stock Activity for the Nine Months Ended September 30, 2013
During the nine months ended September 30, 2013, the Company issued 75,956,990 shares of common stock at prices ranging from $0.006 to $0.0899 per share for services valued at $1,543,492. 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 nine months ended September 30, 2013, the Company issued 7,623,693 shares of common stock at prices ranging from $.006 to $0.0178 per share for capitalized software development costs valued at $97,014. 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 nine months ended September 30, 2013, the Company issued 49,196,020 shares of common stock at $0.003315 to $0.01508 per share for settlement of debt valued at $424,059. 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 nine months ended September 30, 2013, the Company recorded $222,805 to additional paid-in capital for debt discounts recorded on convertible notes payable.
During the nine months ended September 30, 2013, the Company recorded $15,340 to additional paid-in capital in connection with an agreement signed with a consolidated subsidiary which has been determined to be a variable interest entity.
On September 3, 2013, the Company issued 3,500,000 shares of common stock at $0.0738 per share valued at $258,300 in the acquisition of a minority interest in a subsidiary.
During the nine months ended September 30, 2013, the Company recorded $5,400 to additional paid-in capital for expenses paid in behalf of the Company by a related party.
NOTE 14 - OPERATING LEASES
We operate properties and businesses which operate under leasehold contracts. These are operated as business units within this division of the Company. As of this report, we have entered into three such contracts in China, one in the USA and one in Mexico. Revenues are reported gross and our costs, including the leasehold payments are consolidated into our condensed consolidated statements of operations. We do not acquire the assets, but instead lease them, and we pay the property owners certain fixed and variable cost in the process. This strategy delivers to us revenue streams and access to customers without the significant capital cost which might otherwise be required. The agreements are on a quarter by quarter basis.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 14 - OPERATING LEASES (CONTINUED)
Jiangsu ChengXiang Plastic Co., LTD (JCP)
As previously reported in the first quarter, EWSI entered into an agreement with JCP which is incorporated in the People’s Republic of China (“PRC”) wherein EWSI leased the business and properties and is operating the business on those properties. Under this agreement the Company operates a plastics recycling business for the construction industry. The Company recognizes the revenue, directly related costs of revenues and all associated costs; pays for the leased premises with certain fixed and variable payments and also reimburses JCP for the use of personnel leased by the Company
Shanghai Yibao Shangwu Xinxi Zixun Youxian Gongsi (eBao)
Effective April 1, 2013 EWSI entered into an agreement with eBao which is incorporated in the People’s Republic of China (“PRC”) wherein EWSI leased the business and properties and is operating the business on those properties. Under this agreement the Company operates a consulting and specialized services business for the hospitality industry. The Company recognizes the revenue, directly related costs of revenues and all associated costs; pays for the leased premises with certain fixed and variable payments and also reimburses eBao for the use of personnel leased by the Company
Shanghai City View Hotel Management and Shanghai Kunyuan Jiudan Guanli (City)
Effective April 1, 2013 EWSI entered into a joint agreement with City, which consists of two ‘sister’ companies incorporated in the People’s Republic of China (“PRC”) which has identical shareholders, wherein EWSI leased and is operating the business from those properties. The Company recognizes the revenue, directly related costs of revenues and all associated costs; pays for the leased premises with certain fixed and variable payments and also reimburses City for the use of personnel leased by the Company.
GED(GED)
Effective July 1, 2013 EWSI
XTS(XTS)
Effective July 1, 2013 EWSI
NOTE 15 - VARIABLE INTEREST ENTITY
Consolidation of Shanghai YaZhuo Jiudan Guanli (Xufu)
On March 26, 2013, EWSI entered into a set of agreements with Xufu, a company incorporated in the People’s Republic of China (“PRC”), wherein EWSI will provide management services in relation to the current and proposed operations of Xufu’s business in the PRC. The management services include general business operation, human resources, business development, and such other advice and assistance as may be agreed upon by the parties. In consideration, Xufu will pay a management services fee, payable each quarter, equivalent to all of Xufu’s net income for such quarter.
In order to ensure that Xufu will perform its obligations under the management services agreement, and in order to provide an additional mechanism for EWSI to enforce its rights to collect its fees pursuant to the agreement, the Xufu shareholders agreed to pledge all of their equity interests in Xufu as security for the performance of the obligations of Xufu under the agreement, including payment of management fees due EWSI.
