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EX-31.2 - EXHIBIT312 - EWaste Systems, Inc.exhibit312.htm
EX-31.1 - EXHIBIT311 - EWaste Systems, Inc.exhibit311.htm
EX-32.2 - EXHIBIT322 - EWaste Systems, Inc.exhibit322.htm
EX-32.1 - EXHIBIT321 - EWaste Systems, Inc.exhibit321.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
 
For the quarterly period ended:  June 30, 2014
   
o
Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
   
 
For the transition period from __________ to __________
   
 
Commission File Number:  333-165863

E-Waste Systems, Inc.
(Exact name of registrant as specified in its charter)

Nevada
26-4018362
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)

1350 E. Flamingo, #3101, Las Vegas, NV
89119
(Address of principal executive offices)
(Zip Code)

650-283-2907
(Registrant’s telephone number)
 
_________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days   Yes   x      No    o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer    o
Accelerated filer                         o
Non-accelerated filer      o
Smaller reporting company       x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No   x

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 9, 2014, there were 425,883,176 shares of our common stock issued and outstanding.
 
 
 
 

 
 
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PART I – FINANCIAL INFORMATION
 
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Item 2:
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Item 3:
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Item 4:
43
     
PART II – OTHER INFORMATION
 
Item 1:
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Item 1A:
44
     
Item 2:
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Item 3:
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Item 4:
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Item 5:
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Item 6:
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PART I - FINANCIAL INFORMATION


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





These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  Operating results for the interim period ended June 30, 2014 are not necessarily indicative of the results that can be expected for the full year.
 
 
 
 
 

 

 
 
 
 
E-Waste Systems, Inc. and Subsidiaries
 
 
             
   
June 30,
   
December 31,
 
   
2014
   
2013
 
   
(Unaudited)
       
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 96,962     $ 145,778  
Restricted cash held in escrow
    140,000       140,000  
Accounts receivable, net
    251,210       63,217  
Related parties receivable
    -       1,052  
Inventory
    3,315       5,752  
Deferred financing costs
    34,830       -  
Other current assets
    18,129       3,833  
Total Current Assets
    544,446       359,632  
                 
Property and equipment, net
    277,349       181,720  
Security deposits
    107,886       3,270  
Intangible assets
    280,823       324,011  
Investments
    285,573       285,573  
TOTAL ASSETS
  $ 1,496,077     $ 1,154,206  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
CURRENT LIABILITIES:
               
Accounts payable and accrued expenses
  $ 807,355     $ 479,884  
Accrued expenses, related parties
    1,252,832       1,320,918  
Due to related parties
    3,284       -  
Due to others
    12,965       -  
Deferred rent
    4,352       -  
Deferred revenue
    88,789       -  
Short-term notes payable
    205,228       194,460  
Short-term related party convertible notes payable, net
    6,000       12,000  
Short-term convertible notes payable, net
    2,138,796       1,139,897  
Derivative liability on short-term convertible notes payable
    1,921,990       465,880  
Total Current Liabilities
    6,441,591       3,613,039  
                 
Long term portion of notes payable
    36,255       85,908  
Long term portion of convertible notes payable, net
    563,500       251,406  
Long-term portion of derivative liabilities
    497,670       -  
TOTAL LIABILITIES
    7,539,016       3,950,353  
                 
                 
STOCKHOLDERS' DEFICIT:
               
Preferred stock, Series A, $0.001 par value, 10,000,000 shares authorized;
               
5,891 and 1,903 shares issued and outstanding, respectively
    6       2  
Preferred stock, Series B, $0.001 par value, 10,000,000 shares authorized;
               
195,000 and 195,000 shares issued and outstanding, respectively
    487       195  
Common stock, $0.001 par value, 800,000,000 shares authorized;
               
425,918,387 and 262,734,973 shares issued and outstanding, respectively
    425,918       262,735  
Additional paid-in capital
    13,083,431       7,154,225  
Accumulated deficit
    (19,552,781 )     (10,213,304 )
TOTAL STOCKHOLDERS' DEFICIT
    (6,042,939 )     (2,796,147 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 1,496,077     $ 1,154,206  
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
E-Waste Systems, Inc. and Subsidiaries
 
 
                         
                         
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
         
(Restated)
         
(Restated)
 
NET REVENUES:
                       
Product sales revenue
  $ 227,796     $ 168,374     $ 447,649     $ 168,374  
Service revenues
    317,430       88,638       606,633       88,638  
TOTAL REVENUES
    545,226       257,012       1,054,282       257,012  
                                 
Cost of sales
    483,531       143,884       796,039       143,884  
                                 
GROSS PROFIT
    61,695       113,128       258,243       113,128  
                                 
OPERATING EXPENSES:
                               
Officer and director compensation
    91,035       84,895       182,070       224,517  
Professional fees
    528,402       133,362       3,925,838       539,094  
Financing costs
    49,163       -       212,860       -  
Stock based compensation
    688,283       -       1,626,792       -  
Impairment in available for sale securities
    -       730,000       -       730,000  
General and administrative expenses
    624,145       229,248       1,250,269       244,028  
TOTAL OPERATING EXPENSES
    1,981,028       1,177,505       7,197,829       1,737,639  
                                 
LOSS FROM OPERATIONS
    (1,919,333 )     (1,064,377 )     (6,939,586 )     (1,624,511 )
                                 
OTHER (EXPENSE) INCOME:
                               
Interest expense, net
    (158,288 )     (108,839 )     (354,354 )     (169,028 )
Change in derivative liability
    (737,273 )     43,074       (1,953,780 )     43,074  
Loss on conversion of notes payable
    (3,659 )     -       (3,659 )     -  
TOTAL OTHER (EXPENSE) INCOME
    (899,220 )     (65,765 )     (2,311,793 )     (125,954 )
                                 
Loss from Operations before Income Taxes
    (2,818,553 )     (1,130,142 )     (9,251,379 )     (1,750,465 )
Provision for Income Taxes
    -       -       -       -  
                                 
NET LOSS FROM CONTINUING OPERATIONS
    (2,818,553 )     (1,130,142 )     (9,251,379 )     (1,750,465 )
                                 
Loss from Discontinued Operations, net of Income Taxes
    (3,616 )     (5,416 )     (88,098 )     3,643  
                                 
NET LOSS
  $ (2,822,169 )   $ (1,135,558 )   $ (9,339,477 )   $ (1,746,822 )
                                 
NET LOSS PER COMMON SHARE:
                               
