Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE
1 – NATURE OF OPERATIONS AND ORGANIZATION
The
Company is primarily in the business of residential and commercial waste disposal and hauling, transfer, and landfill disposal
and recycling services. The Company has contracts with various cities and municipalities. The majority of the Company’s
customers are located in the St. Louis metropolitan and surrounding areas and throughout central Virginia.
In
2014, the Company purchased the assets of a solid waste disposal company in the St. Louis, MO market. This acquisition is considered
the platform company for future acquisitions in the solid waste disposal industry.
Basis
of Presentation
The
accompanying condensed consolidated financial statements of Meridian Waste Solutions, Inc. and its subsidiaries
(collectively called the “Company”) included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated
financial statements do not include all of the information and footnotes required by US Generally Accepted Accounting
Principles (“GAAP”) for complete financial statements. The unaudited condensed consolidated financial statements
should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31,
2016 included in our Annual Report on Form 10-K for the Company as filed with the SEC. The condensed consolidated balance
sheet at December 31, 2016 contained herein was derived from audited financial statements, but does not include all
disclosures included in the Form 10-K for Meridian Waste Solutions, Inc., and applicable under accounting principles
generally accepted in the United States of America. Certain information and footnote disclosures normally included in our
annual financial statements prepared in accordance with accounting principles generally accepted in the United States of
America, but not required for interim reporting purposes, have been omitted or condensed.
As
noted in NOTE 3, the Company entered into a share exchange agreement with Mobile Science Technologies, Inc., a Georgia
corporation (“MSTI”) which was deemed to be an entity under common control. Accordingly, the financial statements
have been retrospectively adjusted to furnish comparative information for all periods presented in accordance with Accounting
Standards Codification (ASC) 805-50-45-5. Specifically, the financial statements include the financial information of MSTI
for all periods presented.
In
the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair presentation of the
unaudited condensed consolidated financial statements as of June 30, 2017, and the results of operations and cash flows for
the three and six months ended June 30, 2017 have been made. The results of operations for the six months ended June 30, 2017
are not necessarily indicative of the results to be expected for a full year.
Basis
of Consolidation
The
condensed consolidated financial statements for the three and six months ended June 30, 2017 include the operations of the Company
and its wholly-owned subsidiaries, and a Variable Interest Entity (“VIE”) owned 20% by the Company.
All
significant intercompany accounts and transactions have been eliminated in consolidation.
Liquidity
and Capital Resources
We have experienced recurring operating
losses in recent years. Because of these losses, the Company had negative working capital of approximately $4,700,000 at June
30, 2017. As of June 30, 2017 the Company had approximately $2,300,000 in cash to cover its short term cash requirements.
Further, the Company is still evaluating raising capital through the public markets as well as looking for capital partners
to assist with operating activities and growth strategies.
Further, the Company has approximately $1,500,000
of borrowing capacity on its multi-draw term loans and revolving commitments available for working capital and general corporate
purposes. See note 6, under the heading Goldman Sachs Credit Agreement.
In 2017, the Company raised additional capital
with the January 30, and June 30, 2017 equity offerings that raised approximately $13.8 million dollars. See note 7, Shareholder’s
equity. Also in 2017, the Company completed a significant $42 million acquisition of a waste management business in Virginia that
is expected to be accretive to operating cash flows in the fourth quarter of 2017.
The Company has prepared its business plan for
the ensuing twelve months, and believes it has sufficient resources to operate for the ensuing 12 month period. The Company’s
objectives in preparing this plan include: (1) renegotiating contracts to increase revenue; (2) increasing fees on existing contracts
and (3) reducing costs. The Company has already been successful in increasing rates on several recently negotiated contracts and
acquiring additional contracts, both of which are accretive to net income and operating cash flow.
Further, the Company believes that net income will
improve enough beginning in the third quarter of 2017 and that along with our available debt and cash on hand will provide enough
resources for the Company to have the cash flow to fund operations.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents, short term investments, accounts receivable, account
payable, accrued expenses, derivative liabilities and notes payable. The carrying amount of these financial instruments approximates
fair value due to length of maturity of these instruments.
Income
Taxes
The
Company accounts for income taxes pursuant to the provisions of ASC 740-10, “Accounting for Income Taxes,” which requires,
among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires
the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred
tax assets for which management believes it is more likely than not that the net deferred asset will not be realized. The Company
has deferred tax liabilities related to its intangible assets, which were approximately $418,000 as of June 30, 2017.
The
Company follows the provisions of the ASC 740 -10 related to, Accounting for Uncertain Income Tax Positions. When tax returns
are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while
others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements
in the period during which, based on all available evidence, management believes it is more likely than not that the position
will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are
not offset or aggregated with other positions.
Tax
positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more
than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain
tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing
authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination.
As such, the Company has not recorded a liability for uncertain tax benefits.
The
Company analyzes its tax positions by utilizing ASC 740-10-25 Definition of Settlement, which provides guidance on how an entity
should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits
and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without
being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax
benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical
merits and the statute of limitations remains open. As of June 30, 2017, tax years ended December 31, 2015, 2014, and 2013 are
still potentially subject to audit by the taxing authorities.
Use
of Estimates
Management
estimates and judgments are an integral part of financial statements prepared in accordance with GAAP. We believe that the critical
accounting policies described in this section address the more significant estimates required of management when preparing our
consolidated financial statements in accordance with GAAP. We consider an accounting estimate critical if changes in the estimate
may have a material impact on our financial condition or results of operations. We believe that the accounting estimates employed
are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring
adjustment to these balances in future periods.
Reclassification
Certain
reclassifications have been made to previously reported amounts to conform to 2017 amounts. These reclassifications had no impact
on previously reported results of operations or stockholders’ equity (deficit). The statement of operations has been reformatted
in such a way that approximately $900,000 and $450,000 has been reclassified from Selling, general and administrative to Operating
expenses for the six and three months ended June 30, 2016, respectively. Also, the statement of operations has been reformatted
in such a way that there is no longer a caption showing gross profit.
Accounts
Receivable
Accounts
receivable are recorded at management’s estimate of net realizable value. At June 30, 2017, and December 31, 2016 the Company
had approximately $7,300,000 and $3,000,000 of gross trade receivables, respectively.
Our
reported balance of accounts receivable, net of the allowance for doubtful accounts, represents our estimate of the amount that
ultimately will be realized in cash. We review the adequacy and adjust our allowance for doubtful accounts on an ongoing basis,
using historical payment trends and the age of the receivables and knowledge of our individual customers. However, if the financial
condition of our customers were to deteriorate, additional allowances may be required. At June 30, 2017 and December 31, 2016
the Company had approximately $760,000 and $500,000 recorded for the allowance for doubtful accounts, respectively.
Intangible
Assets
Intangible
assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The Company has
intangible assets related to its purchase of Meridian Waste Services, LLC, Christian Disposal LLC, Eagle Ridge Landfill, LLC and
the CFS Group, LLC; the CFS Group Disposal & Recycling Services, LLC; and RWG5, LLC, collectively “The CFS Group”.
Goodwill
Goodwill
is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill,
but as discussed in the impairment of long lived assets section above, we assess our goodwill for impairment at least annually.
Landfill
Accounting
Capitalized
landfill costs
Cost
basis of landfill assets — we capitalize various costs that we incur to make a landfill ready to accept waste. These costs
generally include expenditures for land (including the landfill footprint and required landfill buffer property); permitting;
excavation; liner material and installation; landfill leachate collection systems; landfill gas collection systems; environmental
monitoring equipment for groundwater and landfill gas; and directly related engineering, capitalized interest, on-site road construction
and other capital infrastructure costs. The cost basis of our landfill assets also includes asset retirement costs, which represent
estimates of future costs associated with landfill final capping, closure and post-closure activities. These costs are discussed
below.
Final
capping, closure and post-closure costs — Following is a description of our asset retirement activities and our related
accounting:
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Final
capping — Involves the installation of flexible membrane liners and geosynthetic clay liners, drainage and compacted
soil layers and topsoil over areas of a landfill where total airspace capacity has been consumed. Final capping asset retirement
obligations are recorded on a units-of-consumption basis as airspace is consumed related to the specific final capping event
with a corresponding increase in the landfill asset. The final capping is accounted for as a discrete obligation and recorded
as an asset and a liability based on estimates of the discounted cash flows and capacity associated with the final capping.
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Closure
— Includes the construction of the final portion of methane gas collection systems (when required), demobilization and
routine maintenance costs. These are costs incurred after the site ceases to accept waste, but before the landfill is certified
as closed by the applicable state regulatory agency. These costs are recorded as an asset retirement obligation as airspace
is consumed over the life of the landfill with a corresponding increase in the landfill asset. Closure obligations are recorded
over the life of the landfill based on estimates of the discounted cash flows associated with performing closure activities.
