Risk
Factors Summary
Risks
Relating to Our Business and Industry
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The
coronavirus disease (COVID-19) pandemic has had, and may continue to have, an adverse effect on our business, results of operations,
financial condition and cash flows. Future epidemics or other public health emergencies could have similar effects. |
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We
operate in industries that are cyclical and sensitive to general economic conditions, which could have a material adverse effect
on our operating results, financial condition and cash flows. |
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Changing
conditions in global markets including the impact of sanctions and tariffs, quotas and other trade actions and import restrictions
may adversely affect our operating results, financial condition and cash flows. |
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Changes
in the availability or price of inputs such as raw materials and end-of-life vehicles could reduce our sales. |
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Significant
decreases in scrap metal prices may adversely impact our operating results. |
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Imbalances
in supply and demand conditions in the global steel industry may reduce demand for our products. |
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Impairment
of long-lived assets and equity investments may adversely affect our operating results. |
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We
may be unable to renew facility leases, thus restricting our ability to operate. |
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Increases
in the value of the U.S. dollar relative to other currencies may reduce the demand for our products. |
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Equipment
upgrades, equipment failures and facility damage may lead to production curtailments or shutdowns. |
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We
are subject to legal proceedings and legal compliance risks that may adversely impact our financial condition, results of operations
and liquidity. |
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Climate
change may adversely impact our facilities and our ongoing operations. |
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Catastrophic
events may disrupt our business and impair our ability to provide our platform to clients and consumers, resulting in costs for remediation,
client and consumer dissatisfaction, and other business or financial losses. |
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We
depend on a small number of suppliers for the materials necessary to run our business. The loss of these suppliers, or their failure
to supply us with these materials, would materially and adversely affect our business. |
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We
have substantial customer concentration, with a limited number of customers accounting for a substantial portion of our 2021 and
2020 revenues. |
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We
have a limited history upon which an evaluation of our prospects and future performance can be made and have no history of profitable
operations. |
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We
are highly dependent on the services of key executives, the loss of whom could materially harm our business and our strategic direction.
If we lose key management or significant personnel, cannot recruit qualified employees, directors, officers, or other personnel or
experience increases in our compensation costs, our business may materially suffer. |
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We
may need to obtain additional financing to fund our operations. |
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Our
independent registered accounting firm has expressed concerns about our ability to continue as a going concern. |
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In
the past we have experienced material weaknesses in our internal control over financial reporting, which if continued, could impair
our financial condition. |
Risks
Relating to Government Laws and Regulations
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Tax
increases and changes in tax rules may adversely affect our financial results. |
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We
may not realize our deferred tax assets in the future. |
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Environmental
compliance costs and potential environmental liabilities may have a material adverse effect on our financial condition and results
of operations. |
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Governmental
agencies may refuse to grant or renew our licenses and permits, thus restricting our ability to operate. |
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Compliance
with existing and future climate change and greenhouse gas emission laws and regulations may adversely impact our operating results. |
Risks
Relating to Intellectual Property
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We
may not be able to protect our intellectual property rights throughout the world. |
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We
may be involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time-consuming and unsuccessful
and the outcome might have an adverse effect on the success of our business. |
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We
may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property or
claiming ownership of what we regard as our own intellectual property. |
Risks
Related to our Common Stock
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There
can be no assurance that our common stock will ever be approved for listing on a national securities exchange. |
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The
market price of our common stock may be volatile and adversely affected by several factors. |
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If
our shares of common stock become subject to the penny stock rules, it would become more difficult to trade our shares. |
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We
are a “smaller reporting company” within the meaning of the Securities Act, and if we decide to take advantage of certain
exemptions from various reporting requirements applicable to smaller reporting companies, our common stock could be less attractive
to investors. |
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We
do not anticipate paying dividends on our common stock, and investors may lose the entire amount of their investment. |
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You
could lose some or all of your investment. |
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Our
management controls a large block of our common stock that will allow them to control us. |
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Because
we can issue additional shares of Common Stock, purchasers of our Common Stock may incur immediate dilution and experience further
dilution. |
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Provisions
in our Second Amended and Restated Certificate of Incorporation and Bylaws and Delaware law might discourage, delay or prevent a
change in control of our Company or changes in our management and, therefore, depress the market price of our Common Stock. |
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If
securities or industry research analysts do not publish research or reports about our business, or if they issue unfavorable or misleading
opinions regarding common stock, the market price and trading volume of our Common Stock could decline. |
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Future
sales and issuances of our Common Stock or rights to purchase our Common Stock, including pursuant to our equity incentive plans,
could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall. |
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We
have broad discretion in the use of the net proceeds from our public offerings and may not use them effectively. |
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Our
disclosure controls and procedures may not prevent or detect all errors or acts of fraud. |
Risks
Relating to Our Business and Industry
The
coronavirus disease (COVID-19) pandemic has had, and may continue to have, an adverse effect on our business, results of operations,
financial condition and cash flows. Future epidemics or other public health emergencies could have similar effects.
Our
operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the COVID-19 pandemic
which spread to many other countries including the United States. In March 2020, the World Health Organization characterized COVID-19
as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak resulted in governments
around the world implementing stringent measures to help control the spread of the virus, followed by phased regulations and guidelines
for reopening communities and economies. In addition, governments and central banks in several parts of the world have enacted fiscal
and monetary stimulus measures to counteract the impacts of COVID-19.
We
are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with
federal guidelines and with state and local orders to date, we have continued to operate across our footprint. Notwithstanding our continued
operations, COVID-19 has negatively impacted and may have further negative impacts on our financial performance, operations, supply chain
and flows of raw materials, transportation and logistics networks and customers. Due in large part to the impacts of and response to
the spread of COVID-19, global economic conditions declined sharply during the second quarter of fiscal 2020, resulting in historic unemployment
levels, rapid changes in supply and demand in certain industry sectors, businesses switching to remote work or ceasing operations, and
consumers eliminating, restricting or redirecting spending. The economic downturn adversely affected demand for our products and contributed
to weaker supply and demand conditions affecting prices and volumes in the markets for our products, services and raw materials. During
fiscal 2020, in particular the second quarter, our operations, margins and results were adversely impacted by lower sales volumes of
recycled metals driven by severely constrained supplies of scrap metal including end-of-life vehicles, leading to lower processed volumes
at our recycling facilities. We also experienced significant decreases in selling prices for our recycled metal products, softer demand,
supply chain disruptions, reduced availability of shipping containers, and other logistics constraints. During 2021, metal prices recovered,
contributing to an increase in revenues, although supply chain disruptions persisted.
The
COVID-19 pandemic could further negatively impact our business or results of operations through the temporary closure of our operating
locations or those of our customers or suppliers, disrupting scrap metal inflows to our recycling facilities, limiting our ability to
process scrap metal through our shredder, inhibiting the manufacture of steel products at our steel mill, and delaying or preventing
deliveries to our customers, among others. In addition, the ability of our employees and our suppliers’ and customers’ employees
to work may be significantly impacted by individuals contracting or being exposed to COVID-19, or as a result of prevention and control
measures, which may significantly hamper our production throughout the supply chain and constrict sales channels.
Because
the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, continually changing and difficult
to predict, the pandemic’s impacts on our operations and financial performance, as well as its impact on our ability to successfully
execute our business strategies and initiatives, are also uncertain and difficult to predict. Further, the ultimate impact of the COVID-19
pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited
to: governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic (including
restrictions on travel and transportation and workforce pressures); the impact of the pandemic and actions taken in response on global
and regional economies and on levels of economic activity; the availability of federal, state or local funding programs; general economic
uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the
pace of recovery when the COVID-19 pandemic subsides. While we expect the COVID-19 pandemic to continue to negatively impact our results
of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19
means the related financial impact cannot be reasonably estimated at this time.
We
operate in industries that are cyclical and sensitive to general economic conditions, which could have a material adverse effect on our
operating results, financial condition and cash flows.
Demand
for most of our products is cyclical in nature and sensitive to general economic conditions. The timing and magnitude of the cycles in
the industries in which our products are used, including global steel manufacturing and nonresidential and infrastructure construction
in the U.S., are difficult to predict. The cyclical nature of our operations tends to reflect and be amplified by changes in economic
conditions, both domestically and internationally, and foreign currency exchange fluctuations. Economic downturns or a prolonged period
of slow growth in the U.S. and foreign markets or any of the industries in which we operate could have a material adverse effect on our
results of operations, financial condition and cash flows.
Changing
conditions in global markets including the impact of sanctions and tariffs, quotas and other trade actions and import restrictions may
adversely affect our operating results, financial condition and cash flows.
A
significant portion of the metal we process is sold to end customers located outside the U.S., including countries in Asia, the Mediterranean
region and North, Central and South America. Our ability to sell our products profitably, or at all, is subject to a number of risks
including adverse impacts of political, economic, military, terrorist or major pandemic events; labor and social issues; legal and regulatory
requirements or limitations imposed by foreign governments including quotas, tariffs or other protectionist trade barriers, sanctions,
adverse tax law changes, nationalization, currency restrictions, or import restrictions for certain types of products we export; and
disruptions or delays in shipments caused by customs compliance or other actions of government agencies. The occurrence of such events
and conditions may adversely affect our operating results, financial condition and cash flows.
For
example, in fiscal 2017, regulators in China began implementing the National Sword initiative involving inspections of Chinese industrial
enterprises, including recyclers, in order to identify rules violations with respect to discharge of pollutants or illegally transferred
scrap imports. Restrictions resulting from the National Sword initiative include a ban on certain imported recycled products, lower contamination
limits for permitted recycled materials, and more comprehensive pre- and post-shipment inspection requirements. Disruptions in pre-inspection
certifications and stringent inspection procedures at certain Chinese destination ports have limited access to these destinations and
resulted in the renegotiation or cancellation of certain nonferrous customer contracts in connection with the redirection of such shipments
to alternate destinations. Commencing July 1, 2019, China imposed further restrictions in the form of import license requirements and
quotas on certain scrap products, including certain nonferrous products we sell. Chinese import licenses and quotas are issued to Chinese
scrap consumers on a quarterly basis for the importation of scrap products. Since the implementation of this program, the size of import
quotas has been steadily reduced on a quarter-over-quarter basis. We have continued to sell our recycled metal products into China; however,
additional or modified license requirements and quotas, as well as additional product quality requirements, may be issued in the future.
We believe that the potential impact on our recycling operations of the Chinese regulatory actions described above could include requirements
that would necessitate additional processing and packaging of certain nonferrous recycled scrap metal products, increased inspection
and certification activities with respect to exports to China, or a change in the use of our sales channels in the event of delays in
the issuance of licenses, restrictive quotas or an outright ban on certain or all of our recycled metals products by China. As regulatory
developments progress, we may need to make further investments in nonferrous processing equipment beyond existing planned investments
where economically justified, incur additional costs in order to comply with new inspection requirements, or seek alternative markets
for the impacted products, which may result in lower sales prices or higher costs and may adversely impact our business or results of
operations.
In
March 2018, the U.S. imposed a 25% tariff on certain imported steel products and a 10% tariff on certain imported aluminum products under
Section 232 of the Trade Expansion Act of 1962. These new tariffs, along with other U.S. trade actions, have triggered retaliatory actions
by certain affected countries, and other foreign governments have initiated or are considering imposing trade measures on other U.S.
goods. For example, China has imposed a series of retaliatory tariffs on certain U.S. products, including a 25 percent tariff on all
grades of U.S. scrap and an additional 25 percent tariff on U.S. aluminum scrap. These tariffs and other trade actions could result in
a decrease in international steel demand beyond that already experienced and further negatively impact demand for our products, which
would adversely impact our business. Given the uncertainty regarding the scope and duration of these trade actions by the U.S. or other
countries, the impact of the trade actions on our operations or results remains uncertain, but this impact could be material.
Changes
in the availability or price of inputs such as raw materials and end-of-life vehicles could reduce our sales.
Our
businesses require certain materials that are sourced from third party suppliers. Industry supply conditions generally involve risks,
including the possibility of shortages of raw materials, increases in raw material and other input costs, and reduced control over delivery
schedules. We procure our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have
no obligation to sell scrap metal to us. In periods of declining or lower scrap metal prices suppliers may elect to hold scrap metal
to wait for higher prices or intentionally slow their metal collection activities, tightening supply. If a substantial number of suppliers
cease selling scrap metal to us, we will be unable to recycle metal at desired levels, and our results of operations and financial condition
could be materially adversely affected. For instance, in the second quarter of fiscal 2020 a lower price environment for recycled metals
in combination with economic and other restrictions on suppliers relating to COVID-19 severely constricted the supply of scrap metal
including end-of-life vehicles, which resulted in significantly reduced processed volumes. A slowdown of industrial production in the
U.S. may also reduce the supply of industrial grades of metal to the metals recycling industry, resulting in less recyclable metal available
to process and market. Increased competition for domestic scrap metal, including as a result of overcapacity in the scrap recycling industry
in the U.S. and Canada, may also reduce the supply of scrap metal available to us. Failure to obtain a steady supply of scrap material
could both adversely impact our ability to meet sales commitments and reduce our operating margins. Failure to obtain an adequate supply
of end-of-life vehicles could adversely impact our ability to attract customers and charge admission fees and reduce our parts sales.
Failure to obtain raw materials and other inputs to steel production such as graphite electrodes, alloys and other required consumables,
could adversely impact our ability to make steel to the specifications of our customers.
Significant
decreases in scrap metal prices may adversely impact our operating results.
The
timing and magnitude of the cycles in the industries in which we operate are difficult to predict and are influenced by different economic
conditions in the domestic market, where we typically acquire our raw materials, and foreign markets, where we typically sell the majority
of our products. Purchase prices for scrap metal including end-of-life vehicles and selling prices for recycled scrap metal are subject
to market forces beyond our control. While we attempt to respond to changing recycled scrap metal selling prices through adjustments
to our metal purchase prices, our ability to do so is limited by competitive and other market factors. As a result, we may not be able
to reduce our metal purchase prices to fully offset a sharp reduction in recycled scrap metal sales prices, which may adversely impact
our operating income and cash flows. In addition, a rapid decrease in selling prices may compress our operating margins due to the impact
of average inventory cost accounting, which causes cost of goods sold recognized in the Consolidated Statements of Operations to decrease
at a slower rate than metal purchase prices.
For
instance, in fiscal 2020, weaker market conditions for recycled metals, including as a result of the sharp decline in global economic
conditions during the third quarter of fiscal 2020 in large part due to the impacts of the COVID-19 pandemic, and structural changes
to the market for certain recycled nonferrous products primarily from Chinese import restrictions and tariffs, resulted in periods of
sharply declining commodity prices and lower average net selling prices for our ferrous and nonferrous recycled metal products compared
to fiscal 2019. As a result, operating margins in fiscal 2020 compressed as the decline in average net selling prices for our recycled
metal products outpaced the reduction in purchase costs for raw materials. In fiscal 2021, prices for our ferrous and non-ferrous metals
increased significantly, resulting in an increase in revenue and purchasing costs for raw materials.
Imbalances
in supply and demand conditions in the global steel industry may reduce demand for our products.
Economic
expansions and contractions in global economies can result in supply and demand imbalances in the global steel industry that can significantly
affect the price of commodities used and sold by our business, as well as the price of and demand for finished steel products. In a number
of foreign countries, such as China, steel producers are generally government-owned and may therefore make production decisions based
on political or other factors that do not reflect free market conditions. In the past, overcapacity and excess steel production in these
foreign countries resulted in the export of aggressively priced semi-finished and finished steel products. This led to disruptions in
steel-making operations within other countries, negatively impacting demand for our recycled scrap metal. Existing or new trade laws
and regulations may cause or be inadequate to prevent disadvantageous trade practices, which could have a material adverse effect on
our financial condition and results of operations. Although trade regulations restrict or impose duties on the importation of certain
products, if foreign steel production significantly exceeds consumption in those countries, global demand for our recycled scrap metal
products could decline and imports of steel products into the U.S. could increase, resulting in lower volumes and selling prices for
our recycled metal products and finished steel products.
Impairment
of long-lived assets and equity investments may adversely affect our operating results.
Our
long-lived asset groups are subject to an impairment assessment when certain triggering events or circumstances indicate that their carrying
value may be impaired. If the carrying value exceeds our estimate of future undiscounted cash flows of the operations related to the
asset group, an impairment is recorded for the difference between the carrying amount and the fair value of the asset group. The results
of these tests for potential impairment may be adversely affected by unfavorable market conditions, our financial performance trends,
or an increase in interest rates, among other factors. If, as a result of the impairment test, we determine that the fair value of any
of our long-lived asset groups is less than its carrying amount, we may incur an impairment charge that could have a material adverse
effect on our financial condition and results of operations.
We
may be unable to renew facility leases, thus restricting our ability to operate.
We
lease a significant portion of our facilities. The cost to renew such leases may increase significantly, and we may not be able to renew
such leases on commercially reasonable terms or at all. Failure to renew these leases or find suitable alternative locations for our
facilities may impact our ability to continue operations within certain geographic areas, which could have a material adverse effect
on our financial condition, results of operations and cash flows.
Increases
in the value of the U.S. dollar relative to other currencies may reduce the demand for our products.
A
significant portion of our recycled scrap metal revenues is generated from sales to foreign customers, which are denominated in U.S.
dollars, including customers located in Asia, the Mediterranean region and North, Central and South America. A strengthening U.S. dollar,
as experienced during recent years including fiscal 2020, makes our products more expensive for non-U.S. customers, which may negatively
impact export sales. A strengthening U.S. dollar also makes imported metal products less expensive, which may result in an increase in
imports of steel products into the U.S. As a result, our finished steel products, which are made in the U.S., may become more expensive
for our U.S. customers relative to imported steel products thereby reducing demand for our products.
Equipment
upgrades, equipment failures and facility damage may lead to production curtailments or shutdowns.
Our
business operations and recycling and manufacturing processes depend on critical pieces of equipment, including information technology
equipment, shredders, nonferrous sorting technology, furnaces and a rolling mill, which may be out of service occasionally for scheduled
upgrades or maintenance or as a result of unanticipated failures. Our facilities are subject to equipment failures and the risk of catastrophic
loss due to unanticipated events such as fires, earthquakes, accidents or violent weather conditions. Interruptions in our processing
and production capabilities and shutdowns resulting from unanticipated events could have a material adverse effect on our financial condition,
results of operations and cash flows.
We
are subject to legal proceedings and legal compliance risks that may adversely impact our financial condition, results of operations
and liquidity.
We
spend substantial resources ensuring that we comply with domestic and foreign regulations, contractual obligations and other legal standards.
Notwithstanding this, we are subject to a variety of legal proceedings and compliance risks in respect of various matters, including
regulatory, safety, environmental, employment, transportation, intellectual property, contractual, import/export, international trade
and governmental matters that arise in the course of our business and in our industry. An outcome in an unusual or significant legal
proceeding or compliance investigation in excess of insurance recoveries could adversely affect our financial condition and results of
operations. For information regarding our current significant legal proceedings and contingencies, see “Legal Proceedings”
in Part I, Item 3 and “Contingencies – Other” within Note 8 - Commitments and Contingencies in the notes to the financial
statements.
Climate
change may adversely impact our facilities and our ongoing operations.
The
potential physical impacts of climate change on our operations are highly uncertain and depend upon the unique geographic and environmental
factors present, for example rising sea levels at deep water port facilities, changing storm patterns and intensities, and changing temperature
levels. As many of our recycling facilities are located near deep water ports, rising sea levels may disrupt our ability to receive scrap
metal, process the scrap metal through our shredders and ship products to our customers. Extreme weather events and conditions, such
as hurricanes, thunderstorms, tornadoes, wildfires and snow or ice storms, may increase our costs or cause damage to our facilities,
and any damage resulting from extreme weather may not be fully insured. Increased frequency and duration of adverse weather events and
conditions may also inhibit construction activity utilizing our products, scrap metal inflows to our recycling facilities, and retail
admissions and parts sales at our auto parts stores. Potential adverse impacts from climate change, including rising temperatures and
extreme weather events and conditions, may create health and safety issues for employees operating at our facilities and may lead to
an inability to maintain standard operating hours.
Catastrophic
events may disrupt our business and impair our ability to provide our platform to clients and consumers, resulting in costs for remediation,
client and consumer dissatisfaction, and other business or financial losses.
Our
operations depend, in part, on our ability to protect our facilities against damage or interruption from natural disasters, power or
telecommunications failures, criminal acts and similar events. Despite precautions taken at our facilities, the occurrence of a natural
disaster, an act of terrorism, vandalism or sabotage, spikes in usage volume or other unanticipated problems at a facility could result
in lengthy interruptions in the availability of our platform. Even with current and planned disaster recovery arrangements, our business
could be harmed. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses
that we may incur. These factors in turn could further reduce revenue, subject us to liability and lead to decreased usage of our platform
and decrease sales of our advertising placements, any of which could harm our business.
We
depend on a small number of suppliers for the materials necessary to run our business. The loss of these suppliers, or their failure
to supply us with these materials, would materially and adversely affect our business.
We
depend on the availability of key materials for our business from a small number of third-party suppliers. Because there are a limited
number of suppliers for these materials, we may need to engage alternate suppliers to prevent a possible disruption. We do not have any
control over the availability of materials. If we or our manufacturers are unable to purchase these materials on acceptable terms, at
sufficient quality levels, or in adequate quantities, if at all, the successful operation of our business would be delayed or there would
be a shortage in supply, which would impair our ability to generate revenues from our business.