Xufu shareholders also agreed to irrevocably grant and entrust EWSI with all of their voting rights as shareholders of Xufu including but not limited to the rights to sell or transfer all or any of the shareholders’ equity interest of Xufu, appoint and elect board members and directors, and the signing of legal documents. Xufu shareholders also granted an exclusive option to EWSI to purchase at any time all or a portion of the shareholders’ equity interest in Xufu.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 15 - VARIABLE INTEREST ENTITY (CONTINUED)
The Company follows ASC 810-10, "Consolidation of Variable Interest Entities" to account for its relationships with variable interest entities (“VIE”). At the execution of the contractual agreements between EWSI and Xufu, the Company determined that it was the primary beneficiary of Xufu and that the assets, liabilities and operations of Xufu should be consolidated into its financial statements. This assessment was made based on the following factors:
?
|
EWSI, through the terms of the management agreement, has the power to direct the activities of Xufu that most significantly impact the entity’s economic performance such as entering into equity and debt arrangements, entering into transactions related to the purchase fixed assets, entering into any transactions related to lending money or paying dividends, entering into transactions with related parties, or engaging in any other type of business without the written consent of EWSI.
|
?
|
EWSI has the right to receive expected residual returns of Xufu in the form of the management service fees equivalent to all of the net income of Xufu.
|
Included in the accompanying consolidated financial statements are the following assets and liabilities of Xufu as of September 30, 2013:
|
|
September 30, 2013
|
|
|
|
|
|
Cash
|
|
$ |
- |
|
Accounts receivable
|
|
|
1,477,345 |
|
Inventories
|
|
|
31,465 |
|
Total assets
|
|
$ |
1,508,810 |
|
|
|
|
|
|
Accounts payable
|
|
$ |
1,197,687 |
|
Accrued liabilities
|
|
|
99,594 |
|
Checks in excess of bank
|
|
|
14,802 |
|
Total liabilities
|
|
$ |
1,312,083 |
|
Included in the accompanying consolidated financial statements are the following income and expenses of Xufu from the date of the execution of the management agreement on March 26, 2013 through September 30, 2013:
|
|
From the Date of
Consolidation on
March 26, 2013
through
September 30,
|
|
|
|
2013
|
|
|
|
|
|
Revenues
|
|
$ |
2,572,124 |
|
Cost of goods sold
|
|
|
1,862,954 |
|
Gross margin
|
|
|
709,170 |
|
|
|
|
|
|
General and administrative expenses
|
|
|
286,252 |
|
Consulting services
|
|
|
186,609 |
|
Income tax expense
|
|
|
36 |
|
Interest expense
|
|
|
77,474 |
|
Net loss
|
|
$ |
158,799 |
|
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 16 – ACQUISITION OF SUBSIDIARY
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 $250,148. 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.
The following table shows the assets and liabilities acquired, consideration paid and net assets acquired:
Assets
|
|
|
|
Cash
|
|
$ |
42,549 |
|
Accounts receivable, net
|
|
|
31,028 |
|
Inventories
|
|
|
3,342 |
|
Other current assets
|
|
|
872 |
|
Security deposits
|
|
|
1,942 |
|
Total Assets
|
|
$ |
79,733 |
|
|
|
|
|
|
Certifications
|
|
$ |
200,000 |
|
Customer list
|
|
|
71,184 |
|
Total
|
|
$ |
350,917 |
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
$ |
100,733 |
|
Total Liabilities
|
|
$ |
100,733 |
|
|
|
|
|
|
Net Assets Acquired
|
|
$ |
250,184 |
|
NOTE 17 – COST METHOD INVESTMENT
GoEz Deals, Inc. (GED)
On August 9, 2013, the Company entered into a binding agreement to acquire 7% of the shares of GoEz Deals, Inc., ({"GED") 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 issuance of 230 shares of Series A Preferred Stock valued at $27,273, the issuance of 3,500,000 shares of common stock at $0.0738 per share valued at $258,300 for a total consideration of $285,573. The investment is recorded at the cost of the investment.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 18 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted certain provisions of ASC Topic 820. ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:
Level 1 inputs: Quoted prices for identical instruments in active markets.
Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 inputs: Instruments with primarily unobservable value drivers.
The following table presents assets and liabilities that are measured and recognized at fair value as of September 30, 2013 and December 31, 2012, on a recurring basis:
Assets and liabilities measured at fair value
on a recurring basis at September 30, 2013
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Carrying
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$ |
1,595,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,595,000 |
|
Stock warrant derivative liabilities
|
|
|
- |
|
|
|
- |
|
|
|
(245,008 |
) |
|
|
(245,008 |
) |
|
|
$ |
1,595,000 |
|
|
$ |
- |
|
|
$ |
(245,008 |
) |
|
$ |
1,349,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured at fair value
on a recurring basis at December 31, 2012
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Carrying
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Stock warrant derivative liabilities
|
|
|
- |
|
|
|
- |
|
|
|
(61,545 |
) |
|
|
(61,545 |
) |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(61,545 |
) |
|
$ |
(61,545 |
) |
NOTE 19 - SUBSEQUENT EVENTS
The Company has made the aggregate payments on the loan for the months of August, 2013 resulting in 644,330 shares issued at a price of $.0194 per share; September, 2013 resulting in 256,674 shares issued at a price of $.0487 per share and October, 2013 resulting in 352,113 shares issued at a price of $.0355. In addition, the interest that had accrued from June 1, 2013 through and including November 4, 2013 was paid in full by issuing 91,270 shares of stock at a price per share of $.0355. Pursuant to the issuance of these shares these Notes have been paid in full and no longer appear on the books of EWSI.