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Post-closure
— Involves the maintenance and monitoring of a landfill site that has been certified closed by the applicable regulatory
agency. Generally, we are required to maintain and monitor landfill sites for a 30-year period. These maintenance and monitoring
costs are recorded as an asset retirement obligation as airspace is consumed over the life of the landfill with a corresponding
increase in the landfill asset. Post-closure obligations are recorded over the life of the landfill based on estimates of
the discounted cash flows associated with performing post-closure activities.
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We
develop our estimates of these obligations using input from our operations personnel, engineers and accountants. Our estimates
are based on our interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value.
Absent quoted market prices, the estimate of fair value is based on the best available information, including the results of present
value techniques. In many cases, we contract with third parties to fulfill our obligations for final capping, closure and post
closure. We use historical experience, professional engineering judgment and quoted and actual prices paid for similar work to
determine the fair value of these obligations. We are required to recognize these obligations at market prices whether we plan
to contract with third parties or perform the work ourselves. In those instances where we perform the work with internal resources,
the incremental profit margin realized is recognized as a component of operating income when the work is performed.
Once
we have determined the final capping, closure and post-closure costs, we inflate those costs to the expected time of payment and
discount those expected future costs back to present value. During the six months ended June 30, 2017 we inflated these costs
in current dollars until the expected time of payment using an inflation rate of 1.78%. We discounted these costs to present value
using the credit-adjusted, risk-free rate effective at the time an obligation is incurred, consistent with the expected cash flow
approach. Any changes in expectations that result in an upward revision to the estimated cash flows are treated as a new liability
and discounted at the current rate while downward revisions are discounted at the historical weighted average rate of the recorded
obligation. As a result, the credit adjusted, risk-free discount rate used to calculate the present value of an obligation is
specific to each individual asset retirement obligation. The weighted average rate applicable to our long-term asset retirement
obligations at June 30, 2017 is approximately 9%.
We
record the estimated fair value of final capping, closure and post-closure liabilities for our landfill based on the capacity
consumed through the current period. The fair value of final capping obligations is developed based on our estimates of the airspace
consumed to date for the final capping. The fair value of closure and post-closure obligations is developed based on our estimates
of the airspace consumed to date for the entire landfill and the expected timing of each closure and post-closure activity. Because
these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing
of future final capping, closure and post-closure activities could result in a material change in these liabilities, related assets
and results of operations. We assess the appropriateness of the estimates used to develop our recorded balances annually, or more
often if significant facts change.
Changes
in inflation rates or the estimated costs, timing or extent of future final capping, closure and post-closure activities typically
result in both (i) a current adjustment to the recorded liability and landfill asset and (ii) a change in liability and asset
amounts to be recorded prospectively over either the remaining capacity of the related discrete final capping or the remaining
permitted and expansion airspace (as defined below) of the landfill. Any changes related to the capitalized and future cost of
the landfill assets are then recognized in accordance with our amortization policy, which would generally result in amortization
expense being recognized prospectively over the remaining capacity of the final capping or the remaining permitted and expansion
airspace of the landfill, as appropriate. Changes in such estimates associated with airspace that has been fully utilized result
in an adjustment to the recorded liability and landfill assets with an immediate corresponding adjustment to landfill airspace
amortization expense.
Interest
accretion on final capping, closure and post-closure liabilities is recorded using the effective interest method and is recorded
as final capping, closure and post-closure expense, which is included in “operating” expenses within our Consolidated
Statements of Operations.
Amortization
of Landfill Assets - The amortizable basis of a landfill includes (i) amounts previously expended and capitalized; (ii) capitalized
landfill final capping, closure and post-closure costs, (iii) projections of future purchase and development costs required to
develop the landfill site to its remaining permitted and expansion capacity and (iv) projected asset retirement costs related
to landfill final capping, closure and post-closure activities.
Amortization
is recorded on a units-of-consumption basis, applying expense as a rate per ton. The rate per ton is calculated by dividing each
component of the amortizable basis of a landfill by the number of tons needed to fill the corresponding asset’s airspace.
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Remaining
permitted airspace — Our management team, in consultation with third-party engineering consultants and surveyors, are
responsible for determining remaining permitted airspace at our landfills. The remaining permitted airspace is determined
by an annual survey, which is used to compare the existing landfill topography to the expected final landfill topography.
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Expansion
airspace — We also include currently unpermitted expansion airspace in our estimate of remaining permitted and expansion
airspace in certain circumstances. First, to include airspace associated with an expansion effort, we must generally expect
the initial expansion permit application to be submitted within one year and the final expansion permit to be received within
five years. Second, we must believe that obtaining the expansion permit is likely, considering the following criteria:
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Personnel
are actively working on the expansion of an existing landfill, including efforts to obtain land use and local, state or provincial
approvals;
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We
have a legal right to use or obtain land to be included in the expansion plan;
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There
are no significant known technical, legal, community, business, or political restrictions or similar issues that could negatively
affect the success of such expansion; and
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Financial
analysis has been completed based on conceptual design, and the results demonstrate that the expansion meets the Company’s
criteria for investment.
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For
unpermitted airspace to be initially included in our estimate of remaining permitted and expansion airspace, the expansion effort
must meet all of the criteria listed above. These criteria are evaluated by our field-based engineers, accountants, managers and
others to identify potential obstacles to obtaining the permits. Once the unpermitted airspace is included, our policy provides
that airspace may continue to be included in remaining permitted and expansion airspace even if certain of these criteria are
no longer met as long as we continue to believe we will ultimately obtain the permit, based on the facts and circumstances of
a specific landfill.
When
we include the expansion airspace in our calculations of remaining permitted and expansion airspace, we also include the projected
costs for development, as well as the projected asset retirement costs related to the final capping, closure and post-closure
of the expansion in the amortization basis of the landfill.
Once
the remaining permitted and expansion airspace is determined in cubic yards, an airspace utilization factor (“AUF”)
is established to calculate the remaining permitted and expansion capacity in tons. The AUF is established using the measured
density obtained from previous annual surveys and is then adjusted to account for future settlement. The amount of settlement
that is forecasted will take into account several site-specific factors including current and projected mix of waste type, initial
and projected waste density, estimated number of years of life remaining, depth of underlying waste, anticipated access to moisture
through precipitation or recirculation of landfill leachate, and operating practices. In addition, the initial selection of the
AUF is subject to a subsequent multi-level review by our engineering group, and the AUF used is reviewed on a periodic basis and
revised as necessary. Our historical experience generally indicates that the impact of settlement at a landfill is greater later
in the life of the landfill when the waste placed at the landfill approaches its highest point under the permit requirements.
After
determining the costs and remaining permitted and expansion capacity at each of our landfill, we determine the per ton rates that
will be expensed as waste is received and deposited at the landfill by dividing the costs by the corresponding number of tons.
We calculate per ton amortization rates for the landfill for assets associated with each final capping, for assets related to
closure and post-closure activities and for all other costs capitalized or to be capitalized in the future. These rates per ton
are updated annually, or more often, as significant facts change.
It
is possible that actual results, including the amount of costs incurred, the timing of final capping, closure and post-closure
activities, our airspace utilization or the success of our expansion efforts could ultimately turn out to be significantly different
from our estimates and assumptions. To the extent that such estimates, or related assumptions, prove to be significantly different
than actual results, lower profitability may be experienced due to higher amortization rates or higher expenses; or higher profitability
may result if the opposite occurs. Most significantly, if it is determined that expansion capacity should no longer be considered
in calculating the recoverability of a landfill asset, we may be required to recognize an asset impairment or incur significantly
higher amortization expense. If at any time management makes the decision to abandon the expansion effort, the capitalized costs
related to the expansion effort are expensed immediately.
As
part of its acquisition of The CFS Group, the Company now owns and operates two landfills in the state of Virginia: Tri-City Regional
Landfill in Petersburg, Virginia and Lunenburg Landfill in Lunenburg, Virginia. Information on both landfills has been included
in the Company’s tables of landfill assets and liabilities.
The
Company operations related to its landfill assets and liability are presented in the tables below:
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Six Months Ended
June
30,
2017
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Landfill Assets
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Beginning Balance
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$
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3,278,817
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Assets acquired
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31,766,000
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Capital additions
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1,089,803
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Amortization of landfill assets
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(2,091,816
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)
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$
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34,042,804
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Landfill Asset Retirement Obligation
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Beginning Balance
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$
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5,299
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Liabilities assumed in acquisition
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7,903,620
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Interest accretion
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169,206
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$
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8,078,125
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Revenue
Recognition
The
Company recognizes revenue when persuasive evidence of arrangement exists, services have been provided, the seller’s price
to the buyer is fixed or determinable, and collection is reasonably assured. The majority of the Company’s revenues are
generated from the fees charged for waste collection, transfer, disposal and recycling. The fees charged for our services are
generally defined in service agreements and vary based on contract-specific terms such as frequency of service, weight, volume
and the general market factors influencing a region’s rate. For example, revenue typically is recognized as waste is collected,
or tons are received at our landfills and transfer stations.
Deferred
Revenue
The
Company records deferred revenue for customers that were billed in advance of services. The balance in deferred revenue represents
amounts billed in April, May and June for services that will be provided during July, August and September.
