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, HTSMWD purchased the assets of a large 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 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.
In
the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair presentation of the unaudited
condensed financial statements as of March 31, 2017, and the results of operations and cash flows for the three months ended March
31, 2017 have been made. The results of operations for the three months ended March 31, 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 months ended March 31, 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 $970,000 at March 31, 2017. As of March 31, 2017 the Company had approximately $1,300,000 in cash and $1,900,000 in short-term investments to cover its short term cash requirements. Further, the Company has approximately
$10,000,000 of borrowing capacity on its multi-draw term loans and revolving commitments.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Short-term
Investments
Management
determines the appropriate classification of short-term investments at the time of purchase and evaluates such designation
as of each balance sheet date. All short-term investments to date have been classified as held-to-maturity and carried at
amortized costs, which approximates fair market value, on our condensed consolidated Balance Sheets. Our short-term
investments’ contractual maturities occurred before March 31, 2017. The short-term investment of $1,940,522 is
currently restricted as this amount is collateralizing a letter of credit needed for our performance bond. Subsequent to
March 31, 2017 the restriction has been lifted and the cash is unrestricted.
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.
Derivative
Instruments
The
Company enters into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that
contain embedded derivative features. The Company accounts for these arrangements in accordance with Accounting Standards Codification
topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretations
of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the
balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly
and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized
as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based
on available market data using appropriate valuation models, considering of the rights and obligations of each instrument.
The
Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are
considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers,
among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For
less complex derivative instruments, such as freestanding warrants, the Company generally use the Black Scholes model, adjusted
for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms,
dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments
requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the
instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes
model) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial
instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility
in these estimates and assumption changes. Under the terms of this accounting standard, increases in the trading price of the
Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash
derivative loss. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair
value during a given financial quarter result in the application of non-cash derivative gain.
See
Note 6 and 7 for a description and valuation of the Company’s derivative
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
does have deferred tax liabilities related to its intangible assets, which were approximately $295,000 as of March 31, 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 March 31, 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 consolidated 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 there is no longer
a caption showing gross profit.
Accounts
Receivable
Accounts
receivable are recorded at management’s estimate of net realizable value. At March 31, 2017, and December 31, 2016 the Company
had approximately $6,700,000 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 March 31, 2017 and December 31, 2016
the Company had approximately $640,000 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 three months ended March 31, 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 March 31, 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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Three Months Ended
March 31, 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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27,566,000
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Capital Additions
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401,388
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Amortization of landfill assets
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(653,182
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)
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Asset retirement adjustments
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-
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$
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30,593,023
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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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7,922,420
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Interest accretion
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37,601
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Revisions in estimates and interest rate assumption
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-
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$
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7,965,320
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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 January, February and March for services that will be provided during April, May and June.
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 March 31, 2017 the Company had outstanding stock warrants and options for 3,112,871 and 12,250 common shares,
respectively.
At
March 31, 2017, the Company had warrants and stock options outstanding that could be converted into approximately, 3,125,000 common
shares. 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 $27,000 and $3,500,000 during the three months ended March
31, 2017 and 2016, respectively, which is included in compensation and related expense on the statement of operations.
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
2016-18 “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.
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.
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 that certain Membership Interest Purchase Agreement, dated February 15, 2017. This
acquisition was consummated to 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. Certain amounts below are
provisional based on our best estimates using information available as of the reporting date. The Company is waiting for
information to become available to finalize its valuation of certain elements of this transaction. Specifically, the assigned
values for property, plant and equipment, trade names and trademarks, landfill permits, customer relationships, capital
leases payable, mortgage payable, asset retirement obligations and goodwill are provisional in nature and subject to change
upon the completion of the final valuation of such elements. 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
aggregate purchase price consisted of the following:
Cash consideration
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$
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3,933,000
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Cash consideration funded through debt issuance
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34,100,000
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|
Restricted stock consideration
|
|
|
1,390,000
|
|
Total
|
|
$
|
39,423,000
|
|
Goldman Sachs was a lender to both the Company and CFS at the
time of the acquisition. Goldman Sachs novated this debt from CFS to the Company as part of the acquisition. See note 6.
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 $1,390,000.