We
have substantial customer concentration, with a limited number of customers accounting for a substantial portion of our 2021 and 2020
revenues.
We
currently derive a significant portion of our revenues from one customer, which accounted for 83% of our revenue in fiscal 2021. There
are inherent risks whenever a large percentage of total revenues are concentrated with a limited number of customers. It is not possible
for us to predict the future level of demand for our services that will be generated by this customer or the future demand for the products
and services of this customer in the end-user marketplace. In addition, revenues from larger customers, especially our largest customer
may fluctuate from time to time based on the commencement and completion of projects, the timing of which may be affected by market conditions
or other facts, some of which may be outside of our control. Further, some of our contracts with larger customers permit them to terminate
our relationship at any time (subject to notice and certain other provisions). If any of these customers experience declining or delayed
sales due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our services which
could have an adverse effect on our margins and financial position and could negatively affect our revenues and results of operations
and/or trading price of our common stock. If our largest customer terminates our services, such termination would negatively affect our
revenues and results of operations and/or trading price of our common stock.
We
have a limited history upon which an evaluation of our prospects and future performance can be made and have no history of profitable
operations.
We
were incorporated in April 2013 and have a limited operating history and our business is subject to all of the risks inherent in the
establishment of a new business enterprise. Our likelihood of success must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with development and expansion of a new business enterprise. We may sustain
losses in the future as we implement our business plan. There can be no assurance that we will operate profitably.
We
are highly dependent on the services of key executives, the loss of whom could materially harm our business and our strategic direction.
If we lose key management or significant personnel, cannot recruit qualified employees, directors, officers, or other personnel or experience
increases in our compensation costs, our business may materially suffer.
We
are highly dependent on our management team, specifically our Chief Executive Officer, Danny Meeks. While we have an employment agreement
with Danny Meeks, such employment agreement permits Mr. Meeks to terminate such agreement upon notice. If we lose key employees, our
business may suffer. Furthermore, our future success will also depend in part on the continued service of our key management personnel
and our ability to identify, hire, and retain additional personnel. We carry “key-man” life insurance on the life of our
executive officer. We experience intense competition for qualified personnel and may be unable to attract and retain the personnel necessary
for the development of our business. Because of this competition, our compensation costs may increase significantly.
We
may need to obtain additional financing to fund our operations.
We
may need additional capital in the future to continue to execute our business plan. Therefore, we may be dependent upon additional capital
in the form of either debt or equity to continue our operations. At the present time, we do not have arrangements to raise additional
capital, and we may need to identify potential investors and negotiate appropriate arrangements with them. We may not be able to arrange
enough investment within the time the investment is required or that if it is arranged, that it will be on favorable terms. If we cannot
obtain the needed capital, we may not be able to become profitable and may have to curtail or cease our operations. Additional equity
financing, if available, may be dilutive to the holders of our capital stock. Debt financing may involve significant cash payment obligations,
covenants and financial ratios that may restrict our ability to operate and grow our business.
Our
independent registered accounting firm has expressed concerns about our ability to continue as a going concern.
The
report of our independent registered accounting firm expresses concern about our ability to continue as a going concern based on our
historical losses from operations and the potential need for additional financing to fund our operations. It is not possible at this
time for us to predict with assurance the potential success of our business. If we cannot continue as a viable entity, we may be unable
to continue our operations and you may lose some or all of your investment in our securities.
In
the past we have experienced material weaknesses in our internal control over financial reporting, which if continued, could impair our
financial condition.
As
reported in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021, our management concluded that our internal
control over financial reporting was not effective as of December 31, 2021 and 2020 due to material weaknesses regarding our controls
and procedures. The Company did not have sufficient segregation of duties to support its internal control over financial reporting. Due
to our small size and limited resources, segregation of all conflicting duties has not always been possible and may not be economically
feasible in the near term; however, we do expect to hire additional accounting personnel in the near future. We have and do endeavor
to take appropriate and reasonable steps to make improvements to remediate these deficiencies. If we have continued material weaknesses
in our internal financial reporting, our financial condition could be impaired or we may have to restate our financials, which could
cause us to expend additional funds that would have a material impact on our ability to generate profits and on the success of our business.
Risks
Relating to Government Laws and Regulations
Tax
increases and changes in tax rules may adversely affect our financial results.
As
a company conducting business on a global basis with physical operations throughout North America, we are exposed, both directly and
indirectly, to the effects of changes in U.S., state, local and foreign tax rules. Taxes for financial reporting purposes and cash tax
liabilities in the future may be adversely affected by changes in such tax rules. In many cases, such changes put us at a competitive
disadvantage compared to some of our major competitors, to the extent we are unable to pass the tax costs through to our customers.
We
may not realize our deferred tax assets in the future.
The
assessment of recoverability of our deferred tax assets is based on an evaluation of existing positive and negative evidence as to whether
it is more-likely-than-not that they will be realized. If negative evidence outweighs positive evidence, a valuation allowance is required.
Impairment of deferred tax assets may result from significant negative industry or economic trends, a decrease in earnings performance
and projections of future taxable income, adverse changes in laws or regulations, and a variety of other factors. Impairment of deferred
tax assets could have a material adverse impact on our results of operations and financial condition and could result in not realizing
the deferred tax assets. Deferred tax assets may require further valuation allowances if it is not more-likely-than-not that the deferred
tax assets will be realized.
Environmental
compliance costs and potential environmental liabilities may have a material adverse effect on our financial condition and results of
operations.
Compliance
with environmental laws and regulations is a significant factor in our business. We are subject to local, state and federal environmental
laws and regulations in the U.S. and other countries relating to, among other matters:
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Waste
disposal; |
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Air
emissions; |
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Waste
water and storm water management, treatment and discharge; |
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The
use and treatment of groundwater; |
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Soil
and groundwater contamination and remediation; |
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Climate
change; |
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Generation,
discharge, storage, handling and disposal of hazardous materials and secondary materials; and |
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Employee
health and safety. |
We
are also required to obtain environmental permits from governmental authorities for certain operations. Violation of or failure to obtain
permits or comply with these laws or regulations could result in our business being fined or otherwise sanctioned by regulators or becoming
subject to litigation by private parties. Future environmental compliance costs, including capital expenditures for environmental projects,
may increase because of new laws and regulations, changing interpretations and stricter enforcement of current laws and regulations by
regulatory authorities, expanding emissions, groundwater and other testing requirements and new information on emission or contaminant
levels, uncertainty regarding adequate pollution control levels, the future costs of pollution control technology and issues related
to climate change. We have seen an increased focus by federal, state and local regulators on metals recycling and auto dismantling facilities
and new or expanding regulatory requirements.
Our
operations use, handle and generate hazardous substances. In addition, previous operations by others at facilities that we currently
or formerly owned, operated or otherwise used may have caused contamination from hazardous substances. As a result, we are exposed to
possible claims, including government fines and penalties, costs for investigation and clean-up activities, claims for natural resources
damages and claims by third parties for personal injury and property damage, under environmental laws and regulations, especially for
the remediation of waterways and soil or groundwater contamination. These laws can impose liability for the cleanup of hazardous substances
even if the owner or operator was neither aware of nor responsible for the release of the hazardous substances. We have, in the past,
been found not to be in compliance with certain of these laws and regulations, and have incurred liabilities, expenditures, fines and
penalties associated with such violations. Environmental compliance costs and potential environmental liabilities could have a material
adverse effect on our financial condition, results of operations and cash flows. See “Contingencies – Environmental”
in Note 9 – Commitments and Contingencies in the Notes to the Consolidated Financial Statements.
Governmental
agencies may refuse to grant or renew our licenses and permits, thus restricting our ability to operate.
We
conduct certain of our operations subject to licenses, permits and approvals from state and local governments. Governmental agencies
often resist the establishment of certain types of facilities in their communities, including auto parts facilities. Changes in zoning
and increased residential and mixed-use development near our facilities are reducing the buffer zones and creating land use conflicts
with heavy industrial uses such as ours. This could result in increased complaints, increased inspections and enforcement including fines
and penalties, operating restrictions, the need for additional capital expenditures and increased opposition to maintaining or renewing
required approvals, licenses and permits. In addition, from time to time, both the U.S. and foreign governments impose regulations and
restrictions on trade in the markets in which we operate. In some countries, governments require us to apply for certificates or registration
before allowing shipment of recycled metal to customers in those countries. There can be no assurance that future approvals, licenses
and permits will be granted or that we will be able to maintain and renew the approvals, licenses and permits we currently hold. Failure
to obtain these approvals could cause us to limit or discontinue operations in these locations or prevent us from developing or acquiring
new facilities, which could have a material adverse effect on our financial condition and results of operations.
Compliance
with existing and future climate change and greenhouse gas emission laws and regulations may adversely impact our operating results.
Future
legislation or increased regulation regarding climate change and greenhouse gas “GHG” emissions could impose significant
costs on our business and our customers and suppliers, including increased energy, capital equipment, emissions controls, environmental
monitoring and reporting and other costs in order to comply with laws and regulations concerning and limitations imposed on climate change
and GHG emissions. The potential costs of allowances, taxes, fees, offsets or credits that may be part of “cap and trade”
programs or similar future legislative or regulatory measures are still uncertain and the future of these programs or measures is unknown.
Future climate change and GHG laws or regulations could negatively impact our ability (and that of our customers and suppliers) to compete
with companies situated in areas not subject to such requirements. Until the timing, scope and extent of any future laws or regulations
becomes known, we cannot predict the effect on our financial condition, operating performance or ability to compete. Furthermore, even
without such laws or regulations, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies
in the metals recycling and steel manufacturing industries could harm our reputation and reduce customer demand for our products.
Risks
Relating to Intellectual Property
We
may not be able to protect our intellectual property rights throughout the world.
The
success of our business depends on our continued ability to use our existing tradename in order to increase our brand awareness. The
unauthorized use or other misappropriation of any our brand names could diminish the value of our business which would have a material
adverse effect on our financial condition and results of operation.
We
may be involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time-consuming and unsuccessful
and the outcome might have an adverse effect on the success of our business.
Competitors
may infringe our trademarks or other intellectual property. Moreover, it may be difficult or impossible to obtain evidence of infringement
by a competitor. To counter infringement or unauthorized use, we may be required to file infringement claims on an individual basis,
which can be expensive and time-consuming and divert the time and attention of our management. There can be no assurance that we will
have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they
are concluded.
We
may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property or claiming
ownership of what we regard as our own intellectual property.
Some
of our employees may have executed non-disclosure and non-competition agreements in connection with their previous employment. Although
we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject
to claims that we or these employees have used or disclosed confidential information or intellectual property, including trade secrets
or other proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these claims.
Risks
Relating to Ownership of our Common Stock
There
can be no assurance that our Common Stock will ever be approved for listing on a national securities exchange.
Currently,
shares of our Common Stock are quoted on the over the counter “OTC” Pink Market and are not traded or listed on any securities
exchange. While we remain determined to work towards getting our securities listed on a national exchange, there can be no assurance
that this will occur. As a result we may never develop an active trading market for our securities which may limit our investors’
ability to liquidate their investments.
The
market price of our Common Stock may be volatile and adversely affected by several factors.
The
market price of our Common Stock could fluctuate significantly in response to various factors and events, including, but not limited
to: our ability to execute our business plan; operating results below expectations; our issuance of additional securities, including
debt or equity or a combination thereof, necessary to fund our operating expenses; announcements of technological innovations or new
products by us or our competitors; and period-to-period fluctuations in our financial results.
In
addition, the securities markets have from time-to-time experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of
our Common Stock.
If
our shares of common stock become subject to the penny stock rules, it would become more difficult to trade our shares.
The
SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally
equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized
for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions
in such securities is provided by the exchange or system. If we do not obtain a listing on a national securities exchange and if the
price of our common stock is less than $5.00, our common stock could be deemed a penny stock. The penny stock rules require a broker-dealer,
before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing
specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise
exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for
the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written
agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure
requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders
may have difficulty selling their shares.
We
are a “smaller reporting company” within the meaning of Rule 12b-2 of the Exchange Act, and if we decide to take advantage
of certain exemptions from various reporting requirements applicable to smaller reporting companies, our Common Stock could be less attractive
to investors.
We
qualify as a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned
subsidiary of a parent company that is not a “smaller reporting company,” and have either: (i) a public float of less than
$250 million or (ii) annual revenues of less than $100 million during the most recently completed fiscal year and (A) no public float
or (B) a public float of less than $700 million. As a “smaller reporting company,” we are entitled to rely on certain reduced
disclosure requirements, such as an exemption from providing executive compensation information in our periodic reports and proxy statements.
We are also exempt from the auditor attestation requirements provided in Section 404(b) of the Sarbanes-Oxley Act. These exemptions and
reduced disclosures in our SEC filings due to our status as a smaller reporting company may make it harder for investors to analyze our
results of operations and financial prospects. We cannot predict if investors will find our Common Stock less attractive because we may
rely on these exemptions. If some investors find our Common Stock or warrants less attractive as a result, there may be a less active
trading market for our Common Stock and our stock prices may be more volatile.
We
do not anticipate paying dividends on our Common Stock, and investors may lose the entire amount of their investment.
Cash
dividends have never been declared or paid on our Common Stock, and we do not anticipate such a declaration or payment for the foreseeable
future. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent
a sale of their shares of common stock. If we do not pay dividends, our Common Stock may be less valuable because a return on your investment
will only occur if our stock price appreciates. We cannot assure stockholders of a positive return on their investment when they sell
their shares, nor can we assure that stockholders will not lose the entire amount of their investment.
You
could lose some or all of your investment.
An
investment in our securities is speculative and involves a high degree of risk. Potential investors should be aware that the value of
an investment in the Company may go down as well as up. In addition, there can be no certainty that the market value of an investment
in the Company will fully reflect its underlying value. You could lose some or all of your investment.
Our
management controls a large block of our Common Stock that will allow them to control us.
As
of March 30, 2022 members of our management team beneficially own approximately 50.67% of our outstanding common stock.
As
a result, management may have the ability to control substantially all matters submitted to our stockholders for approval including:
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Election
and removal of our directors; |
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Amendment
of our Certificate of Incorporation or Bylaws; and |
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Adoption
of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving
us. |
In
addition, management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to
obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock
price. Any additional investors will own a minority percentage of our common stock and will have minority voting rights.
Because
we can issue additional shares of Common Stock, purchasers of our Common Stock may incur immediate dilution and experience further dilution.
We
are authorized to issue up to 1,200,000,000 shares of Common Stock, of which 3,338,416 shares of Common Stock are issued and outstanding
as of March 30, 2022. Our Board of Directors has the authority to cause us to issue additional shares of Common Stock without consent
of any of stockholders. Consequently, our stockholders may experience further dilution in their ownership of our stock in the future,
which could have an adverse effect on the trading market for our Common Stock.
Provisions
in our Second Amended and Restated Certificate of Incorporation and Bylaws and Delaware law might discourage, delay or prevent a change
in control of our Company or changes in our management and, therefore, depress the market price of our Common Stock.
Our
Second Amended and Restated Certificate of Incorporation provides that all Internal Corporate Claims must be brought solely and exclusively
in the Court of Chancery of the State of Delaware (or, if such court does not have jurisdiction, the Superior Court of the State of Delaware,
or, if such other court does not have jurisdiction, the United States District Court for the District of Delaware). The exclusive forum
provision may limit a stockholders’ ability to bring a claim in a judicial forum that it finds favorable for disputes based upon
Internal Corporate Claims, which may discourage lawsuits against us or our current or former directors or officers and/or stockholders
in such capacity. In addition, if a court were to find this exclusive forum provision to be inapplicable or unenforceable in an action,
we may incur costs associated with resolving the dispute in other jurisdictions, which could have a material adverse effect on our business
and operations.
If
securities or industry research analysts do not publish research or reports about our business, or if they issue an unfavorable or misleading
opinion regarding our common stock, the market price and trading volume of our Common Stock could decline.
The
trading market for our Common Stock will rely in part on the research and reports that securities or industry research analysts, over
whom we have no control, publish about us and our business. If any of the analysts who cover us issue an adverse or misleading opinion
regarding us, our business model, our intellectual property or our stock performance, our stock price would likely decline. If one or
more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets,
which in turn could cause our stock price or trading volume to decline.
Future
sales and issuances of our Common Stock or rights to purchase our Common Stock, including pursuant to our equity incentive plans, could
result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We
expect that significant additional capital may be needed in the future to continue our planned operations, including expanded research
and development activities and costs associated with operating a public company. To raise capital, we may sell Common Stock, convertible
securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell
common stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales
may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior
to the holders of our common stock.
We
have broad discretion in the use of the net proceeds from our public offerings and may not use them effectively.
Our
management has broad discretion in the application of the net proceeds from our public offerings, and you will be relying on the judgment
of our management regarding the application of these proceeds. Our management might not apply the net proceeds from our public offerings
in ways that ultimately increase the value of your investment. If we do not invest or apply the net proceeds from our public offerings
in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.
Our
disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We
are subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to reasonably
assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management
and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that
any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met.
These
inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people
or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements
due to error or fraud may occur and not be detected.
Related Party Transactions
Parties are considered related to the Company
if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with
the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal
owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from
fully pursuing its own separate interests. The Company discloses all related party transactions. See Note 18 – Related Party Transactions.
Leases
The Company
accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as
operating or financing leases and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated
by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing
rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the
lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line
rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred.
In calculating
the right of use asset and lease liability, the Company elected to combine lease and non-lease components. The Company excluded short-term
leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on
a straight-line basis over the lease term. See Note 15 – Leases.
Paycheck Protection Program
Notes
We classified
the loan we received under the Paycheck Protection Program (“PPP”) and the PPP note we assumed upon consummation of the Empire
acquisition as non-convertible notes. We accrued interest on the PPP notes through the date of forgiveness of the respective notes by
the Small Business Administration (“SBA”). On the date of forgiveness of the respective PPP notes by the SBA, the principal
and interest due under the PPP notes were recorded as gains on forgiveness of debt.
Commitments and Contingencies
From time to time, we may become involved in various
lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and
an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, we are
currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect
on our business, financial condition or operating results. See Note 9 – Commitments and Contingencies.
Revenue
Recognition
The
Company recognizes revenue when services are realized or realizable and earned, less estimated future doubtful accounts.
The
Company’s revenues are accounted for under ASC Topic 606, “Revenue From Contracts With Customers” (“ASC 606”)
and generally do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales
prices are generally fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s
contracts do not include multiple performance obligations or material variable consideration.
In
accordance with ASC 606, the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company recognizes
revenue in accordance with that core principle by applying the following:
(i) |
Identify
the contract(s) with a customer; |
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(ii) |
Identify
the performance obligation in the contract; |
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(iii) |
Determine
the transaction price; |
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Allocate
the transaction price to the performance obligations in the contract; and |
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(v) |
Recognize
revenue when (or as) the Company satisfies a performance obligation. |
The
Company primarily generates revenue by purchasing scrap metal from businesses and retail customers, processing it, and selling the ferrous
and non-ferrous metals to clients.
The
Company realizes revenue upon the fulfillment of its performance obligations to customers. As of December 31, 2021 and 2020, the Company
had a contract liability of $25,000 and $0, respectively, for contracts under which the customer had paid for and the Company had not
yet delivered.
Inventories
Although
we ship the ferrous and non-ferrous metals we purchase to customers multiple times per day, we do maintain inventories. We calculate
the value of the inventories we do carry, which consist of processed and unprocessed scrap metal (ferrous and nonferrous), used and salvaged
vehicles, and supplies, based on the net realizable value or the cost of the inventories, whichever is less. We calculate the value of
the inventory based on the first-in-first-out (FIFO) methodology. We calculate the value of finished products based on their net realizable
value as their cost basis is not readily available. The value of our inventories was $381,002 and $0, respectively, as of December 31,
2021 and 2020.
Advertising
The
Company charges the costs of advertising to expense as incurred. Advertising costs were $33,595 and $58,961 for the year ended December
31, 2021 and 2020, respectively.
Stock-Based
Compensation
Stock-based
compensation expense is measured at the grant date fair value of the award and is expensed over the requisite service period. For stock-based
awards to employees, non-employees and directors, the Company calculates the fair value of the award on the date of grant using the Black-Scholes
option pricing model. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including
estimating volatility, employee stock option exercise behaviors and forfeiture rates. The assumptions used in calculating the fair value
of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application
of management’s judgment.
Income
Taxes
The
Company follows ASC Subtopic 740-10, “Income Taxes” (“ASC 740-10”) for recording the provision for income taxes.
Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets
and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled.
Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period.
If
available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized,
a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future
changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income
taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes
in different periods.
Business Combinations
Our
business combinations are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business
Combinations” (“ASC 805”). Under the acquisition method, we recognize 100% of the assets we acquire and liabilities
we assume, regardless of the percentage we own, at their estimated fair values as of the date of acquisition. Any excess of the purchase
price over the fair value of the net assets and other identifiable intangible assets we acquire is recorded as goodwill. To the extent
the fair value of the net assets we acquire, including other identifiable assets, exceeds the purchase price, a bargain purchase gain
is recognized. The assets we acquire, and liabilities we assume from contingencies, are recognized at fair value if we can readily determine
the fair value during the measurement period. The operating results of businesses we acquire are included in our consolidated statement
of operations from the date of acquisition. Acquisition-related costs are expensed as incurred. See “Note 4—
Empire Acquisition.”
Convertible
Instruments
U.S.