Subsequent to June 30, 2013, the Company issued 4,663,480 shares of common stock valued at an average of $0.0165 per share to various contractors for services valued at $83,337. The Company also issued
2,887,296 shares of common stock valued at an average of $0.0087 per share to various note holders in conversion of $25,000.
Effective July 10, 2013 the Company’s chief executive officer converted past obligations totaling $165,750 into 50,000,000 shares of the Company’s common stock.
Effective July 10, 2013 the Company’s chief executive officer converted past obligations totaling $8,275 into 2,500,000 shares of the Company’s S8 unrestricted common stock.
Effective August 13, 2013 the Company’s chief executive officer converted past obligations totaling $20,000 into 20,000 shares of the Company’s newly established Series B Preferred shares.
Effective July 26, 2013 the Company created an additional class of securities called the Series B Preferred stock, designating 500,000 shares at a par value of $0.001.
On August 27, 2012, the Company executed a 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 period ended June 30, 2013. As of June 30, 2013, there was a balance outstanding of $53,438 on this note. On August 14, 2013 the Company received an additional payment of $25,000.
E-WASTE SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2013 and December 31, 2012
(Unaudited)
NOTE 19 - SUBSEQUENT EVENTS (CONTINUED)
On December 31, 2012, two unsecured convertible notes bearing interest at 6% per annum and due on December 31, 2015 were issued with face values of $11,000 and $29,000 in exchange for services provided to the Company. The notes are 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.
Subsequent to this, during the third quarter, the Company is currently negotiating settlements of both notes whereby the existing debt would be purchased from the note holders by an unrelated third party. Cash will be paid to the note holders according to an agreed upon schedule of payment. In return, the unrelated third party has the right to convert the debt at a later date under much more favorable conditions to the Company.
Effective 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.
Subsequent to this, during the third quarter, the Company is currently negotiating settlement of this note whereby the existing debt would be purchased from the note holder by an unrelated third party. Cash will be paid to the note holder according to an agreed upon schedule of payments. In return, the unrelated third party has the right to convert the debt at a later date under much more favorable conditions to the Company.
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.
On June 25, 2013, the Company entered into a binding agreement to acquire 100% of the shares of Surf Investments, Ltd 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. The consideration paid was the assumption of liabilities of $222,928 and the issuance of 223 shares of Series A Preferred Stock for total consideration of $250,148. Results of operations are from date of acquisition. Fair values are estimates of management and they are in the process of getting a third-party valuation
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.
Our Business
A summary of our Business Plan has been published on our website at www.ewastesystems.com and is available for download there. We have also filed the Business Plan in an information Form 8K filed on January 9, 2013 and included herein by reference.
Through subsidiaries, affiliations, licensees, and leasehold operating agreements, EWSI offers customized end-to-end solutions in IT Asset Recovery, e-Waste Recycling, Reverse Logistics, Management Services, Technology and Engineering solutions and provides other solution providers with branding options that are proprietary to our Company.
In our e-waste recycling and reverse logistics business segments, we target as customers organizations facing a mix of regulatory, environmental, and price pressures, as well as those which need to protect their brand names and safeguard their data in the management of their waste and end-of-life assets. EWSI’s adherence to the principles of Fair Trade and the requirements of local and national legislation provides these customers with reassurance that end-of-life waste management is not only fully compliant and certified but is also done with social and environmental responsibility focus.
In our Leasehold Operations business segment, we target businesses who can benefit from improved, structured management from us whereby we can introduce our brands and our principles and grow our revenues in a potentially faster manner and with much less cost of capital.
Our strategy for growth in 2013 comprises the following key elements:
Build a global brand : We believe our brand is unique and we are promoting it through our website and via public relations to attain awareness of and alignment with the highest compliance standards in the world, led by Europe’s WEEE Directive. Our commitment is to continuously enhance and achieve the best brand in the industry, to the benefit of our clients and our business partners. We recognize that waste, and particularly e-waste, is a global problem that requires a global solution. We are therefore committed to developing and managing a worldwide presence, and intend to do so by using brand licensing and affiliations as a principle method to do so. We have and will continue developing affiliations with quality companies that share our business and environmental principles, which expand the geographic and service coverage of our Company, and which can do so with a lower capital outlay for our shareholders.