Basic and Diluted Loss per Share from Continuing Operations
  $ (0.01 )   $ (0.01 )   $ (0.03 )   $ (0.01 )
Basic and Diluted Loss per Share from Discontinued Operations
  $ 0.00     $ 0.00     $ 0.00     $ 0.00  
NET LOSS PER SHARE - BASIC AND DILUTED
  $ (0.01 )   $ (0.01 )   $ (0.03 )   $ (0.01 )
                                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
                               
Basic and diluted
    385,926,313       152,493,541       344,559,961       136,837,931  
                                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
 
 
 
 
 
E-Waste Systems, Inc. and Subsidiaries
 
 
             
   
For the Six Months Ended
 
   
2014
   
2013
 
         
(Restated)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss from continuing operations
  $ (9,251,379 )   $ (1,750,465 )
Adjustment to reconcile net loss to net cash used in operating activities:
               
Bad debt provision
    2,036       2,700  
Amortization of deferred financing costs
    19,170       -  
Depreciation expense
    30,205       -  
Amortization of intangible assets
    43,188       -  
Origination interest charge
    88,500       5,556  
Convertible notes payable executed for services
    142,145       117,940  
Amortization of debt discount
    133,645       86,592  
Change in derivative liability
    1,953,780       43,074  
Common stock issued for services
    824,207       347,533  
Stock based compensation
    1,626,792       -  
Loss on conversion of debt
    3,659       52,125  
Preferred stock issued for services
    2,817,100       -  
Impairment on available for sale securities
    -       730,000  
Contributed capital
    -       40,927  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    (190,029 )     (50,043 )
Related parties receivable
    1,052       (750 )
Inventory
    2,437       (6,520 )
Prepaid Expenses
    -       24,277  
Other current assets
    204       -  
Accounts payable and accrued expenses
    418,114       314,019  
Accrued expenses, related parties
    255,926       226,829  
Deferred revenue
    88,789       1,657  
Deferred rent
    4,352       -  
                 
NET CASH (USED IN) PROVIDED BY CONTINUING OPERATING ACTIVITIES
    (986,107 )     185,451  
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATING ACTIVITIES
    (88,098 )     3,643  
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    (1,074,205 )     189,094  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of equipment
    (125,834 )     -  
Payments towards security deposits
    (104,616 )     (1,589 )
Payments towards intangible assets
    -       (247,198 )
                 
NET CASH USED IN CONTINUING INVESTING ACTIVITIES
    (230,450 )     (248,787 )
NET CASH USED IN INVESTING ACTIVITIES
    (230,450 )     (248,787 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from convertible notes payable
    1,158,975       73,750  
Principal payments towards convertible notes payable
    (27,500 )     -  
Principal payments towards notes payable
    (38,885 )     -  
Principal payments towards convertible notes payable, related parties
    (6,000 )     -  
Advances from related parties
    3,284       -  
Advances from others
    12,965       -  
Issuance of common stock for cash
    153,000       -  
                 
NET CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES
    1,255,839       73,750  
NET CASH PROVIDED BY FINANCING ACTIVITIES
    1,255,839       73,750  
                 
Effects of exchange rates on cash
    -       -  
                 
Net (decrease) increase in cash and cash equivalents
    (48,816 )     14,057  
                 
Cash and cash equivalents, beginning of period
    145,778       139  
                 
Cash and cash equivalents, end of period
  $ 96,962     $ 14,196  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for interest
  $ 15,999     $ 25,895  
Cash paid for taxes
  $ -     $ -  
                 
NON-CASH ACTIVITIES:
               
Deferred financing costs associated with convertible notes payable issuances
  $ 54,000     $ -  
Conversions of convertible notes payable and accrued interest into shares of common stock
  $ 265,649     $ 44,445  
Issuance of common stock as payment towards accrued expenses
  $ 27,838     $ 214,808  
Conversion of preferred Series A stock into common stock
  $ 14,877     $ -  
Issuance of preferred Series A stock for payment of accrued expenses, related parties
  $ 300,169     $ -  
Issuance of preferred Series A stock for payment of accounts payable and accrued expenses
  $ 50,428     $ -  
Accrued interest added to principal in connection with assignments of convertible notes payable between third parties
  $ 3,913     $ -  
Monies due from convertible notes payable
  $ 14,500     $ -  
Issuance of common stock as payment towards accrued expenses, related parties
  $ 23,550     $ -  
Debt discounts on convertible notes payable
  $ -     $ 309,550  
Intangible assets from investment in Surf
  $ -     $ 100,171  
Convertible notes payable executed for accounts payable and accrued expenses
  $ -     $ 112,284  
Common stock issued for prepaid services
  $ -     $ 219,357  
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 


 

 

E-Waste Systems, Inc. and Subsidiaries
NOTE 1 - BACKGROUND INFORMATION
 
Organization and Business
 
We were incorporated on December 19, 2008 in the State of Nevada.  Our wholly owned subsidiary, E-Waste Systems (UK) Ltd. was founded in January 2011 for the purpose of implementing our business strategy and has had limited operations. We acquired all of the issued and outstanding capital stock of EWSO on October 14, 2011. On September 20, 2012, certain of the assets and business of EWSO were physically transferred to Two Fat Greek, LLC.

Surf Investments, Ltd. (Surf)

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

E-Waste Systems Cincinnati Inc. (EWS-C)

E-Waste Systems Cincinnati Inc. (EWS-C) was formed as a wholly owned subsidiary on November 16, 2013 to acquire certain debt from Fifth Third Bank secured by the assets of WWS Associates d/b/a 2TRG.  The transaction for the purchase of the debt was concluded in December of 2013. Subsequent to the acquisition of the debt, the obligors surrendered the collateral to the Company and EWS-C began operations with operations in Ohio and New York.


NOTE 2 - GOING CONCERN

The Company’s condensed consolidated financial statements have been prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred net losses of $9,339,477 and $1,746,822 during the six months ended June 30, 2014 and 2013, respectively. Cash on hand will not be sufficient to cover debt repayments scheduled as of June 30, 2014, and operating expenses and capital expenditure requirements for at least twelve months from the consolidated balance sheet date. As of June 30, 2014 and December 31, 2013, the Company had working capital deficits of $5,897,145 and $3,253,407, respectively. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to seek equity and/or debt financing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.
 