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial
instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of
the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract,
(b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value
under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and
(c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception
to this rule is when the host instrument is deemed to be conventional, as that term is described under ASC 480, “Distinguishing
Liabilities From Equity.”
When
the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records,
when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon
the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective
conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their
stated date of redemption using the effective interest method.
Beneficial
Conversion Features and Deemed Dividends
The
Company records a beneficial conversion feature for preferred stock when, on the date of issuance, the conversion rate is less than the
Company’s stock price. The Company also records, when necessary, a contingent beneficial conversion resulting from price protection
of the conversion price of preferred stock, based on the change in the intrinsic value of the conversion options embedded in such preferred
stock.
The
Company records, when necessary, deemed dividends for: (i) warrant price protection, based on the difference between the fair value of
the warrants immediately before and after the repricing (inclusive of any full ratchet provisions); (ii) the exchange of preferred shares
for convertible notes, based on the amount of the face value of the convertible notes in excess of the carrying value of the preferred
shares; (iii) the settlement of warrant provisions, based on the fair value of the common shares issued; and (iv) amortization of discount
on preferred stock resulting from recognition of a beneficial conversion feature.
Derivative
Financial Instruments
The
Company classifies as equity any contracts that: (i) require physical settlement or net-share settlement; or (ii) provide the Company
with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such
contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that: (i) require
net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s
control); or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
The Company assesses classification of its common stock purchase warrants and other freestanding derivatives at each reporting date to
determine whether a change in classification between assets and liabilities is required.
The
Company’s freestanding derivatives consisted of warrants to purchase common stock that were issued in connection with the issuance
of debt and the sale of common shares, and of embedded conversion options within convertible notes. The Company evaluated these derivatives
to assess their proper classification in the balance sheet as of December 31, 2021 and 2020 using the applicable classification criteria
enumerated under ASC 815, “Derivatives and Hedging.” The Company determined that certain embedded conversion and/or exercise
features did not contain fixed settlement provisions. The convertible notes contained a conversion feature such that the Company could
not ensure it would have adequate authorized shares to meet all possible conversion demands. As such, the Company was required to record
the derivatives which do not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value at
the end of each reporting period. The Company also records derivative liabilities for instruments, including convertible notes, preferred
stock, and warrants, in which the Company does not have sufficient authorized shares to cover the conversion of these instruments into
shares of common stock.
Environmental
Remediation Liability
The
operations of the Company, like those of other companies in its industry, are subject to various domestic and foreign environmental laws
and regulations. These laws and regulations not only govern current operations and products, but also impose potential liability on the
Company for past operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon
the Company and the industry in the future. Management believes that the Company conducts its operations in compliance with applicable
environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.
The
Company continuously assesses its potential liability for remediation-related activities and adjusts its environmental-related accruals
as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are
issued. At December 31, 2021 and 2020, the Company had accruals reported on the balance sheet as current liabilities of $22,207
and $0, respectively.
Actual
costs incurred may vary from the accrued estimates due to the inherent uncertainties involved including, among others, the nature and
magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation
with respect to a particular site. Additionally, costs for environmental-related activities may not be reasonably estimable and therefore
would not be included in our current liabilities.
Management
expects these contingent environmental-related liabilities to be resolved over the next fiscal year.
Long-Lived
Assets
The
Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management
at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the
future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Intangible assets are stated
at cost and reviewed annually to examine any impairments, usually assuming an estimated useful life of five
to ten years. When retired or otherwise
disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less
any amount realized from disposition, is reflected in earnings. The estimated useful lives of the Intellectual Property, Customer List,
and Licenses assumed in the Empire acquisition is 5 years, 10 years, and 10 years, respectively. See Note 19 – Amortization of
Intangible Assets.
Indefinite
Lived Intangibles and Goodwill
The
Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,”
where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on
their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one
year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and
revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired
less liabilities assumed is recognized as goodwill.
The
Company tests indefinite lived intangibles and goodwill for impairment in the fourth quarter of each year and whenever events or circumstances
indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.
Goodwill
Goodwill is the excess of the purchase price paid
over the fair value of the net assets of the acquired business. Goodwill is tested annually at December 31 for impairment. The annual
qualitative or quantitative assessments involve determining an estimate of the fair value of reporting units in order to evaluate whether
an impairment of the current carrying amount of goodwill exists. A qualitative assessment evaluates whether it is more likely than not
that a reporting unit’s fair value is less than its carrying amount before applying the two-step quantitative goodwill impairment
test. The first step of a quantitative goodwill impairment test compares the fair value of the reporting unit to its carrying amount
including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss may be recognized. The amount
of impairment loss is determined by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount.
If the carrying amount exceeds the implied fair value then an impairment loss is recognized equal to that excess. The Company has adopted
the provisions of ASU 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU
2017-04 requires goodwill impairments to be measured on the basis of the fair value of a reporting unit relative to the reporting unit’s
carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. Thus,
ASU 2017-04 permits an entity to record a goodwill impairment that is entirely or partly due to a decline in the fair value of other
assets that, under existing GAAP, would not be impaired or have a reduced carrying amount. Furthermore, the ASU removes “the requirements
for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative
test, to perform Step 2 of the goodwill impairment test.” Instead, all reporting units, even those with a zero or negative carrying
amount will apply the same impairment test. Accordingly, the goodwill of reporting unit or entity with zero or negative carrying values
will not be impaired, even when conditions underlying the reporting unit/entity may indicate that goodwill is impaired.
We test our goodwill for impairment annually,
or, under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. We are required
to write down the value of goodwill only when our testing determines the recorded amount of goodwill exceeds the fair value. Our annual
measurement date for testing goodwill impairment is December 31.
None of the goodwill is deductible for income tax purposes.
Segment
Reporting
Operating
segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by
the Chief Executive Officer, or decision-making group, in deciding the method to allocate resources and assess performance. The Company
currently has one reportable segment for financial reporting purposes, which represents the Company’s core business.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings (loss) per share under ASC subtopic 260-10, Earnings Per Share. Net loss per common share is computed by dividing
net loss by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share, if presented,
would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock
using the “treasury stock” and/or “if converted” methods, as applicable.
The
computation of basic and diluted income (loss) per share, for the year ended December 31, 2021 and 2020 excludes potentially dilutive
securities when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the
common stock during the period.
Potentially
dilutive securities excluded from the computation of basic and diluted net loss per share are as follows:
SCHEDULE OF POTENTIALLY DILUTIVE SECURITIES EXCLUDED FROM THE COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
Common shares issuable upon conversion of convertible notes | |
| 2,527,144 | | |
| 8,541,605 | |
Options to purchase common shares | |
| 92,116 | | |
| 92,116 | |
Warrants to purchase common shares | |
| 2,752,941 | | |
| 8,403,603 | |
Common shares issuable upon conversion of preferred stock | |
| 822,593 | | |
| 22,364,393 | |
Total potentially dilutive shares | |
| 6,194,794 | | |
| 39,401,717 | |
On
February 28, 2022 the Company completed 1-for-300 reverse stock split. Pursuant to GAAP, the
Company retrospectively recasted and restated the weighted-average shares included within its consolidated statements of operations
for the years ended December 31, 2021 and 2020. The basic and diluted weighted-average common shares are retroactively converted to shares
of the Company’s common stock to conform to the recasted consolidated statements of stockholders’ equity.
Reclassifications
Certain
reclassifications have been made to the prior years’ data to conform to the current year presentation. These reclassifications
had no effect on reported income (losses).
Recent
Accounting Pronouncements
In
December 2019, the FASB issued ASU 2019-12, which is intended to simplify various aspects related to accounting for income taxes. ASU
2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve
consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2020, with early adoption permitted. The Company adopted ASU No. 2019-12 effective January 1, 2021, and the adoption did not have
a material impact on its financial statements and related disclosures.
In
August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on accounting for convertible debt instruments by removing the
separation models for: (1) convertible debt with a cash conversion feature; and (2) convertible instruments with a beneficial conversion
feature. As a result, the Company will not separately present in equity an embedded conversion feature in such debt. Instead, we will
account for a convertible debt instrument wholly as debt, unless certain other conditions are met. We expect the elimination of these
models will reduce reported interest expense and increase reported net income for the Company’s convertible instruments falling
under the scope of those models before the adoption of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method
for calculating diluted earnings per share and the treasury stock method will be no longer available. The provisions of ASU 2020-06 are
applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after
December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.
In
August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure
Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes
certain disclosure requirements, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy,
the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also
adds disclosure requirements, including changes in unrealized gains and losses for the period included in other comprehensive income
for recurring Level 3 fair value measurements, and the range and weighted average of significant unobservable inputs used to develop
Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, and the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements, should be applied prospectively for only the most recent interim
or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods
presented upon their effective date. ASU 2018-13 became effective for us on January 1, 2020. The adoption of this update did not have
a material impact on the Company’s consolidated financial statements and related disclosures.
In October
2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from
Contracts with Customers, which requires that an acquirer recognize and measure contract assets and contract liabilities acquired in
a business combination in accordance with Topic 606, as if it had originated the contracts. Prior to this ASU, an acquirer generally
recognizes contract assets acquired and contract liabilities assumed that arose from contracts with customers at fair value on the acquisition
date. The ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The ASU is to be applied
prospectively to business combinations occurring on or after the effective date of the amendment (or if adopted early as of an interim
period, as of the beginning of the fiscal year that includes the interim period of early application). We are still assessing this standard’s
impact on our consolidated financial statements.
There
are other various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations
or cash flows.
NOTE
4 – ACQUSITION OF EMPIRE
On
September 30, 2021, the Company entered into an agreement and plan of merger to acquire Empire Services, Inc., a Virginia Corporation
(the “Empire Acquisition”). The Empire Acquisition became effective upon the filing of the articles of merger with the State Corporation Commission of Virginia on October 1, 2021.
Empire,
a company headquartered in Virginia, operates 11 metal recycling facilities in Virginia and North Carolina, where it collects, classifies
and processes raw scrap metals (ferrous and nonferrous) for recycling, such as iron, steel, aluminum, copper, lead, stainless steel and
zinc. Empire’s business consists of purchasing scrap metals from retail customers, municipal governments and large corporations,
and selling both processed and unprocessed scrap metals to steel mills and others purchasers across the country. Empire utilizes technology
to create operating efficiencies and competitive advantages over other scrap metal recyclers.
At
the effective time of the Empire Acquisition, each share of Empire’s common stock was converted into the right to receive consideration
consisting of: (i) 1,650,000 shares of newly-issued restricted shares of the Company’s common stock, par value $0.001 per share,
(ii) within 3 business days of the closing of the Company’s next capital raise, repayment of a $1 million advance made to purchase
Empire’s Virginia Beach location to Empire’s sole shareholder and Greenwave’s CEO and (iii) a promissory note in the
principal amount of $3.7 million with a maturity date of September 30, 2023 to Empire’s sole shareholder and Greenwave’s
CEO.
The
merger agreement contains representations, warranties and covenants customary for transactions of this type. Investors in, and security
holders of, the Company should not rely on the representations and warranties as characterizations of the actual state of facts since
they were made only as of the date of the Empire Acquisition. Moreover, information concerning the subject matter of such representation
and warranties may change after the date of the Empire Acquisition, which subsequent information may or may not be fully reflected in
public disclosures.
On
September 30, 2021, the Company entered into an employment agreement with the sole owner of Empire which did not represent additional
purchase consideration.
The
fair value of the assets acquired and liabilities assumed are based on management’s initial estimates of the fair values on October
1, 2021 and on subsequent measurement adjustments as of December 31, 2021. Based upon the purchase price allocation, the following table
summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
SCHEDULE
OF BUSINESS ACQUISITION
Assets acquired: | |
| |
Cash | |
$ | 141,027 | |
Deposits | |
| 1,150 | |
Notes receivable – related party | |
| 1,515,778 | |
Property and equipment, net | |
| 3,224,337 | |
Right of use and other assets | |
| 3,585,961 | |
Licenses | |
| 21,274,000 | |
Intellectual Property | |
| 3,036,000 | |
Customer Base | |
| 2,239,000 | |
Goodwill | |
| 2,499,753 | |
Total assets acquired at fair value | |
| 37,517,046 | |
| |
| | |
Liabilities assumed: | |
| | |
Accounts payable | |
| 845,349 | |
Advances and environmental remediation liabilities | |
| 4,143,816 | |
Note payable | |
| 5,684,662 | |
Other liabilities | |
| 3,729,219 | |
Total liabilities assumed | |
| 14,403,046 | |
Net assets acquired | |
| 23,114,000 | |
| |
| | |
Purchase consideration paid: | |
| | |
Common stock | |
| 18,414,000 | |
Promissory Note | |
| 3,700,000 | |
Promissory Note | |
| 1,000,000 | |
Total purchase consideration paid | |
$ | 23,114,000 | |
The
assets acquired and liabilities assumed are recorded at their estimated fair values on the acquisition date as adjusted during the measurement
period with subsequent changes recognized in earnings or loss. The Company utilized an independent specialist for the valuation of
the intangible assets.
The
following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Empire had occurred as of
the beginning of the following periods:
SCHEDULE
OF BUSINESS ACQUISITION PRO FORMA
| |
Year Ended December 31, 2021 | | |
Year Ended December 31, 2020 | |
Net Revenues | |
$ | 27,755,762 | | |
$ | 12,963,692 | |
Net Income (Loss) Available to Common Shareholders | |
$ | 5,233,967 | | |
$ | (115,372,857 | ) |
Net Basic Earnings (Loss) per Share | |
$ | 1.08 | | |
$ | (24.80 | ) |
Net
Diluted Earnings (Loss) per Share | |
$ | 0.64 | | |
$ | (24.80 | ) |
Pro
forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning
of the periods presented and is not intended to be a projection of future results.
NOTE
5 – PROPERTY AND EQUIPMENT
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company acquired equipment with a purchase price of
$5,511,568 with
accumulated depreciation of $2,287,231.
Property and equipment as of December 31, 2021 and
December 31, 2020 is summarized as follows:
SCHEDULE OF PROPERTY AND EQUIPMENT
| |
December 31, 2021 | | |
December 31, 2020 | |
Equipment | |
$ | $4,816,756 | | |
$ | 23,987 | |
Subtotal | |
| 4,816,756 | | |
| 23,987 | |
Less accumulated depreciation | |
| (1,911,719 | ) | |
| (23,987 | ) |
Property and equipment, net | |
$ | 2,905,037 | | |
$ | - | |
Depreciation
expense for the years ended December 31, 2021 and 2020 was $149,156 and $0, respectively. Impairment of equipment expense for the years
ended December 31, 2021 and 2020 was $388,877 and $0, respectively.
NOTE
6 – ADVANCES, NON-CONVERTIBLE NOTES PAYABLE AND PPP NOTE PAYABLE
Advances
During
the year ended December 31, 2021 and 2020, the Company received aggregate proceeds from non-interest bearing advances of $70,452 and
$3,696,
received forgiveness of advances for $0
and $250,000, and
repaid an aggregate of $61,639 and
$3,009,
respectively, of advances. Included in the year ended December 31, 2021 were $2,957 of
advances from and $6,144 of
repayments to the Company’s Chief Information Officer and a $25,000 settlement
payment made by Empire Services, Inc. on behalf of the Company (See Note 18). The remaining advances are primarily for Simple Agreements
for Future Tokens, entered into with accredited investors issued pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended, by virtue of Section 4(a)(2) thereof and/or Regulation D thereunder in 2018. As of December 31, 2021
and December 31, 2020, the Company owed $97,000 and
$88,187 in
principal and $4,000 and
$0 in
accrued interest, respectively, on advances.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company became liable for merchant cash advances Empire
had obtained in the amount of $4,975,940 with
a carrying value of $4,072,799
as of the acquisition date. The advances had final payment
dates ranging from November 19, 2020 to March 11, 2022. The advances were secured against the assets of Empire. The Company made payments
of $4,104,334 towards
these advances during the year ended December 31, 2021. There was amortization of debt discount of $903,141
from October 1 to December 8, 2021. The
Company realized an aggregate gain on the settlement of these advances of $871,606
from November 30 to December 8, 2021.
These advances were fully satisfied and retired as of December 31, 2021.
Non-Convertible
Notes Payable
During
the year ended December 31, 2021 and 2020, the Company received proceeds from the issuance of non-convertible notes of $1,465,053 and
$82,911,
had $1,515,778
in intercompany loans eliminated, and repaid
an aggregate of $5,629,455 and
$39,641,
respectively, of non-convertible notes. Included in the years ended December 31, 2021 and 2020 were $24,647 and
$20,520,
respectively, of advances from and $59,103
and $0 of
repayments to the Company’s Chief Executive Officer. The $5,629,455
in repayments in 2021 was comprised of $5,479,288
in payments made towards non-convertible
notes assumed in the Empire acquisition, $150,167
was towards non-convertible notes Greenwave had
outstanding and $60,000
was towards the resolution agreement with
Sheppard Mullin.
On
April 17, 2020, the outstanding principal balance of $23,500 and accrued interest of $17,281 on non-convertible notes held by one holder
was consolidated into a new non-convertible note with a face value of $79,000, resulting in a loss on debt settlement of $38,219 as of
December 31, 2020. On June 2, 2021, holders of this non-convertible notes entered into an agreement to cancel the entire amount owed
to him (including principal of $79,000 and accrued interest of $63,055), resulting in gain on forgiveness of debt of $142,055.
On
May 4, 2020, the Company received proceeds of $50,000 from a PPP note. The note had a maturity date of May 4, 2022 and bore 1% interest
per annum. On April 6, 2021, the Small Business Administration forgave the Company’s Paycheck Protection Program loan in the principal
amount of $50,000 and accrued interest of $466, resulting in gain on forgiveness of debt of $50,466. As of December 31, 2021 and December
31, 2020, the Company owed $0 and $50,000 in principal and $0 and $330 in accrued interest, respectively, on this note.
On
June 4, 2021, one of the holders of a non-convertible note payable for $60,000 extended the due date of the note from June 26, 2022
to June 24, 2023. On November 30, 2021, the Company settled this note for payment of $100,000.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for a secured promissory
note with an interest rate of 10.495%
and a maturity date of August
5, 2022. As of October 1, 2021, the note’s
principal balance was $764,464,
had a carrying value of $707,644,
and had accrued interest and penalties of $30,330.
The note was secured by assets of Empire. The Company made payments towards the principal and interest of the note of $37,800
from October 1 to November 30, 2021. There was
amortization of debt discount on the note of $56,820
from October 1 to November 30, 2021. The Company
paid $730,347
to settle the note on November 30, 2021.
The Company realized a gain on the settlement of this note of $34,117
on November 30, 2021. This note was fully satisfied
and retired as of December 31, 2021.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for a secured promissory
note with an interest rate of 10.495%
and a maturity date of November
15, 2025. As of October 1, 2021, the note’s
principal balance was $524,381,
carrying value was $450,268,
and had accrued interest and penalties of $7,896.
The note was secured by assets of Empire. The Company made payments towards the principal and interest of the note of $9,070
from October 1 to November 30, 2021. There was
amortization of debt discount on the note of $74,113
from October 1 to November 30, 2021. The Company
paid $507,880
to settle the note on November 30, 2021.
The Company realized a gain on the settlement of this note of $16,501
on November 30, 2021. This note was fully satisfied
and retired as of December 31, 2021.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for a secured promissory
note with an interest rate of 4.75%
and a maturity date of December
30, 2023. As of October 1, 2021, the note’s
remaining principal balance was $1,223,530.
The note was secured by all assets of Empire and property owned by the Company’s Chief Executive Officer. The Company made payments
towards the principal and interest of the note of $48,000
from October 1 to November 30, 2021. There was
an interest expense of $11,907
from October 1 to November 30, 2021. The
Company paid $1,292,024
to settle the note on November 30, 2021.
The Company realized a loss on the settlement of this note of $69,968
on November 30, 2021. This
note was fully satisfied and retired as of December 31, 2021.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for a secured, demand
promissory note with an interest rate of 4.75%
and a maturity date of January
30, 2024. As of October 1, 2021, the note’s
remaining principal balance was $888,555.
Under the terms of the note, any principal amount that was paid off could be reborrowed. The note was secured by all assets Empire and
property owned by the Company’s Chief Executive Officer. On October 26, 2021, the Company received additional proceeds of $108,000
under the note. The Company made payments towards
the principal and interest of the note of $23,000
from October 1 to November 30, 2021. There was
an interest expense of $2,146
from October 1 to November 30, 2021. The Company
paid $996,554
to settle the note on November 30, 2021.
This note was fully satisfied and retired as of December 31, 2021.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for an Economic Injury
Disaster Loan (“EIDL”) note with a 3.75% interest rate and a maturity date of April 19, 2040. As of October 1, 2021, the
note’s principal balance was $500,000 and had $12,501 in accrued interest. The Company made payments towards interest of the note
of $4,874 from October 1 to November 30, 2021. There was an interest expense of $5,211 on this note from October 1 to November 30, 2021.
The Company paid $512,838 to settle the note on November 30, 2021. This note was fully satisfied and retired as of December 31, 2021.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for a secured promissory
note with an interest rate of 10.495%
and a maturity date of September
12, 2024. As of October 1, 2021, the note’s
principal balance was $258,815,
had a carrying value of $220,657,
and had accrued interest and late fees of $4,897.
The note was secured by assets of Empire. The Company made payments towards the principal and interest of the note of $6,995
from October 1 to November 30, 2021. There was
amortization of debt discount on the note of $38,158
from October 1 to November 30, 2021. The Company
paid $234,914
to settle the note on November 30, 2021.