The
following table summarizes the estimated fair value of The CFS Group assets acquired and liabilities assumed at the date of acquisition:
Accounts receivable
|
|
|
2,793,000
|
|
Prepaid expenses and other current assets
|
|
|
845,000
|
|
Property, plant and equipment (provisional)
|
|
|
14,179,000
|
|
Trade names and trademarks (provisional)
|
|
|
780,000
|
|
Landfill permits (provisional)
|
|
|
27,566,000
|
|
Customer relationships (provisional)
|
|
|
560,000
|
|
Accounts payable and accrued liabilities
|
|
|
(2,654,000
|
)
|
Capital leases payable (provisional)
|
|
|
(6,896,000
|
)
|
Mortgage payable (provisional)
|
|
|
(1,429,000
|
)
|
Asset retirement obligations (provisional)
|
|
|
(7,904,000
|
)
|
Non-controlling interest (provisional)
|
|
|
(71,000
|
)
|
Goodwill (provisional)
|
|
|
11,654,000
|
|
Total
|
|
$
|
39,423,000
|
|
Revenue
and net loss included in the three months ended March 31, 2017 financial statements attributable to the CFS Group
is $2,725,000 and $966,000, respectively. Transaction costs related to this acquisition were approximately $207,000 and were
expensed within selling, general, and administrative expense on the consolidated statement of operations.
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:
|
|
Three
Months
Ended
March 31,
2017
|
|
|
Three
Months
Ended
March 31,
2016
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
13,361,038
|
|
|
$
|
12,501,682
|
|
Net Loss
|
|
$
|
(5,889,139
|
)
|
|
$
|
(7,036,425
|
)
|
Basic Net Loss Per Share
|
|
$
|
(1.14
|
)
|
|
$
|
(6.49
|
)
|
NOTE
4 – PROPERTY, PLANT AND EQUIPMENT
The
following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
3,294,000
|
|
|
$
|
1,550,000
|
|
Buildings & Building Improvements
|
|
|
1,492,072
|
|
|
|
777,822
|
|
Furniture & office equipment
|
|
|
535,378
|
|
|
|
406,419
|
|
Containers
|
|
|
9,544,706
|
|
|
|
5,969,677
|
|
Trucks, Machinery, & Equipment
|
|
|
23,380,966
|
|
|
|
14,190,871
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
38,247,122
|
|
|
|
22,894,789
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(7,466,518
|
)
|
|
|
(6,097,774
|
)
|
|
|
|
|
|
|
|
|
|
Net property and Equipment
|
|
$
|
30,780,604
|
|
|
$
|
16,797,015
|
|
As
of March 31, 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 three
months ended March 31, 2017. Depreciation expense for the three months ended March 31, 2017 and 2016 was approximately
$1,385,000 and $780,000, respectively.
NOTE
5 – INTANGIBLE ASSETS
At
March 31, 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 $166,000 and
$52,000, amounted to approximately $875,000 and $875,000 for the three months ended March 31, 2017 and 2016, respectively.
The
following tables set forth the intangible assets, both acquired and developed, including accumulated amortization as of March
31, 2017:
|
|
March 31, 2017
|
|
|
Remaining
|
|
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
Customer lists
|
|
9.55 years
|
|
$
|
23,433,452
|
|
|
$
|
9,247,698
|
|
|
$
|
14,185,754
|
|
Non-compete agreement
|
|
2.95 years
|
|
|
206,000
|
|
|
|
101,620
|
|
|
|
104,380
|
|
Website
|
|
3.75 years
|
|
|
44,619
|
|
|
|
6,496
|
|
|
|
38,123
|
|
|
|
|
|
$
|
23,684,071
|
|
|
$
|
9,355,814
|
|
|
$
|
14,328,257
|
|
NOTE
6 – NOTES PAYABLE AND CONVERTIBLE NOTES
The
Company had the following long-term debt:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Goldman Sachs - Tranche A Term Loan - LIBOR Interest on loan date plus 8%, 9% at March 31, 2017
|
|
$
|
65,500,000
|
|
|
$
|
40,000,000
|
|
Goldman Sachs – Revolver- LIBOR Interest on loan date plus 8%, 9.338% at March 31, 2017
|
|
|
4,864,212
|
|
|
|
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 0%, due in monthly installments of approximately $8,000 through October 2016, then approximately $4,600 monthly thereafter until March 2019
|
|
|
109,294
|
|
|
|
-
|
|
Equipment loans
|
|
|
203,447
|
|
|
|
282,791
|
|
Notes payable to seller of Meridian, subordinated debt
|
|
|
1,475,000
|
|
|
|
1,475,000
|
|
Less: debt issuance cost/fees
|
|
|
(2,166,789
|
)
|
|
|
(1,195,797
|
)
|
Less: debt discount
|
|
|
(1,719,365
|
)
|
|
|
(1,810,881
|
)
|
Total debt
|
|
|
78,161,226
|
|
|
|
43,196,113
|
|
Less: current portion
|
|
|
(250,752
|
)
|
|
|
(1,385,380
|
)
|
Long term debt less current portion
|
|
$
|
77,910,474
|
|
|
$
|
41,810,733
|
|
Goldman
Sachs Credit Agreement
On
February 15, 2017, the Company closed an Amended and Restated Credit and Guaranty Agreement (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 March
31, 2017 and December 31, 2016, the unamortized balance of the costs was $2,166,789 and $1,195,797, respectively.