Expand our 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. These technologies include software solutions as well as high-end separation, refining, and processing technologies applied to component materials and output streams such as plastics, precious metals, glass, carbon, and bio-materials.
Accelerate our Revenues . We sell new branding licenses which generate revenue from up-front license fees and from subsequent royalties from sales executed under our brands; from the sale of technologies; from leasehold operations, from management services; from resale of still usable end-of-life electronics; from sale of extracted commodities produced by recycling; and from selected acquisitions.
Our Business Segments
E-Waste Recycling and Reverse Logistics
We offer services to process end of life or second hand electronic and generate revenues from returns management, repairing, refurbishing, reselling and recycling of electronics and electronic components, and sale of related commodities and materials extracted from the recycling process as well as related services such as data destruction. These are performed by our own business units, by companies we acquire, or are executed under cooperation with other businesses under contracts with us such as with our teaming agreements. Units operating in this segment include the recent acquisition of Surf Investments LP in California. Teaming agreements have been entered into and logistics services contracted so that the Company is able to arrange collection from any zip code in the USA and to process equipment in any of a number of regional locations in the USA and internationally
Brand Licensing
We have branded our offerings to include the following current names: eWaste™, eWasteCC™, ePlant1000™, and eWasteTRAK™. Our company brand and logo represent our commitment to the highest standards of end of life processing of electronic waste, and is supported by a policy of Zero Landfill, and Fair Trade. Other organizations can promote their company with our brand so long as they commit to the same principles as we do and pay a license fee and royalty to do so. The eWaste™ brand is being sold presently.
Engineering and Technology Sales
ePlant1000 is a range of highly engineered machinery and plant designs to achieve fast throughput and very high quality output streams. ePlant1000 is nearing commercial stage. eWasteTRAK is a software solution under development to target efficient handling of cross border yet secure and compliant transactions involving commodity and waste streams, but it is not yet ready for commercialization. eWasteCC is now launched and ready for commercialization. In the second quarter, no sales were recorded in this business segment.
Leasehold Operations
We operate properties and businesses which operate under leasehold contracts. These operate as business units within this division of the Company. Revenues are reported gross and our costs, including the leasehold payments are consolidated into our Income Statement. We do not acquire the assets, but instead lease them, and we pay the property owners certain fixed and variable cost in the process. This strategy delivers to us revenue streams and access to customers without the significant capital cost which might otherwise be required.
Surf Investments, Ltd. (Surf)
On June 25, 2013, the Company closed a definitive agreement to acquire Surf involving mix of assumed convertible debt and Series A preferred shares. The shareholder has elected the option to have us acquire the debt and forego the Series A preferred shares, but our counsel has not yet determined that the debt can be converted. Accordingly the Series A preferred shares will not be issued until counsel’s determination is complete.
Surf was acquired to provide a base of operations in California. It was founded in 1979 and the founding management has been retained. It has focused on mobile computing and offers qualified technical services such as warranty and non-warranty repair, refurbishment, resale and recycling. Over the years it has been accredited to perform warrant repair on behalf of electronics manufacturers such as Toshiba, Hewlett Packard, Lenovo and others. It has also been accredited as a certified electronics processor by the State of California. The company’s location in Southern California is considered strategically important, although current space is considered too small to handle new volumes of end-of-life electronics, so alternative locations are presently being sought.
YaZhou (now known as Xufu) - a Variable Interest Entity or V.I.E.
Through a series of contractual arrangements in the first quarter of 2013we became the indirect holding company of Shanghai YaZhuo Jiudian Guanli, Ltd. (“ YaZhuo ”), which is now our primary management company located in the People's Republic of China ("PRC").
Beginning early in the first quarter, EWSI’s Shanghai office, with YaZhuo as leader of the effort, began setting up new accounting systems and processes to manage the affairs of the business units we bring under contract as Leasehold Operations. Using United States GAAP practices and English language based software YaZhuo is now overseeing the operations of our China based Leasehold Operations and is actively engaged in business development. Their results in the first half year have led to many very important developments for our Company.
Jiangsu ChengXiang Plastic Co., LTD (JCP)
JCP is the first company managed by YaZhuo on behalf of the Company, JCP holds patents for the recycling of plastics, including electronic waste plastics, which it then processes into new materials for the construction industry. The company produces these construction grade plastics which are structurally advanced and are presently being used in the construction industry as reusable forms for building concrete structures. We ultimately hope to be able to identify improved methods of operation, and intend to source access to additional input streams of plastics from ewaste and other materials; and to seek new uses of the patented recycling technology.
