Caution Regarding Forward-Looking Statements
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "believe," "expect," "anticipate," "intend," "estimate," "may," "should," "could," "will," "plan," "future," "continue," and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.
With respect to this discussion, the terms "EWSI," the "Company," "we," "us," and "our" refer to E-Waste Systems, Inc. and the term "EWSO" refers to E-Waste Systems (Ohio), Inc. (formerly known as Tech Disposal, Inc.) This discussion and analysis should be read in conjunction with the financial statements and notes, and other financial information included in this quarterly report.
We were incorporated in the State of Nevada on December 19, 2008. In May 2011, we changed our name to "E-Waste Systems, Inc." to reflect the strategy we are now operating.
2013 Operations Acquisitions
The strategy behind every acquisition is strongly related to three criteria:
? Strategic: Synergies, Differentiation and Compliance; ? Financial: Financial Strength, P/E, Growth; ? Management: Vision, Culture, Quality. History and background
Mission Statement Create a market-leading, integrated business group in the emerging electronic waste ("ewaste") and reverse logistics industry, in the advisory for compliant management and in the development of new commercial and technological ventures by offering customers global, seamless, and expanded custom services.
Company History After 5 years of research, planning and operating various companies in the industry, Martin Nielson founded E-Waste Systems as a wholly owned subsidiary of a US public company shell, specifically to grow by completing a series of acquisitions as its basis for operations. EWSI has three operating units in US, UK and China, corresponding to the first geographies in which EWSI is completing acquisitions.
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Financial Strategy Execution of the Company's Business Plan requires a foundation capable of sustaining rapid growth. This foundation consists of a global brand, proprietary technologies and substantial revenues. In addition, the Company's financial plan needs to support the potential for very rapid quarter to quarter growth over the next few years, which could be 50\% or more.
The total value of our Company's economic resources is capital invested in our equity plus debt we assume. The Company must make efficient use of a combination of debt and equity in our operations to fuel growth. Equity is the portion of our Company's economic resources that our shareholders own and debt will be used to leverage equity by using borrowed money to obtain additional economic resources. Leverage, while increasing investment returns, must be used wisely. Accordingly, the basic elements of our financing strategy are the following:
1. Balance Sheet Strengthening. We will strengthen our balance sheet and the balance sheets of our subsidiaries and key affiliates by acquiring tangible and intellectual assets. We will also convert certain liabilities into equity, eliminate debt of high burden, and avoid both short term liabilities that cannot be managed and unsustainable long term liabilities. 2. Financing for ePlant™ and other Technology. We will seek friendly third party financing for new capital equipment, such as ePlant™ and other eWaste™ systems in order to improve the operating performance of our business units. We will invest in developing our proprietary technologies using equity wherever possible. 3. Financing for our Subsidiaries and Affiliates. The growth of our subsidiaries and affiliates directly contributes to our company growth. We will provide financial support to our subsidiaries and affiliates in a manner in which the investment can lead to superior returns and within manageable and acceptable risks. 4. Manage a Sustainable Capitalization Structure. The Company has presently authorized 500 Million shares of equity, of which 490 Million are Common Shares and 10 Million are Preferred. During 2013 the share price ranged from $0.01 to $0.1 bringing the Market Capital to an average of $8M with average volumes of 1.99M. As of January 31, 2014, the closing share price is $0.041, the issued and outstanding was 262,699,762 and its market value was $10,770,690. As the Company's value increases with its performance, the market capitalization value should increase. It is in the best interest of the Company to have a high market capitalization, higher share prices, and strong liquidity to obtain sufficient capital for our growth and for acquisitions. Maintaining a balance of sensible debt alongside a robust market capitalization is targeted. 5. Use of Performance-Based Incentives. The Company believes in creating an atmosphere that encourages and motivates our people to out-perform the competition. Disciplined and hard-working management, professionals, and other individuals can help us meet or exceed our company's objectives and are fundamental to the growth we seek. Incentive compensation plans tied to equity will be a key element of our compensation packages and our officers must set the example by accepting equity as a primary component of their compensation. 6. Equity as Growth Capital. Preferred shares will be increasingly used to increase asset values, to minimize current dilution of common stock and to enhance overall shareholder equity while providing for attractive means to maintain sensible voting and conversion features. Alongside preferred equity instruments, registered shares will be used to compensate qualified individuals to grow the company. Wherever possible, we will also use equity as a currency for acquisitions. - 5 -
Table of Contents 7. Debt Financing. Debt can leverage our equity and capital. We will selectively obtain debt financing, even paying premium interest rates if necessary so that we can avoid toxic convertible debt. And, we will establish plans to buy out potentially toxic liabilities by using loyal and long term investors. 8. Investor Relations, Communication and Awareness. We intend to have a strong and comprehensive investor communications plan using regular press releases, information 8K filings with the SEC, social media programs, frequent website updates; and an increasing use of CEO and management interviews and media relations programs. These are all designed to make the investing public and our other constituents fully aware our plans, accomplishments, and developments as they occur. 9. Secondary Public Offering and Upgrade Listing. The company will seek to raise capital from a public offering to fuel its growth and, at the proper time, consider migration to a national exchange like NASDAQ or NYSE to have access to higher quality and quantity of capital to fuel its desire for expansive growth.