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
 
NOTE 3 - RESTATEMENT

On March 26, 2013, EWSI entered into a set of agreements with XuFu (Shanghai) Co, Ltd, (“XuFu”) a company incorporated in the People’s Republic of China (“PRC”) and formerly known as Yazhuo.  The interests in XuFu were initially consolidated on the Company’s interim financial statements as a Variable Interest Entity (“VIE”) as of March 31, 2013, June 30, 2013 and September 30, 2013.  Upon further analysis, prior to filing its 10-K for the year ended December 31, 2013, the Company concluded that consolidation was not proper. The VIE agreements and all corresponding Lease and Operating Agreements and Management Agreements were terminated by action of the Board of Directors.  Discussions with potential targets to the extent deemed prudent by management are on-going and new agreements will be executed as and when deemed to be in the best interest of the Company. Accordingly, the Company has not consolidated Xufu in the quarterly statements for the six months ended June 30, 2014 and 2013.
 

 



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


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






NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
 
The Financial Statements and related disclosures have been prepared pursuant to the rules and regulations of the SEC.  The Financial Statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (“GAAP”).

Use of estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations, and cash flows at June 30, 2014, and for all periods presented herein, have been made.
 
Beneficial Conversion Feature
 
Costs incurred with parties who are providing financing, which include the intrinsic value of beneficial conversion features associated with the underlying debt, are reflected as a debt discount.  These discounts are generally amortized over the life of the related debt.  In certain circumstances, the intrinsic value of the beneficial conversion feature may be greater than the proceeds associated to the convertible instrument.  In such situations, the amount of the discount assigned to the beneficial conversion feature is limited to the amount of the proceeds allocated to the convertible instrument.
 
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities”.

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

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

 
 
- 10 -


 

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

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

Cash and Cash Equivalents
 
For the purpose of the financial statements cash equivalents include all highly liquid investments with maturity of three months or less. Cash and cash equivalents were $96,962 and $145,778 at June 30, 2014 and December 31, 2013, respectively. See Note 6 – Restricted Cash Held in Escrow
 
Cash Flows Reporting
 
The Company follows ASC 230, Statement of Cash Flows, for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by ASC 230, Statement of Cash Flows, to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period.

Commitments and Contingencies
 
The Company follows ASC 440, Commitments and ASC 450, Loss Contingencies, to report accounting for commitments and contingencies. 
 
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.  There were no commitments or contingencies at June 30, 2014 and 2013.
 
Earnings per Share
 
The Company computes basic and diluted earnings per share amounts in accordance with ASC Topic 260, Earnings per Share. Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. 
 
For the six months ended June 30, 2014 and 2013, the effect of common stock equivalents has been excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.
 
The Company does not have any potentially dilutive instruments as of June 30, 2014 and, thus, anti-dilution issues are not applicable.
 
At June 30, 2014, there were no stock options.
 
 
 

 
- 11 -


 

 
Fair Value of Financial Instruments
 
The Company follows paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments and paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.  The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
 
Level 1
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3
Pricing inputs that are generally unobservable inputs and not corroborated by market data.
 
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
 
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
 
The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts payable, accrued expenses and loans payable approximate their fair values because of the short maturity of these instruments. Loans payable are recorded at their issue value.
  
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
 
It is not, however, practical to determine the fair value of advances from stockholders, if any, due to their related party nature.
 
The following table presents assets and liabilities that are measured and recognized at fair value as of June 30, 2014 and December 31, 2013, on a recurring basis:
 
Assets and liabilities measured at fair value
on a recurring basis at June 30, 2014
Level 1
 
Level 2
 
Level 3
 
Total
Carrying
Value
 
                           
Derivative liabilities
-
 
-
 
(2,419,660
)
 
(2,419,660
)

 
Assets and liabilities measured at fair value
on a recurring basis at December 31, 2013
Level 1
 
Level 2
 
Level 3
 
Total
Carrying
Value
 
                         
Derivative liabilities
 
-
   
-
   
(465,880
)
 
(465,880
)

 
 

 
 
- 12 -


 

 
Property and Equipment
 
Property and equipment are stated at cost. Depreciation was calculated using the straight-line method over the estimated useful lives of the related assets, ranging from three to seven years.  Expenditures for additions and improvements were capitalized, while repairs and maintenance costs were expensed as incurred.  The cost and related accumulated depreciation of property and equipment sold or otherwise disposed of were removed from the accounts and any gain or loss was recorded in the year of disposal.  Depreciation expense for the six months ended June 30, 2014 and 2013 was $30,205 and $0, respectively.
 
Related Parties
 
The Company follows ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.  Related party transactions for the six months ending June 30, 2014 and 2013 are reflected in Note 9.
 
Stock Based Compensation

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

The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, Equity – based Payments to Non-Employees.  Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable:  (a) the goods or services received; or (b) the equity instruments issued.  The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.  
 
Under our stock compensation plan (the “Stock Plan”) which is registered under Form S8, or through newly issued restricted common stock, we pay qualified contractors and advisors common shares in lieu of compensation for services provided including business development, management, technology development, consulting, legal services and accounting services.
 
Share-based expense for the six months ended June 30, 2014 and 2013 was $0 and $0, respectively.
 
Reclassifications

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

Principles of Consolidation

The accompanying condensed consolidated financial statements for the six months ended June 30, 2014, include the accounts of the Company and its wholly-owned subsidiary E-Waste Systems Cincinnati, Inc. (“EWS-C”), and Surf Investments, Ltd. (“Surf”). All significant intercompany balances and transactions have been eliminated in consolidation.
 
 
 

 
- 13 -


 

 
Concentration of Credit Risk

SURF

For the six months ended June 30, 2014, Customer A accounted for 24.6% of the Surf’s net revenue and 16.63% of Surf’s total accounts receivable. Customer B accounted for approximately 19.87% of Surf’s net revenue and 31.1% of Surf’s total accounts receivable for the six months June 30, 2014. Customer C accounted for approximately 15.9% of the Company’s net revenue.  Customer D accounted for 13.0% of Surf’s net revenue for the six months ended June 30 2014.  Customer E accounted for 14.03% of Surf’s total accounts receivable for the six months ended June 30, 2014.

EWS-C

For the six months ended June 30, 2014, Customer A accounted for 76.84% of EWS-C’s net revenue.  Customer B accounted for approximately 21.04% of EWS-C’s net revenue.  Customer C accounted for approximately 13.36% of EWS-C’s accounts receivable for the six months ended June 30, 2014.
 