Shaghai Yibao Shangwu Xinxi ZixunYouxian Gongsi (eBao)
eBao is historically a consulting and contracting firm specializing in the hotel, entertainment, and leisure industry. The company provides products and services designed to improve asset management, increase revenues and customer retention, and enhance the consumer experience. The clients are frequently in need of new technology products and to find efficient methods for asset recovery or disposal. We believe that our eWasteCC software solution will have significant applications to the industry served by eBao and we ultimately seek to learn more about that application so we can broaden the offering while simultaneously looking to secure streams of end of life assets.
Shanghai City View Hotel Management LTD. and Shanghai Kunyuan Jiudian Guanli Co., Ltd (City)
City is an upscale hotel and leisure company, and one of the types of targets for our eWasteCC technology. City targets high-end consumers and regularly strives to find ways to upgrade the consumer experience by the use of new technologies and services. While are terminated our contract with City at on June 30, 2013, we believe that our eWasteCC software solution will similarly have significant applications to the hotel and leisure industry and we ultimately seek to learn more about that application so we can broaden the offering while simultaneously looking to secure streams of end of life assets.
XTS
Effective July 1, 2013 YaZhuo entered into a lease and operating agreement with XTS to lease its assets and to operate its business in in China.
GoEz Deals, Inc. (GED)
On August 9, 2013, the Company entered into a binding agreement to acquire 7% of the shares of GoEz Deals, Inc., ("GED") a California company in the mobile computing and e-waste recycling business. The Company acquired GED 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. Effective July 1, 2013, in addition to initial investment in stock as described herein. EWSI entered into a lease and operating agreement with GED providing for lease of GED properties and operation of its businesses as business units within this division of the Company.
Factors impacting EWSI’s Consolidated Results of Operations
Among the principal factors that might affect future operations are the following:
Sudden Termination of Leasehold Operations . Unexpected termination of any of our Leasehold Operations could result in a drop in revenues which we may struggle to replace in a short period of time.
Damage to our Brand. Our brand is very important to us. If any of our brand licensees were to do or take any action which would violate the principles we stand for, including our voluntary adoption of the highest standards of end of life processing, or our Zero Landfill policies for example, our brand could value could be diminished and could affect our ability to retain customers or sell more licenses
Availability of feedstock volumes . We have limited contracts with suppliers of feedstock and there is no guarantee of access to regular, predictable volumes of feedstock.
Demand for second-hand electronic equipment . Our revenue, operating results and investment in working capital depended on the level of demand for second-hand electronic equipment that had been repaired and/or refurbished. If demand for used electronics sharply declines for any reason, including businesses and consumers curtailing their investment it could affect our revenues.
Market prices for certain commodities . Our business is affected by changes in commodity prices notably that of precious metals used to manufacture key components found in electronic equipment.
Regulatory changes . Each time the legal or regulatory environment 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 experience an increase in operating costs, which may not be able to be passed downstream.
General and administrative costs . In order to execute our strategy for growth, we expect to further increase general and administrative overhead cost. Our results of operations will be adversely impacted if these additional overhead costs are incurred before growth in revenue is realized.
Condensed Consolidated Results of Operations for E-Waste Systems, Inc.
Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
Revenues
We generated revenue of $ 8,296,752 during the nine months ended September 30, 2013, compared with $0 during the nine months ended September 30, 2012. Sales realized during the nine months ended September 30 2013 are from the sale of brand licenses and management service; from repair and recycling services from our acquisition of Surf; and from product sales and services in our leasehold operations. The Company is implementing the revised business plan announced at the start of the year and comparisons to the last fiscal year are accordingly not meaningful.
Cost of Sales
Cost of sales for the nine months ended September 30, 2013 amounted to $ 6,536,621, compared with $0 for the nine months ended September 30, 2012 . Costs of sales during the nine months ended September 30, 2013 were comprised primarily of the cost of acquiring materials for recycling refurbishment and repair and the cost of product sales and direct labor in our leasehold operations. Our direct cost of sales for brand licenses is nil. Comparisons to 2012 are not meaningful.
Gross Profit
Gross profit for the nine months ended September 30, 2013 was $1,760,131, or 21.2% of revenues, compared to gross profit of 0 for the nine months ended September 30, 2012 . We are in a period of fast growth and gross margins are expected to remain under pressure as we continue our high growth activities. Comparisons to 2012 are not meaningful.
Operating Expenses
We incurred operating expenses of $ 3,803,095 for the nine months ended September 30, 2013 compared with operating expenses of $738,616 for the same period in 2012, an increase of $3,064,479. This increase is attributable to an reduction in hiring business development professionals in the amount of $51,684and an increase in other professional fees of $2,456,754, as well as an increase in general and administrative expenses of $659,409.