To provide a foundation for expansion internationally and streamline response to international business opportunities, the Company provides centralized organization and corporate services (legal, accounting, travel) as well as strategic direction and management to each of the units.
The business unit's mission is to integrate the industry worldwide under a quality brand: namely, EWSI's eWaste™ brand. Through its broad network of subsidiaries and affiliates, EWSI offers customized end-to-end solutions in IT Asset Recovery, E-Waste Management, and Electronics Reverse Logistics. EWSI leverages its affiliates' complementary geographies, technical capabilities, and strong supplier relationships to expand the services offered to customers, cross-fertilize best management practices, streamline logistics, aggregate volumes, offer state-of-the-art engineering, and provide a truly global e-waste solution. The expertise, experience, and relationships of the EWSI senior management team, particularly in the application of scale cost reductions, business development, and technology implementation is a key differentiator.
eWaste's primary customer targets are organizations facing a mix of regulatory, environmental, and price pressures, as well as an increasing need to protect their brand names and safeguard their data in the management of their e-waste. eWaste Systems' adherence to the principles of Fair Trade and the requirements of the WEEE Directive provides these customers with reassurance that end-of-life e-waste management is not only fully compliant and certified but is also done with social and environmental responsibility at the forefront.
This unit provides best practices management and business lease agreements to companies that want to become compliant to US GAAP. The agreements entitle eVolve to become responsible to execution of activities related to sales, accounting, advisory, training and business development.
The strategy behind the lease and management agreements provide growth acceleration with lower capital costs than acquisition and strategic industry penetration with synergies between the companies. In support of the eWaste branch, the agreements will include full commitment to the environmental compliance providing eco-friendly initiatives and services. eVolve primary customers targets are companies that wish to grow their business and to enhance the management, accounting and operations of their business to such high standards that they may potentially become a public company or become attractive for investing/acquiring purposes. All companies under this type of agreement report directly for balance sheet purposes.
eIncubator takes in consideration different forms of investments and ventures directly and indirectly related to the e-waste market by which business can experience future growth by developing new products or processes to improve and expand operations and market opportunities. The companies involved in Joint Ventures with eIncubator benefit of added credibility and visibility through the wide network of affiliates of the group nevertheless of the expertise and know-how to develop and improve the business.
The ideal candidates for Joint Venture investments with eIncubator are companies that have developed innovative technologies or other compelling businesses. eIncubator promotes and supports also social and environmental no-profit ventures.