Basic
Income (Loss) Per Share
Basic
income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted
average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net
income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the year. The
diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive
debt or equity.
At June 30, 2017 the Company had outstanding stock warrants and options for 3,687,871 and 12,250 common shares,
respectively.
At December 31, 2016 the Company had a series
of convertible notes, warrants and stock options outstanding that could be converted into approximately, 600,000 common shares.
These are not presented in the consolidated statements of operations as the effect of these shares is anti- dilutive.
Stock-Based
Compensation
Stock-based
compensation is accounted for at fair value in accordance with ASC Topic 718.
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition
in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity
instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively,
the vesting period). The ASC also require measurement of the cost of employee and director services received in exchange for an
award based on the grant-date fair value of the award.
Pursuant
to ASC Topic 505-50, for share based payments to consultants and other third-parties, compensation expense is determined at the
“measurement date.” The expense is recognized over the service period of the award. Until the measurement date is
reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based
on the fair value of the award at the reporting date.
The
Company recorded stock based compensation expense of approximately $70,000 and $5,500,000 during the six months ended June
30, 2017 and 2016, respectively, which is included in compensation and related expense on the statement of
operations.
Allocation
of Purchase Price of Business Combinations
In
accordance with the guidance for business combinations, we determine whether a transaction or other event is a business combination.
If the transaction is determined to be a business combination, we determine if the transaction is considered to be between entities
under common control. The acquisition of an entity under common control is accounted for on the carryover basis of accounting
whereby the assets and liabilities of the companies are recorded upon the merger on the same basis as they were carried by the
companies on the merger date. All other business combinations are accounted for by applying the acquisition method of accounting.
Under the acquisition method, we recognize the identifiable assets acquired, the liabilities assumed and any non-controlling interest
in the acquired entity. In addition, we evaluate the existence of goodwill or a gain from a bargain purchase. We will immediately
expense acquisition-related costs and fees associated with business combinations and asset acquisitions.
We
allocate the purchase price of acquired properties and business combinations accounted for under the acquisition method of accounting
to tangible and identifiable intangible assets acquired based on their respective fair values to tangible and identifiable intangible
assets acquired based on their respective fair values. Tangible assets include land, buildings, equipment and tenant improvements
on an as-if vacant basis. We utilize various estimates, processes and information to determine the as-if vacant property value.
Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis
and other methods.
Recent
Accounting Pronouncements
ASU
2016-09 “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”
Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences;
(b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amended
guidance is effective for the Company on January 1, 2017. The adoption of this amended guidance did not have a material impact
on our consolidated financial statements.
ASU
2016-15 “Statement of Cash Flows”
-
In August 2016, the FASB issued amended authoritative guidance associated
with the classification of certain cash receipts and cash payments on the statement of cash flows. The amended guidance addresses
specific cash flow issues with the objective of reducing existing diversity in practice. The amended guidance is effective for
the Company on January 1, 2018, with early adoption permitted. While we are still evaluating the impact of the amended guidance,
we currently do not expect it to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU
2016-18,
Statement of Cash Flows (Topic 230) - Restricted Cash
("ASU 2016-18"), which clarifies how
entities should present restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 requires that
a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. ASU 2016-18 is effective for public business entities for fiscal years beginning
after December 15, 2017, and interim periods within those years, and will be applied using a retrospective transition method to
each period presented. As such, the Company will adopt the standard beginning January 1, 2018. We currently do not expect it to
have a material impact on our consolidated financial statements.
ASU
2014-09 “Revenue Recognition” - In May 2014, the FASB issued amended authoritative guidance associated with revenue
recognition. The amended guidance requires companies to recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. Additionally, the amendments will require enhanced qualitative and quantitative disclosures regarding customer contracts.
The amended guidance associated with revenue recognition is effective for the Company on January 1, 2018. The amended guidance
may be applied retrospectively for all periods presented or retrospectively with the cumulative effect of initially applying the
amended guidance recognized at the date of initial adoption.
Based
on our work to date to assess the impact of this standard, we believe we have identified all material contract types and costs
that may be impacted by this amended guidance related to the Midwest segment. We are actively reviewing the material contract
types and costs of the newly acquired Mid-Atlantic Segment (CFS Acquisition). We expect to quantify and disclose the expected
impact, if any, of adopting this amended guidance in the third quarter Form 10-Q. While we are still evaluating the impact of
the amended guidance, we currently do not expect it to have a material impact on operating revenues.
ASU
2017-01 “Business Combinations” – In January 2017, the FASB issued amended authoritative guidance to clarify
the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this standard provide a screen to determine
when a set of inputs and processes are not a business. The screen requires that when substantially all the fair value of the gross
assets acquired is concentrated in a single identifiable asset or a group of similar assets, the set is not a business. This screen
reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this standard
require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly
contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing
elements. This guidance will become effective for the Company on January 1, 2018. While we are still evaluating the impact of
this amended guidance, its impact will be limited to the evaluation of future acquisitions post effectiveness of this standard
and will not have an effect on the current financial statements and acquisitions.
ASU 2016-02 “Leases (Topic 842).”
Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with
the exception of short-term leases) at the commencement date:
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A lease liability, which is a lessee‘s obligation
to make lease payments arising from a lease, measured on a discounted basis; and
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A right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified asset for the lease term.
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Under the new guidance, lessor accounting
is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting
model and Topic 606, Revenue from Contracts with Customers.
The amended guidance is effective
for the Company on January 1, 2019, with early adoption permitted. We are assessing the provisions of the amended guidance and
evaluating the timing and impact on our consolidated financial statement and disclosures.
Lessees (for capital and operating leases) and lessors (for sales-type, direct
financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach
would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees
and lessors may not apply a full retrospective transition approach.
NOTE
3 – ACQUISITIONS
The
CFS Group Acquisition
On
February 15, 2017, the Company, in order to expand its geographical footprint to new markets outside of the state of Missouri,
acquired 100% of the membership interests of The CFS Group, LLC, The CFS Group Disposal & Recycling Services, LLC and RWG5,
LLC (“The CFS Group”) pursuant to a Membership Interest Purchase Agreement, dated February 15, 2017. This acquisition
was consummated to further define the Company’s growth strategy of targeting and expanding within vertically integrated
markets and serve as a platform for further growth.
The
acquisition was accounted for by the Company using acquisition method under business combination accounting. Under this method,
the purchase price paid by the acquirer is allocated to the assets acquired and liabilities assumed as of the acquisition date
based on the fair value. Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often
involves the use of significant estimates and assumptions. Measurement period adjustments were recorded in the period in which
the adjustments to the provisional amounts are determined. During the three months ended June 30, 2017, finalized valuations were
performed on certain assets resulting measurement period adjustments:
Landfill assets increased
|
|
$
|
4,200,000
|
|
|
to
|
|
$
|
31,766,000
|
|
Customer relationships increased
|
|
$
|
1,940,000
|
|
|
to
|
|
$
|
2,500,000
|
|
Trade names and trademarks decreased
|
|
$
|
(570,000
|
)
|
|
to
|
|
$
|
210,000
|
|
Non-controlling interest increased
|
|
$
|
(69,000
|
)
|
|
to
|
|
$
|
140,000
|
|
Goodwill decreased
|
|
$
|
(5,640,000
|
)
|
|
to
|
|
$
|
6,014,000
|
|
Purchase price – restricted stock decreased
|
|
$
|
139,000
|
|
|
to
|
|
$
|
39,284,000
|
|
Additionally
the changes in these provisional amounts resulted in an increase in depreciation and amortization expense of $248,000, of which
$93,000 relates to the previous quarter.
All
fair value measurements of acquired assets and liabilities assumed are non-recurring in nature and classified as level 3 on the
fair value hierarchy.
The
calculation of purchase price, including measurement period adjustments, is as follows:
Cash consideration
|
|
$
|
3,933,000
|
|
Debt assumed - as consideration
|
|
|
34,100,000
|
|
Restricted stock consideration
|
|
|
1,251,000
|
|
Total
|
|
$
|
39,284,000
|
|
As
noted in the table above, the Company issued 500,000 restricted shares of common stock as consideration which was valued at market
at the date of the closing, fair value of approximately $1,251,000. A 10% discount to the trading price of the stock was taken to account for the restricted nature of the shares.
The
following table summarizes the estimated fair value of The CFS Group assets acquired and liabilities assumed at the date of acquisition,
including measurement period adjustments:
Accounts receivable
|
|
|
2,793,000
|
|
Prepaid expenses and other current assets
|
|
|
845,000
|
|
Property, plant and equipment
|
|
|
14,179,000
|
|
Trade names and trademarks
|
|
|
210,000
|
|
Landfill permits
|
|
|
31,766,000
|
|
Customer relationships
|
|
|
2,500,000
|
|
Accounts payable and accrued liabilities
|
|
|
(2,654,000
|
)
|
Capital leases payable
|
|
|
(6,896,000
|
)
|
Mortgage payable
|
|
|
(1,429,000
|
)
|
Asset retirement obligations
|
|
|
(7,904,000
|
)
|
Non-controlling interest
|
|
|
(140,000
|
)
|
Goodwill
|
|
|
6,014,000
|
|
Total
|
|
$
|
39,284,000
|
|
Revenue
and net loss included in the six months ended June 30, 2017 financial statements attributable to the CFS Group is approximately
$8,200,000 and $2,800,000, respectively.