Our operating expenses for the nine months ended September 30, 2013 consisted of directors’ and officers’ accrued compensation, business development, professional fees and general and administrative expenses.
We anticipate that our operating expenses will continue to increase as we seek to increase the scale and range of services our business can offer to our customers.
Other Items
We incurred other expenses of ($371,921) for the nine months ended September 30, 2013 compared with ($84,005) during the same period in 2012, an increase of $287,916. This increase in attributable to a $788,762 increase in interest expense on various convertible and non-convertible notes, an increase in the gain on derivative liability of $429,026, a decrease in contingent consideration settlement losses of $66,671and a foreign currency gain of $5,149.
Other income and expenses comprise interest expense on demand notes payable, gain on currency exchange and the interest on a derivative liability attaching to our convertible debt.
Net Income (Loss)
As a result of the above, we reported a net loss of $ 2,414,885 for the nine months ended September 30, 2013.
Liquidity and Capital Resources
As of September 30, 2013, our condensed consolidated balance sheet presented total current assets of $3,465,321 and total current liabilities of $3,853,361 which resulted in a working capital deficit of $388,040. EWSI generated consolidated revenue from condensed consolidated operations during the nine months ended September 30, 2013 that fell short of its condensed consolidated operating expenses from continuing operations over the same period by $2,042,964.
To date, we have relied upon issuances of common stock and unsecured notes to finance our operations and help us meet our short-term obligations. Over the next twelve months we anticipate incurring further expenditures to execute our business plan. The operating expenses for the year will consist primarily of compensation, business development costs to grow the business and 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 and issue more common stock in order to continue to implement our business plan during and beyond the next twelve months.
We anticipate that additional future funding will be in the form of equity financing from the sale of our common and preferred stock and secured debt financing. We are currently seeking additional funding. Additional equity financings could result in significant dilution to our stockholders.
Consolidated Cash Used in Operating Activities
Continuing operating activities in the nine months ended September 30, 2013 used cash of $197,402, which is a reflection of the corresponding period’s operating results. Our consolidated net loss from continuing operations reported for nine months ended September 30, 2013 of $2,414,885 was the primary reason for our negative operating cash flow. The impact of our consolidated net loss from continuing operations on our condensed consolidated cash flow for the nine months ended September 30, 2013 was primarily offset by $2,143,125 in common stock issued for services and amortization of debt discounts and origination interest on derivative liabilities of $681,754, both non-cash items, and an increase in accounts payable and accrued expenses of $1,617,179. These offsets were reduced by an increase in accounts receivable of $1,410,150.
Consolidated Cash Used in Investing Activities
We did not use any cash in investing for the nine months ended September 30, 2013 or 2012. However, the Company did acquire $42,549 in cash with its acquisition of a subsidiary.
Consolidated Cash from Financing Activities
We have financed our operations primarily from loans made to the company. Consolidated net cash flow provided by continuing financing activities for the nine months ended September 30, 2013 was $187,500, which consisted of proceeds received from notes payable and expenses paid in behalf of the Company of $11,977.
Off Balance Sheet Arrangements
As of September 30, 2013, we had 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.
In order to continue as a going concern, we will need, among other things, additional capital resources and proper execution of our business plan. Management’s plan is to obtain such resources for us by seeking additional equity and/or debt financing. However, management cannot provide any assurances we will be successful in accomplishing any of our plans.
The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
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, 2012, that are included in our 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, 2012.
(Not Applicable)
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures 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.
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 September 30, 2013. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, Mr. Martin Nielson Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2013, our disclosure controls and procedures are effective for a company our size. Our conclusion is based on the changes we implemented and discussed below
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.
PART II – OTHER INFORMATION
As of the filing of this document, the Company is not aware of any current or pending litigation.
Forward-Looking Statements
We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations, throughout this report, which include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions. Any number of risks and uncertainties could cause actual results to differ materially from those we express in our forward-looking statements, including the risks and uncertainties we describe below and other factors we describe from time to time in our periodic filings with the SEC. We therefore caution you not to rely unduly on any forward-looking statement. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise.
Risks and Uncertainties
We are subject to various risks that could have a negative effect on us or on our financial condition. You should understand that these risks could cause results to differ materially from those expressed in forward-looking statements contained in this report or in other Company communications. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following:
Our industry is highly competitive, which may impact our ability to compete successfully for customers . We generally operate in markets that contain numerous competitors. Each of our operations compete with national international and independent companies in regional markets. Some of this competition is very large. Our ability to remain competitive and to attract and retain business depends on our success in distinguishing the quality, value, and efficiency of our products and services, from those offered by others. If we cannot compete successfully in these areas, our operating margins could contract, our market share could decrease, and our earnings could decline.