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Factors Impacting EWSI's Consolidated Results of Operations
The principal factors that impact our past and future results of operations include:
? Availability of feedstock volumes. We do not have any formal contracts with suppliers of feedstock batches. There is no mechanism in place that effectively underpins our access to a regular, predictable volume of feedstock each week/month. Our revenue streams are all dependent on batches of used electronic equipment being available to fuel the repair, refurbishment and spare parts recovery processes from which the revenue base is derived. ? Demand for second-hand electronic equipment. Our revenue, operating results and investment in working capital depend on the level of demand for second-hand electronic equipment that has been repaired and/or refurbished together with a requirement for recovered spare parts that can be used in repair and refurbishment operations. We will usually have concluded an agreement or be in advanced negotiations to sell our repaired and refurbished units before we commit to buying feedstock batches. This careful management of the profits and cash cycles will be disrupted if demand for used electronics were to sharply decline for any reason including businesses and consumers curtailing their investment in new equipment in response to changes in economic conditions. ? Market prices for certain commodities. Our business is affected by changes in the market prices of certain traded commodities, notably those precious metals that are used to manufacture key components found in electronic equipment today. Movements in the prices at which these commodities are traded influences the prices at various stages of the reverse supply chain for electronic goods, including the prices that we negotiate to acquire our feedstock volumes and the value we are able to extract from the residual scrap remaining at the end of our repair, refurbishment and spare parts recovery processes. ? Regulatory changes. The businesses that derive their revenue and profits from handling electronic waste in the United States are exposed to increasingly pervasive legislative and regulatory regimes at both Federal and State levels of government. Each time the legal or regulatory backcloth changes it is likely that incremental cost is added to the reverse supply chain, which in turn implies that all participants in that supply chain will observe an increase in their operating cost base, which depending on their leverage may, or may not, be capable of being passed on downstream. ? General and administrative costs. Our business is still very young and at the beginning of its pursuit of organic and external growth. In order to execute on any strategy for growth, we expect to have to further increase its general and administrative overheads cost base. Our results from operations will be adversely impacted if these additional overhead costs are incurred before the growth in revenue is received.
Consolidated Results of Operations for E-Waste Systems, Inc. - Continuing Operations
Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012
Operating Expenses - Continuing Operations
We incurred operating expenses of $560,134 for the three months ended March 31, 2013 compared with operating expenses of $257,131 for the same period in 2012, an increase of $303,003. This increase is attributable to an increase in professional fees of $355,023, offset by a decrease in officer compensation of $48,178 and a decrease in general and administrative expenses of $3,842.
Our operating expenses for the three months ended March 31, 2013 consisted of directors' and officers' accrued compensation, professional fees and general and administrative expenses.
We anticipate that our operating expenses will continue to increase as we seek to increase the scale and range of services our business can offer to our customers.
Other (Expenses) Income - Continuing Operations . We incurred other expenses of $92,434 for the three months ended March 31, 2013 compared with $64,391 during the same period in 2012, an increase of $28,043. This increase in attributable to an $55,099 increase in interest expense on various convertible and non-convertible notes, an increase in the loss on derivative liability of $39,616, offset by a $66,672 decrease in contingent consideration settlement losses. - 7 -
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Net Loss - Continuing Operations
As a result of the above, we reported a net loss from continuing operations of $652,568 for the three months ended March 31, 2013.
Net Income (Loss) - Discontinued Operations
We reported a net income from continuing operations of $9,059 for the three months ended March 31, 2013, compared to a net loss from continuing operations of $(23,902) for the three months ended March 31, 2012, which was a result of write offs of accrued expenses which were not to realized.
Liquidity and Capital Resources
As of March 31, 2013, our condensed consolidated balance sheet presented total current assets of $9,690 and total current liabilities of $1,741,428, which resulted in a working capital deficit of $1,731,738.
To date, we have relied upon issuances of unsecured notes to finance our operations and help us meet our short-term obligations. There is no assurance that we will be able to continue to issue notes to finance our short-term obligations. Our present capital resources are insufficient to implement our business plan, which includes meeting our contractual obligations described below. Over the next twelve months we anticipate incurring expenditures of approximately $600,000 to implement our business plan, exclusive of approximately $30,000 in ongoing operating expenses per month for the next twelve months, for total anticipated expenditures of approximately $960,000 over the coming twelve months. The operating expenses for the year will consist primarily of compensation for senior management, professional fees for the audit and legal work relating to our regulatory filings throughout the year, as well as transfer agent fees, travel and general office expenses. Our current cash on hand is insufficient to make our planned expenditures and to pay for our general operating expenses over the next twelve months. Accordingly, we must obtain additional financing in order to continue to implement our business plan during and beyond the next twelve months.