The
following unaudited pro forma information below presents the consolidated results operations data as if the acquisition of the
CFS Group took place on January 1, 2016:
|
|
Six Months Ended
June
30,
2016
|
|
|
Six Months Ended
June
30,
2017
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
25,888,000
|
|
|
$
|
27,850,000
|
|
Net Loss
|
|
$
|
(14,770,000
|
)
|
|
$
|
(11,338,000
|
)
|
Basic Net Loss Per Share
|
|
$
|
(12.62
|
)
|
|
$
|
(1.89
|
)
|
Mobile
Science Technologies, Inc.
On
April 21, 2017, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with MSTI and
its shareholders. MSTI is a technology service provider and builder of mobile applications that enable efficient two-way communications
between organizations and entities such as municipalities and their respective customers or citizens. The Company seeks to utilize
the technology underlying MSTI’s current applications to develop an enhanced communication system between the Company and
its customers.
Pursuant
to the Share Exchange Agreement, the Company purchased 100% of the outstanding stock (28,333,333 common shares) of MSTI in exchange
for 1,083,017 shares of the Company’s common stock (the “Purchase Shares”). In accordance with the payment schedule
contained in the Share Exchange Agreement, 403,864 of the Purchase Shares were issued as of the closing date, with the remaining
679,153 Purchase Shares to be issued upon certain milestones; however, if the milestones are not attained, such Purchase Shares
will be issued on April 21, 2018. Such ‘to be issued’ shares are shown within equity in the Consolidated Balance Sheets.
The Selling Shareholders were mainly comprised Walter H. Hall, Jr., the Company’s President, Chief Operating Officer and
a director, and four limited liability companies managed by Jeffrey Cosman, the Company’s Chief Executive Officer and Chairman.
Such selling shareholders also have controlling financial interest of the Company. Accordingly, the acquisition of MSTI was deemed
to be a transaction between entities under common control and thus the assets and liabilities of MSTI were transferred at their
historical cost with prior periods retrospectively adjusted to include the historical financial results of MSTI. The equity accounts
of the entities are combined and the par value of the shares issued by the Company is recognized.
Upon
closing of the Share Exchange Agreement, the Company assumed all financial and contractual obligations of MSTI incurred
both prior to and after the closing. Prior to its entering into the Share Exchange Agreement, the Company owned 5,000,000
shares of MSTI, or 15% of the issued and outstanding stock of MSTI, which was accounted for as an equity method
investment. Originally, the Company transferred the assets of MSTI for its initial 15% investment, and then repurchased those
assets with additional shares of stock of the Company. As a result of the closing of the Share Exchange Agreement the Company
became the owner of 100% of the shares of MSTI.
In
June of 2017, the Company recorded $221,146 of impairment expense on the MSTI capitalized software.
Prior
to the approval of the Share Exchange Agreement by the Company’s Board of Directors and prior to the Company’s entry
into the Share Exchange Agreement, the Company obtained a fairness opinion from a third party investment bank opining that the
consideration to be paid by the Company in the Share Exchange Agreement is fair from a financial point of view.
The
following table includes the financial information originally reported and the net effect of the acquisition for the six months
ended June 30, 2016:
|
|
Prior to Acquisition
|
|
|
Net Effect of Acquisition
|
|
|
Post-Acquisition
|
|
Total Sales
|
|
$
|
15,494,337
|
|
|
$
|
0
|
|
|
$
|
15,494,337
|
|
Net Loss
|
|
$
|
10,572,100
|
|
|
$
|
14,033
|
|
|
$
|
10,586,133
|
|
The
following table includes the financial information originally reported and the net effect of the acquisition as of December 31,
2016:
|
|
Prior to Acquisition
|
|
|
Net Effect of Acquisition
|
|
|
Post-Acquisition
|
|
Total Assets
|
|
$
|
49,201,572
|
|
|
$
|
(2,940
|
)
|
|
$
|
49,198,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
(10,319,514
|
)
|
|
$
|
(9,766
|
)
|
|
$
|
(10,329,280
|
)
|
NOTE
4 – PROPERTY, PLANT AND EQUIPMENT
The
following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
3,434,000
|
|
|
$
|
1,550,000
|
|
Buildings & Building Improvements
|
|
|
1,748,009
|
|
|
|
777,822
|
|
Furniture & office equipment
|
|
|
659,122
|
|
|
|
406,419
|
|
Containers
|
|
|
11,179,213
|
|
|
|
5,969,677
|
|
Trucks, Machinery, & Equipment
|
|
|
28,574,895
|
|
|
|
14,190,871
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
45,595,239
|
|
|
|
22,894,789
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(9,434,377
|
)
|
|
|
(6,097,774
|
)
|
|
|
|
|
|
|
|
|
|
Net property and Equipment
|
|
$
|
36,160,862
|
|
|
$
|
16,797,015
|
|
As
of June 30, 2017, the Company has $395,000 of land and building which are held for sale and included in amounts noted above. These
amounts are included in our Midwest segment. These held for sale assets were not depreciated during the six months ended June
30, 2017. Depreciation expense for the six months ended June 30, 2017 and 2016 was approximately $3,369,000 and $1,615,000, respectively.
NOTE
5 – INTANGIBLE ASSETS
At
June 30, 2017, customer lists include the intangible assets related to customer relationships acquired through the acquisition
of Christian Disposal, Eagle Ridge and the CFS Group. The customer list intangible assets are amortized over their useful life
which range from 5 to 20 years. Amortization expense, excluding amortization of landfill assets of approximately $2,059,000 and
$136,000, amounted to approximately $1,970,000 and $1,757,000 for the six months ended June 30, 2017 and 2016, respectively.
The
following tables set forth the intangible assets, both acquired and developed, including accumulated amortization as of June 30,
2017:
|
|
June 30, 2017
|
|
|
Remaining
|
|
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
Customer lists
|
|
9.30 years
|
|
$
|
25,387,452
|
|
|
$
|
10,255,320
|
|
|
$
|
15,132,132
|
|
Non-compete agreement
|
|
2.70 years
|
|
|
206,000
|
|
|
|
111,920
|
|
|
|
94,080
|
|
Trademarks
|
|
4.62 years
|
|
|
210,000
|
|
|
|
15,750
|
|
|
|
194,250
|
|
Capitalized software
|
|
2.92 years
|
|
|
135,020
|
|
|
|
3,750
|
|
|
|
131,270
|
|
Website
|
|
3.50 years
|
|
|
44,619
|
|
|
|
8,216
|
|
|
|
36,403
|
|
|
|
|
|
$
|
25,983,091
|
|
|
$
|
10,394,956
|
|
|
$
|
15,588,135
|
|
NOTE
6 – NOTES PAYABLE AND CONVERTIBLE NOTES
The
Company had the following long-term debt:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Goldman Sachs - Tranche A Term Loan - LIBOR
Interest on loan date plus 8%, 9.045% at June 30, 2017
|
|
$
|
65,500,000
|
|
|
$
|
40,000,000
|
|
Goldman Sachs – Revolver- LIBOR Interest on loan
date plus 8%, 9.045% at June 30, 2017
|
|
|
3,405,018
|
|
|
|
3,195,000
|
|
Goldman Sachs – Tranche B Term Loan - Interest
11% annually
|
|
|
8,600,000
|
|
|
|
-
|
|
Convertible Notes Payable
|
|
|
-
|
|
|
|
1,250,000
|
|
Mortgage note payable to a bank, secured by real estate
and guarantee of Company, bearing interest at 4.6%, due in monthly installments of $9,934, maturing May 2020
|
|
|
1,295,427
|
|
|
|
-
|
|
Notes payable, secured by equipment, bearing interest
at rates from 9.25% to 9.49%, due in monthly installments of approximately $150,000 through April 2022
|
|
|
6,406,131
|
|
|
|
282,791
|
|
Notes payable to seller of Meridian, subordinated debt
|
|
|
1,475,000
|
|
|
|
1,475,000
|
|
Less: debt issuance cost/fees
|
|
|
(2,023,910
|
)
|
|
|
(1,195,797
|
)
|
Less: debt discount
|
|
|
(1,650,592
|
)
|
|
|
(1,810,881
|
)
|
Total debt
|
|
|
83,007,074
|
|
|
|
43,196,113
|
|
Less: current portion
|
|
|
(1,366,676
|
)
|
|
|
(1,385,380
|
)
|
Long term debt
less current portion
|
|
$
|
81,640,398
|
|
|
$
|
41,810,733
|
|
Goldman
Sachs Credit Agreement
On
February 15, 2017, the Company closed an Amended and Restated Credit and Guaranty Agreement (as amended by the First Amendment
to Amended and Restated Credit and Guaranty Agreement dated April 28, 2017,
the
“
Credit Agreement
”). The Credit Agreement amended and restated the Credit and Guaranty Agreement entered into
as of December 22, 2015 “
Prior Credit Agreement
”).