Economic uncertainty could continue to impact our financial results and growth . Weak economic conditions in parts of the world, the strength or continuation of recovery in countries that have experienced improved economic conditions, potential disruptions in the U.S. economy as a result of governmental action or inaction on the federal deficit, budget, and related issues, political instability in some areas, and the uncertainty over how long any of these conditions will continue, could continue to have a negative impact on our industry.
Operational Risks
Premature termination of our leasehold operating agreements could hurt our financial performance . Our leasehold operating agreements may be subject to sudden termination. A significant loss due to sudden terminations could hurt our financial performance or our ability to grow our business.
Our operations are subject to global, regional, and national conditions . Because we conduct our business on a global platform, our activities are affected by changes in global and regional economies. Our future performance could be similarly affected by the economic environment in each of the regions in which we operate.
The major significance of our operations outside of the United States also makes us increasingly susceptible to the risks of doing business internationally, which could lower our revenues, increase our costs, reduce our profits, or disrupt our business . We currently operate in multiple countries, and our operations in China represent the majority of our revenues to date. We expect that the international share of our total revenues will continue to increase in future periods. As a result, we are increasingly exposed to the challenges and risks of doing business outside the United States, which could reduce our revenues or profits, increase our costs, result in significant liabilities or sanctions, or otherwise disrupt our business. These challenges include: (1) compliance with complex and changing laws, regulations and policies of governments that may impact our operations, such as foreign ownership restrictions, import and export controls, and trade restrictions; (2) compliance with U.S. and foreign laws that affect the activities of companies abroad, such as anti-corruption laws, competition laws, currency regulations, and laws affecting dealings with certain nations; (3) limitations on our ability to repatriate non-U.S. earnings in a tax effective manner; (4) the difficulties involved in managing an organization doing business in many different countries; (5) uncertainties as to the enforceability of contract and intellectual property rights under local laws; (6) rapid changes in government policy, political or civil unrest, acts of terrorism, or the threat of international boycotts or U.S. anti-boycott legislation; and (7) currency exchange rate fluctuations.
Our new programs and new branded products may not be successful . We cannot assure you that our recently launched brands, our recent operational management agreements, our intended acquisitions, or any new programs or products we may launch in the future will be accepted by the public or other customers. We also cannot be certain that we will recover the costs we incurred in developing or acquiring the brands or any new programs or products, or that the brands or any new programs or products will be successful. In addition, some of our new brands involve or may involve cooperation and/or consultation with one or more third parties, including some shared control over product design and development, sales and marketing, and brand standards. Disagreements with these third parties could slow the development of these new brands and/or impair our ability to take actions we believe to be advisable for the success and profitability of such brands.
Disagreements with the owners of the businesses that we manage, operate, or sell brand licenses to may result in litigation or may delay implementation of product or service initiatives . Consistent with our focus on leasehold operating contracts and branding, we own very few of our functional properties. The nature of our responsibilities under our management agreements to operate and enforce the standards required for our brands under management operating agreements may be subject to interpretation and will from time to time give rise to disagreements, which may include disagreements over the need for or payment for new product or service initiatives. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential business owners but may not always able to do so. Failure to resolve such disagreements could result in litigation. If any such litigation results in a significant adverse judgment, settlement, or court order, we could suffer significant losses, our profits could be reduced, or our future ability to operate our business could be constrained.
Our business depends on the quality and reputation of our brands, and any deterioration in the quality or reputation of these brands could have an adverse impact on our market share, reputation, business, financial condition, or results of operations . Events that may be beyond our control could affect the reputation of one or more of our brands. If the reputation or perceived quality of our brands declines, our market share, reputation, business, financial condition, or results of operations could be affected.
Actions by our brand licensees or operating divisions could adversely affect our image and reputation . We license many of our brand names and trademarks to third parties. Under the terms of their agreements with us, our licensees may interact directly with customers and other third parties under our brand and trade names. If these licensees fail to maintain or act in accordance with applicable brand standards, experience operational problems, or project a brand image inconsistent with ours, our image and reputation could suffer.
Development and Financing Risks
While we are a leasehold operator, licensor and acquiror, we or the business owners depend on capital to buy, develop, and improve their business and we and or the owners may be unable to access capital when necessary . In order to fund new investments both the Company and business owners in our network must periodically spend money. The availability of funds for new investments and improvement of operations our current businesses and our current business owners depends in large measure on capital markets and liquidity factors, over which we can exert little control.
Our growth strategy depends upon third-party business owners/operators, and future arrangements with these third parties may be less favorable . Our growth strategy for development of additional facilities entails entering into and maintaining various arrangements with business owners. The terms of our management operating agreements, license agreements, and acquisitions are influenced by contract terms offered by our competitors, among other things. We cannot assure you that any of our current arrangements will continue or that we will be able to enter into future collaborations, renew agreements, or enter into new agreements in the future on terms that are as favorable to us as those that exist today.