We believe that debt financing may not be an alternative for funding as we have minimal tangible assets available to secure debt financing. We anticipate that additional future funding will be in the form of equity financing from the sale of our common and preferred stock. We are currently seeking additional funding in the form of equity financing from the sale of equity shares, but cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common and preferred stock to implement our business plan. Additional equity financings could result in significant dilution to our stockholders.
Contractual Obligations Notes Payable
Effective October 28, 2011 the Company received $12,000 in cash from a related party in exchange for a convertible note payable. The note accrues interest at 12\% and is due twelve months from the date of origination or October 28, 2012. The principal balance of the note along with accrued interest is convertible at any time, at the option of the note holder, into the Company's common stock on or before the maturity date at a price of $0.25 per share. The Company recognized $355 and $355 of interest expense for the three months ended March 31, 2013 and 2012 on the related party convertible note payable leaving a balance in accrued interest of $2,052 and $1,697 as of March 31, 2013 and December 31, 2012, respectively. At the time of the original filing, the note was in default, but has since been extended and has a maturity date of October 28, 2014.
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 three month ended March 31, 2013, the Company recognized $2,589 of interest expense on these notes payable leaving balances in accrued interest of $11,898 and $9,309, respectively as of March 31, 2013 and December 31, 2012.
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. During the period ended March 31, 2013 the Company recognized $3,500 of interest expense and made no payments on this promissory note leaving a balance of $7,019 accrued interest of as of March 31, 2013.
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Effective August 27, 2012, the Company executed a convertible promissory note in the principal sum of $150,000. The consideration to be provided by the note holder is no more than $135,000. A $13,500 (10\%) original issue discount ("OID") applies to the principal sum. The note holder made payments to the Company of $25,000 and $15,000 of the total consideration during the year ended December 31, 2012, and $25,000 through the three months ended March 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 $2,778 for the three months ended March 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.
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.
The note contains a conversion feature wherein the note may be converted to shares of the Company's common stock at a conversion price of the lesser of $0.01 or 70\% of the lowest trade price in the 25 trading days prior to the conversion date. Unless otherwise agreed in writing by both parties, at no time will the holder of the note convert any amount outstanding into common stock that would result in it owning more than 4.99\% of the total common stock outstanding. The Company determined the note qualified for derivative liability treatment under ASC 815. The Company recorded initial derivative liabilities of $58,646 and debt discounts of $44,445 on the payment dates of the note for the year ended December 31, 2012, and $71,833 and $27,778 for the three months ended March 31, 2013. As of March 31, 2013 and December 31, 2012, the Company had recognized amortization on debt discounts on these notes of $21,075 and $37,814, leaving unamortized debt discounts of $37,814 and $31,111, respectively. See Note 9 for treatment of derivative liability associated with convertible notes payable.
Effective December 31, 2012, the Company negotiated the forgiveness of accounts payable of $50,000 owed to a Company consultant in exchange for the execution of a convertible note payable with a face value of $162,500. On the same date and under the same terms, the Company executed two other convertible notes payable with face values of $11,000 and $29,000 in exchange for services provided to the Company. The notes are unsecured, bear interest at 6\% per annum and are due on December 31, 2015. The notes are also convertible, at the option of the holder, into shares of the Company's common stock at a share price of the lower of $0.0064 or the average of the three lowest volume weighted-average prices per share during the 30 calendar day period immediately prior to the date of conversion
The intrinsic value of the beneficial conversion features and the debt discounts associated with the equity issued in connection with these convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $25,313. The discount will be amortized and recorded to the statement of operations over the stated term of the notes and is included within interest expense. As of March 31, 2013 and December 31, 2012, the Company had recognized amortization on the debt discounts on these notes of $10,218 and $-0- of the total outstanding debt discounts leaving an unamortized debt discounts of $15,095 and $25,313, respectively.