Pursuant
to the Credit Agreement, certain credit facilities to the Companies, in an aggregate amount not to exceed $89,100,000, consisting
of $65,500,000 aggregate principal amount of Tranche A Term Loans (the “
Tranche A Term Loans
”), $8,600,000
aggregate principal amount of Tranche B Term Loans (the “
Tranche B Term Loans
”), $10,000,000 aggregate principal
amount of MDTL Term Loans (the “
MDTL Term Loans
”), and up to $5,000,000 aggregate principal amount of Revolving
Commitments (the “
Revolving Commitments
”). The principal amount of the Tranche A Term Loans in the Credit Agreement
is $25,500,000 greater than the principal amount provided in the Prior Credit Agreement; the Tranche B Term Loans were not contemplated
in the Prior Credit Agreement; and the principal amount of the MDTL Term Loans and Revolving Credit Agreements in the Credit Agreement
are the same as provided in the Prior Credit Agreement. The proceeds of the Tranche A Term Loans made on the Closing Date were
used to pay a portion of the purchase price for the acquisitions made in connection with the closing of the Prior Credit Agreement,
to refinance existing indebtedness, to fund consolidated capital expenditures, and for other purposes permitted. The proceeds
of the Tranche A Term Loans and Tranche B Term Loans made on the Restatement Date shall be applied by Companies to (i) partially
fund the Restatement Date Acquisition, (ii) refinance existing indebtedness of the Companies, (iii) pay fees and expenses in connection
with the transactions contemplated by the Credit Agreement, and (iv) for working capital and other general corporate purposes.
The
proceeds of the Revolving Loans will be used for working capital and general corporate purposes. The proceeds of the MDTL Term
Loans may be used for Permitted Acquisitions (as defined in the Credit Agreement). The Loans are evidenced, respectively, by that
certain Tranche A Term Loan Note, Tranche B Term Loan Note, MDTL Note and Revolving Loan Note, all issued on February 15, 2017
(collectively, the “
Notes
”). Payment obligations under the Loans are subject to certain prepayment premiums,
in addition to acceleration upon the occurrence of events of default under the Credit Agreement.
The
amounts borrowed pursuant to the Loans are secured by a first position security interest in substantially all of the Company’s
and subsidiaries assets.
In
December of 2015 the Company incurred $1,446,515 of issuance cost related to obtaining the notes. In February 2017, the Company
incurred an additional $1,057,950 of issuance costs related to the amendment and restatement of these notes. These costs are being
amortized over the life of the notes using the effective interest rate method. At June 30, 2017 and December 31, 2016, the unamortized
balance of the costs was $2,023,910 and $1,195,797, respectively.
As
of March 31, 2017 and June 30, 2017 and at certain times thereafter, the Company was in violation of covenants within
its credit agreement with Goldman, Sachs & Co. The lenders and agents and the Company and its affiliates entered into
a waiver and amendment letter on August 18, 2017 whereby the covenant violations were waived. Such covenant failures
included, maintaining certain leverage ratios and exceeding maximum corporate overhead. Should the Company have violations in
the future that are not waived, it could materially effect the Company's operations and ability to fund future
operations.
In
addition, in connection with the prior credit agreement, the Company issued warrants to Goldman, Sachs & Co. (“GS”)
for the purchase of shares of the Company equal to 6.5% of the total common stock outstanding and common stock equivalents at
a purchase price equal to $449,553, exercisable on or before December 22, 2023. The warrants grant the holder certain other rights,
including registration rights, preemptive rights for certain capital raises, board observation rights and indemnification.
Due
to the put feature contained in the agreement, the warrant was recorded as a derivative liability at December 31, 2016.
In
January of 2017, the Company entered into an Amended and Restated Warrant Cancellation and Stock Issuance Agreement (the “
Warrant
Cancellation Agreement
”). Pursuant to the Warrant Cancellation Agreement, upon the closing of a “Qualified Offering”
as defined in the Warrant Cancellation Agreement, the Amended and Restated Warrant was cancelled and the Company issued to GS
restricted shares of common stock in the amount equal to a 6.5% ownership interest in the Company calculated on a fully-diluted
basis, which includes the shares of common stock issued pursuant to this offering, but excludes all warrants issued pursuant to
such Qualified Offering and all shares underlying such warrants, pursuant to the terms and conditions of the Warrant Cancellation
Agreement. A “Qualified Offering” is defined as an underwritten offering by the Company pursuant to which (1) the
Company receives aggregate gross proceeds of at least $10,000,000 and (2) the Common Stock becomes listed on The Nasdaq Capital
Market, or the New York Stock Exchange. As a result the Company issued GS 421,326 shares of common stock, with a fair value of
$1,243,000 on January 30, 2017 for the warrant cancellation. The warrant liability fair value and carrying value at January 30,
2017 was $960,000 accordingly a loss on extinguishment of liability of $283,000 was recognized. Pursuant to the Warrant Cancellation
Agreement, GS entered into a lock-up agreement, prohibiting the offer for sale, issue, sale, contract for sale, pledge or other
disposition of any of the Company’s common stock or securities convertible into common stock for a period of 180 days after
the date of the Qualified Offering, and no registration statement for any of our common stock owned by GS can be filed during
such lock-up period.
The
liability was revalued at each reporting period and changes in fair value were recognized in the consolidated statement of operations.
Upon the initial recording of the derivative warrant at fair value the instrument was bifurcated and the Company recorded a debt
discount of $2,160,000. This debt discount is being amortized as interest expense using the effective interest rate method over
the life of the note, which is 5 years. At June 30, 2017 and December 31, 2016 the balance of the debt discount is $1,650,592
and $1,810,881, respectively.
The
key inputs used in the March 31, 2016, December 31, 2016 and January 30, 2017 fair value calculations were as follows:
|
|
January 30,
2017
|
|
|
December 31,
2016
|
|
|
March 31,
2016
|
|
Purchase Price
|
|
$
|
450,000
|
|
|
$
|
450,000
|
|
|
$
|
450,000
|
|
Time to expiration
|
|
|
12/22/2023
|
|
|
|
12/22/2023
|
|
|
|
12/23/2023
|
|
Risk-free interest rate
|
|
|
1.41
|
%
|
|
|
1.42
|
%
|
|
|
1.60
|
%
|
Estimated volatility
|
|
|
60
|
%
|
|
|
60
|
%
|
|
|
45
|
%
|
Dividend
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Stock price
|
|
$
|
2.95
|
|
|
$
|
10.34
|
|
|
$
|
36.00
|
|
Expected forfeiture rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The
change in the market value for the period ending March 31, 2017 is as follows:
Fair value of warrants @ December 31, 2016
|
|
$
|
1,250,000
|
|
|
|
|
|
|
Unrealized gain on derivative liability
|
|
|
(290,000
|
)
|
|
|
|
|
|
Extinguishment of warrant liability
|
|
|
(960,000
|
)
|
|
|
|
|
|
Fair value of warrants @ June 30, 2017
|
|
$
|
-
|
|
The
change in the market value for the period ending June 30, 2016 was as follows:
Fair value of warrants @ December 31, 2015
|
|
$
|
2,820,000
|
|
|
|
|
|
|
Unrealized gain on derivative liability
|
|
|
(120,000
|
)
|
|
|
|
|
|
Fair value of warrants @ June 30, 2016
|
|
$
|
2,700,000
|
|
Convertible
Notes Payable
In
2015, as part of the purchase price consideration of the Christian Disposal acquisition, the Company issued a convertible promissory
note to the seller in the amount of $1,250,000. The note bears interest at 8% and matures on December 31, 2020. The seller may
convert all or any part of the outstanding and unpaid amount of this note into fully paid and non-assessable common stock in accordance
with the agreement. The conversion price shall equal the volume weighted average prices of the Company’s common stock in
the 10 trading days immediately prior to the date upon which the note is converted.
In
February of 2017 the convertible promissory note issued to the seller of Christian Disposal was paid in full, including all accrued
interest.
Notes
Payable, related parties
At
December 31, 2014 the Company had a short term, non-interest bearing note payable of $150,000 which was incurred in connection
with the Membership Interest Purchase Agreement. The Company also had a loan from Here to Serve Holding Corp. due to expenses
paid by Here to Serve on behalf of the Company prior to the recapitalization. This loan totaled $376,585 bringing total notes
payable to $526,585. In 2015, the short term, non-interest bearing note was paid off, and at December 31, 2016, the Company’s
loan from Here to Serve Holding Corp. was $359,891, and is included in current liabilities on the consolidated balance sheet.
Also included in current liabilities on the consolidated balance sheet is a short-term loan received from an officer of the Company
in December 2016 of $250,000. This loan was paid back, by the Company, in full, including interest of $20,000 on January 30, 2017.