As of March 31, 2017 the Company is in compliance with all of its financial
covenants related to the Credit agreement.
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 is revalued at each reporting period and changes in fair value are recognized currently 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 March 31, 2017 and December 31, 2016 the balance of the debt discount
is $1,719,365 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 @ March 31, 2017
|
|
$
|
-
|
|
The
change in the market value for the period ending March 31, 2016 was as follows:
Fair value of warrants @ December 31, 2015
|
|
$
|
2,820,000
|
|
|
|
|
|
|
Unrealized gain on derivative liability
|
|
|
(180,000
|
)
|
|
|
|
|
|
Fair value of warrants @ March 31, 2016
|
|
$
|
2,640,000
|
|
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.
Also 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 months ended March 31, 2017 and March 31, 2016 was approximately $1,695,000 and $1,659,000, respectively.
Amortization of debt discount was approximately $90,000 and $100,000, respectively. Amortization of capitalized loan fees was
approximately $60,000 and $54,000, respectively. Interest expense on debt was approximately $1,545,000 and $1,500,000, 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 March 31, 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 – March 31, 2017
|
|
$
|
-
|
|
Common
Stock Transactions
During
the three months ended March 31, 2017, the Company issued 5,222,134 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 5,222,134 shares issued during the three months
ended March 31, 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 Agreement;”
|
4
|
Issued
1,082,022 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
6,132 of these shares to the outside members of our Board of Directors for services for a total expense of $22,500.
|
Underwriting
Agreement
On
January 24, 2017, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Joseph Gunnar
& Co., LLC, as representative of the several underwriters listed therein (the “Underwriters”), with respect to
the issuance and sale in an underwritten public offering (the “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 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.
Warrants
The 3,000,000 warrants issued in
the 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.
A
summary of the status of the Company’s outstanding stock warrants for the period ended March 31, 2017 is as follows:
|
|
Number
of Shares
|
|
|
Average
Exercise Price
|
|
|
If
exercised
|
|
Expiration
Date
|
Outstanding - December 31, 2016
|
|
|
148,777
|
|
|
$
|
3.02
|
|
|
|
|
|
Granted
|
|
|
3,112,871
|
|
|
|
5.16
|
|
|
|
|
January 31, 2022
|
Exercised
|
|
|
148,777
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2017
|
|
|
3,112,871
|
|
|
$
|
5.16
|
|
|
|
|
|
Warrants exercisable at March 31,
2017
|
|
|
3,112,871
|
|
|
|
|
|
|
|
|
|
Stock
Options
A
summary of the Company’s stock options as of and for the three months ended March 31, 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 three months ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
12,250
|
|
|
$
|
19.35
|
|
|
$
|
4.78
|
|
|
|
4.59
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable at March 31, 2017
|
|
|
1,701
|
|
|
$
|
19.35
|
|
|
$
|
4.78
|
|
|
|
4.59
|
|
|
|
-
|
|
(1)
|
The
aggregate intrinsic value is based on the $3.89 closing price as of March 31, 2017 for the Company’s Common Stock.