On January 18, 2013, the Company executed a convertible note payable with a face value of $41,557 in exchange for services provided to the Company. This note is unsecured, bears interest at 6\% per annum and is due January 18, 2016. The note is convertible, at the option of the holder, into shares of the Company's common stock at a share price of the lower of $0.0064 or the average of the three lowest volume weighted-average prices per share during the 30 calendar day period immediately prior to the date of conversion. The intrinsic value of the beneficial conversion features and the debt discounts associated with the equity issued in connection with the convertible debt was recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $41,557. The discount will be amortized and recorded to the statement of operations over the stated term of the note and is included within as interest expense. As of March 31, 2013, the Company had recognized amortization on the debt discounts on this note of $2,753 of the total outstanding debt discounts leaving an unamortized debt discount $38,824.
Effective February 8, 2013, the Company executed a convertible note payable with a face value of $162,500 in exchange for services provided to the Company in the amount of $115,440 and forgiveness of accounts payable of $47,060. The intrinsic value of the beneficial conversion features and the debt discounts associated with the equity issued in connection with the convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded was $162,500. The discount will be amortized and recorded to the statement of operations over the stated term of the note and is included within as interest expense. As of March 31, 2013, the Company had recognized amortization on the debt discounts on this note of $7,568 of the total outstanding debt discounts leaving an unamortized debt discounts $154,932.
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.
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 March 31, 2013, the Company has amortized $2,046 of the total outstanding debt discounts leaving an unamortized debt discount of $15,371.
We entered into a variable lease agreement in the People's Republic of China, at 302 Golden Finance Tower, 58 Yan'an East Road, Shanghai, China 200040 with Evotech Capital, Ltd. on February 12, 2013 for a term of two years. The terms of the lease call for EWSI to issue Evotech Capital, Ltd. 250,000 shares of common stock during the second quarter of 2013.
Consolidated Cash Used in Operating Activities
Continuing operating activities in the three months ended March 31, 2013 used cash of $24,508, which is a reflection of the corresponding period's operating results. Our consolidated net loss from continuing operations reported for three months ended March 31, 2013 of $652,568 was the primary reason for our negative operating cash flow. The impact of our consolidated net loss from continuing operations on our condensed consolidated cash flow for the three months ended March 31, 2013 was primarily offset by convertible notes payable executed for services of $115,440, and common stock issued for services of $262,505, both non-cash items, and offset by a decrease in accounts payable and accrued expenses of $70,237, and accrued expenses, related parties of $57,951.
Net cash flow used in discontinued operating activities for the three months ended March 31, 2013 and 2012 was $9,059 and $(15,706), respectively.
Consolidated Cash Used in Investing Activities
We did not use any cash in investing for the three months ended March 31, 2013 or 2012.
Consolidated Cash from Financing Activities
We have financed our operations primarily from loans made to the company. Consolidated net cash flow provided by continuing financing activities for the three months ended March 31, 2013 was $25,000, which consisted of proceeds received from notes payable.
Off Balance Sheet Arrangements
As of March 31, 2013, we had no off balance sheet arrangements.
Our financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have not yet established an on-going source of revenues sufficient to cover our operating costs and allow us to continue as a going concern. Our ability to continue as a going concern is dependent on us obtaining adequate capital to fund operating losses until we become profitable. If we are unable to obtain adequate capital, we could be forced to cease operations.
In order to continue as a going concern, we will need, among other things, additional capital resources. Management's plan is to obtain such resources for us by obtaining capital from management and significant shareholders sufficient to meet our minimal operating expenses and seeking equity and/or debt financing. However management cannot provide any assurances that we will be successful in accomplishing any of our plans.
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Our ability to continue as a going concern is dependent upon our ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Critical Accounting Policies
Our financial statements have been prepared in conformity with GAAP. For a full description of our accounting policies as required by GAAP, refer to our condensed consolidated financial statements for the year ended December 31, 2013, that are included in this Annual Report on Form 10-K. We consider certain accounting policies to be critical to an understanding of our condensed consolidated financial statements because their application requires significant judgment and reliance on estimations of matters that are inherently uncertain. The specific risks related to these critical accounting policies are described in our condensed consolidated financial statements for the year ended December 31, 2013.
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