In February of 2017 the Company paid back $3,000 to Here to Serve Holding Corp, which reduced the loan to $356,891, and is included
in current liabilities on the condensed consolidated balance sheet.
Total
interest expense for the three and six months ended June 30, 2017 was approximately $2,230,000 and $3,925,000, respectively. Amortization
of debt discount was approximately $95,000 and $185,000, respectively. Amortization of capitalized loan fees was approximately
$145,000 and $205,000, respectively. Interest expense on debt was approximately $1,990,000 and $3,535,000, respectively.
Total
interest expense for the three and six months ended June 30, 2016 was $1,146,841 and $2,379,590, respectively. Amortization of
debt discount was $84,089 and $165,838, respectively. Amortization of capitalized loan fees was $54,367 and $107,221, respectively.
Interest expense on debt was $1,008,385 and $2,106,531, respectively.
NOTE
7 – SHAREHOLDERS’ EQUITY
Preferred
Stock
The
Company has authorized 5,000,000 shares of Preferred Stock, for which three classes have been designated to date. Series A has
51 and 51 shares issued and outstanding, Series B has 0 and 0 shares issued and outstanding and series C has 0 and 35,750 shares
issued and outstanding, as of June 30, 2017 and December 31, 2016, respectively.
Each
share of Series A Preferred Stock has no conversion rights, is senior to any other class or series of capital stock of the Company
and has special voting rights. Each one (1) share of Series A Preferred Stock shall have voting rights equal to (x) 0.019607 multiplied
by the total issued and outstanding Common Stock eligible to vote at the time of the respective vote (the “Numerator”),
divided by (y) 0.49, minus (z) the Numerator.
Series
C
The
Company has authorized for issuance up to 67,361 shares of Series C Preferred Stock (“Series C”). Each share of Series
C: (a) has a stated value of equal to $100 per share; (b) has a par value of $0.001 per share; (c) accrues fixed rate dividends
at a rate of eight percent per annum; (d) are convertible at the option of the holder into 89.28 shares of common Stock (conversion
price of $22.40 per share based off stated value of $100); (e) votes on an ‘as converted’ basis; (f) has a liquidation
privileges of $22.40 per share; and (g) expire 15 months after issuance.
Further,
in the event of a Qualified Offering, the shares of Series C Preferred Stock will be automatically converted at the lower of $22.40
per share or the per share price that reflects a 20% discount to the price of the Common Stock pursuant to such Qualified Offering.
A “Qualified Offering” is defined as an underwritten offering by the Company pursuant to which (1) the Company receives
aggregate gross proceeds of at least $20,000,000 in consideration of the purchase of shares of Common Stock or (2) (a) the Company
receives aggregate gross proceeds of at least $15,000,000 amended to reflect gross proceeds of at least $12,000,000, in consideration
of the purchase of shares of Common Stock and (b) the Common Stock becomes listed on The Nasdaq Capital Market, the New York Stock
Exchange, or the NYSE MKT.
In
addition, if after six months from the date of the issuance until the expiration date, the holder voluntarily converts a Series
C security to common stock and sells such common stock for total proceeds that do not equal or exceed such holder’s purchase
price, the Company is obligated to issue additional shares of common stock in an amount sufficient such that, when sold and the
net proceeds are added to the net proceeds of the initial sale, the holder shall have received funds equal to that of the holder’s
initial purchase price (“Shortfall Provision”).
The
Company evaluated the Series C in accordance with ASC 815 – Derivatives and Hedging, to discern whether any feature(s) required
bifurcation and derivative accounting. The Company noted the Shortfall Provision has variable settlement based upon an item (initial
purchase price) that is not an input into a fixed for fixed price model, thus such provision is not considered indexed to the
Company’s stock. Accordingly, the Shortfall Provision was bifurcated and accounted for as a derivative liability.
Between
July 21, 2016 and August 26, 2016, the Company sold 12,750 shares of Series C for gross proceeds of $1.275 million. These proceeds
were allocated between the Shortfall Provision derivative liability ($310,000) and the host Series C instrument ($965,000). After
such allocation, the Company noted that the Series C had a beneficial conversion feature of $265,000 which was recognized as a
deemed dividend.
On
August 26, 2016, the Company issued 23,000 shares of Series C to repurchase the 2,053,573 shares of common stock and related top
off provision derivative issued in June 2016. Given the transaction was predominantly the repurchase of common stock that was
immediately retired, the Company accounted for this as a treasury stock transaction. The Series C was recorded at a fair value
of $2.3 million ($620,000 of which was allocated to the Shortfall Provision), the top off provision (which was $246,000 at the
time of exchange) was written off, and a beneficial conversion feature of $373,000 was recognized immediately as a deemed dividend.
Preferred
Series C conversion
On
January 30, 2017, a Qualified Offering occurred and accordingly at such time all 35,750 shares of Preferred Series C were converted
into 1,082,022 shares of common stock. The shares were converted according to the terms in the original agreement at a 20% discount
to the public offering price per unit of $4.13 which was $3.30.
The
automatic conversion resulted in the extinguishment of the shortfall derivative liability resulting in a gain on the extinguishment
of liabilities of approximately $2,937,000. In addition, in accordance with ASC 470, the Company recognized a deemed dividend
of approximately $2,100,000 upon conversion which represented the unamortized discount on the Series C that resulted from the
beneficial conversion feature
Derivative
Footnote
As
noted above, the Series C included a Shortfall Provision that required bifurcation and to be accounted for as a derivative liability
(until the Series C was converted). Upon the execution of the automatic conversion feature, the Shortfall Provision was no longer
in effect and the associated derivative liability was extinguished resulting in a gain on extinguishment of liability. The fair
value of the Shortfall Provision was calculated using a Monte Carlo simulated put option Black Scholes Merton Model. The cumulative
fair values at respective date of issuances and extinguishment were $930,000 and $2.9 million, respectively. The key assumptions
used in the model at inception and at January 30, 2017 (extinguishment) are as follows:
|
|
Inception
|
|
1/30/2017
|
|
|
|
|
|
Stock Price
|
|
$0.00 - $60.00
|
|
$0.00 - $6.20
|
Exercise Price
|
|
$22.40
|
|
$22.40
|
Term
|
|
.5 years
|
|
0.72 to 0.83 years
|
Risk Free Interest Rate
|
|
.39% - .47%
|
|
0.81%
|
Volatility
|
|
60%
|
|
60%
|
Dividend Rate
|
|
0%
|
|
0%
|
The
roll forward of the Shortfall Provision derivative liability is as follows
Balance – December 31, 2016
|
|
$
|
2,093,623
|
|
Fair Value Adjustment
|
|
|
844,112
|
|
Extinguishment of Liability
|
|
|
(2,937,735
|
)
|
Balance – June 30, 2017
|
|
$
|
-
|
|
Common
Stock Transactions
During
the six months ended June 30, 2017, the Company issued 7,644,225 shares of common stock. The fair values of the shares of common
stock were based on the quoted trading price on the date of issuance. Of the 7,644,775 shares issued during the six months ended
June 30, 2017, the Company:
1.
|
Issued
421,326 of these shares to Goldman Sachs as a result of their warrant agreement see note 6 Notes Payable and Convertible Notes;
|
|
|
2.
|
Issued
212,654 of these shares to an officer, see note 13 Equity and Incentive Plans;
|
|
|
3.
|
Issued
3,000,000 of these shares as part of the January 2017 offering, see below “Underwriting
Agreements;”
|
4
|
Issued
1,081,472 of these shares due to the conversion of Series C preferred stock, see above “Preferred Series C conversion;”
|
|
|
5.
|
Issued
500,000 of restricted shares to Waste Services Industries, LLC, as a result of the CFS Group Acquisition, see note 3;
|
|
|
6.
|
Issued
19,908 of these shares to the outside members of our Board of Directors for services for a total expense of $45,000;
|
|
|
7.
|
Issued
2,000,000 of these shares as part of the June 2017 offering, see below “Underwriting Agreements;”
|
|
|
8.
|
Issued
5,000 of these shares to a vendor for services performed;
|
|
|
9.
|
Issued
403,865 of these shares for the purchase of the remaining 85% of MSTI. See Note 3
|
Underwriting
Agreements
On
January 24, 2017, the Company entered into an underwriting agreement (the “January 2017 Underwriting Agreement”)
with Joseph Gunnar & Co., LLC, as representative of the several underwriters listed therein, with respect to the issuance
and sale in an underwritten public offering (the “January 2017 Offering”) by the Company of an aggregate
3,000,000 shares of the Company’s common stock, par value $0.025 per share (“Shares”) and warrants to
purchase up to an aggregate of 3,000,000 shares of common stock (the “Warrants”), at a combined public offering
price of $4.13 per unit comprised of one Share and one Warrant. The January 2017 Offering closed on January 30, 2017,
upon satisfaction of customary closing conditions. The Company received approximately $11,000,000 in net proceeds from
the Offering after deducting the underwriting discount and other estimated offering expenses payable by the
Company.