Accounts Receivable

Trade accounts receivables are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivables are included in net cash provided by operating activities in the consolidated cash flow statements. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers a number of factors, including historical losses, current receivables aging reports, the counter party’s current ability to pay its obligation to the Company, and existing industry. The Company reviews its allowances every month. Past due invoices over 90 days that exceed a specific amount are reviewed individually for collectability. During the six months ended June 30, 2014 and the year ended  December 31, 2013, allowance for doubtful accounts was $0 and $2,700, 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 Sales of Brand Licenses

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

 
 
- 14 -


 

 
Segment Reporting

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

The Company reports its investments in marketable securities under the provisions of ASC 320, Investments in Debt and Equity Securities. All the Company’s marketable securities are classified as “available for sale” securities, as the market value of the securities are readily determinable and the Company’s intention upon obtaining the securities was neither to sell them in the short term nor to hold them to maturity. Pursuant to ASC 320, securities which are classified as “available for sale” are recorded on the Company’s consolidated balance sheet at fair market value, with the resulting unrealized holding gains and losses excluded from earnings and reported as other comprehensive income until realized.
 
The Company evaluates securities for other-than-temporary impairment at least on a yearly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to the length of time and amount of the loss relative to cost, the nature and financial condition of the issuer and the ability and intent of the Company to hold the investment for a time sufficient to allow any anticipated recovery in fair value. Pursuant to ASC 320-5, other than temporary impairment losses are recorded as impairment expense in the statement of operations during the period in which the impairment is determined.  The Company did not record an impairment expense for the six months ended June 30, 2014.

Intangible Assets

Intangible assets are recorded at the costs associated with the asset. These assets are then amortized using the straight-line method over the remaining useful economic life of each asset type. At each consolidated balance sheet date, the unamortized capitalized cost of the each intangible asset will be compared to the net realizable value of that asset. If the unamortized capitalized cost exceeds the net realizable value, then the difference will be written down to the net realizable value. Intangible assets consist of customer lists and certification.  Amortization of intangible assets for the six months ended June 30, 2014 was $43,188. The Company did not record an impairment expense as of June 30, 2014.
 
Cost Method Investments

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

Capitalized Software Development Costs

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

 
 
- 15 -


 

 
Long-Lived Assets

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

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

Automobiles and Equipment
5 years
Computer Software
3 years
Leasehold Improvements
3 years

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. ASC 350-30-35-4 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.  

Foreign Currency

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

Accumulated Other Comprehensive 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’ deficit.
 
 

 
 
- 16 -

 

 

Stock-Based Compensation

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

Deferred income tax assets as of June 30, 2014, of $1,112 resulting from net operating losses and future amortization deductions, have been fully offset by valuation allowances.  The valuation allowances have been established equal to the full amounts of the deferred tax assets, as the Company is not assured that it is more likely than not that these benefits will be realized.

Reconciliation between the statutory United States corporate income tax rate (35%) and the effective income tax rates based on continuing operations is as follows:
 
As of  June 30,
 
2014
   
2013
 
             
Income tax benefit at Federal statutory rate of 44%
 
$
(2,978,253
)
 
$
(556,480
)
State Income tax benefit, net of Federal effect
   
(825,166
)
   
(154,180
)
Permanent and other differences
   
-
     
-
 
                 
Change in valuation allowance
   
3,803,419
     
710,660
 
 Total
 
$
-
   
$
-
 

Components of deferred tax assets were approximately as follows:

 As at June 30,
 
2014
   
2013
 
                 
Fixed assets
 
$
219
   
$
-
 
Allowance for doubtful accounts
   
893
     
1,184 
 
Valuation allowance
   
(1,112
)
   
(1,184
)
Total
 
$
-
   
$
-
 

At June 30, 2014, the Company has available net operating losses of approximately $6,840,000 which may be carried forward to apply against future taxable income. These losses will expire in 2032. Deferred tax assets related to these losses have not been recorded due to uncertainty regarding their utilization.

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

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

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

 
 
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Recently Issued Accounting Pronouncements

Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification™ (“ASC”) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company.
 
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for annual and interim periods beginning on or after December 15, 2016, and early adoption is not permitted. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in the ASU. The Company is currently evaluating the impact of adopting this guidance.
 
In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period." This ASU provides more explicit guidance for treating share-based payment awards that require a specific performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2015. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.
 
NOTE 5 – DISCONTINUED OPERATIONS

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

NOTE 6 – RESTRICTED CASH HELD IN ESCROW

On November 30, 2013 the Company entered into a Credit Agreement with TCA Global Credit Master Fund (“TCA”) for a loan of up to $5,000,000 with an initial draw of $1,000,000. At the initial funding of the first $1,000,000 on the TCA revolving credit facility, TCA held in reserve/escrow $140,000 pending completion of several post-closing matters.  Those funds have not yet been released.

As of June 30, 2014, the Company had a balance of $140,000 in escrow.
 
NOTE 7 – DEFERRED FINANCING COSTS

During the period ended June 30, 2014, the Company incurred financing costs in connection with the issuance of various convertible promissory notes totaling $54,000.  The costs are being amortized over the term of their respective convertible promissory notes on the straight-line method, which approximates the interest rate method.  As of June 30, 2014, the Company amortized $19,170 of financing costs resulting in a balance of $34,830.
 
 
 

 

 
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NOTE 8 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of June 30, 2014 and December 31, 2013:

   
June 30,
   
December 31,
 
   
2014
   
2013
 
             
Equipment
  $ 187,384     $ 165,518  
Automobiles
    20,926       20,926  
Computer Software
    9,858       -  
Leasehold Improvements
    94,110       -  
Less:  accumulated depreciation
    (34,929 )     (4,724 )
                 
Property and Equipment, Net
  $ 277,349     $ 181,720  

Depreciation expense for the six months ended June 30, 2014 and 2013 was $30,205 and $0, respectively.

NOTE 9 - RELATED PARTY TRANSACTIONS

Transactions Involving Non-Officers and Directors

Effective October 28, 2011 the Company received $12,000 in cash from a related party in exchange for a convertible note payable. The note accrues interest at 12% and is due twelve months from the date of origination or October 28, 2012. The principal balance of the note along with accrued interest is convertible at any time, at the option of the note holder, into the Company's common stock on or before the maturity date at a price of $0.25 per share. The Company recognized $714 and $714 of interest expense on the related party convertible note payable leaving a balance in accrued interest of $3,851 and $2,411 as of June 30, 2014 and 2013, respectively. The note has been extended and has a maturity date of November 22, 2014.
 
On May 1, 2013, the Company issued 1,500,000 shares of common stock to an employee for past obligations due. 

At June 30, 2014, the Company had payables to related parties totaling $3,284. 

Transactions Involving Officers and Directors

During the six months ended June 30, 2014, the Company accrued $182,070 in officer compensation, issued 1,000,000 shares of common stock valued at $23,550, and issued 292,500 shares of Series B preferred stock valued at $292,500, leaving an ending balance of $1,178,293 in accrued officer and director compensation at June 30, 2014.
 