Development activities that involve investment with third parties may result in disputes that could increase costs, impair operations, or increase project completion risks . Partnerships, joint ventures, and other business combinations involving investment with third parties generally include some form of shared control over the operations of the business and create added risks, including the possibility that other investors in such ventures could have or develop business interests, policies, or objectives that are inconsistent with ours. Although we actively seek to minimize such risks before investing in partnerships, joint ventures, acquisitions or similar structures, actions by another investor or party may present additional risks of delay, increased costs, or operational difficulties following completion.
Other Risks
Changes in tax and other laws and regulations could reduce our profits or increase our costs . Our businesses are subject to regulation under a wide variety of laws, regulations, and policies in jurisdictions around the world. In response to the economic environment, we anticipate that many of the jurisdictions in which we do business will continue to review laws, regulations, and policies, and any resulting changes could impose new restrictions, costs, or prohibitions on our current practices and reduce our profits.
If we cannot attract and retain talented associates, our business could suffer . We compete with other companies both within and outside of our industry for talented personnel. If we cannot recruit, train, develop, and retain sufficient numbers of talented individuals it could limit our ability to grow and expand our businesses.
We previously determined that our disclosure controls and procedures were not effective. We have addressed previous issues but if our actions prove insufficient, we could suffer consequences.. , We cannot assure you that we will not discover additional weaknesses in our disclosure controls and procedures. Any such additional weakness could adversely affect our financial condition or ability to comply with applicable financial reporting requirements.
In addition to the above, we refer you to further statements of risks filed in our annual report with the SEC on Form 10K filed on April 16, 2013 and incorporated herein by reference.
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
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.
See the Exhibit Index following the signatures page of this report, which is incorporated herein by reference.
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.
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E-Waste Systems, Inc.
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Date:
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November 19, 2013
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By:
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/s/ Martin Nielson
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Martin Nielson
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Title:
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President, Chief Executive Officer.
Chief Financial Officer and Director
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E-Waste Systems, Inc.
(the “Registrant”)
(Commission File No. 333-165863)
Exhibit Index
To Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2013
Exhibit
Number
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Description
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Incorporated by
Reference to:
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Filed
Herewith
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31.1
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X
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31.2
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X
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32.1
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X
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32.2
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X
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EXHIBIT 31.1
CERTIFICATIONS
I, Martin Nielson, certify that;
(1)
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I have reviewed this quarterly report on Form 10-Q for the period ending September 30, 2013 of E-Waste Systems, Inc.;
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(2)
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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(3)
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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(4)
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The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(1) and 15d-15(f) for the registrant and have:
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a)
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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b)
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c)
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d)
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
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(5)
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
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a)
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
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b)
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: November 19, 2013
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/s/ Martin Nielson
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By: Martin Nielson
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Title: Chief Executive Officer
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EXHIBIT 31.2
CERTIFICATIONS
I, Martin Nielson, certify that;
(1)
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I have reviewed this quarterly report on Form 10-Q for the period ending September 30, 2013 of E-Waste Systems, Inc.;
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(2)
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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(3)
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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(4)
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The registrant’s other certifying officer(s) an I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(1) and 15d-15(f) for the registrant and have:
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a)
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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b)
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c)
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d)
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
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(5)
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
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a)
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
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b)
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: November 19, 2013
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/s/ Martin Nielson
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By: Martin Nielson
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Title: Chief Financial Officer
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EXHIBIT 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
In connection with the accompanying Quarterly Report on Form 10-Q of E-Waste Systems, Inc. for the quarter ended September 30, 2013, I certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) |
the Quarterly Report on Form 10-Q of E-Waste Systems, Inc. for the quarter ended September 30, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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(2) |
the information contained in the Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, fairly presents in all material respects, the financial condition and results of operations of E-Waste Systems, Inc.
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By:
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/s/ Martin Nielson
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Name:
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Martin Nielson
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Title:
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Principal Executive Officer
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Date:
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November 19, 2013
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EXHIBIT 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
In connection with the accompanying Quarterly Report on Form 10-Q of E-Waste Systems, Inc. for the quarter ended September 30, 2013, I certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) |
the Quarterly Report on Form 10-Q of E-Waste Systems, Inc. for the quarter ended September 30, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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(2) |
the information contained in the Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, fairly presents in all material respects, the financial condition and results of operations of E-Waste Systems, Inc.
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By:
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/s/ Martin Nielson
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Name:
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Martin Nielson
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Title:
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Principal Financial Officer
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Date:
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November 19, 2013
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