The Company realized a gain on the settlement of this note of $23,901
on November 30, 2021. This note was fully satisfied
and retired as of December 31, 2021.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for a secured promissory
note with an interest rate of 10.015%
and a maturity date of November
5, 2023. As of October 1, 2021, the note’s
principal balance was $213,080,
had a carrying value of $188,812,
and had accrued interest and penalties of $4,186.
The note was secured by assets of Empire. The Company made payments towards the principal and interest of the note of $7,610
from October 1 to November 30, 2021. There was
amortization of debt discount on the note of $24,898
from October 1 to November 30, 2021. The Company
paid $195,896
to settle the note on November 30, 2021.
The Company realized a gain on the settlement of this note of $17,184
on November 30, 2021. This note was fully satisfied
and retired as of December 31, 2021.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for a Paycheck Protection
Program (“PPP”) note with a 1% interest rate and a maturity date of March 16, 2023. As of October 1, 2021, the note’s
principal balance was $543,000 in principal and had $2,902 in accrued interest. The note was secured by assets of Empire. The note accrued
interest of $1,012 from October 1 to December 7, 2021. On December 7, 2021, the Small Business Administration forgave the Company’s
Paycheck Protection Program loan in the principal amount of $543,275 and accrued interest of $3,915, resulting in gain on forgiveness
of debt of $547,190. This note was fully satisfied and retired as of December 31, 2021.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for a secured promissory
note with an interest rate of 10.015%
and a maturity date of June
21, 2024. As of October 1, 2021, the note’s
principal balance was $493,000,
had a carrying value of $431,201,
and had accrued interest and penalties of $7,896.
The note was secured by assets of Empire. The Company made payments towards the principal and interest of the note of $14,500
from October 1 to November 30, 2021. There was
amortization of debt discount on the note of $61,799
from October 1 to November 30, 2021. The Company
paid $460,453
to settle the note on November 30, 2021.
The Company realized a gain on the settlement of this note of $32,547
on November 30, 2021. This note was fully satisfied
and retired as of December 31, 2021.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for a secured promissory
note with an interest rate of 10.015%
with a maturity date of June
21, 2024. As of October 1, 2021, the note’s
principal balance was $196,875,
had carrying value of $172,893,
and had accrued interest and penalties of $844.
The note was secured by assets of Empire. The Company made payments towards the principal and interest of the note of $5,625
from October 1 to November 30, 2021. There was
amortization of debt discount on the note of $23,982
from October 1 to November 30, 2021. The Company
paid $186,087
to settle the note on November 30, 2021.
The Company realized a gain on the settlement of this note of $10,788
on November 30, 2021. This note was fully satisfied
and retired as of December 31, 2021.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for a secured promissory
note with an interest rate of 10.015%
and a maturity date of August
23, 2024. As of October 1, 2021, the note’s
principal balance was $257,400,
had a carrying value of $223,036,
and had accrued interest and penalties of $358.
The note was secured by assets of Empire. The Company made payments towards the principal and interest of the note of $7,150
from October 1 to November 30, 2021. There was
amortization of debt discount on the note of $34,364
from October 1 to November 30, 2021. The Company
paid $239,608
to settle the note on November 30, 2021.
The Company realized a gain on the settlement of this note of $17,792
on November 30, 2021. This note was fully satisfied
and retired as of December 31, 2021.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred a liability for a secured promissory
note with an interest rate of 10.015%
and a maturity date of September
7, 2024. As of October 1, 2021, the note had
a principal balance of $154,980,
carrying value of $135,420,
and accrued interest and penalties of $215.
The note was secured by assets of Empire. There was amortization of debt discount on the note of $19,560
from October 1 to November 30, 2021. The Company
paid $135,523
to settle the note on November 30, 2021.
The Company realized a gain on the settlement of this note of $19,457
on November 30, 2021. This note was fully satisfied
and retired as of December 31, 2021.
On
September 23, 2021, the Company entered into a Resolution Agreement with Sheppard, Mullin, Richter & Hampton concerning the $459,250.88 judgement
entered against the Company (See Note 9). Under the terms of the Resolution Agreement, which the Company has classified as
a non-convertible note, the Company was required to make a $25,000 initial payment by September 30, 2021 and is required to make $15,000
monthly payments from October 2021 to January 2023 with a final $10,000 payment due in February 2023. The Company has made the October
2021 to March 2022 monthly payments. During the year ended December 31, 2021, the Company made $70,000 in payments towards the Resolution
Agreement. As of December 31, 2021, the Resolution Agreement had a balance of $192,187, net an unamortized debt discount of $12,013.
The
following table details the current and long-term principal due under non-convertible notes as of December 31, 2021.
SCHEDULE
OF CURRENT AND LONG TERM PRINCIPAL DUE UNDER NONCONVERTIBLE NOTE
| |
Principal (Current) | | |
Principal (Long Term) | |
Non-Convertible Note (subsequently settled) | |
$ | 55,000 | | |
$ | - | |
Non-Convertible Note | |
| 5,000 | | |
| - | |
Sheppard Mullin Resolution Agreement | |
| 180,000 | | |
| 25,000 | |
Total Principal of Non-Convertible Notes | |
$ | 240,000 | | |
$ | 25,000 | |
NOTE
7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As
of December 31, 2021 and 2020, the Company owed accounts payable and accrued expenses of $2,773,894 and $4,948,890, respectively. These
are primarily comprised of payments to vendors, accrued interest on debt, and accrued legal bills.
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
December 31, 2021 | | |
December 31, 2020 | |
Accounts Payable | |
$ | 623,557 | | |
$ | 1,112,994 | |
Credit Cards | |
| 126,063 | | |
| - | |
Accrued Interest | |
| 1,880,066 | | |
| 3,691,688 | |
Accrued Expenses | |
| 144,208 | | |
| 144,208 | |
Total Accounts Payable and Accrued Expenses | |
$ | 2,773,894 | | |
$ | 4,948,890 | |
NOTE
8 – ACCRUED PAYROLL AND RELATED EXPENSES
The
Company is delinquent in filing its payroll taxes, primarily related to stock compensation awards in 2016 and 2017, but also including
payroll for 2018, 2019, 2020, and 2021. As of December 31, 2021 and 2020, the Company owed payroll tax liabilities, including penalties,
of $4,001,470 and $3,864,055, respectively, to federal and state taxing authorities. The actual liability may be higher or lower due
to interest or penalties assessed by federal and state taxing authorities.
NOTE
9 – COMMITMENTS AND CONTINGENCES
From
time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation
is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
Except as set forth below, we are currently not aware of any such legal proceedings or claims that will have, individually or in the
aggregate, a material adverse effect on our business, financial condition or operating results.
Sheppard
Mullin’s Demand for Arbitration
On
December 1, 2020, Sheppard, Mullin, Richter & Hampton LLP (“Sheppard Mullin”), the Company’s former securities
counsel, filed a demand for arbitration at JAMS in New York, New York against the Company, alleging the Company’s breach of an
engagement agreement dated January 4, 2018, and a failure of the Company to pay $487,390.73 of outstanding legal fees to Sheppard
Mullin. Sheppard Mullin was awarded $459,251 in unpaid legal fees, disbursements and interest on June 25, 2021. A judgement confirming
the arbitration award was entered on September 8, 2021 in the Federal District Court located in Denver, Colorado.
On
September 23, 2021, the Company entered into a Resolution Agreement with Sheppard, Mullin, Richter & Hampton concerning the $459,250.88 judgement
entered against the Company. Under the terms of the Resolution Agreement, the Company was required to make a $25,000 initial payment
by September 30, 2021 and is required to make $15,000 monthly payments from October 2021 to January 2023 with a final $10,000 payment
due in February 2023. The Company has made the October 2021 to March 2022 monthly payments.
Virginia
DEQ Consent Order
On
June 30, 2021, the Company entered into a Consent Order with the Virginia State Water Control Board. Under the Consent Order, the Company
is required to pay a civil penalty of $90,000, improve its internal control plans regarding recycled and waste materials, remediate certain
environmental concerns on the properties it leases, among other requirements. The Company believes it is appropriate to recognize an
environmental remediation liability as a regulatory claim that was asserted in the Notices of Violations issued to the Company in November
2019, for which the June 2021 Consent Order rectifies.
Upon
effectiveness of the Company’s acquisition of Empire on October 1, 2021, the Company incurred $71,017 in environmental remediation
liabilities, of which $15,017 was a fair estimate of the cost to remediate the properties it leases and a balance of $56,000 for the
civil penalty as of the acquisition date. The Company paid $34,983 towards the remediation of the properties and $42,000 towards the
civil penalty from October 1, 2021 to December 31, 2021. The Company had $22,207 in environmental remediation liabilities as of December
31, 2021, of which $14,000 is the remaining civil penalty and $8,207 is the estimated cost to remediate the properties in accordance
with the Consent Order. The Company is committed to improving its processes and controls to ensure its operations have minimal environmental
impact with the goal of minimizing the number of comments and citations received by the Department of Environmental Quality going forward.
Rother
Investments’ Petition
On October
28, 2020, Rother Investments, LLC (“Rother Investments”) filed a complaint in the District Court of 419th Judicial District,
Travis County, Texas against the Company, alleging the Company’s default under a certain promissory note (the “Rother Investments
Note”) in payment of the outstanding principal amount and interest under the Note, as described in the complaint. Rother Investments
seeks to collect the amount of $124,750 as of the date of the complaint with late fees continuing to accrue on a daily basis, monetary
relief of over $100,000 but not more than $200,000 pursuant to Tex. R. Civ. P. 47(c)(3), court’s costs and attorney’s fees,
pre-judgment and post-judgment interest, and such other relief as the court deems appropriate. On May 19, 2021, Rother Investments,
LLC received a default judgment against the Company in the amount of $144,950. On June 17, 2021, Greenwave filed a motion to set aside
default and motion for new trial asserting it was improperly served. On July 20, 2021, the court granted the Company’s motion finding
and ordered a new trial of the matter. On December 1, 2021, the Rother Investment Note and the complaint were settled for payment of
$100,000. The complaint was dismissed on December 3, 2021.
Power
Up Lending Group, Ltd. Complaint
As disclosed
in the Company’s Annual Report on Form 10-K filed with the SEC on April 16, 2021, on October 11, 2019, Power Up Lending Group,
Ltd. (“Power Up”) filed a complaint against the Company and Isaac Dietrich, a former officer and director of the Company,
in the Supreme Court of the State of New York, County of Nassau. The complaint alleged, among other things, (i) the occurrence of events
of default in certain notes (the “Power Up Notes”) issued by the Company to Power Up, (ii) misrepresentations by the Company
including, but not limited to, with respect to the Company’s obligation to timely file its required reports with the SEC and (iii)
lost profits as a result of the Company’s failure to convert the Power Up Notes in accordance with the terms thereof.
On April
30, 2021, the Company entered into a settlement agreement (the “Settlement”) with PowerUp by accepting an offer communicated
to the Company via electronic mail. In accordance with the terms of the Settlement, PowerUp, the judgment creditor of a judgment against
the Company and Isaac Dietrich, the Company’s former Chief Executive Officer and director, in the total amount of $350,551.10 entered
in the Office of the Clerk of the County of Nassau on February 23, 2021 (the “Judgement”), agreed to a settlement and filing
of a satisfaction of judgment in consideration of receipt of the sum of $150,000.00 (the “Settlement Amount”) on April
30, 2021. The Company accepted the aforementioned offer by remitting the Settlement Amount timely and in full. Accordingly, a satisfaction
of Judgment was filed by PowerUp with the Office of the Clerk of the County of Nassau on May 3, 2020.
Trawick’s
Complaint
As previously
reported by the Company in its Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2021, on or
about January 25, 2021, Travis Trawick (“Trawick”) filed a complaint (“Trawick’s Lawsuit”) against the
Company and Isaac Dietrich, the Company’s former Chief Information Officer and director, in the Circuit Court for the City of Virginia
Beach, Virginia (the “Court”), asserting the Company’s failure to remit payments under the certain promissory note,
as subsequently amended and modified, and ancillary documents thereto (collectively, the “Note”), and Mr. Dietrich’s
failure to fulfill its obligations, as the guarantor, under the Note.
On May 4,
2021, Trawick requested that the Clerk of the Court filed for entry an order to dismiss Trawick’s Lawsuit with prejudice.
Iroquois
Master Fund
On June
30, 2021, the Company received an e-mail containing a demand (the “Demand”) for arbitration (the “Arbitration”)
at American Arbitration Association in Denver, Colorado, by Iroquois Master Fund Ltd. (“Iroquois”) against the Company, Isaac
Dietrich, a former officer and director, and Danny Meeks, the Company’s director, and Empire Services, Inc. (“Empire”). The
Demand alleges breach of contract and various related state law claims against the defendants, and sought, inter alia, specific
performance of the subject warrant, damages in an amount not less than $12 million, equitable relief, and attorney’s fees for the
Company’s alleged failure to reserve more than 150 million shares of common stock that Iroquois is allegedly entitled to in connection
with the exercise of a certain warrant issued by the Company on July 21, 2017, and subsequently purchased by Iroquois from an unrelated
third party. As a result of a legal action commenced by Isaac Dietrich, Danny Meeks, and Empire (See – “Litigation”
below), Iroquois informed the American Arbitration Association (the arbitral body overseeing the Arbitration) that it would (i) dismiss
the Counterclaim Defendants from the Arbitration without prejudice, (ii) assert its claims against Isaac Dietrich, Danny Meeks, and Empire
the in the action commended by them, and (iii) proceed with the Arbitration with respect to the Company only.
Litigation
On July
21, 2021, in response to the Demand, Isaac Dietrich, Danny Meeks, and Empire, filed a complaint (the “Complaint”) against
Iroquois in the United States District Court of the Southern District of New York alleging that the aforementioned plaintiffs were not
parties to the warrant the Demand based on, and as such, the Demand could not have brought against them. Declaratory relief and injunctive
relief were sought in the Complaint. On August 20, 2021, Iroquois submitted an answer with counterclaims stating that Iroquois informed
the American Arbitration Association (the arbitral body overseeing the Arbitration) that it would (i) dismiss the Counterclaim Defendants
from the Arbitration without prejudice, (ii) assert its claims against Isaac Dietrich, Danny Meeks, and Empire the in the action commended
by them, and (iii) proceed with the Arbitration with respect to the Company only. In its answer, Iroquois made allegations substantially
similar to the claims made in the Arbitration, asserted defenses, and requested an award in not less than $12 million against Demand,
Isaac Dietrich, Danny Meeks, and Empire, an entry of an award of a constructive trust against them, and costs and expenses, including
its reasonable attorneys’ fees, incurred in prosecuting said action and the Arbitration.
Settlement
On September
30, 2021, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with Iroquois; Dietrich;
Meeks; and Empire. Pursuant to the Settlement Agreement, in exchange for terminating any duties owed by the Company to Iroquois under
the Warrant, the Company agreed to pay, on its own behalf and on behalf of Dietrich, Meeks, and Empire, one million dollars ($1,000,000)
and issue shares of the Series Z Convertible Preferred Stock, par value $0.001 per share (the “Series Z”), sufficient
in number such that if they are converted into the Company’s common stock, par value $0.001 per share (“Common Stock”)
by Iroquois, such shares of Common Stock will be equal in number to 9.99% of the issued and outstanding shares of Common Stock at
the time of such conversion. Accordingly, on September 30, 2021, 250 Series Z Preferred Shares were issued to the investor
(See Note 12). The payment of $1,000,000 was made to Iroquois on October 5, 2021 due to an administrative delay.
NOTE
10 – CONVERTIBLE NOTES PAYABLE
On
December 17, 2018, the Company issued a secured convertible promissory note in the principal amount of $2,225,000 (including an original
issuance discount of $225,000) that matured on December 17, 2019 and bears interest at a rate of 8% per annum (which increased to 22%
on July 16, 2019 upon the occurrence of an event of default). The note is secured by the Security Agreement (as defined below). The investor
has the right to convert the Outstanding Balance (as defined in the note) of the note at any time into shares of common stock of the
Company at a conversion price of $105.00 per share, subject to adjustment. Commencing on June 17, 2019, the investor has the right to
redeem all or any portion of the note; provided, however, the investor may not request redemption in an amount that exceeds $350,000
during any single calendar month; provided, further however, upon the occurrence of an event of default, the redemption amount in any
calendar month may exceed $350,000. Payments on redemption amounts may be made in cash, by converting the redemption amount into shares
of the Company’s common stock at a conversion price of the lesser of: (a) $105.00 per share, subject to adjustment; and (b) the
Market Price (as defined in the note), or a combination thereof. Upon the occurrence of an event of default, the investor may accelerate
the note pursuant to which the Outstanding Balance will become immediately due and payable in cash at the Mandatory Default Amount (as
defined in the note). The Company is prohibited from effecting a conversion of the note to the extent that, as a result of such conversion,
the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common
stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial
ownership limitation may be increased by the investor up to, but not exceeding, 9.99%.
In
connection with the December 2018 note, the Company also entered into a security agreement (the “Security Agreement”) on
the closing date pursuant to which the Company granted the investor a security interest in the Collateral (as defined in the Security
Agreement). On July 16, 2019, the Company received a notice from the noteholder indicating that events of default had occurred and
asserting default penalties of $761,330. During the year ended December 31, 2019, the noteholder converted $345,000 of principal into
an aggregate of 178,408 shares of common stock. During the year ended December 31, 2020, (i) the noteholder converted $37,000 of principal
into an aggregate of 103,699 shares of common stock; and (ii) $1,049,329 of accrued interest was reclassified to the principal balance
of this note. During the year ended December 31, 2021, the noteholder converted $13,345 of principal into an aggregate of 14,828 shares
of common stock, having a fair value of $133,002, resulting in a reduction of the derivative liability by $118,778 and a loss
on conversion of $880. On November 30, 2021, the Company paid $2,367,000 to settle the note, including (i) $2,878,985 in principal, (ii)
$1,686,953 in accrued interest, and (iii) derivative liabilities of $5,087,057, resulting in a gain on settlement of $7,285,995. As of
December 31, 2021 and 2020, the remaining carrying value of the note was $0 and $2,892,330, respectively, net of unamortized debt discount
of $0 and $0, respectively. As of December 31, 2021 and 2020, accrued interest payable of $0 and $1,073,809, respectively, was outstanding
on the note.
On
January 25, 2019, the Company issued a convertible promissory note in the principal amount of $55,000 (including original issuance discount
of $5,000) that matured July 25, 2019 and bearing a one-time interest fee of 10%. The investor has the right to convert the Outstanding
Balance (as defined in the note) of the note at any time into shares of common stock of the Company at a conversion price of $22.50 per
share, subject to adjustment. Upon maturity, payment may be made in cash, by converting the redemption amount into shares of the Company’s
common stock at a conversion price of the lesser of: (a) $22.50 per share, subject to adjustment; and (b) the Market Price (as defined
in the notes), or a combination thereof. Upon the occurrence of an event of default, the investor may accelerate the note pursuant to
which the Outstanding Balance will become immediately due and payable in cash at the Mandatory Default Amount (as defined in the notes).
The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together
with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately
after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may
be increased by the investor up to, but not exceeding, 9.99%. On May 19, 2021, the investor received a default judgment against the Company
in the amount of $144,950. In accordance with the judgment, commencing May 19, 2021, the Company began accruing interest at the rate
of 18% per annum. On June 17, 2021, the Company filed a motion to set aside default and motion for new trial asserting it was improperly
served. On July 20, 2021, the court granted the Company’s motion finding and ordered a new trial of the matter.
On
December 1, 2021, the Company paid $100,000 to settle the note and litigation, including (i) principal in the amount of $148,685, (ii)
accrued interest of $32,415, and (iii) derivative liabilities of $190,132, resulting in a gain on settlement of $271,232. As of December
31, 2021 and 2020, the remaining carrying value of the notes was $0 and $55,000, net of unamortized debt discount of $0 and $0, respectively.
As of December 31, 2021 and 2020, accrued interest payable of $0 and $92,600, respectively, was outstanding on the note. During the quarter
ended December 31, 2020, this note was included in convertible notes payable on the consolidated balance sheet whereas it had been previously
included in non-convertible notes payable.
From
January to June 2019, the Company issued convertible promissory notes in the aggregate principal amount of $389,000 (including aggregate
original issuance discount of $39,000) that matured at dates ranging from July 15, 2019 to June 6, 2020 and accruing interest at rates
ranging from 5% to 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes) of the notes
at any time into shares of common stock of the Company at a conversion price of $22.50 per share, subject to adjustment. Upon maturity,
payment may be made in cash, by converting the redemption amount into shares of the Company’s common stock at a conversion price
of the lesser of: (a) $22.50 per share, subject to adjustment; and (b) the Market Price (as defined in the notes), or a combination thereof.
Upon the occurrence of an event of default, the investors may accelerate the note pursuant to which the Outstanding Balance will become
immediately due and payable in cash at the Mandatory Default Amount (as defined in the notes). The Company is prohibited from effecting
a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially
own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance
of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased by the investor up to,
but not exceeding, 9.99%. In January 2020, one of the promissory notes was amended whereby the conversion price for $9,202 which is a
portion of the principal amount of the note was amended to $0.12 per share. The amendment was deemed a debt modification
and accounted for accordingly. During the year ended December 31, 2019, the noteholders converted $31,180 of principal and $8,000 of
accrued interest into an aggregate of 33,334 shares of common stock. During the year ended December 31, 2020, one of the holders converted
$24,826 of principal into an aggregate of 116,687 shares of common stock; and one of the holders converted $168,820 of principal and
$362,027 of accrued interest into 26.54237 shares of Series Y preferred shares having a stated value of $530,847, resulting in a reduction
of the derivative liability by $719,416 and a gain on settlement of $719,416. During the year ended December 31, 2021, one of the holders
converted $33,000 of principal and $1,185,200 of accrued interest into 60.91 shares of Series Y preferred shares
having a stated value of $1,218,200, resulting in a reduction of the derivative liability by $936,405 and a gain on settlement of
$936,405. As of December 31, 2021 and 2020, the remaining carrying value of the notes was $0 and $164,174, net of unamortized debt
discount of $0 and $0, respectively. As of December 31, 2021 and 2020, accrued interest payable of $0 and $1,191,998, respectively, was
outstanding on the notes.