NOTE 10 – NOTES AND LOANS PAYABLE

Effective October 28, 2011, the Company received $12,000 in cash from a related party in exchange for a convertible note payable. The note accrues interest at 12% and is due twelve months from the date of origination or October 28, 2012. The principal balance of the note along with accrued interest is convertible at any time, at the option of the note holder, into the Company's common stock on or before the maturity date at a price of $0.25 per share. The balance in accrued interest is $3,851 and $2,411 as of June 30, 2014 and 2013, respectively. The note has been extended and has a maturity date of October 28, 2014.

On April 28, 2014, the Company paid the note holder the amount of $6,000 in cash toward the principal amount due on this note as of the date of the payment.
 
 
 

 
 
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Effective February 3, 2012, and February 21, 2012 the Company borrowed $40,000 and $35,000, respectively, from an unrelated third party entity in the form of two promissory notes. The notes bear interest at 14%, are unsecured and are due on demand. During the year ended December 31, 2013, the Company recognized $7,714 of interest expense on these notes payable leaving balances in accrued interest of $403, respectively as of December 31, 2013.

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

It was further agreed that the principal amount of the combined notes would be paid on a monthly basis in the amounts of $5,833 for the $35,000 Note, and $6,667 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 year ending December 31, 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 an issuance of 1,543,210 shares at a price per share of $0.0081. The aggregate payment for both notes for the month of June 2013 resulted in an issuance of 1,344,086 shares at a price per share of $0.0093.  The aggregate payment for both notes for the month of July 2013 resulted in an issuance of 828,912 shares at a price per share of $0.0151.

Effective November 1, 2013 the Company issued an aggregate of 1,253,117 shares of the Company’s unrestricted common stock as payment in full of the existing debt to this note holder as follows:  the Company issued 644,330 shares at a price of $0.0194 for the month of August; in addition, the Company issued 256,674 at a price of $0.0487 for the month of September and we also issued 352,113 at a price of $0.0355 for the month of October, 2013.  Upon receipt of all the shares listed in this paragraph, the note holder acknowledged that the principal amount of the note had been paid in full and requested that the interest payment in the form of stock also to be issued at this time.

Effective February 24, 2012, the Company borrowed $100,000 from an unrelated third party in the form of a Line of Credit. The funds were to support the working capital requirements of E-Waste Systems (Ohio) and specifically, the procurement of electronic waste for refurbishment or recycling. The promissory note accrues interest at 14% and is due on March 24, 2013. On April 22, 2013 the Company issued 1,029,479 shares of the Company’s common stock in payment of all interest from inception of the note through May 31, 2013. The note holder has agreed to accept no payment on the principal amount of the note for the present time, and interest will continue to accrue on the note beginning with June 1, 2013 through the time the note is completely retired. During the period ended December 31, 2013 the Company recognized $14,000 of interest expense and made no payments on this promissory note leaving a balance of $8,167 accrued interest as of December 31, 2013.  During the period ended June 30, 2014 the Company recognized $7,000 of interest expense and made no payments on this promissory note leaving a balance of $15,167 in accrued interest as of June 30, 2014.

Effective August 27, 2012, the Company executed a convertible promissory note in the principal sum of $150,000. The consideration to be provided by the note holder is no more than $135,000. A $13,500 (10%) original issue discount (“OID”) applies to the principal sum. The note holder made payments to the Company of $25,000 and $15,000 of the total consideration during the year ended December 31, 2012, $95,000 through the year ended December 31, 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 year ended December 31, 2013.

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

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

Effective April 16, 2013, the note holder elected to convert $9,931 of the principal balance resulting in the issuance of 2,695,650 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $3,265 to interest expense.
 
Effective May 6, 2013, the note holder elected to convert $8,341 of the principal balance resulting in the issuance of 2,500,000 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $4,062 to interest expense.

Effective June 13, 2013, the note holder elected to convert $8,217 of the principal balance resulting in the issuance of 2,981,397 shares of the Company’s common stock. In connection with the conversion, the Company recognized a pro rata portion of the unamortized debt discount of $168 to interest expense.

Effective August 27, 2013, the note holder elected to convert $27,778 of the principal balance 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 $18,418 to interest expense.

Effective January 21, 2014, the note holder elected to convert $27,778 of the principal balance resulting in the issuance of 3,055,556 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 $12,406 to interest expense.

Effective February 25, 2013, the note holder elected to convert $27,778 of the principal balance resulting in the issuance of 3,055,556 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 $17,199 to interest expense.

Effective March 26, 2013, the note holder elected to convert $22,222 of the principal balance resulting in the issuance of 2,444,444 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 $16,377 to interest expense. This loan is now considered to be paid in full and all debt discount has been amortized in full.

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 $402,675 and debt discounts of $105,556 on the payment dates of the note for the year ended December 31, 2013. As of June 30, 2014, the Company had recognized amortization on debt discounts on these notes of $45,982, leaving unamortized debt discounts of $0. See Note 11 for treatment of derivative liability associated with convertible notes payable.

On February 6, 2014, the Company executed a convertible promissory note in the principal sum of $500,000. The consideration to be paid to the Lender shall be equal to the consideration actually paid by the Lender plus prorated interest and any other fees such that the Company shall be required to pay.  The Company will incur a one-time interest charge of 6% on the principal amount of each loan. The note holder made payments of $225,000 total to the Company of the total consideration during the period ending June 30, 2014, along with a one-time interest charge per payment that is added to the total principal in the amount of $13,500.  The maturity date is two years from the date of each payment to the Company, and is the date upon which the principal sum, as well as any unpaid interest and other fees, shall be due and payable. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $338,975 on the payment date of the notes for the period ended June 30, 2014.  See Note 11 for treatment of derivative liability associated with convertible notes payable.
 
 
 

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

The intrinsic value of the beneficial conversion features and the debt discounts associated with the equity issued in connection with these convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $25,313. The discount will be amortized and recorded to the statement of operations over the stated term of the notes and is included within interest expense. As of June 30, 2014 and December 31, 2013, the Company had recognized amortization on the debt discounts on these note of $3,414 and $-0- of the total outstanding debt discounts leaving an unamortized debt discounts of $1,990, and $5,404, respectively.

Effective September 9, 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 $1,114 to interest expense.

Effective March 12, 2014, a settlement was reached with the note holder of the $29,000 convertible note whereby his note and all accrued interest was purchased by an unrelated third party.  This note has been retired in its entirety.

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.