On
June 28, 2017, the Company entered into an underwriting agreement (the “June 2017 Underwriting Agreement”) with
Roth Capital Partners, LLC and Joseph Gunnar & Co., LLC, with respect to the issuance and sale in an underwritten public
offering (the “June 2017 Offering”) by the Company of an aggregate of 2,000,000 shares of the Company’s
common stock, $0.025 par value per share and five year warrants to purchase up to 575,000 shares of Common Stock, including
75,000 warrants sold pursuant to the partial exercise of the underwriters' over-allotment option with an exercise price of
$1.90 per share (the “June 2017 Warrants”), at a combined public offering price of $1.75 per share of Common
Stock and quarter-warrant. Pursuant to the Underwriting Agreement, the Company agreed to issue and sell to the Underwriters for an aggregate purchase price of $100 a warrant (the "Representatives' Warrant") to purchase up to 100,000 shares of Common Stock.
The
gross proceeds to the Company from the sale of the shares and the June 2017 Warrants in the June 2017 Offering are
approximately $3,500,000, before deducting the underwriting discount and other estimated offering expenses payable by
the Company.
The
June 2017 Offering closed on June 30, 2017, upon satisfaction of customary closing conditions.
Warrants
The
3,000,000 warrants issued in the January 2017 Offering are exercisable for five years from issuance and have an exercise
price equal to $5.16. The Warrants are listed on The NASDAQ Capital Market under the symbol “MRDNW.”
In
addition, pursuant to the underwriting agreement, the Company granted the underwriters a 45-day option to purchase up to an additional
450,000 shares and/or 450,000 warrants. The underwriters elected to purchase 112,871 warrants under this option for net proceeds
of approximately $1,200.
The
575,000 warrants issued in the June 2017 Offering are exercisable for five years from issuance and have an exercise price equal
to $1.90. The Warrants are listed on The NASDAQ Capital Market under the symbol “MRDNW.”
The 100,000 warrants issued
in the June 2017 Offering are exercisable from December 25, 2017 through December 25, 2022 and have an exercise price equal to
$2.19.
A
summary of the status of the Company’s outstanding stock warrants for the period ended June 30, 2017 is as follows:
|
|
Number of Shares
|
|
|
Average Exercise Price
|
|
|
If exercised
|
|
Expiration Date
|
Outstanding - December 31, 2016
|
|
|
148,777
|
|
|
$
|
3.02
|
|
|
|
|
|
Granted – January 30, 2017
|
|
|
3,112,871
|
|
|
|
5.16
|
|
|
|
|
January 31, 2022
|
Granted – June 30, 2017
|
|
|
575,000
|
|
|
|
1.90
|
|
|
|
|
|
Granted – June 30, 2017
|
|
|
100,000
|
|
|
|
2.19
|
|
|
|
|
|
Exercised
|
|
|
148,777
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2017
|
|
|
3,787,871
|
|
|
$
|
4.59
|
|
|
|
|
|
Warrants exercisable at March 31, 2017
|
|
|
3,787,871
|
|
|
|
|
|
|
|
|
|
Stock
Options
A
summary of the Company’s stock options as of and for the six months ended June 30, 2017 are as follows:
|
|
Number of Shares Underlying
Options
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Weighted Average
Remaining
Contractual
Life
|
|
|
Aggregate Intrinsic
Value
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
12,250
|
|
|
$
|
19.35
|
|
|
$
|
4.78
|
|
|
|
4.84
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
12,250
|
|
|
$
|
19.35
|
|
|
$
|
4.78
|
|
|
|
4.35
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable at June 30, 2017
|
|
|
2,722
|
|
|
$
|
19.35
|
|
|
$
|
4.78
|
|
|
|
4.35
|
|
|
|
-
|
|
(1)
|
The
aggregate intrinsic value is based on the $1.65 closing price as of June 30, 2017 for the Company’s Common Stock.
|
The
following information applies to options outstanding at June 30, 2017:
Options Outstanding
|
|
Options Exercisable
|
|
Exercise Price
|
|
Number of Shares Underlying
Options
|
|
|
Weighted Average Remaining
Contractual Life
|
|
|
Number Exercisable
|
|
|
Exercise Price
|
|
$12.00
|
|
|
1,000
|
|
|
|
4.35
|
|
|
|
222
|
|
|
$
|
12.00
|
|
$20.00
|
|
|
11,250
|
|
|
|
4.35
|
|
|
|
2,500
|
|
|
$
|
20.00
|
|
|
|
|
12,250
|
|
|
|
4.35
|
|
|
|
2,722
|
|
|
|
|
|
At
June 30, 2017 there was $445,500 of unrecognized compensation cost related to stock options, with expense expected to be recognized
ratably over the next 3 years.
NOTE
8 – FAIR VALUE MEASUREMENT
ASC
Topic 820 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority
to unobservable data and requires disclosures for assets and liabilities measured at fair value based on their level in the hierarchy.
Also, ASC Topic 820 provides clarification that in circumstances, in which a quoted price in an active market for the identical
liabilities is not available, a reporting entity is required to measure fair value using one or more of the techniques provided
for in this update.
The
standard describes a fair value hierarchy based on three levels of input, of which the first two are considered observable and
the last unobservable, that may be used to measure fair value, which are the following:
Level
1
- Quoted prices in active markets for identical assets and liabilities.
Level
2
- Input other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
of liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the asset or liabilities.
Level
3
- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.
Our
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
The
Company had no instruments recorded on the June 30, 2017 balance sheet that are measured at fair value on a recurring basis.
The
following table sets forth the liabilities at December 31, 2016 which were recorded on the balance sheet at fair value on a recurring
basis by level within the fair value hierarchy. As required, these are classified based on the lowest level of input that is significant
to the fair value measurement:
|
|
|
|
|
Fair Value Measurements at
Reporting Date
Using
|
|
|
|
December 31, 2016
|
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Derivative liability – stock warrants
|
|
$
|
1,250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,250,000
|
|
Derivative liability – Series C Preferred Stock
|
|
|
2,093,623
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,093,623
|
|
|
|
$
|
3,343,623
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,343,623
|
|
NOTE
9 – LEASES
The
Company is obligated under capital leases for buildings and vehicles that expire at various dates through 2043. Property and equipment
and related accumulated amortization recorded under capital leases consists of the following:
June 30,
|
|
2017
|
|
|
|
|
|
Gross asset value
|
|
$
|
5,028,147
|
|
Less accumulated amortization
|
|
|
(172,504
|
)
|
|
|
|
|
|
Net book value
|
|
$
|
4,855,643
|
|
Amortization
expense of approximately $170,000 for assets held under capital lease obligations is included in depreciation and amortization
for the six months ended June 30, 2017.
Future
minimum capital lease payments were as follows at June 30, 2017:
June 30, 2018
|
|
$
|
888,649
|
|
June 30, 2019
|
|
|
844,717
|
|
June 30, 2020
|
|
|
840,930
|
|
June 30, 2021
|
|
|
866,199
|
|
June 30, 2022
|
|
|
687,861
|
|
Thereafter
|
|
|
6,690,229
|
|
|
|
|
|
|
Total payments
|
|
|
10,818,585
|
|
Less interest
|
|
|
(3,902,513
|
)
|
|
|
|
|
|
|
|
|
6,916,072
|
|
Less current
|
|
|
(543,775
|
)
|
|
|
|
|
|
|
|
$
|
6,372,297
|
|
NOTE
10 – DEFINED CONTRIBUTION 401(k) PLANS
The
Company implemented a 401(k) plan in October of 2016. Eligible employees contribute to the 401(k) plan. Employees become eligible
after attaining age 21 and after 3 months of employment with the Company. The employee may become a participant of the 401(k)
plan on the first day of the month following the completion of the eligibility requirements. Effective October 2016 the Company
implemented a discretionary employer match to the plan (the “Contribution”). The Contributions are subject to a vesting
schedule and become fully vested after one year of service, retirement, death or disability, whichever occurs first. The Company
made contributions of $0 for the six months ended June 30, 2017 and 2016.
One
of the Company’s wholly owned subsidiary also sponsors a 401(k) employee savings plan. The plan allows eligible employees
to contribute a portion of their compensation on a pretax basis through plan contributions. CFS matches 4% of eligible compensation.
Total contributions to this plan were approximately $48,000 for the six months ended June 30, 2017.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
Landfill
Host Agreements
The
Company has host agreements with the City of Petersburg (the “City”) and the County of Lunenburg (the “County”),
collectively (the “Municipalities”) related to the operation of its landfills.