On
November 13, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $108,900, having an aggregate
original issuance discount of $9,900, resulting in cash proceeds of $99,000. The notes matured on May 13, 2020 and accrue interest at
a rate of 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes) of the notes at any
time into shares of common stock of the Company at a conversion price of $3.00 per share, subject to adjustment. In the event of default,
the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the
20 days prior to the conversion date. The Company is prohibited from effecting a conversion of any note to the extent that, as a result
of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the
Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of
the note, which beneficial ownership limitation may be increased if the Market Capitalization (as defined in the notes) falls below $2,500,000,
but not exceeding, 9.99%. During the year ended December 31, 2020, two of the holders converted $72,600 of principal and $112,671 of
accrued interest into 9.26353 shares of Series Y preferred shares having a stated value of $185,271, resulting in a reduction of the
derivative liability by $301,257 and a gain on settlement of $301,257. On November 30, 2021, the Company paid $133,000 to redeem 4 shares
of Series X preferred stock for $133,000 and settle the remaining note in the principal amount of $36,300, with accrued interest of $94,617,
and a derivative liability of $145,859, resulting in a gain on debt settlement of $240,025 and a reduction in additional paid in capital
of $96,250. As of December 31, 2021 and 2020, the remaining carrying value of the notes was $0 and $36,300, net of unamortized debt discount
of $0 and $0, respectively. As of December 31, 2021 and 2020, accrued interest payable of $0 and $57,231, respectively, was outstanding
on the notes.
On
December 6, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $110,000, having an aggregate
original issuance discount of $10,000, resulting in cash proceeds of $100,000. The notes matured on June 6, 2020 and accrue interest
at a rate of 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes) of the notes
at any time into shares of common stock of the Company at a conversion price of $3.00 per share, subject to adjustment. In the event
of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock
during the 20 days prior to the conversion date. The Company is prohibited from effecting a conversion of any note to the extent that,
as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares
of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion
of the note, which beneficial ownership limitation may be increased if the Market Capitalization (as defined in the notes) falls below
$2,500,000, but not exceeding, 9.99%. During the year ended December 31, 2020, the holders converted $110,000 of principal and $123,451
of accrued interest into 11.67255 shares of Series Y preferred shares having a stated value of $233,451, resulting in a reduction of
the derivative liability by $379,600 and a gain on settlement of $379,600. As of December 31, 2021 and 2020, the remaining carrying value
of the notes was $0 and $0, net of unamortized debt discount of $0 and $0, respectively. As of December 31, 2021 and 2020, accrued interest
payable of $0 and $0, respectively, was outstanding on the notes.
In
December 2019, the Company and the holders of all of the outstanding Series A and Series B Preferred Shares (the “Preferred Shares”)
entered into Exchange Agreements whereby 2,800 Series A Preferred Shares and 1,126 Series B Preferred Shares were canceled in exchange
for the issuance of an aggregate of $3,500,000 and $1,548,250 of convertible promissory notes, respectively. The notes matured at dates
ranging from December 24, 2019 to May 18, 2020 and accrue interest at a rate of 12% per annum. The investors have the right to convert
the Outstanding Balance (as defined in the notes) of the notes at any time into shares of common stock of the Company at a conversion
price of $1.50 per share, subject to adjustment. In the event of default, the Outstanding Balance shall immediately increase to 130%
of the Outstanding Balance and a penalty of $100 per day shall accrue until the default is remedied. For a period of two years from the
issuance date, in the event the Company issues or sells any additional common shares or common stock equivalents at a price less than
the Conversion Price (as defined in the notes) then in effect (a “Dilutive Issuance”), the Conversion Price of the notes
shall be reduced to the Dilutive Issuance Price and the number of shares issuable upon conversion shall be increased on a full ratchet
basis. The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor,
together with its affiliates, would beneficially own more than 9.99% of the number of shares of the Company’s common stock outstanding
immediately after giving effect to the issuance of shares of common stock upon conversion of the note. During the year ended December
31, 2019, the noteholders converted $185,500 of principal and $300 of accrued interest into an aggregate of 102,234 shares of common
stock and 123,867 shares of common stock to be issued. During the year ended December 31, 2020, the noteholders converted $31,137 of
principal and $128 of accrued interest into an aggregate of 20,844 shares of common stock; and the noteholders converted $4,793,113 of
principal and $2,564,325 of accrued interest into 367.8719 shares of Series Y preferred shares having a stated value of $7,357,438, resulting
in a reduction of the derivative liability by $89,648,951 and a gain on settlement of $89,648,951. During the year ended December
31, 2021, a noteholder converted $38,500 of principal and $55,261 of accrued interest into 3.72667 shares of Series Y preferred shares
having a stated value of $74,533, resulting in a reduction of the derivative liability by $3,880,958 and a gain on settlement of $3,900,186. As
of December 31, 2021 and 2020, the remaining carrying value of the notes was $0 and $38,500, net of unamortized debt discount of $0 and
$0, respectively. As of December 31, 2021 and 2020, accrued interest payable of $0 and $54,473, respectively, was outstanding on the
notes.
From
January to September 2020, the Company issued convertible promissory notes in the aggregate principal amount of $700,700, having an aggregate
original issuance discount of $63,700, resulting in cash proceeds of $637,000. The notes mature from July 2020 to March 2021 and
accrue interest at a rate of 12% per annum. During the first 180 days the notes are outstanding, the Company shall have the right to
prepay the notes for an amount equal to 120% (during the first 90 days) or 135% (during the subsequent 90 days) of the Outstanding Balance
(as defined in the notes) being prepaid. The investors have the right to convert the Outstanding Balance of the notes at any time into
shares of common stock of the Company at a conversion price of $3.00 per share, subject to adjustment. In the event of default, the conversion
price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 days prior
to the conversion date. Notwithstanding the foregoing, upon the occurrence of an event of default, the conversion price for the April
2020 notes, having an aggregate original principal amount of $330,000, shall not be less than $0.30. The Company is prohibited from effecting
a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially
own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance
of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased if the Market Capitalization
(as defined in the notes) falls below $2,500,000, but not exceeding, 9.99%. During the year ended December 31, 2020, the noteholders
converted $700,700 of principal and $462,763 of accrued interest into 58.17315 shares of Series Y preferred shares having a stated value
of $1,163,463, resulting in a reduction of the derivative liability by $1,885,194, a reduction in unamortized debt discount by $72,637
and a gain on settlement of $1,812,557. As of December 31, 2021 and 2020, the remaining carrying value of the notes was $0 and $0, net
of unamortized debt discount of $0 and $0, respectively. As of December 31, 2021 and 2020, accrued interest payable of $0 and $13,844
was outstanding on the notes, respectively.
On
December 15, 2020, $79,143 of accrued compensation owed to the Company’s Chief Financial Officer was settled by the issuance of
a convertible note in the amount of $64,143, having a maturity date of June 15, 2021 and bearing interest of 12% per annum, resulting
in a gain on settlement of accounts payable of $15,000. The holder has the right to convert the Outstanding Balance (as defined in the
note) of the note at any time into shares of common stock of the Company at a conversion price of $27.00 per share, subject to adjustment.
In the event of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s
common stock during the 20 days prior to the conversion date. As a result of the beneficial conversion feature of the note, unamortized
debt discount of $64,143
was recognized with a corresponding increase
in additional paid-in capital. On December 24, 2020, the holder converted $64,143 of principal into 3.20716 shares of Series Y preferred
shares having a stated value of $64,143, resulting in a reduction in unamortized debt discount by $60,971 and a loss on settlement of
$60,971. As of December 31, 2021 and 2020, the remaining carrying value of the note was $0
and $0,
net of unamortized debt discount of $0
and $0,
respectively. As of December 31, 2021 and 2020, accrued interest payable of $0
and $0
was outstanding on the note, respectively (See
Note 18).
On
November 29, 2021, the Company entered into a securities purchase agreement with certain institutional investors as purchasers. Pursuant
to the securities purchase agreement, the Company sold, and the Investors purchased, approximately $37,714,966, which consisted of approximately
$27,585,450 in cash and $4,762,838 of existing debt of the Company which was exchanged for the notes and warrants issued in this offering
principal amount of senior secured convertible notes and 2,514,331 warrants valued at $36,516,852. The senior notes were issued with
an original issue discount of 6%, bear interest at the rate of 6% per annum, and mature after 6 months, on May 30, 2022. The senior notes
are convertible into shares of the Company’s common stock, par value $0.001 per shares at a conversion price per share of $15.00,
subject to adjustment under certain circumstances described in the senior notes. To secure its obligations thereunder and under the securities
purchase agreement, the Company has granted a security interest over substantially all of its assets to the collateral agent for the
benefit of the Investors, pursuant to a pledge and security agreement. Upon the listing of the common stock on a national exchange and
certain other conditions being met, the senior notes issued in this offering will automatically convert into Common Stock at the conversion
price set forth in the senior notes. The Company paid $2,200,000 and a warrant to purchase 200,000 shares of common stock valued at $2,904,697
as commission for the offering.
The
maturity date of the senior notes may be extended by the Company prior to the initial maturity date to November 30, 2022 if no equity
conditions failure is occurring. The maturity date of the senior notes also may be extended by the holders under other circumstances
specified therein. If the Company is unable to extend the senior notes or elects not to do so, the Company will be required to repay
the Senior Notes through equity issuances, additional borrowings, cash flows from operations and/or other sources of liquidity. The warrants
are exercisable for five (5) years to purchase an aggregate of 2,514,331 shares of Common Stock at an exercise price of $19.50, subject
to adjustment under certain circumstances described in the warrants.
Upon
the issuance of certain convertible notes, the Company determined that the features associated with the embedded conversion option embedded
in the notes, should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number
of shares would be available to settle all potential future conversion transactions.
The
Company does not have enough authorized and unissued common shares to convert all of the convertible promissory notes into common shares.
As a result of this authorized shares shortfall, all of the convertible notes payable, including those where the maturity date has not
yet been reached, are in default. Accordingly, (i) interest has been accrued at the default interest rate, if applicable, and (ii) the
embedded conversion option has been accounted for, at fair value, as a derivative liability (See Note 10).
The
maturity dates of the convertible notes outstanding at December 31, 2021 are:
SCHEDULE
OF MATURITY DATES OF CONVERTIBLE NOTES
Maturity Date | |
Principal
Balance Due | |
May 30, 2022 (may be extended by the Company to November 30, 2022) | |
$ | 37,714,966 | |
Total Principal Outstanding | |
$ | 37,714,966 | |
As
of December 31, 2021 and 2020, the remaining carrying value of the convertible notes was $6,459,469 and $3,186,303, net of unamortized
debt discount of $31,225,497 and $0, respectively. As of December 31, 2021 and 2020, accrued interest payable of $192,191 and $2,483,955,
respectively, was outstanding on the notes.
NOTE
11 – DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS
Upon
the issuance of certain convertible debentures, warrants, and preferred stock, the Company determined that the features associated with
the embedded conversion option embedded in the debentures, should be accounted for at fair value, as a derivative liability, as the Company
cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions.
During
the year ended December 31, 2020, upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately
prior to conversion of the underlying instrument), the Company estimated the fair value of the embedded derivatives using the Black-Scholes
Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 119.33% to 128.94%, (3) risk-free
interest rate of 0.06% to 1.56%, and (4) expected life of 0.06 to 2.11 years.
On
December 31, 2020, the Company estimated the fair value of the embedded derivatives of $25,475,514 using the Black-Scholes Pricing
Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 132.11%, (3) risk-free interest rate of
0.08% to 0.13%, and (4) expected life of 0.04 to 2.08 years.
During
the year ended December 31, 2021, upon issuance of convertible debt and warrants, the Company estimated the fair value of the embedded
derivatives using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%,
(2) expected volatility of 110.59%
to 138.73%,
(3) risk-free interest rate of 0.07%
to 1.14%,
and (4) expected life of 0.50
to
5.0
years.
On
December 31, 2021, the Company estimated the fair value of the embedded derivatives of $44,024,242
using the Black-Scholes Pricing Model based on
the following assumptions: (1) dividend yield of 0%,
(2) expected volatility of 136.12%,
(3) risk-free interest rate of 0.19%
to 1.15%,
and (4) expected life of 0.41
to 5.0
years.
The
Company adopted the provisions of ASC 825-10. ASC 825-10 defines fair value as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal
or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the
asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance. ASC 825-10 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
● |
Level
1 – Quoted prices in active markets for identical assets or liabilities. |
|
|
● |
Level
2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets
with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs
are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the
assets or liabilities. |
|
|
● |
Level
3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. |
All
items required to be recorded or measured on a recurring basis are based upon Level 3 inputs.
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair
value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed
and is determined based on the lowest level input that is significant to the fair value measurement.
The
Company recognizes its derivative liabilities as Level 3 and values its derivatives using the methods discussed below. While the Company
believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair
value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are
that of volatility and market price of the underlying common stock of the Company.
As
of December 31, 2021, the Company did not have any derivative instruments that were designated as hedges.
Items
recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following
items as of December 31, 2021 and 2020:
SCHEDULE
OF FAIR VALUE ON A RECURRING BASIS IN THE ACCOMPANYING FINANCIAL STATEMENTS
| |
December 31, 2021 | | |
Quoted Prices in Active
Markets for Identical Assets (Level 1) | | |
Significant Other Observable
Inputs (Level 2) | | |
Significant Unobservable
Inputs (Level 3) | |
Derivative liability | |
$ | 44,024,242 | | |
$ | - | | |
$ | - | | |
$ | 44,024,242 | |
| |
December 31, 2020 | | |
Quoted Prices in Active
Markets for Identical Assets (Level 1) | | |
Significant Other Observable
Inputs (Level 2) | | |
Significant
Unobservable
Inputs (Level 3) | |
Derivative liability | |
$ | 25,475,514 | | |
$ | - | | |
$ | - | | |
$ | 25,475,514 | |
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the two years ended
December 31, 2021:
SCHEDULE
OF CHANGES IN FAIR VALUE OF THE COMPANY’S LEVEL 3 FINANCIAL LIABILITIES
Balance, December 31, 2019 | |
$ | 20,236,870 | |
Transfers in due to issuance of convertible notes and warrants with embedded conversion and reset provisions | |
| 573,230 | |
Transfers out due to conversions of convertible notes and accrued interest into common shares | |
| (278,545 | ) |
Transfers out due to exchanges of convertible notes, accrued interest and warrants into Series Y Preferred
Shares | |
| (165,826,982 | ) |
Derivative liability due to authorized shares shortfall | |
| 170,319,590 | |
Mark to market to December 31, 2020 | |
| 451,351 | |
Balance, December 31, 2020 | |
$ | 25,475,514 | |
Transfers in due to issuance of convertible notes and warrants with embedded conversion and reset provisions | |
| 33,448,287 | |
Transfers out due to conversions of convertible notes and accrued interest into common shares | |
| (118,778 | ) |
Transfers out due to exchanges of convertible notes, accrued interest and warrants into Series Y preferred
shares | |
| (4,834,911 | ) |
Transfers out due to cash payments made pursuant to settlement agreements | |
| (180,988,150 | ) |
Derivative liability due to authorized shares shortfall | |
| 171,343,164 | |
Mark to market to December 31, 2021 | |
| (300,885 | ) |
Balance, December 31, 2021 | |
$ | 44,024,242 | |
| |
| | |
Gain on change in derivative liabilities for the year ended December 31, 2021 | |
$ | 300,885 | |
Fluctuations
in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As
the stock price increases/(decreases) for each of the related derivative instruments, the value to the holder of the instrument generally
increases/(decreases), therefore increasing/(decreasing) the liability on the Company’s balance sheet. Decreases in the conversion
price of the Company’s convertible notes are another driver for the changes in the derivative valuations during each reporting
period. As the conversion price decreases for each of the related derivative instruments, the value to the holder of the instrument (especially
those with full ratchet price protection) generally increases, therefore increasing the liability on the Company’s balance sheet.
Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the
Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company’s
expected volatility. Increases in expected volatility would generally result in higher fair value measurements. A 10% change in pricing
inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value.
NOTE
12 – STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of blank check preferred stock, par value $0.001 per share.
Series
A
On
July 2, 2019, the Company authorized the issuance of 6,000 Series A preferred stock, par value $0.001 per share. The Series A preferred
stock have a $1,250 stated value and are convertible into shares of common stock at $15.00 per share, subject to certain adjustments.
The Certificate of Designation for the Series A preferred stock was filed on July 9, 2019.
As
of December 31, 2021 and 2020, there were 0 shares of Series A Preferred Stock outstanding.
A
Certificate of Elimination of the Series A convertible preferred stock was filed on December 6, 2021.
Series
B
On
June 24, 2019, the Company authorized the issuance of 2,000 shares of Series B Preferred Stock, par value $0.001 per share. The Series
B Preferred Stock have a $1,250 stated value and are convertible into shares of common stock at $15.00 per share, subjected to certain
adjustments. The Certificate of Designation for the Series B Preferred Stock was filed on July 9, 2019.
As
of December 31, 2021 and 2020, there were 0 shares of Series B Preferred Stock outstanding.
A
Certificate of Elimination of the Series B convertible preferred stock was filed on December 6, 2021.
Series
C
On
July 16, 2019, the Company authorized the issuance of 1,000
Series C Preferred Stock, par value $0.001
per share. The 1,000
Series C preferred shares are convertible into
3,334
shares of common stock upon the Company listing
on a national exchange and other conditions. The Certificate of Designation for the Series C Preferred Stock was filed on July 19, 2019.
As
of December 31, 2021 and 2020, there were 0 and 1,000 shares of Series C Preferred Stock outstanding, respectively.
On
December 16, 2021, the Company’s former Chief Executive Officer forfeited his 1,000 shares of Series C Preferred Stock for no consideration.
A
Certificate of Elimination of the Series C convertible preferred stock was filed on December 16, 2021.
Series
X
On
November 23, 2020, the Company authorized the issuance of 100 shares of Series X Preferred Stock, par value $0.0001 per share. The Series
X Preferred Stock has a $20,000 stated value and is convertible into shares of common stock at $0.60 per share, subjected to certain
adjustments. In the event the Company issues or sells any securities with an effective price or exercise or conversion price less than
the Conversion Price, the Conversion Price shall be reduced to the sale price or exercise or conversion price of the securities issued
or sold. The Certificate of Designation for the Series X Preferred Stock was filed on November 23, 2020.
From
November 25 to December 23, 2020, the Company issued an aggregate of 16.05 shares of Series X Preferred Stock for aggregate
proceeds of $321,000. Upon each issuance of Series X shares, the conversion price was less than the Company’s stock price. Accordingly,
during the year ended December 31, 2020, the Company recognized an aggregate beneficial conversion feature of $454,200 upon issuance
of the Series X preferred shares with a $454,200 increase in Discount on preferred stock and a corresponding increase in additional paid-in
capital. The preferred stock discount was amortized over 120 days commencing November 25, 2020 (the date of the initial issuance of the
Series X preferred shares), which is the maximum amount of time the Company had to conduct a stockholder vote to increase the Company’s
authorized shares. Amortization of the preferred stock discount of $46,448 was recognized as a deemed dividend for the year ended December
31, 2020. As of December 31, 2020, unamortized debt discount on Series X Preferred Stock was $407,752.
From
February 16 to March 10, 2021, the Company issued an aggregate of 10.00 shares of Series X Preferred Stock for aggregate proceeds of
$200,000. Upon each issuance of Series X shares, the conversion price was less than the Company’s stock price. Accordingly,
during the year ended December 31, 2021, the Company recognized an aggregate beneficial conversion feature of $2,852,500 upon issuance
of the Series X preferred shares with a $2,852,500 increase in Discount on preferred stock and a corresponding increase in additional
paid-in capital. The preferred stock discount was amortized over 120 days commencing November 25, 2020 (the date of the initial issuance
of the Series X preferred shares), which is the maximum amount of time the Company had to conduct a stockholder vote to increase the
Company’s authorized shares. Amortization of the preferred stock discount of $3,260,252 was recognized as a deemed dividend
for the year ended December 31, 2021. As of December 31, 2021, unamortized debt discount on Series X Preferred Stock was $0.
On
November 30, 2021 26.05 shares of the Series X Preferred Stock were redeemed for $501,463,
resulting in a negative deemed dividend of $3,326,237.
A
Certificate of Elimination of the Series X convertible preferred stock was filed on December 10, 2021.
As
of December 31, 2021 and 2020, there were 0
and 16.05
shares, respectively, of Series X Preferred
Stock outstanding.
Series
Y
On
December 30, 2020, the Company authorized the issuance of 1,000 shares of Series Y Preferred Stock, par value $0.001 per share. The Series
Y Preferred Stock has a $20,000 stated value and is convertible into shares of common stock at $0.60 per share, subjected to certain
adjustments. In the event the Company issues or sells any securities with an effective price or exercise or conversion price less than
the Conversion Price, the Conversion Price shall be reduced to the sale price or exercise or conversion price of the securities issued
or sold. The Certificate of Designation for the Series Y Preferred Stock was filed on December 30, 2020.