Effective March 12, 2014, a settlement was reached with the note holder whereby his note and all accrued interest was purchased by an unrelated third party.  This note has been retired in its entirety, and the remaining debt discount of $28,387 was amortized in full.

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 June 30, 2014, the Company had recognized amortization on the debt discounts on this note of $27,306 of the total outstanding debt discounts leaving an unamortized debt discounts $86,815.
  
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.
 
 
 

 
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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.

Effective March 12, 2014, a settlement was reached with the note holder whereby his note and all accrued interest was purchased by an unrelated third party.  This note has been retired in its entirety, and the remaining debt discount of $11,240 was amortized in full.

The intrinsic value of the beneficial conversion features and the debt discounts associated with equity issued in connection with the convertible debts has been recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $15,371. The discount will be amortized and recorded to the statement of operations over the stated term of the note and is included within as interest expense. As of December 31, 2013, the Company has amortized $6,177 of the total outstanding debt discounts leaving an unamortized debt discount of $11,240.

On June 25, 2013, the Company assumed loans payable with the acquisition of Surf in the amount of $222,928. These loans are non-interest bearing and due upon demand.  Of the total amount of these loans, on the consolidated balance sheet, $74,539 is classified in accrued expenses, related party, and $90,00 is classified in accounts payable and accrued expenses.

In connection with its acquisition of EWS-C, the Company assumed five financing agreements that comprise all the equipment listed in EWS-C.  The total value of these notes is $180,368. The original terms of these notes consist of a term of 60 months, with interest rates ranging from 4.60% to 9.24%, due dates of May 1, 2015, May 27, 2015, September 30, 2015, June 14, 2016, and October 1, 2016, and total payments ranging from $282 to $3,414.  Of the total balance of these notes, $205,228 is deemed to be the short term portion and is included in short-term notes payable on the consolidated balance sheet.

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 December 31, 2013, the Company had recognized amortization on debt discounts on these notes of $32,500 leaving unamortized debt discounts of $0. See Note 11 for treatment of derivative liability associated with convertible notes payable. On October 28, 2013, this note was paid in full by the Company.

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 $12,258 and debt discount of $32,500 on the payment dates of the note.  As of December 31, 2013, the Company had recognized amortization on debt discounts on these notes of $32,500 leaving unamortized debt discounts of $0 See Note 11 for treatment of derivative liability associated with convertible notes payable. On December 31, 2013, this note was paid in full by the Company.
 
 
 

 
 
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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 $55,751 and debt discount of $27,500 on the payment dates of the note for the period ended September 30, 2013.  As of December 31, 2013, the Company had recognized amortization on debt discounts on these notes of $12,600 leaving unamortized debt discounts of $14,900. See Note 11 for treatment of derivative liability associated with convertible notes payable.  On March 10, 2014, this note was paid in full by the Company, and the remaining debt discount of $14,900 was amortized in full, and the remaining derivative liability was reversed in full.

Effective October 1, 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%. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $25,339 on the payment dates of the note for the period ended March 31, 2014.  See Note 11 for treatment of derivative liability associated with convertible notes payable.

On April 18, 2014, the note holder elected to convert $20,000 of this note into 2,531,646 at a price per share of $0.00790, leaving an unconverted amount due of $12,500.

On April 23, 2014, the note holder elected to convert the balance of the principal of $12,500 and accrued interest of $1,300 on this note into 2,059,701 shares of common stock.   As a result, the remaining derivative liability balance associated with this note has reversed.

Effective December 9, 2013, the Company executed a convertible note payable with a face value of $63,000. This note is unsecured, bears interest at 8% per annum and is due September 9, 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%. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $75,362 on the payment date of the note for the period ended December 31, 2013.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On June 18, 2014 the note holder elected to convert $20,000 of this note into 3,846,154 shares of common stock at a per share of $0.0052.

On June 23, 2014 the note holder elected to convert $23,000 of this note into 4,693,878 shares of common stock at a per share of $0.0049.

On June 26, 2014 the note holder elected to convert $12,000 of this note into 2,727,273 shares of common stock at a per share of $0.0044.  The remaining principal balance due on this note at June 30, 2014 is $8,000.

Effective February 10, 2014, the Company executed a convertible note payable with a face value of $18,000, whereby the full $18,000 went towards payment for professional fees. This note is unsecured, bears interest at 8% per annum and is due September 9, 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%. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $22,230 on the payment date of the note for the period ended June 30, 2014.  See Note 11 for treatment of derivative liability associated with convertible notes payable.
 
 
 

 
 
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On November 30, 2013, the Company entered into a Credit Agreement with TCA Global Credit Master Fund for a loan of up to $5.0 Million with an initial draw of $1.0 Million. At the initial funding of the first $1.0 Million on the TCA revolving credit facility, TCA held in reserve/escrow $160,000 pending completion of several post-closing matters.  Those funds have not yet been released.  The debt is secured by assets of the Company and its subsidiaries Surf and e-Waste Systems Cincinnati, Inc. and e-Waste Systems Ohio, Inc.  Interest accrues at the rate of 16.5% per annum, calculated on the actual number of days elapsed over a 360-day year.  Provisions for a Reserve of 15% there is a mandatory repayment of not less than 15% of the gross revenues.  At the present time, this loan is in default.  The Company determined the note qualified for derivative liability treatment under ASC 815.

On January 30, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $100,000 which carries an interest rate of 12% per annum, whereby $10,000 of the proceeds were recorded as deferred financing costs.  This note will mature on January 30, 2015.  The issuer of the Note can convert unpaid portions of this Note any time after July 30, 2014. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $200,870 on the payment date of the note for the period ended March 31, 2014. See Note 11 for treatment of derivative liability associated with convertible notes payable.

On March 12, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $44,425 which carries an interest rate of 12% per annum.  This note will mature on February 28, 2015.  The issuer of the Note can convert unpaid portions of this Note any time after September 12, 2014. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $99,524 on the payment date of the note for the period ended March 31, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On April 1, 2014 the note holder elected to convert the $28,126 of this note into 2,000,000 shares of common stock at a per share price of $0.0270.

On April 23, 2014, the note holder elected to convert the remaining balance of the note, and the related accrued interest, totaling $16,513, into 2,411,674 shares of common stock at a per share price of $0.0068.

On March 12, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $18,483 which carries an interest rate of 12% per annum.  This note will mature on February 28, 2015.  The issuer of the Note can convert unpaid portions of this Note any time after September 12, 2014. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $41,407 on the payment date of the note for the period ended March 31, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On May 1, 2014, the note holder elected to convert the note and accrued interest totaling $18,775 into 2,742,054 shares of common stock at a per share price of $0.0068.