|
The
following information applies to options outstanding at March 31, 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
|
|
|
|
4.59
|
|
|
|
139
|
|
|
$
|
12.00
|
|
$20.00
|
|
|
11,250
|
|
|
|
4.59
|
|
|
|
1,562
|
|
|
$
|
20.00
|
|
|
|
|
12,250
|
|
|
|
4.59
|
|
|
|
1,701
|
|
|
|
|
|
At
March 31, 2017 there was $50,375 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 March 31, 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:
March 31,
|
|
2017
|
|
|
|
|
|
Gross asset value
|
|
$
|
5,028,147
|
|
Less accumulated amortization
|
|
|
(86,252
|
)
|
|
|
|
|
|
Net book value
|
|
$
|
4,941,895
|
|
Amortization
expense of approximately $86,000 for assets held under capital lease obligations is included in depreciation and
amortization for the quarter ended March 31, 2017.
Future
minimum capital lease payments were as follows at March 31, 2017:
March 31, 2018
|
|
$
|
887,428
|
|
March 31, 2019
|
|
|
855,694
|
|
March 31, 2020
|
|
|
847,522
|
|
March 31, 2021
|
|
|
822,180
|
|
March 31, 2022
|
|
|
822,368
|
|
Thereafter
|
|
|
6,804,627
|
|
|
|
|
|
|
Total payments
|
|
|
11,039,819
|
|
Less interest
|
|
|
(3,993,603
|
)
|
|
|
|
|
|
|
|
|
7,046,216
|
|
Less current
|
|
|
(534,901
|
)
|
|
|
|
|
|
|
|
$
|
6,511,315
|
|
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 three months ended March 31, 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 $12,000 for the three months ended March 31, 2017.
NOTE
11 – BONDING
For
the three months ended March 31, 2017, the Company had approximately $136,000 of expenses related to this performance bond and
for the three months ended March 31, 2016, the Company had approximately $29,000 of expenses related to this performance bond.
NOTE
12 – 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
13 – 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 three months ended March 31, 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, March 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Unrecognized
compensation cost at March 31, 2017 was nil.
NOTE 14 – 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 combined and consolidated financial statements of the Company. Total assets, liabilities, income and expenses of TCR in
the condensed consolidated financial statements at March 31, 2017 are $1,461,000, $1,295,000, $71,000 and $31,000, respectively.
At March 31, 2017, total liabilities include the mortgage obligations
of TCR in the aggregate of approximately $1,295,000, collateralized by the net book value of the facilities under lease by the
Company of approximately $1,447,000.
NOTE
15 – SEGMENT AND RELATED INFORMATION
Historically, the Company had one
operating segment. However, with the acquisition of The Mid-Atlantic segment during the three months ended March 31, 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 three months ended March 31, 2017 is shown in the following table:
|
|
Service
Revenues
|
|
|
Net
Income (loss)
|
|
|
Depreciation and Amortization
|
|
|
Capital Expenditures
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
$
|
2,725,000
|
|
|
$
|
(966,000
|
)
|
|
$
|
937,000
|
|
|
$
|
500,000
|
|
|
$
|
58,800,000
|
|
Midwest
|
|
|
8,180,000
|
|
|
|
(585,000
|
)
|
|
|
2,042,000
|
|
|
|
900,000
|
|
|
|
47,900,000
|
|
Corporate
|
|
|
-
|
|
|
|
(1,472,000
|
)
|
|
|
20,000
|
|
|
|
-
|
|
|
|
1,000,000
|
|
Total
|
|
$
|
10,905,000
|
|
|
$
|
(3,023,000
|
)
|
|
$
|
2,999,000
|
|
|
$
|
1,400,000
|
|
|
$
|
107,700,000
|
|
NOTE
16 – SUBSEQUENT EVENTS
On
April 21, 2017, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with Mobile Science
Technologies, Inc., a Georgia corporation (“MSTI”) and its shareholders. Pursuant to the Share Exchange Agreement,
the Company purchased 28,333,333 shares of MSTI in exchange for 1,083,017 shares of the Company’s common stock (the “Purchase
Shares”), valued at $2.90 per share, to be paid to MSTI selling shareholders (the “MSTI Selling Shareholders”).
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. The Selling Shareholders included 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. 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; as a
result of the closing of the Share Exchange Agreement the Company became the owner of 100% of the shares of MSTI.
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.