From
December 23 to December 30, 2020, the Company issued 654.781794 shares of Series Y Preferred Stock, having a stated value of
$13,095,636, in exchange for convertible notes payable of $5,775,767 (net of debt discount of $133,608), accrued interest of $3,625,237,
and 14,765,624,721 warrants. The exchanges resulted in a reduction of derivative liabilities related to the convertible notes
and accrued interest of $92,934,419, a reduction of derivative liabilities related to the warrants of $72,892,563, and a net gain on
settlement of $162,132,350. Included in the foregoing amounts is 3.20716 shares of Series Y Preferred Stock, having a stated
value of $64,143, issued to the Company’s Chief Financial Officer, in exchange for convertible notes of $3,172 (net of debt
discount of $60,971), resulting in a loss on settlement of $60,971. Upon each issuance of Series Y shares, the conversion price was less
than the Company’s stock price. Accordingly, during the year ended December 31, 2020, the Company recognized an aggregate beneficial
conversion feature of $21,594,115 upon issuance of the Series Y preferred shares with a $21,594,115 increase in Discount on
preferred stock and a corresponding increase in additional paid-in capital. The preferred stock discount was amortized over 120 days
commencing December 23, 2020 (the date of the initial issuance of the Series Y preferred shares), which is the maximum amount of time
the Company had to conduct a stockholder vote to increase the Company’s authorized shares. Amortization of the preferred stock
discount of $1,028,091 was recognized as a deemed dividend for the year ended December 31, 2020. As of December 31, 2020, unamortized
debt discount on Series Y Preferred Stock was $20,566,024.
From
January 7 to March 23, 2021, the Company issued 4.82388 shares
of Series Y Preferred Stock, having a stated value of $96,478,
in exchange for convertible notes payable of $38,500,
accrued interest of $77,205,
and 437,500 warrants.
The exchanges resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $2,502,223,
a reduction of derivative liabilities related to the warrants of $1,396,283,
and a net gain on settlement of $3,917,734.
On May 1, the Company issued 60.91 shares
of Series Y Preferred Stock, having a stated value of $1,218,200,
in exchange for a convertible note payable of $33,000 and
accrued interest of $1,185,200.
The exchange resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $936,405,
and a net gain on settlement of $936,405.
Upon each issuance of Series Y shares, the conversion price was less than the Company’s stock price. Accordingly, during the year
ended December 31, 2021, the Company recognized an aggregate beneficial conversion feature of $10,972,647 upon
issuance of the Series Y preferred shares with a $10,972,647 increase
in Discount on preferred stock and a corresponding increase in additional paid-in capital. The preferred stock discount was amortized
over 120 days commencing December 23, 2020 (the date of the initial issuance of the Series Y preferred shares), which is the maximum
amount of time the Company had to conduct a stockholder vote to increase the Company’s authorized shares. Amortization of the preferred
stock discount of $31,538,671 was
recognized as a deemed dividend for the year ended December 31, 2021. As of December 31, 2021, unamortized debt discount on Series Y
Preferred Stock was $0.
On
November 30, 2021, the Series Y Preferred Stock were redeemed for $11,095,941,
resulting in a negative deemed dividend of $35,881,134.
A
Certificate of Elimination of the Series Y convertible preferred stock was filed on December 10, 2021.
As of December 31, 2021 and 2020,
there were 0
and 654.781794
shares of Series Y Preferred Stock outstanding, respectively.
Series
Z
On
September 30, 2021, the Company authorized the issuance of 500 shares of Series Z Preferred Stock, par value $0.001 per
share. The Series Z Preferred Stock has a $20,000 stated value per share and all 500 Series Z preferred shares, in aggregate,
are convertible into 19.98% of the issued and outstanding common shares of the Company (post conversion). The conversion rate is
applicable on a pro rata basis to each share of Series Z Preferred Stock upon conversion. This anti-dilutive conversion feature is in
effect until such time an S-1 Registration Statement is declared effective by the SEC in conjunction with a NASDAQ listing.
On
September 30, 2021, the Company entered into a Series Z Preferred Stock Issuance Agreement with the Company’s Chief Executive Officer
whereby the Company entered into a non–convertible note payable agreement for $1,000,000 in exchange for: (i) a $1,000,000
cash payment directly paid to the warrant holder; and (ii) the issuance of 250 Series Z Preferred Shares having a fair value of $6,530,867.
The note bears interest of 8% per annum and is due within three days of the Company’s next closing of equity financing of
$3,000,000 or more. The proceeds received were allocated to the debt and equity on a relative fair value basis. Accordingly, debt
discount of $867,213 was recognized with a corresponding increase in additional paid-in capital. Since the due date is contingent
upon a future event, the entire debt discount was amortized to interest expense immediately.
On
September 30, 2021, an investor owning warrants to purchase 520,834
common shares at $0.12 per
share entered into an agreement to cancel the aforementioned warrants in exchange for: (i) a cash payment of $1,000,000 received
directly from the Chief Executive Officer; and (ii) 250 Series Z Preferred Shares having a fair value of $6,530,867. The
settlement resulted in a reduction in the derivative liability of $5,750,067,
an increase in non-convertible notes payable of $1,000,000,
an increase in additional paid-in capital of $6,530,867 and
a loss on settlement of debt of $1,780,800.
The Series Z Preferred Shares are not convertible
into shares of common stock until there is sufficient authorized but unissued shares of common stock to satisfy the conversions, thus
a derivative liability was not recorded for the shares of common stock underlying the Series Z Preferred Shares.
Common
Stock
The
Company is authorized to issue 1,200,000,000
shares of common stock, par value $0.001
per share.
On
January 8, 2020, the Company issued 123,867 shares of the Company’s common stock previously recorded as to be issued as of December
31, 2019.
On
March 7, 2020, a stockholder returned 230 shares of the Company’s common stock back to the Company. The shares were immediately
retired. Accordingly, common stock was decreased by the par value of the common shares contributed of $1 with a corresponding increase
in additional paid in capital.
During
the year ended December 31, 2020, a warrant exercise in 2019, to purchase 400 common shares, was rescinded. The rescission was recorded
as a decrease in common stock to be issued of $120 and a decrease in additional paid-in capital of $5,880 with a corresponding increase
in accounts payable and accrued expenses of $6,000.
During
the year ended December 31, 2020, the Company issued an aggregate of 241,228 shares of its common stock, having an aggregate fair value
of $370,755, upon the conversion of convertible notes with a principal amount of $92,964 and accrued interest of $128, which resulted
in the elimination of $278,545 of derivative liabilities and an aggregate net gain on conversion of convertible notes of $882. Accordingly,
common stock was increased by the par value of the common shares issued of $241 and additional paid in capital was increased by $370,514.
During
the year ended December 31, 2021, the Company issued 14,828 shares of its common stock, having a fair value of $133,002,
upon the conversion of convertible notes with a principal amount of $13,345, which resulted in the reduction of $118,778 of
derivative liabilities and a loss on conversion of $880.
During
the year ended December 31, 2021, the Company issued 3,355 shares of the Company’s common stock previously recorded as
to be issued as of December 31, 2020.
During
the year ended December 31, 2021, an investor owning 4,950 shares of the Company’s common stock and warrants to purchase 3,238,542 common
shares at $0.12 per share entered into an agreement to cancel the aforementioned common shares and warrants in exchange for a cash
payment of $11,000 by the Company. Accordingly, the cancelation agreement resulted in a reduction in common stock of $5 for
the par value of the common shares, a reduction in additional paid-in capital of $10,995, and a reduction in the derivative liability
of $74,134,327 and a gain on settlement of $74,134,327.
During
the year ended December 31, 2021, the Company awarded an aggregate of 7,252 fully-vested shares of common stock, having a fair
value of $166,855, to the Chief Executive Officer for services rendered.
During
the year ended December 31, 2021, the Company issued 1,650,000 shares of common stock, having a fair value of $18,414,000 for the acquisition
of Empire Services, Inc.
During
the year ended December 31, 2021, the Company retired 3,012,746 shares to be issued for no consideration, returning the $3,013 for the
par value of the common shares to additional paid in capital.
As
of December 31, 2021 and 2020, there were 3,331,916 and 1,661,431 shares, respectively, of common stock issued and outstanding.
NOTE
13 – WARRANTS
From
December 23 to December 30, 2020, the Company issued 654.78 shares of Series Y Preferred Stock, having a stated value of $13,095,636,
in exchange for convertible notes payable of $5,775,767 (net of debt discount of $133,608), accrued interest of $3,625,237, and 49,215,416
warrants. The exchanges resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $92,934,419,
a reduction of derivative liabilities related to the warrants of $72,892,563, and a net gain on settlement of $162,132,350.
During
the year ended December 31, 2020, the Company recorded $95,838,488 in deemed dividends as a result of the triggering of price protection
provisions in certain outstanding warrants. Accordingly, additional paid in capital was increased by $95,838,488 with a corresponding
decrease in the accumulated deficit.
During
the year ended December 31, 2021, the Company issued 4.82388 shares
of Series Y preferred stock, having a stated value of $96,478,
in exchange for convertible notes payable of $38,500,
accrued interest of $77,205,
and 437,500 warrants.
The exchanges resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $2,502,223,
a reduction of derivative liabilities related to the warrants of $1,396,283,
and a net gain on settlement of $3,917,734 (See
Note 11).
During
the year ended December 31, 2021, an investor owning 4,950 shares
of the Company’s common stock and warrants to purchase 3,238,542 common
shares at $0.12 per
share entered into an agreement to cancel the aforementioned common shares and warrants in exchange for a cash payment of $11,000 by
the Company. The cancelation agreement resulted in a reduction in common stock of $1,485 for
the par value of the common shares, a reduction in additional paid-in capital of $9,515,
and a reduction in the derivative liability of $74,134,327 and
a gain on settlement of debt of $74,134,327 (See
Note 11).
During
the year ended December 31, 2021, an investor owning warrants to purchase 4,166,667 common shares at $0.12 per share entered
into an agreement to cancel the aforementioned common shares and warrants in exchange for a cash payment of $15,000 by the Company.
Accordingly, the cancelation agreement resulted in a reduction in the derivative liability of $95,380,286 and a gain on settlement
of $95,365,286.
During
the year ended December 31, 2021, an investor owning warrants to purchase 520,834 common shares at $0.12 per share entered
into an agreement to cancel the aforementioned in exchange for: (i) a cash payment of $1,000,000 received directly from the Chief
Executive Officer; and (ii) 250 Series Z Preferred Shares having a fair value of $6,530,868. The settlement resulted in a reduction
in the derivative liability of $5,750,067, offset by a reduction in cash of $1,000,000, an increase in additional paid-in capital of
$6,530,867 and a loss on settlement of debt of $1,780,800.
During
the year ended December 31, 2021, the Company issued warrants to purchase 2,514,351 shares of common stock in a placement of senior secured
debt and warrants.
During
the year ended December 31, 2021, the Company issued warrants to purchase 200,000 shares of common stock as commission for an offering.
A
summary of the warrant activity for the years ended December 31, 2021 and 2020 is as follows:
SCHEDULE OF WARRANT ACTIVITY
| |
Shares | | |
Weighted- Average Exercise
Price | | |
Weighted- Average Remaining
Contractual Term | | |
Aggregate Intrinsic Value | |
Outstanding at December 31, 2019 | |
| 11,141,255 | | |
$ | 0.795 | | |
| 2.96 | | |
$ | 8,791,956 | |
Granted | |
| 46,478,847 | | |
$ | 0.12 | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Canceled/Exchanged | |
| (49,216,499 | ) | |
$ | 0.12 | | |
| | | |
| | |
Outstanding at December 31, 2020 | |
| 8,403,603 | | |
$ | 0.327 | | |
| 2.04 | | |
$ | 14,804,944 | |
Granted | |
| 2,714,351 | | |
$ | 19.50 | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Canceled/Exchanged | |
| (8,365,013 | ) | |
$ | 0.15 | | |
| | | |
| | |
Outstanding at December 31, 2021 | |
| 2,752,941 | | |
$ | 19.77 | | |
| 4.86 | | |
$ | 11,650 | |
Exercisable at December 31, 2021 | |
| 2,752,941 | | |
$ | 19.77 | | |
| 4.86 | | |
$ | 11,650 | |
SCHEDULE
OF STOCK OUTSTANDING AND EXERCISABLE
Exercise Price | |
Warrants Outstanding | | |
Weighted Avg. Remaining Life | | |
Warrants Exercisable | |
$ |
0.12 | |
| 834 | | |
| 1.08 | | |
| 834 | |
|
19.50 | |
| 2,714,351 | | |
| 4.92 | | |
| 2,714,351 | |
|
22.50 – 60.00 | |
| 37,339 | | |
| 0.91 | | |
| 37,339 | |
|
120.00 | |
| 417 | | |
| 0.99 | | |
| 417 | |
|
| |
| 2,752,941 | | |
| 4.86 | | |
| 2,752,941 | |
The
aggregate intrinsic value of outstanding stock warrants was $11,650, based on warrants with an exercise price less than the Company’s
stock price of $14.10 as of December 31, 2021 which would have been received by the warrant holders had those holders exercised the warrants
as of that date.
NOTE
14 – STOCK OPTIONS
Our
stockholders approved our 2014 Equity Incentive Plan in June 2014 (the “2014 Plan”), our 2015 Equity Incentive Plan in December
2015 (the “2015 Plan”), our 2016 Equity Incentive Plan in October 2016 (“2016 Plan”), our 2017 Equity Incentive
Plan in December 2016 (“2017 Plan” and together with the 2014 Plan, 2015 Plan, 2016 Plan, the “Prior Plans”),
our 2018 Equity Incentive Plan in June 2018 (the “2018 Plan”), and our 2021 Equity Incentive Plan in September 2021 (“2021
Plan” , and together with the Prior Plans, the “Plans”). The Prior Plans are identical, except for the number
of shares reserved for issuance under each. As of December 31, 2021, the Company had granted an aggregate of 214,367 securities
under the Plans since inception, with 167,300 shares available for future issuances. The Company made no grants under the plans
during the years ended December 31, 2021 and 2020.
The
Plans provide for the grant of incentive stock options to our employees and our subsidiaries’ employees, and for the grant of stock
options, stock bonus awards, restricted stock awards, performance stock awards and other forms of stock compensation to our employees,
including officers, consultants and directors. The Prior Plans also provide that the grant of performance stock awards may be paid out
in cash as determined by the committee administering the Prior Plans.
Option
valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using
the Black-Scholes option pricing model with a volatility figure derived from historical data. The Company accounts for the expected life
of options based on the contractual life of the options.
There
were no options issued during the years ended December 31, 2021 and 2020.
A
summary of the stock option activity for the years ended December 31, 2021 and 2020 is as follows:
SCHEDULE
OF STOCK OPTION ACTIVITY
| |
Shares | | |
Weighted- Average Exercise
Price | | |
Weighted- Average Remaining
Contractual Term | | |
Aggregate Intrinsic Value | |
Outstanding at December 31, 2019 | |
| 92,116 | | |
$ | 148.11 | | |
| 7.49 | | |
$ | - | |
Granted | |
| - | | |
| | | |
| | | |
| | |
Exercised | |
| - | | |
| | | |
| | | |
| | |
Forfeiture/Cancelled | |
| - | | |
| | | |
| | | |
| | |
Outstanding at December 31, 2020 | |
| 92,116 | | |
$ | 148.11 | | |
| 6.49 | | |
$ | - | |
Granted | |
| - | | |
| | | |
| | | |
| | |
Exercised | |
| - | | |
| | | |
| | | |
| | |
Forfeiture/Cancelled | |
| - | | |
| | | |
| | | |
| | |
Outstanding at December 31, 2021 | |
| 92,116 | | |
$ | 148.11 | | |
| 5.49 | | |
$ | - | |
Exercisable at December 31, 2021 | |
| 92,116 | | |
$ | 148.11 | | |
| 5.49 | | |
$ | - | |
SCHEDULE
OF STOCK OUTSTANDING AND EXERCISABLE
Exercise Price
| |
Number of Options | | |
Remaining Life In Years | | |
Number
of
Options
Exercisable | |
$ |
30.00-75.00 | |
| 44,368 | | |
| 6.26 | | |
| 44,368 | |
|
75.01-150.00 | |
| 6,479 | | |
| 5.26 | | |
| 6,479 | |
|
150.01-225.00 | |
| 6,079 | | |
| 4.68 | | |
| 6,079 | |
|
225.01-300.00 | |
| 33,133 | | |
| 4.70 | | |
| 33,133 | |
|
300.01-600.00 | |
| 2,110 | | |
| 4.60 | | |
| 2,110 | |
|
| |
| 92,116 | | |
| | | |
| 92,116 | |
The
aggregate intrinsic value of outstanding stock options was $0, based on options with an exercise price less than the Company’s
stock price of $14.10 as of December 31, 2021, which would have been received by the option holders had those option holders exercised
their options as of that date.
The
fair value of all options that were vested as of the year ended December 31, 2021 and 2020 was $0 and $0, respectively. Unrecognized
compensation expense of $0 as of December 31, 2021 will be expensed in future periods.
NOTE
15 – LEASES
Property
Leases (Operating Leases)
The
Company leases its facilities and certain automobiles under operating leases which expire on various dates through 2025. The Company
determines if an arrangement is a lease at inception and whether they are finance or operating leases. Right of Use (“ROU”)
assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation
to make lease payments from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease
based on the present value of lease payments over the lease term. When readily determinable, the Company uses the implicit rate in determining
the present value of lease payments. The ROU asset also includes any fixed lease payments, including in-substance fixed lease payments
and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease term
is determined at lease commencement and includes any non-cancellable period for which the Company has the right to use the underlying
asset, together with any options to extend that the Company is reasonably certain to exercise.
Upon
effectiveness of the acquisition of Empire on October 1, 2021, the Company assumed $3,492,531
in ROU assets and $3,650,358
in lease liabilities for the leasing of
scrap metal yards from an entity controlled by the Company’s Chief Executive Officer. Under
the terms of the leases, Empire is required to pay an aggregate of $145,821
per
month and increasing by 3% on the first of every year.
The leases expire on January
1, 2024 and the
Company has two options to extend the leases by 5 years
per option. In the event the Company does not
exercise the options, the leases will continue on a month-to-month basis. The Company cannot sublease any of the properties under the
lease agreements.
Upon
effectiveness of the acquisition of Empire on October 1, 2021, the Company assumed $30,699
in
ROU assets and $31,061
in
lease liabilities for an office lease. Under the terms of the lease, Empire is required to
pay $1,150 per month and increasing by 3% on April 1st of every year beginning on April 1, 2022. The
lease expires on March
31, 2024 and
Empire was required to make a security deposit of $1,150.
The
Company does not have an option to extend the lease.
The Company cannot sublease any of the properties under the lease agreements.
On
October 11, 2021, Empire entered into leasing agreements with a company owned by the Chief Executive Officer of Empire for the leasing
of the Company’s Virginia Beach metal recycling location. Under
the terms of the leases, Empire is required to pay $9,677 for the prorated first month and $15,000 per month for the facilities beginning
November 1, 2021 and increasing by 3% on the first of every year thereafter.
The leases expire on January
1, 2024 and the
Company has two options to extend the leases by 5
years
per option. In the event the Company does not
exercise the options, the leases will continue on a month-to-month basis. The Company cannot sublease any of the properties under the
lease agreements.
Automobile Leases (Operating Leases)
Upon
effectiveness of the acquisition of Empire on October 1, 2021, the Company assumed $1,666 in ROU assets and $1,383 in lease liabilities
for an automobile lease to which Empire was a party. Under the terms of the lease, Empire was required to pay $700 per month until the
lease expired on December 29, 2021.
Upon
effectiveness of the acquisition of Empire on October 1, 2021, the Company assumed $26,804 in ROU assets and $18,661 in lease liabilities
for an automobile lease. Under the terms of the lease, Empire is required to pay $750 per month until the lease expires on February 18,
2025 and the Company does not have an option to renew or extend. The Company is responsible to any damage to the automobile under the
terms of the lease.
Upon
effectiveness of the acquisition of Empire on October 1, 2021, the Company assumed $34,261 in ROU assets and $27,757 in lease liabilities
for an automobile lease. Under the terms of the lease, Empire is required to pay $650 per month until the lease expires on February 15,
2026 and the Company does not have an option to renew or extend. The Company is responsible to any damage to the automobile under the
terms of the lease.
On
December 23, 2021, Empire entered into a lease agreement for the leasing of an automobile. Under the terms of the lease, Empire was required
to pay $18,000 for the first month and $1,000 per month thereafter for 60 months. The lease expires on December 23, 2025 and the Company
does not have an option to renew or extend. The Company is responsible to any damage to the automobile under the terms of the lease.