On March 12, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $29,000 which carries an interest rate of 12% per annum.  This note will mature on February 28, 2015.  The issuer of the Note can convert unpaid portions of this Note any time after September 12, 2014. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $64,969 on the payment date of the note for the period ended March 31, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On May 5, 2014, the note holder elected to convert the remaining balance of the note, and the related accrued interest, totaling $31,539, into 4,606,292 shares of common stock at a per share price of $0.0068.
 
 
 

 
 
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On March 25, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $50,000 which carries an interest rate of 12% per annum, whereby $5,000 of the proceeds were recorded as deferred financing costs.  This note will mature on March 25, 2015.  The issuer of the Note can convert unpaid portions of this Note any time after September 25, 2014. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $69,748 on the payment date of the note for the period ended March 31, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On March 7, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $60,000 with an interest rate of 8% per annum.  This note will mature on February 28, 2015.  The note holder can convert any unpaid balance only after the note has reached its maturity date. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $66,442 on the payment date of the note for the period ended March 31, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On March 7, 2014, the Company entered into a Convertible Promissory note in the amount of $100,000 that carries an interest rate of 8% per annum, whereby $10,000 of the proceeds were recorded as deferred financing costs.  This note will mature on September 7, 2014 and note holder can convert to the Company’s common stock any time after the maturity date. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $101,215 on the payment date of the note for the period ended March 31, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On March 7, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $50,000 with an interest rate of 8% per annum, whereby $7,500 of the proceeds were recorded as deferred financing costs.  This note will mature on February 28, 2015.  The note holder can convert any unpaid balance after 180 days from the original date of the note.  This Note also contains a Back End note for $50,000 wherein note holder can convert to the Company’s common stock after 180 days and after full cash payment has been made for the convertible shares thereunder. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $50,295 on the payment date of the note for the period ended March 31, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On March 20, 2014, the Company entered into a Convertible Promissory Note with an additional unrelated third party in the amount of $60,000 with an interest rate of 8% per annum.  This note will mature on November 12, 2014.  The note holder can convert any unpaid balance only after the note has reached its maturity date. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $59,406 on the payment date of the note for the period ended March 31, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On March 20, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $84,000 with an interest rate of 8% per annum, whereby $4,000 of the proceeds were recorded as deferred financing costs.  This note will mature on March 20, 2015.  The note holder can convert any unpaid balance after 180 days from the original date of the note.  On March 20, 2014, we also entered into a Back End Convertible Note with this Note Holder for $84,000.  This note has an interest rate of 8% per annum and will mature on March 20, 2015.  On March 20, 2014 the Company also entered into a Collateralized Secured Promissory Back End Note with the same note holder in the amount of $84,000 with a Maturity date of November 20, 2104.  The Back End Note and the Collateralized Secured Promissory Note can be offset against one another if the third party does not fund the Back End Note. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $121,705 on the payment date of the note for the period ended March 31, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.
 
 
 

 
 
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On March 21, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $50,000 with an interest rate of 8% per annum, whereby $7,500 of the proceeds were recorded as deferred financing costs.  This note will mature on March 21, 2015.  The note holder can convert any unpaid balance after 180 days from the original date of the note. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $74,016 on the payment date of the note for the period ended March 31, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On April 1, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $102,600 with an interest rate of 8% per annum, for the forgiveness of obligations for consulting services performed by the holder.  This note is due on demand.  The note holder can convert any unpaid balance, to preferred shares at $0.001 per share, of which these preferred shares can be converted into shares of common stock at a rate of 10 for 1, at any time after the original date of the note.

On April 2, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $665,000 with an interest rate of 10% per annum, whereby $60,000 is original issue discount, and $5,000 is previously paid legal fees.  The effective date of the note per the agreements is March 31, 2014, but will be recorded on April 2, 2014 as the proceeds of the note were issued on April 2, 2014 and all corresponding documents were signed on April 2, 2014 as well. This note will mature on May 31, 2015.  The note holder can convert any unpaid balance after 180 days from the original date of the note.  In connection with this Convertible Promissory Note, the Company also entered into four Secured Buyer Notes with this Note Holder for $100,000 each, which are being recorded as notes receivable on the consolidated balance sheet.  This Secured Buyer Notes have an interest rate of 8% per annum and will mature on March 31, 2015.  Also in connection with this Convertible Promissory Note, on March 31, 2014, the Company issued a warrant to purchase shares of the Company’s common stock equal to $332,500 divided by the Market Price, as defined in the Convertible Promissory Note, of the Company’s common stock on the date of issuance with an exercise price of $0.055 per share.  The warrants expire on March 31, 2020.

On April 4 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $55,000 with an interest rate of 8% per annum, whereby $5,000 is original issue discount.  This note will mature on April 3, 2015.  The note holder can convert any unpaid balance after six months from the original date of the note.  The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $81,989 on the payment date of the note for the period ended June 30, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On April 7 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $55,000 with an interest rate of 8% per annum, whereby $5,000 is original issue discount.  This note will mature on April 7, 2015.  The note holder can convert any unpaid balance after 180 days from the original date of the note.  The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $54,228 on the payment date of the note for the period ended June 30, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On April 7, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $40,000 with an interest rate of 8% per annum, whereby $2,000 of the proceeds were recorded as legal fees, and $4,000 of the proceeds were recorded as financing costs.  This note will mature on April 7, 2015.  The note holder can convert any unpaid balance after 180 days from the original date of the note. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $54,228 on the payment date of the note for the period ended June 30, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.

On April 16 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $55,000 with an interest rate of 8% per annum, whereby $5,000 is original issue discount.  This note will mature on April 3, 2015.  The note holder can convert any unpaid balance after six months from the original date of the note.  The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $41,870 on the payment date of the note for the period ended June 30, 2014.   See Note 11 for treatment of derivative liability associated with convertible notes payable.
 
 
 

 
 
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On May 2, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $42,500 which carries an interest rate of 8% per annum.  This note will mature on February 16, 2015.  The note holder can convert any unpaid balance after 180 days from the original date of the note.  The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $72,489 on the payment date of the note for the period ended June 30, 2014.  See Note 11 for treatment of derivative liability associated with convertible notes payable.

On May 13, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $250,000.  The consideration to be paid to the Lender shall be equal to the consideration actually paid by the Lender plus prorated interest and any other fees such that the Company shall be required to pay.  The Company will incur a one-time interest charge of 10% on the principal amount of each loan. The note holder made a payment to the Company of $50,000 of the total consideration on the date of the closing of the note, along with a one-time interest charge that is added to the principal in the amount of $5,000.This note will mature one year from the date of each payment of consideration.  The note holder can convert any unpaid balance after 180 days from the original date of the note.  The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $69,167 on the payment date of the note for the period ended June 30, 2014.  See Note 11 for treatment of derivative liability associated with convertible notes payable.