Key
aspects of the agreements include the following:
|
●
|
The
Company is required to pay the Municipalities a host fee of $1 per ton for each ton of waste disposed of in its landfills
or its transfer station, regardless of where the waste is actually deposited, The host fee related for the Lunenburg Landfill
is guaranteed to be at least $150,000 per year to the County for the life of the agreement whether or not such volume has
been received in the landfill.
|
●
|
As
part of the host agreement, The CFS Group has also agreed to accept municipal solid waste generated by the Municipalities
themselves and by curbside collection within the Municipalities.
|
|
●
|
The
Company is also required to pay the Municipalities fifty percent of all net revenues generated from the sale of recyclable
materials and methane gas from the landfills.
|
|
●
|
The
Company is required to reimburse each Municipality up to a maximum of $55,000 per year to defray costs and expenses of employing
a landfill liaison.
|
|
●
|
The
Company is required to make an annual contribution of $50,000 each Municipality to be used for a specific expenditure to be
jointly agreed upon on an annual basis.
|
|
●
|
If
the Tri-City Regional Landfill is sold to an entity not affiliated with The CFS Group at any time before August 31, 2019,
the Company is required to remit 5% of the sales price to the City, and any purchaser must also agree to be bound under the
terms of the host agreement.
|
In
addition, the Company is required to maintain a Performance Bond as approved by Lunenburg County which would be used to pay for
mitigation and remediation as may be necessary as a result of the operation of the Lunenburg landfill. As an alternative to the
Performance Bond, the County has permitted the Company to establish a cash Mitigation Fund. The Company is required to deposit
$50,000 per year into the Mitigation Fund until the fund reaches $1,500,000.
Environmental
Risks
We
are subject to liability for environmental damage that our solid waste facilities may cause, including damage to neighboring landowners
or residents, particularly as a result of the contamination of soil, groundwater or surface water, including damage resulting
from conditions existing prior to the acquisition of such facilities. Pollutants or hazardous substances whose transportation,
treatment or disposal was arranged by us or our predecessors, may also subject us to liability for any off-site environmental
contamination caused by these pollutants or hazardous substances.
Any
substantial liability for environmental damage incurred by us could have a material adverse effect on our financial condition,
results of operations or cash flows. As of the date of these condensed consolidated financial statements, we estimate the range
of reasonably possible losses related to environmental matters to be insignificant and are not aware of any such environmental
liabilities that would be material to our operations or financial condition.
General
Legal Proceedings
The
Company evaluates potential loss contingencies in accordance with ASC 450 – Contingencies (“ASC 450”). ASC 450
requires the Company to evaluate the likeliness of material loss to determine whether any specific accounting or disclosure is
required. If the likelihood of loss is deemed probable and the cost is estimable, the Company accrues the estimated loss in its
financial statements and discloses the nature of the matter. If the probable loss cannot be estimated, the Company discloses the
nature of the matter noting the likelihood of loss. If the likelihood of loss is deemed reasonably possible, the Company will
disclose such matter including an estimate of loss if the loss is estimable. If the loss is not estimable, such fact will be disclosed.
If the likelihood of loss is considered remote, no accrual or disclosure is made.
In
the normal course of our business and as a result of the extensive governmental regulation of the solid waste industry, we may
periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In
these proceedings, an agency may seek to impose fines on us or revoke or deny renewal of an operating permit or license that is
required for our operations. From time to time, we may also be subject to actions brought by adjacent landowners or residents
in connection with the permitting and licensing of transfer stations and landfills or allegations related to environmental damage
or violations of the permits and licenses pursuant to which we operate. In addition, we may become party to various claims and
suits for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters
occurring during the normal operation of a waste management business. No provision has been made in the condensed consolidated
financial statements for such matters. We do not currently believe that the possible losses in respect of outstanding litigation
matters would have a material adverse impact on our business, financial condition, results of operations or cash flows.
NOTE
12 – EQUITY AND INCENTIVE PLANS
Effective
March 10, 2016, the Board of Directors (the “Board”) of the Company approved, authorized and adopted the 2016 Equity
and Incentive Plan (the “Plan”) and certain forms of ancillary agreements to be used in connection with the issuance
of stock and/or options pursuant to the Plan (the “Plan Agreements”). The Plan provides for the issuance of up to
375,000 shares of common stock, par value $.025 per share (the “Common Stock”), of the Company through the grant of
nonqualified options (the “Non-qualified options”), incentive options (the “Incentive Options” and together
with the Non-qualified Options, the “Options”) and restricted stock (the “Restricted Stock”) to directors,
officers, consultants, attorneys, advisors and employees.
On
March 11, 2016, the Company entered into a restricted stock agreement with Mr. Jeff Cosman, CEO, (the “Cosman Restricted
Stock Agreement”), pursuant to which 212,654 shares of the Company’s common stock, subject to certain restrictions
set forth in the Cosman Restricted Stock Agreement, were issued to Mr. Cosman pursuant to the Cosman Employment Agreement and
the Plan.
The
entire 212,654 shares fully cliff vested on January 1, 2017. The expense related to this award totaled $2,764,502 which was recognized
ratably over the service period through December 31, 2016. Accordingly the stock based compensation related to this award for
the six months ended June 30, 2017 was nil.
The
restricted stock roll forward is as follows:
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock balance, December 31, 2016
|
|
|
212,654
|
|
|
$
|
13.00
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(212,654
|
)
|
|
$
|
13.00
|
|
|
|
|
|
|
|
|
|
|
Unvested, June 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Unrecognized
compensation cost at June 30, 2017 was nil.
NOTE
13 – VARIABLE INTEREST ENTITY
The
CFS Group owns 20% of the Tri-City Recycling Center, (“TCR”), which has been treated as a variable interest entity
in these condensed consolidated financial statements. TCR leases a facility to the Company used in the operation of the Tri-City
Regional Landfill in Petersburg. The sole source of TCR’s revenues is lease payments from the Company. While the creditors
of TCR do not have general recourse to the assets of the Company, there is an obligation to perform by the Company under the leases
which collateralize mortgage obligations. The terms of the lease are for a period of 20 years with a 10 year renewal option. The
lease includes an annual escalation in rent payments of 1.5%. The equity, income and any contributions or distributions of equity
are reported under non-controlling interest in the consolidated financial statements of the Company. Total assets, liabilities,
income and expenses of TCR in the condensed consolidated financial statements at June 30, 2017 are $418,000, $1,315,000, $143,000
and $78,000, respectively.
At
June 30, 2017, total liabilities include the mortgage obligations of TCR in the aggregate of approximately $1,315,000, collateralized
by the net book value of the facilities under lease by the Company of approximately $418,000.
NOTE
14 – SEGMENT AND RELATED INFORMATION
Historically,
the Company had one operating segment. However, with the acquisition of The Mid-Atlantic segment during the six months ended June
30, 2017, the Company’s operations are now managed through two operating segments: Mid-Atlantic and Midwest regions. These
two operating segments and corporate are presented below as its reportable segments. The historical results, discussion and presentation
of the Company’s reportable segments are the result of its integrated waste management services consisting of collection,
transfer, recycling and disposal of non-hazardous solid waste. Summarized financial information concerning our reportable segments
for the six months ended June 30, 2017 is shown in the following table:
|
|
Service
Revenues
|
|
|
Net
Income (loss)
|
|
|
Depreciation and Amortization
|
|
|
Capital Expenditures
|
|
|
Goodwill
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
$
|
8,160,000
|
|
|
$
|
(2,841,000
|
)
|
|
$
|
3,072,000
|
|
|
$
|
2,626,000
|
|
|
$
|
6,014,000
|
|
|
$
|
58,800,000
|
|
Midwest
|
|
|
16,965,000
|
|
|
|
(1,996,000
|
)
|
|
|
4,296,000
|
|
|
|
6,500,000
|
|
|
|
7,234,000
|
|
|
|
50,205,000
|
|
Corporate
|
|
|
-
|
|
|
|
(5,718,000
|
)
|
|
|
23,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
1,085,000
|
|
Total
|
|
$
|
25,125,000
|
|
|
$
|
(10,555,000
|
)
|
|
$
|
7,391,000
|
|
|
$
|
9,226,000
|
|
|
$
|
13,248,000
|
|
|
$
|
110,090,000
|
|
NOTE
15 – SUBSEQUENT EVENTS
On July 11, 2017, pursuant to the
June 2017 Offering, see note 7, the Company completed the closing of the sale of 300,000 shares of the Company’s common
stock, sold pursuant to the exercise by the Underwriters (defined below) of their remaining over-allotment option, pursuant
to the Underwriting Agreement. On June 28, 2017, the Company entered into an underwriting agreement (the
“Underwriting Agreement”) with Roth Capital Partners, LLC and Joseph Gunnar & Co., LLC (the
“Underwriters”), with respect to the issuance and sale in an underwritten public offering (the “June 2017
Offering”) by the Company of an aggregate of 2,000,000 shares (the “Shares”) of the Company’s common
stock, $0.025 par value per share and five year warrants to purchase up to 500,000 shares of
Common Stock with an exercise price of $1.90 per Share (the “June 2017 Warrants”), at a combined public offering
price of $1.75 per share of Common Stock and quarter-Warrant. Pursuant to the Underwriting Agreement, the Company granted the
Underwriters a 45-day option to purchase up to an additional 300,000 shares of Common Stock and/or 75,000 Warrants to
purchase shares of Common Stock with an exercise price of $1.90 per share.