ROU
assets and liabilities consist of the following:
SCHEDULE
OF RIGHT OF USE ASSETS AND LIABILITIES
| |
December 31, 2021 | | |
December 31, 2020 | |
ROU assets | |
$ | 3,620,523 | | |
$ | - | |
| |
| | | |
| | |
Current portion of lease liabilities | |
$ | 1,715,726 | | |
$ | - | |
Long term lease liabilities, net of current portion | |
| 2,030,722 | | |
| - | |
Total lease liabilities | |
$ | 3,746,498 | | |
$ | - | |
Aggregate
minimum future commitments under non-cancelable operating leases and other obligations at December 31, 2021 were as follows:
SCHEDULE OF MINIMUM FUTURE
COMMITMENTS
Year ended December 31, | |
| |
2022 | |
$ | 2,030,772 | |
2023 | |
| 2,090,820 | |
2024 | |
| 31,850 | |
2025 | |
| 20,550 | |
2026 | |
| 1,300 | |
Total Minimum Lease Payments | |
$ | 4,175,292 | |
Less: Imputed Interest | |
$ | (428,794 | ) |
Present Value of Lease Payments | |
$ | 3,746,498 | |
Less: Current Portion | |
$ | (1,715,726 | ) |
Long Term Portion | |
$ | 2,030,722 | |
The
Company leases its facilities, automobiles, and offices under operating leases which expire on various dates through 2024. Rent expense
related to these leases is recognized based on the payment amount charged under the lease. Rent expense for the years ended December
31, 2021 and 2020 was $497,177 and
$10,802,
respectively. At December 31, 2021, the leases had a weighted average remaining lease term of 2
years and a weighted average discount rate of 10.14%.
NOTE
16 – CONCENTRATIONS OF REVENUE
The
Company has a concentration of customers. For the fiscal year ended December 31, 2021, one customer accounted for $6,682,019,
or approximately 83%,
of our revenue.
The
Company’s sales are concentrated in the Virginia and northeastern North Carolina markets.
NOTE
17 – INCOME TAXES
The
Tax Cuts and Jobs Acts (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax
rate from 35% to 21%. ASC 740, “Income Taxes,” requires that effects of changes in tax rates to be recognized in the period
enacted. Recognizing the late enactment of the Act and complexity of accurately accounting for its impact, the Securities and Exchange
Commission in Staff Accounting Bulletin 118 provides guidance that allows registrants to provide a reasonable estimate of the Act in
their financial statements and adjust the reported impact in a measurement period not to exceed one year.
At
December 31, 2021, the Company has available for income tax purposes of approximately $82,507,844
in federal and $69,144,542
in Colorado state net operating loss carry forward. which
begin expiring in the year 2033, that may be used to offset future taxable income.
The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of
management based upon the earnings history of the Company; it is more likely than not that the benefits will not be realized. Due to
possible significant changes in the Company’s ownership, the future use of its existing net operating losses may be
limited. All or portion of the remaining valuation allowance may be reduced in future years based on an assessment of earnings
sufficient to fully utilize these potential tax benefits. During the year ended December 31, 2021, the Company has increased
the valuation allowance from $18,379,120 to $21,515,047.
The
Company has adopted the provisions of ASC 740-10-25, which provides recognition criteria and a related measurement model for uncertain
tax positions taken or expected to be taken in income tax returns. ASC 740-10-25 requires that a position taken or expected to be taken
in a tax return be recognized in the financial statements when it is more likely than not that the position would be sustained upon examination
by tax authorities.
Tax
position that meet the more likely than not threshold are then measured using a probability weighted approach recognizing the largest
amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company had no tax positions relating
to open income tax returns that were considered to be uncertain.
Sections
382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), provide for annual limitations on the utilization
of net operating loss and credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382 of the Code.
In general, an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent
shareholders, as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares
of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the
event such ownership change occurs, the annual limitation may result in the expiration of the net operating losses prior to full utilization.
The
Company is required to file income tax returns in the U.S. Federal jurisdiction and in California and Colorado. The Company is no longer
subject to income tax examinations by tax authorities for tax years ending before December 31, 2015.
The
Company’s deferred taxes as of December 31, 2021 and 2020 consist of the following:
SCHEDULE
OF DEFERRED TAX ASSETS
| |
2021 | | |
2020 | |
Deferred Tax Assets/(Liability) Detail | |
| | | |
| | |
Stock Compensation | |
$ | 52,313 | | |
$ | 52,313 | |
Amortization | |
| 156,072 | | |
| 156,072 | |
Depreciation | |
| 1,180 | | |
| 1,180 | |
Interest | |
| 1,213,854 | | |
| 1,213,854 | |
Change in Fair Market Value of Derivative Liabilities | |
| 279,582 | | |
| 279,582 | |
NOL DTA | |
| 19,812,046 | | |
| 16,676,120 | |
Valuation allowance | |
| (21,515,047 | ) | |
| (18,379,120 | ) |
Total gross deferred tax assets | |
| - | | |
| - | |
The
Company follows ASC 740-10 for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon
the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable
when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the
changes in the asset or liability during each period.
If
available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized,
a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future
changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income
taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes
in different periods.
SCHEDULE
OF EFFECTIVE RECONCILIATION INCOME TAX
| |
2021 | | |
2020 | |
Expected tax at statutory rates | |
| 21.00 | % | |
| 21.00 | % |
Nondeductible Expenses | |
| (11.72 | )% | |
| (11.72 | )% |
State Income Tax, Net of Federal benefit | |
| 1.51 | % | |
| 1.59 | % |
Current Year Change in Valuation Allowance | |
| (5.83 | )% | |
| (5.83 | )% |
Prior Deferred True-Ups | |
| (5.03 | )% | |
| (5.03 | )% |
NOTE
18 – RELATED PARTY TRANSACTIONS
During
the years ended December 31, 2021 and 2020, the Company received aggregate advances of $2,957 and $3,696 and repaid an aggregate of $6,144
and $509, respectively, to the Company’s former Chief Executive Officer.
The
advances were non-interest bearing and due on demand. As of December 31, 2021, the Company owed $0
in advances to the Company’s former Chief
Executive Officer (See Note 6).
On
December 16, 2021, the Company’s former Chief Executive Officer forfeited his 1,000 shares of Series C Preferred Stock for no consideration.
As of December 31, 2021, the Company leases 11
scrap yard facilities by an entity controlled by the Company’s Chief Executive Officer. During the year ended December 31, 2021,
the Company paid rents of $477,140 to an entity controlled by the Company’s Chief Executive Officer, of which $122,866 was owed
at December 31, 2021. See Note 15 – Leases.
During the year ended December 31, 2021, the Company’s
Chief Executive Officer was reimbursed $224,660 for expenses made on behalf the Company. Further, during the year ended December 31,
2021 and 2020, the Company’s Chief Executive Officer advanced $24,647 and $20,520 to the Company and was repaid $59,103 and $0,
respectively (See Note 6).
On September 30, 2021, the Company authorized
the issuance of 500 shares of Series Z Preferred Stock, par value $0.001 per share. The Series Z Preferred Stock has a
$20,000 stated value per share and all 500 Series Z preferred shares, in aggregate, are convertible into 19.98% of
the issued and outstanding common shares of the Company (post conversion). The conversion rate is applicable on a pro rata basis to each
share of Series Z Preferred Stock upon conversion. This anti-dilutive conversion feature is in effect until such time an S-1 Registration
Statement is declared effective by the SEC in conjunction with a NASDAQ listing. On September 30, 2021, the Company entered into a Series
Z Preferred Stock Issuance Agreement with the Company’s Chief Executive Officer whereby the Company entered into a non–convertible
note payable agreement for $1,000,000 in exchange for: (i) a $1,000,000 cash payment directly paid to the warrant holder; and (ii)
the issuance of 250 Series Z Preferred Shares having a fair value of $6,530,867. The note bears interest of 8% per annum and is
due within three days of the Company’s next closing of equity financing of $3,000,000 or more. The proceeds received were
allocated to the debt and equity on a relative fair value basis. Accordingly, debt discount of $867,213 was recognized with a corresponding
increase in additional paid-in capital. Since the due date is contingent upon a future event, the entire debt discount was amortized
to interest expense immediately.
On
December 15, 2020, the Company entered into a settlement agreement (the “Settlement Agreement”) with JDE Development, LLC
(“JDE”), a Florida limited liability company wholly-owned and managed by Jesus Quintero, the Company’s former Chief
Financial Officer, in connection with the outstanding sum of $89,143
due to JDE for the services of Jesus Quintero
as the Chief Financial Officer of the Company pursuant to that certain CFO Services Agreement entered into as of April
1, 2018, by and between the Company and Jesus
Quintero. Pursuant to the Settlement Agreement, the Company agreed to pay JDE $25,000
(the “Cash Settlement”) and to enter
into a convertible note with JDE in the principal amount of $64,143
(the “Note”). In addition, both parties
agreed, on behalf of themselves, their past and present shareholders, members, directors, employees, managers, parents, affiliates, subsidiaries,
principals, officers, related entities, assigns and successors, to irrevocably and fully release each other, and their respective past
and present shareholders, members, directors, employees, managers, parents, affiliates, subsidiaries, principals, officers, related entities,
assigns and successors, from any and all claims and causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds,
bills specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions,
claims and demands whatsoever at law or in equity, upon or by reason of any matter, cause or thing of any nature whatsoever, including
but not limited to claims related to sums payable by the Company to JDE. In
accordance with the Settlement Agreement, (i) on December 23, 2020, the Company paid JDE the Cash Settlement, and (ii) on December 15,
2020, the Company entered into the Note with JDE for a principal amount of $64,143.
The Note had a maturity date of June
15, 2021 and
accrued interest at a rate of 12%
per annum. The holder has the right to convert the Outstanding Balance of the Note at any time into shares of common stock of the Company
at a conversion price of $0.90 per share, subject to adjustment. In the event of default, the conversion price shall be 60% of the average
of the three lowest closing bid prices of the Company’s common stock during the 20 days prior to the conversion date.
The shares of Series Y Preferred Stock are not convertible
to the extent that (i) the Company’s Certificate of Incorporation has not been amended to increase the number of authorized shares
of Common Stock of the Company, or (ii) the holder (together with such holder’s affiliates) would beneficially own in excess of
4.99% of the shares of Common Stock outstanding immediately after giving effect to such conversion (which provision may be increased
to a maximum of 9.99% by the holder by written notice from such holder to the Company, which notice shall be effective 61 calendar days
after the date of such notice). As a result of
the beneficial conversion feature of the Note, debt discount of $64,143 was recognized with a corresponding increase in additional paid-in
capital. On December 24, 2020, the holder converted $64,143
of principal into 3.20716
shares of Series Y preferred shares having a
stated value of $64,143,
resulting in a reduction in debt discount by $60,971
and a loss on settlement of $60,971.
As of December 31, 2020, the remaining carrying value of the Note was $0,
net of debt discount of $0.
As of December 31, 2021 and 2020, accrued interest payable of $0
and $0,
respectively, was outstanding on the Note (See Note 10).
NOTE
19 – AMORTIZATION OF INTANGIBLE ASSETS
All
of the Company’s current identified intangible assets were assumed upon consummation of the Empire acquisition on October 1, 2021.
Identified intangible assets consisted of the following at the dates indicated below:
SCHEDULE
OF INTANGIBLE ASSETS
| |
December
31, 2021 |
| |
Gross carrying
amount | | |
Accumulated
amortization | | |
Carrying
value | | |
Estimated
useful life |
Intellectual
Property | |
$ | 3,036,000 | | |
$ | (151,800 | ) | |
$ | 2,884,200 | | |
5 years |
Customer List | |
| 2,239,000 | | |
| (55,975 | ) | |
| 2,183,025 | | |
10 years |
Licenses | |
| 21,274,000 | | |
| (531,850 | ) | |
| 20,742,150 | | |
10
years |
Total
finite-lived intangibles | |
| 26,549,000 | | |
| (739,625 | ) | |
| 25,809,375 | | |
|
Total
intangible assets, net | |
$ | 26,549,000 | | |
$ | (739,625 | ) | |
$ | 25,809,375 | | |
|
The
weighted-average amortization period for intangible assets we acquired during the year ended December 31, 2021 was approximately 9.43 years.
There were no intangible assets acquired during the year ended December 31, 2020.
Amortization
expense for intangible assets was $739,625 and $0 for the years ended December 31, 2021 and 2020, respectively. Total estimated
amortization expense for our intangible assets for the years 2021 through 2026 is as follows:
SCHEDULE
OF INTANGIBLE ASSETS AMORTIZATION EXPENSES
Year
ended December 31, | |
| |
2022 | |
$ | 2,958,500 | |
2023 | |
| 2,958,500 | |
2024 | |
| 2,958,000 | |
2025 | |
| 2,958,000 | |
2026 | |
| 2,806,700 | |
Thereafter | |
| 11,168,675 | |
NOTE
20 – SUBSEQUENT EVENTS
On
January 24, 2022, the Company entered into leasing agreements for 3,521 square feet of office space commencing upon the completion of
tenant improvements which is expected to be on April 1, 2022 but shall be no later than May 1, 2022 (“Commencement Date”).
Under the terms of the leases, the Company is required to pay $3,668 for the first twelve months of the lease and increasing by approximately 3%
every 12 months thereafter until the expiration of the lease. The lease is for a period of five years from the Commencement
Date and the Company was required to make a security deposit of $3,668. The Company does not have an option to extend the lease. The
Company cannot sublease any of the properties under the lease agreement.
Effective
February 1, 2022, the Company entered into an office space/land lease agreement with an entity owned by the Chief Executive
Officer of Greenwave for the leasing of the Company’s Fairmont metal scrap yard located at 406 Sandy Street, Fairmont, NC
28340. Under the terms of the lease, the Company is required to pay $8,000 per month for the facility beginning February 1, 2022 and
increasing by 3% on January 1, 2023. The lease expires on January 1, 2024 and the Company has two options to extend the lease by 5 years
per option. The Company also has the option to extend the term of the lease for an additional year for the next 5 years upon the
same terms and conditions. In the event the Company does not exercise the options, the lease will continue on a month-to-month basis.
The Company cannot sublease the property under the lease agreement.
On
February 28, 2022, the
Company effectuated a 1-for-300 reverse stock split, such that (1) post consolidation Common Share was issued for each three hundred
(300) pre-consolidation Common Shares (the “Consolidation”). No fractional shares were issued in the Consolidation and any
fractional interest in Common Shares was rounded up to the nearest whole Common Share.
The 994,871,337
Common Shares issued and outstanding prior to
the Consolidation was reduced to 3,331,916
Common Shares issued and outstanding following
the Consolidation. Pursuant to GAAP, the Company retrospectively recasted and restated the weighted-average shares included within
its consolidated statements of operations for the years ended December 31, 2021 and 2020. The basic and diluted weighted-average common
shares are retroactively converted to shares of the Company’s common stock to conform to the recasted consolidated statements of
stockholders’ equity.
From
January 1 to April 13, 2022, the Company issued 6,500
shares recorded as to be issued for services
rendered on December 31, 2021.
EMPIRE
SERVICES, INC.
FINANCIAL
STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
EMPIRE SERVICES, INC.
YEARS ENDED DECEMBER 31, 2020 AND 2019
I N D E X
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Empire Services, Inc. and Subsidiary
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Empire Services, Inc. and subsidiary (The “Company”) as of December 31, 2020 and 2019, and the related
consolidated statements of operations, shareholders’ deficit and cash flows for each of the years in the two year period ended
December 31, 2020 and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019
and the consolidated results of its operations and its cash flows for each of the years in the two year period ended December 31, 2020,
in conformity with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a
Going Concern
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements,
the Company has an accumulated deficit, recurring losses, and expects continuing future losses. Management’s evaluation of the events
and conditions and management’s plans regarding these matters are also described in Note 2. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern for one year from the issuance of the audited consolidated financial
statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
New York | Washington, DC | California | Nevada
China | India | Greece
Member of ANTEA International with offices
worldwide
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising
from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee
and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. We determined that there were no critical audit matters.
/S/ RBSM LLP |
|
|
|
We have served as the Company’s auditor since
2021. |
|
|
|
Henderson, Nevada |
|
November 16, 2021 |
|
New York | Washington, DC | California | Nevada
China | India | Greece
Member of ANTEA International with offices
worldwide
EMPIRE SERVICES, INC.
CONSOLIDATED
BALANCE SHEETS
| |
December 31, | | |
December 31, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
ASSETS | |
| | |
| |
Current assets: | |
| | |
| |
Cash | |
$ | 301,012 | | |
$ | 54,795 | |
Deposits | |
| - | | |
| 2,014 | |
Total current
assets | |
| 301,012 | | |
| 56,809 | |
| |
| | | |
| | |
Equipment - net of accumulated depreciation of $1,939,638
and $1,557,394, respectively | |
| 2,370,591 | | |
| 1,999,348 | |
Operating lease right of use assets | |
| 4,533,747 | | |
| 5,777,550 | |
| |
| | | |
| | |
Total assets | |
$ | 7,205,350 | | |
$ | 7,833,707 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDER’S DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 1,488,713 | | |
$ | 1,315,482 | |
Advances | |
| 2,843,525 | | |
| 1,083,977 | |
Contract liability | |
| 52,955 | | |
| - | |
Operating lease liability | |
| 1,766,552 | | |
| 1,776,726 | |
Notes payable | |
| 1,924,645 | | |
| 2,895,500 | |
Environmental remediation liability | |
| 140,000 | | |
| 140,000 | |
Total current liabilities | |
| 8,216,390 | | |
| 7,211,685 | |
| |
| | | |
| | |
Operating lease liability, net current portion | |
| 2,911,556 | | |
| 4,086,922 | |
PPP note payable | |
| 176,233 | | |
| - | |
EIDL note payable | |
| 480,504 | | |
| - | |
Notes payable, net current portion | |
| 2,983,596 | | |
| 3,596,202 | |
Total liabilities | |
| 14,768,279 | | |
| 14,894,809 | |
| |
| | | |
| | |
Commitments and contingencies (See Note 7) | |
| | | |
| | |
| |
| | | |
| | |
Shareholder’s deficit: | |
| | | |
| | |
Common stock, $1.00 par value, 5,000 shares authorized,
1,000 shares issued and outstanding | |
| 1,000 | | |
| 1,000 | |
Additional paid in capital | |
| 3,247,543 | | |
| - | |
Accumulated deficit | |
| (10,811,472 | ) | |
| (7,062,102 | ) |
Total shareholder’s
deficit | |
| (7,562,929 | ) | |
| (7,061,102 | ) |
| |
| | | |
| | |
Total liabilities
and shareholder’s deficit | |
$ | 7,205,350 | | |
$ | 7,833,707 | |
The accompanying notes
are an integral part of these consolidated financial statements.
EMPIRE SERVICES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
Year Ended
December 31, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
Revenues | |
$ | 12,956,728 | | |
$ | 17,121,212 | |
Cost of revenues | |
| 6,879,413 | | |
| 8,687,887 | |
Gross Profit | |
| 6,077,315 | | |
| 8,433,325 | |
| |
| | | |
| | |
Operating Expenses: | |
| | | |
| | |
Rent, utilities, and property maintenance | |
| 2,374,860 | | |
| 2,310,421 | |
Consulting, accounting, and legal | |
| 295,364 | | |
| 99,640 | |
Payroll and related expense | |
| 2,405,871 | | |
| 2,459,020 | |
Depreciation expense | |
| 382,244 | | |
| 327,080 | |
Environmental remediation expense | |
| - | | |
| 140,000 | |
Hauling and equipment maintenance | |
| 2,043,551 | | |
| 1,954,730 | |
Other general and administrative expenses | |
| 1,038,708 | | |
| 376,134 | |
Total Operating Expenses | |
| 8,540,598 | | |
| 7,667,025 | |
| |
| | | |
| | |
(Loss) Profit From Operations | |
| (2,463,283 | ) | |
| 766,300 | |
| |
| | | |
| | |
Other Income (Expense): | |
| | | |
| | |
Interest income (expense) | |
| (1,328,527 | ) | |
| (651,361 | ) |
Gain on settlement of legal matter | |
| - | | |
| 285,000 | |
Gain of settlement of debt | |
| 19,440 | | |
| 127,984 | |
Other income | |
| 23,000 | | |
| 19,761 | |
Total Other Income (Expense) | |
| (1,286,087 | ) | |
| (218,616 | ) |
| |
| | | |
| | |
Net (Loss) Income Before Income Taxes | |
| (3,749,370 | ) | |
| 547,684 | |
| |
| | | |
| | |
Provision for Income Taxes | |
| - | | |
| - | |
| |
| | | |
| | |
Net (Loss) Income | |
$ | (3,749,370 | ) | |
$ | 547,684 | |
The accompanying notes are an integral part of these consolidated financial
statements.
EMPIRE SERVICES, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDER’S DEFICIT
FOR THE YEARS ENDED DECEMBER 31,
2020 AND 2019
| |
Common
Stock | | |
Additional
Paid | | |
Accumulated | | |
Shareholder’s
Equity | |
| |
Contribution | | |
in Capital | | |
Deficit | | |
Total | |
Balance at December 31, 2018 | |
| 1,000 | | |
$ | 78,587 | | |
$ | (5,230,691 | ) | |
$ | (5,151,104 | ) |
| |
| | | |
| | | |
| | | |
| | |
Contribution for lease rent | |
| - | | |
| 1,692,201 | | |
| - | | |
| 1,692,201 | |
Cash Distribution | |
| - | | |
| (1,770,788 | ) | |
| (2,379,095 | ) | |
| (4,149,883 | ) |
Net income | |
| - | | |
| - | | |
| 547,684 | | |
| 547,684 | |
| |
| | | |
| | | |
| | | |
| | |
Balance at December 31, 2019 | |
| 1,000 | | |
$ | - | | |
$ | (7,062,102 | ) | |
$ | (7,061,102 | ) |
| |
| | | |
| | | |
| | | |
| | |
Contribution for lease rent | |
| - | | |
| 1,718,463 | | |
| - | | |
| 1,718,463 | |
Cash Contribution | |
| - | | |
| 1,529,080 | | |
| - | | |
| 1,529,080 | |
Net loss | |
| - | | |
| - | | |
| (3,749,370 | ) | |
| (3,749,370 | ) |
| |
| | | |
| | | |
| | | |
| | |
Balance at December 31, 2020 | |
| 1,000 | | |
$ | 3,247,543 | | |
$ | (10,811,472 | ) | |
$ | (7,562,929 | ) |
The accompanying notes
are an integral part of these audited consolidated financial statements.