On June 18, 2014, the Company entered into a Convertible Promissory Note with an unrelated third party in the amount of $32,500 which carries an interest rate of 8% per annum.  This note will mature on March 20, 2015.  The note holder can convert any unpaid balance after 180 days from the original date of the note.  The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $44,859 on the payment date of the note for the period ended June 30, 2014.  See Note 11 for treatment of derivative liability associated with convertible notes payable.

NOTE 11 – 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.

The Company accounted for the detachable warrants included with the convertible notes as liabilities in accordance with ASC 815, as the warrants are subject to anti-dilution protection and could result in them being converted to a variable number of the Company’s common shares. The Company determined the value of the derivate feature of the warrants at the relevant commitment dates to total $464,456 utilizing a Black-Scholes valuation model as of June 30, 2014.

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, 2013, the Company revalued the conversion features using the following assumptions: dividend yield of zero, years to maturity of between 0.29 and 0.70 years, a risk free rate of 0.13%, and annualized volatility of 232.29% and determined that, during the year ended December 31, 2013, the Company’s derivative liability increased by $404,335 to $465,880. The Company recognized a corresponding loss on derivative liability in conjunction with this revaluation.
 
 
 

 
 
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At June 30, 2014, the Company revalued the conversion features using the following assumptions: dividend yield of zero, years to maturity of between 0.19 and 1.98 years, a risk free rate of between 0.11% and 0.47%, and annualized volatility of 185.73% and determined that, during the six months ended June 30, 2014, the Company’s derivative liability increased by $1,806,473 to a total of $2,419,660, of which $497,670 is considered long term. The Company recognized a corresponding loss on derivative liability in conjunction with this revaluation.

At June 30, 2014, the Company revalued the detachable warrants using the following assumptions: dividend yield of zero, years to maturity of 4.75 years, a risk free rate of between 1.62%, and annualized volatility of 185.73% and determined that the change in fair value of the liability for the conversion feature of the detachable warrants resulted in a net expense of $147,307 for the six months ended June 30, 2014. The fair value of the derivative conversion features for the detachable warrants was determined to be $147,307 at June 30, 2014, of which $147,307 is considered long term.  The Company recognized a corresponding loss on derivative liability in conjunction with this revaluation.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

Occupancy Leases

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

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

Effective February 6, 2014, EWSI’s wholly owned subsidiary e-Waste Systems Cincinnati, Inc. entered into a lease with DTC Northwest OH LLC, a Delaware limited liability company for its newly operational Cincinnati, Ohio facility.   The building is approximately 126,500 square foot of warehouse building located at 12075 Northwest Blvd., Springdale, OH 45246.  The monthly rent for this facility for Month 1 through 12 of the first year will be $11,916.  The monthly rent for the facility for Month 1 through 12 of the second year will be $12,274.   The monthly rent for the facility for month 1 through 12 of the third year will be $12,642.
 
Lease and Operating Agreements

The Company entered into three operating agreements to operate businesses on behalf of property and business owners during 2013. Those agreements require facility and equipment payments and personnel payments along with other possible payments in the course of operating these businesses. These agreements were on a quarter-to-quarter basis and can be terminated anytime upon agreement of both parties.  In connection with the suspension of the agreements with with XuFu (Shanghai) Co, Ltd, a company incorporated in the People’s Republic of China (“PRC”) and formerly known as Yazhuo, these agreements, and the corresponding management contracts, were terminated by the Company and new arrangements are in negotiation.  Those companies considered part of the eIncubator operations were evaluated based upon the initial evaluation as per Company policy to determine actual value and desirability for further consideration.  With respect to those entities the Company wishes to pursue and move to the eVolve division, new contracts will be negotiated with the entities and the managers as determined by the Company in its sole and absolute discretion.  Terminations of agreements are as determined by the Company in its discretion are managed by senior managers to take retain residual value for the Company and severance of corresponding managers under management agreements is  determined based upon the Company’s plan for the markets and industry – based on potential for added value.
 
 
 

 
 
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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 13 – STOCKHOLDERS’ DEFICIT

Warrants
 
In connection with the Convertible Promissory Note issued on March 31, 2014, the Company issued a warrant to purchase shares of the Company’s common stock equal to $332,500 divided by the Market Price, as defined in the Convertible Promissory Note, of the Company’s common stock on the date of issuance with an exercise price of $0.055 per share.  The value of the Market Price is defined as the lesser of (i) $0.05, or (ii) 65% of the average of the three lowest closing bid prices in the twenty trading days immediately preceding the applicable conversion, provided that if at any time the average of the three lowest closing bid prices in the twenty trading days immediately preceding any date of measurement is below $0.01, then in such event the conversion factor shall be reduced to 55% for all future conversions.  Based on the Market Price defined above, the total number of warrants issued on March 31, 2014, is 20,461,538, valued by dividing $332,500 by the calculated Market Price of $0.01625. The warrants expire on March 31, 2020.

The following table summarizes the changes in warrants outstanding and related prices for the shares of the Company’s common stock issued to shareholders at June 30, 2014:
 
Exercise
Price
 
Number
Outstanding
 
Warrants Outstanding
Weighted Average
Remaining Contractual
Life (years)
 
Weighted
Average
Exercise price
 
Number
Exercisable
 
Warrants Exercisable
Weighted
Average
Exercise Price
 
                             
$
0.055
 
20,461,538
 
4.75
 
$
0.055
 
20,461,538
 
$
0.055
 

Transactions involving the Company’s warrant issuance are summarized as follows:
 
   
Number of
Shares
   
Weighted
Average
Price Per Share
 
                 
Outstanding at December 31, 2013
   
-
   
$
-
 
Issued
   
20,461,538
     
0.055
 
Exercised
   
-
     
-
 
Expired
   
-
     
-
 
Outstanding at June 30, 2014
   
20,461,538
   
$
0.055
 

Preferred Stock

The Company is authorized to issue 10,000,000 shares of Preferred Stock, of which there are 200,000 shares set aside as Series A Convertible Preferred Stock with a par value of $0.001.  As of June 30 2014, and December 31, 2013, there were 5,891 and 1,903 shares of Series A Convertible Preferred Stock issued and outstanding, respectively.

 
 
 
 
 
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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, 2014 and June 30, 2013 no dividends have been declared or paid.

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

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