EMPIRE SERVICES, INC.
CONSOLIDATED STATEMENTS
OF CASHFLOWS
| |
Year Ended December 31, | |
| |
2020 | | |
2019 | |
Cash flows from operating activities: | |
| | |
| |
Net (loss) income | |
$ | (3,749,370 | ) | |
$ | 547,684 | |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 382,244 | | |
| 327,080 | |
Bad Debts | |
| - | | |
| 8,748 | |
Lease payment contributed | |
| 1,718,463 | | |
| 1,692,201 | |
Environmental remediation expense | |
| - | | |
| 140,000 | |
Interest Expense non-cash | |
| 1,092,173 | | |
| 233,394 | |
Interest income (expense) | |
| | | |
| 3,361 | |
Gain on settlement of debt | |
| (19,440 | ) | |
| (127,984 | ) |
Gain on settlement of legal matter | |
| - | | |
| (285,000 | ) |
Changes in operating Assets and liabilities | |
| | | |
| | |
Accounts payable | |
| 175,241 | | |
| 703,697 | |
Change in lease liability | |
| 58,263 | | |
| 91,478 | |
Contract liability | |
| 52,955 | | |
| - | |
Net cash (used in) provided by operating activities | |
| (289,471 | ) | |
| 3,334,659 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchases of property and equipment | |
| (243,652 | ) | |
| (159,407 | ) |
Net cash (used in) investing activities | |
| (243,652 | ) | |
| (159,407 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from issuance of PPP note payable | |
| 543,000 | | |
| - | |
Proceeds from issuance of EIDL note payable | |
| 500,000 | | |
| - | |
Proceeds from issuance of notes payable | |
| 197,000 | | |
| 1,240,000 | |
Proceeds from advances | |
| 3,309,500 | | |
| 1,109,601 | |
Repayments of notes payable | |
| (2,753,536 | ) | |
| (1,288,115 | ) |
Repayments of advances | |
| (2,545,704 | ) | |
| (32,060 | ) |
Cash distribution | |
| - | | |
| (4,149,883 | ) |
Cash Contribution | |
| 1,529,080 | | |
| - | |
Net cash provided by (used in) financing activities | |
| 779,340 | | |
| (3,120,457 | ) |
| |
| | | |
| | |
Net increase in cash | |
| 246,217 | | |
| 54,795 | |
| |
| | | |
| | |
Cash, beginning of period | |
| 54,795 | | |
| - | |
| |
| | | |
| | |
Cash, end of period | |
$ | 301,012 | | |
$ | 54,795 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid during period for interest | |
$ | 236,354 | | |
$ | 417,972 | |
| |
| | | |
| | |
Supplemental disclosures of non-cash investing and financing activities: | |
| | | |
| | |
Non cash Notes proceeds | |
$ | - | | |
$ | 2,945,844 | |
Non cash notes payment | |
$ | 31,351 | | |
$ | (2,945,844 | ) |
Notes proceeds for equipment | |
$ | 509,836 | | |
$ | 450,000 | |
Write off AR Affiliates and Building | |
$ | - | | |
$ | (2,597,402 | ) |
The accompanying notes are an integral part
of these consolidated financial statements.
EMPIRE SERVICES, INC.
Notes to Consolidated Financial
Statements
December 31, 2020 and 2019
NOTE 1 – NATURE OF OPERATIONS AND
BASIS OF PRESENTATION
Empire Services, Inc.
(“Empire” or the “Company”) operates 11 metal recycling facilities in Virginia and North Carolina. The Company
was incorporated in the State of Virginia on February 12, 2004.
The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Our consolidated financial statements include the accounts of Liverman Metal Recycling, Inc., our wholly-owned subsidiary. All intercompany
transactions were eliminated during consolidation.
NOTE 2 – GOING CONCERN AND MANAGEMENT’S
LIQUIDITY PLANS
As
of December 31, 2020, the Company had cash of $301,012 and a working capital deficit (current liabilities in excess of current assets)
of $7,915,378. During the year ended December 31, 2020, the net loss was $3,749,370 and net
cash used in operating activities was $289,471. As of December 31, 2019, the Company had cash of $54,795 and a working capital deficit
(current liabilities in excess of current assets) of $7,154,876. During the year ended December 31, 2019, the
net income was $547,684 and net cash provided by operating activities was $3,334,659 conditions raise substantial doubt about
the Company’s ability to continue as a going concern for one year from the issuance of the audited consolidated financial statements.
During the year ended December 31, 2020, the
Company received proceeds of $3,309,500, $543,000, $500,000 and $197,000 from the issuance of advances, a paycheck protection program
loan, an emergency injury disaster loan and non-convertible notes, respectively. During fiscal year 2020, the Company used $243,652 to
purchase equipment. The Company may not have sufficient cash to fund operations for the next fiscal year. During the year ended December
31, 2019, the Company received proceeds of $1,109,601 and $1,240,000 from the issuance of advances and non-convertible notes, respectively.
During fiscal year 2019, the Company used $159,407 to purchase equipment. The Company may not have sufficient cash to fund operations
for the next fiscal year.
The Company’s primary source of operating
funds since inception has been cash proceeds from operating activities. The Company has occasionally experienced net losses and negative
cash flows from operations. The Company’s ability to continue its operations is dependent
upon its ability to obtain additional capital through public or private equity offerings, debt financings or other sources; however, financing
may not be available to the Company on acceptable terms, or at all. The Company’s failure to raise capital as and when needed could
have a negative impact on its financial condition and its ability to pursue its business strategy, and the Company may be forced to curtail
or cease operations.
Management’s plans regarding these matters
encompass the following actions: 1) obtain funding from new and current investors to alleviate the Company’s working capital deficiency;
and 2) implement a plan to increase revenues. The Company’s continued existence is dependent upon its ability to raise additional
capital. However, the outcome of management’s plans cannot be determined with any degree of certainty.
Accordingly, the accompanying
audited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business for one year from the date the consolidated financial statements are issued.
The carrying amounts of assets and liabilities presented in the audited consolidated financial statements do not necessarily purport
to represent realizable or settlement values. The audited consolidated financial statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
In March 2020, the World
Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related
adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, leading
to an economic downturn. It has also disrupted the normal operations of many businesses, including ours. It is not possible for us to
predict the duration or magnitude of the adverse results of the outbreak of COVID-19 and its effects on our business including our financial
condition, liquidity, or results of operations at this time. Management is actively monitoring the global situation and its impact on
the Company’s financial condition, liquidity, operations, customers, industry, and workforce. Given the daily evolution of the
COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects that the COVID-19 outbreak
will have on its results of operations, financial condition, or liquidity for fiscal year 2021. As of the date these financial statements
were issued, the Company has experienced delays in securing new customers and related revenues and the longer this pandemic continues
there may be additional impacts. Furthermore, the COVID-19 outbreak has and may continue to impact the Company’s ability to raise
capital.
Although the Company
cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material
adverse effect on the Company’s results of future operations, financial position, liquidity, and capital resources, and those of
the third parties on which the Company relies in fiscal year 2021.
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include
the accounts of Empire Services, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated
in consolidation.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant estimates include right-of-use, lease liability, and environmental remediation calculations. Actual results may differ from
these estimates.
Fair Value of Financial
Instruments
The Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 825-10, “Financial Instruments”
(“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The estimated fair value of certain
financial instruments, including cash, accounts payable and accrued liabilities are carried at historical cost basis, which approximates
their fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities
and equity instruments of the Company are either recognized or disclosed in the consolidated financial statements together with other
information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk.
The Company follows ASC 825-10, which permits
entities to choose to measure many financial instruments and certain other items at fair value.
Cash
For purposes of the consolidated
statements of cash flows, the Company considers highly liquid investments with an original maturity of three months or less to be cash
equivalents. As of December 31, 2020 and 2019, the Company had no cash equivalents. The Company maintains its cash in banks insured by
the Federal Deposit Insurance Corporation in accounts that at times may be in excess of the federally insured limit of $250,000 per bank.
The Company minimizes this risk by placing its cash deposits with major financial institutions. At December 31, 2020 and 2019, the uninsured
balances amounted to $57,041 and $0, respectively.
Property and Equipment,
net
We state property
and equipment at cost or, if acquired through a business combination, fair value at the date of acquisition. We calculate depreciation
and amortization using the straight-line method over the estimated useful lives of the assets, except for our leasehold improvements,
which are depreciated over the shorter of their estimated useful lives or their related lease term. Upon the sale or retirement of assets,
the cost and related accumulated depreciation are removed from our accounts and the resulting gain or loss is credited or charged to
income. We expense costs for repairs and maintenance when incurred. Property and equipment includes assets recorded under finance leases,
see “Note 9—Leases.” We pledge property and equipment as collateral for our line of credit. See “Note 8—Long
Term Debt.”
Revenue Recognition
The Company recognizes revenue when services
are realized or realizable and earned, less estimated future doubtful accounts.
The Company’s
revenues are accounted for under ASC Topic 606, “Revenue From Contracts With Customers” (“ASC 606”) and generally
do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales prices are generally
fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s contracts do
not include multiple performance obligations or material variable consideration.
In accordance with ASC 606, the Company recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company
expects to be entitled in exchange for those goods or services. The Company recognizes revenue in accordance with that core principle
by applying the following:
(i) | Identify
the contract(s) with a customer; |
(ii) | Identify
the performance obligation in the contract; |
(iii) | Determine
the transaction price; |
(iv) | Allocate
the transaction price to the performance obligations in the contract; and |
(v) | Recognize
revenue when (or as) the Company satisfies a performance obligation. |
The Company primarily
generates revenue by purchasing scrap metal from businesses and retail customers, processing it, and selling the ferrous and non-ferrous
metals to clients.
The Company realizes
revenue upon the fulfillment of its performance obligations to customers. As of December 31, 2020 and 2019, the Company had a contract
liability of $52,955 and $0, respectively, for scrap metal customers had paid for and the Company had not yet delivered.
Inventories
We maintain minimal
inventories as we ship the ferrous and non-ferrous metals we purchase to customers multiple times per day. We calculate the value of
the minimal inventories we do carry, which consist of processed and unprocessed scrap metal (ferrous and nonferrous), used and salvaged
vehicles, and supplies, based on the net realizable value or the cost of the inventories, whichever is less. We calculate the value of
the inventory based on the first-in-first-out (FIFO) methodology. The value of our inventories was $0 and $0, respectively, as of December
31, 2019 and 2020.
Advertising
The Company charges the costs of advertising
to expense as incurred. Advertising costs were $1,095 and $6,671 for the years ended December 31, 2020 and 2019, respectively.
Income Taxes
The Company is organized as a Corporation
and has elected to be taxed as S-Corporation for state and federal tax purposes. Income taxes are not payable by the Company. Shareholders
of S-Corporations are taxed individually on their applicable share of earnings. Accordingly, no provision for income taxes is reflected
in these financial statements. Net income or loss is allocated to the shareholder of the corporation.
Long-Lived Assets
The Company reviews its
property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted
operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed
of are reported at the lower of carrying amount or fair value less costs to sell. Intangible assets are stated at cost and reviewed annually
to examine any impairments, usually assuming an estimated useful life of three to five years. When retired or otherwise disposed, the
related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized
from disposition, is reflected in earnings.
Segment Reporting
Operating segments are
defined as components of an enterprise for which separate financial information is available and evaluated regularly by the Chief Executive
Officer, or decision-making group, in deciding the method to allocate resources and assess performance. The Company currently has one
reportable segment for financial reporting purposes, which represents the Company’s core business.
Environmental Remediation Liability
The operations of
the Company, like those of other companies in its industry, are subject to various domestic and foreign environmental laws and regulations.
These laws and regulations not only govern current operations and products, but also impose potential liability on the Company for past
operations. Management expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and
the industry in the future. Management believes that the Company conducts its operations in compliance with applicable environmental
laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance.
The Company is involved
with environmental investigation and remediation activities at some of its currently operated sites. In addition, the Company, together
with other parties, has been designated a potentially responsible party under federal and state environmental protection laws for the
investigation and remediation of environmental matters. In general, these laws provide that potentially responsible parties may be held
jointly and severally liable for investigation and remediation costs regardless of fault.
The Company initially
provides for estimated costs of environmental-related activities relating to its past operations for which commitments or clean-up plans
have been developed and when such costs can be reasonably estimated based on industry standards and professional judgment. These estimated
costs, which are undiscounted, are determined based on currently available facts regarding each site. If the reasonably estimable costs
can only be identified as a range and no specific amount within that range can be determined more likely than any other amount within
the range, the minimum of the range is provided.
The Company continuously
assesses its potential liability for investigation and remediation-related activities and adjusts its environmental-related accruals
as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are
issued. At December 31, 2020 and 2019, the Company had accruals reported on the
balance sheet as current liabilities of $140,000 and $140,000, respectively.
Actual costs incurred
may vary from the accrued estimates due to the inherent uncertainties involved including, among others, the nature and magnitude of the
wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect
to a particular site. Additionally, costs for environmental-related activities may not be reasonably
estimable and therefore would not be included in our current liabilities.
Management expects
these contingent environmental-related liabilities to be resolved over the next fiscal year.
Recent Accounting
Pronouncements
In February 2016,
the Financial Accounting (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic
842), which, among other things, requires lessees to recognize substantially all leases on their balance sheets and disclose key
information about leasing arrangements. The new standard establishes a right of use (“ROU”) model that requires a lessee
to recognize a ROU asset and liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as
finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.
The new standard became effective for the Company on January 1, 2019.
We adopted Topic
842 utilizing the modified retrospective adoption method with an effective date of January 1, 2019. We made the election to not apply
the recognition requirements in Topic 842 to short-term leases (i.e., leases of 12 months or less) for all classes of underlying assets.
Instead, we recognize lease payments in profit or loss on a straight-line basis over the lease term. In addition, in accordance with
Topic 842, variable lease payments in the period in which the obligation for those payments is incurred are not included in the recognition
of a lease liability or right-of-use asset. We elected to not separate non-lease components from the associated lease component for all
underlying classes of assets with lease and non-lease components. The adoption of Topic 842 resulted in the recognition of operating
lease liabilities of $4,678,108 and $5,863,648 and operating ROU assets of $4,533,747 and $5,777,550 as of December 31, 2020 and
2019, respectively, primarily related to leases for the company’s metal recycling facilities. There was no cumulative effect adjustment
to beginning Stockholders’ Deficit on the consolidated balance sheet. The accounting for our finance leases remained substantially
unchanged, as finance lease liabilities and their corresponding ROU assets were already recorded on the consolidated balance sheets under
the previous guidance. The adoption of Topic 842 did not have a significant effect on our results from operations or cash flows. See
“Note 9—Leases” for additional disclosures required by Topic 842.
In August 2020, the FASB issued ASU 2020-06,
which simplifies the guidance on accounting for convertible debt instruments by removing the separation models for: (1) convertible debt
with a cash conversion feature; and (2) convertible instruments with a beneficial conversion feature. As a result, the Company will not
separately present in equity an embedded conversion feature in such debt. Instead, we will account for a convertible debt instrument
wholly as debt, unless certain other conditions are met. We expect the elimination of these models will reduce reported interest expense
and increase reported net income for the Company’s convertible instruments falling under the scope of those models before the adoption
of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and
the treasury stock method will be no longer available. The provisions of ASU 2020-06 are applicable for fiscal years beginning after
December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The adoption of this
update is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB
issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes
to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes certain disclosure
requirements, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for
timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also adds disclosure
requirements, including changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level
3 fair value measurements, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The amendments on changes in unrealized gains and losses, and the range and weighted average of significant unobservable inputs used
to develop Level 3 fair value measurements, should be applied prospectively for only the most recent interim or annual period presented
in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective
date. ASU 2018-13 became effective for us on January 1, 2020. The adoption of this update did not have a material impact on the Company’s
consolidated financial statements and related disclosures.
There are other various
updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries
and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment as of December 31,
2020 and December 31, 2019 is summarized as follows:
| |
December 31, 2020 | | |
December 31, 2019 | |
Equipment | |
$ | 4,310,229 | | |
$ | 3,556,742 | |
Less accumulated depreciation | |
| (1,939,638 | ) | |
| (1,557,394 | ) |
Property and equipment, net | |
$ | 2,370,591 | | |
$ | 1,999,348 | |
Depreciation expense for the years ended December
31, 2020 and 2019 was $382,244 and $327,080, respectively.
NOTE 5 – MERCHANT
CASH ADVANCES
During the year ended December 31, 2020 and
2019, the Company received proceeds from the issuance of merchant cash advances of $3,309,500 and $1,109,601 and repaid an aggregate
of $2,545,704 and $32,060, respectively, of the advances. The advances have final payment dates ranging from June 19, 2020 to March 31,
2022. The advances are secured against the assets of the Company. As of December 31, 2020 and 2019, the Company owed $2,843,525 and $1,083,977
on the advances, net of issuance discounts of $707,646 and $326,112, respectively. The Company paid interest and penalties of $32,290
and $0 on these advances during the years ended December 31, 2020 and 2019, respectively.
NOTE 6 – ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
As of December 31, 2020 and 2019, the Company
owed accounts payable and accrued expenses of $1,488,713 and $1,315,482, respectively. These are primarily comprised of payments to vendors
of $1,285,788 and $1,224,413, accrued interest on debt of $16,944 and $356, and accrued credit card balances of $142,998 and $86,869
as of December 31 2020 and 2019, respectively.
NOTE 7 – COMMITMENTS AND CONTINGENCES
From time to time, we may become involved
in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties,
and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, we
are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse
effect on our business, financial condition or operating results.
The Company realized a gain on legal settlement
of $285,000 during the year ended December 31, 2019 on a worker’s compensation-related matter. The Company realized gain on debt
settlements of $19,440 and $127,984 during the years ended December 31, 2020 and 2019, respectively, for the early payoff of advances.
On June 30, 2021, the Company entered into
a Consent Order with the Virginia State Water Control Board. Under the Consent Order, the Company is required to pay a civil penalty
of $90,000, improve its internal control plans regarding recycled and waste materials, remediate certain environmental concerns on the
properties it leases, among other requirements. The Company believes it is appropriate to recognize an environmental remediation liability
as a regulatory claim was asserted in the Notices of Violations issued to the Company in November 2019, for which the June 2021 Consent
Order rectifies.
The Company has recognized a $140,000 environmental
remediation liability as of December 31, 2019 and 2020, which the Company believes $50,000 is a fair estimate of the cost to remediate
the properties it leases and the $90,000 civil penalty. The Company is committed to improving its processes and controls to ensure its
operations have minimal environmental impact with the goal of minimizing the number of comments and citations received by the Department
of Environmental Quality going forward.
NOTE 8 – NON-CONVERTIBLE
NOTES PAYABLE, EIDL NOTE PAYABLE AND PPP NOTE PAYABLE
On November 17, 2014, the Company entered
into a secured promissory note in the principal amount of $2,500,000 bearing an interest rate of 5.25% with a maturity date of October
16, 2019. The note is secured by all assets of the Company and property owned by the Company’s Chief Executive Officer. During
fiscal years 2020 and 2019, the Company made payments of $0 and $1,187,938, respectively. As of December 31, 2020 and 2019, the note
had a carrying value of $0 and $0, respectively.
On November 17, 2014, the Company entered
into a secured promissory note in the principal amount of $3,400,000 bearing an interest rate of 5.25% with a maturity date of November
17, 2019. The note is secured by all assets of the Company and property owned by the Company’s Chief Executive Officer. During
fiscal years 2020 and 2019, the Company made payments of $0 and $773,394, respectively. As of December 31, 2020 and 2019, the note had
a carrying value of $0 and $0, respectively.
On November 17, 2014, the Company entered
into a secured promissory note in the principal amount of $3,000,000 bearing an interest rate of 5.25% with a maturity date of October
16, 2019. The note is secured by all assets of the Company and property owned by the Company’s Chief Executive Officer. During
fiscal years 2020 and 2019, the Company made payments of $1,732,686 and $156,035, respectively. As of December 31, 2020 and 2019, the
note had a carrying value of $0 and $1,732,686, respectively.
On July 7, 2015, the Company entered into
a secured promissory note in the principal amount of $294,000 bearing an interest rate of 5.25% with a maturity date of July 7, 2020.
The note is secured by all assets of the Company and property owned by the Company’s Chief Executive Officer. During fiscal years
2020 and 2019, the Company made payments of $0 and $106,877, respectively. As of December 31, 2020 and 2019, the note had a carrying
value of $0 and $0, respectively.
On August 15, 2015, the Company entered into
an equipment finance note in the principal amount of $202,000 with a maturity date of August 15, 2021. The finance and interest charges
were included in the principal amount. The note is secured against equipment owned by the Company. During fiscal years 2020 and 2019,
the Company made payments of $0 and $111,238, respectively, towards the principal balance and $0 and $8,213, respectively, towards interest
and finance charges. As of December 31, 2020 and 2019, the note had a carrying value of $0 and $0, respectively.
On September 16, 2015, the Company entered
into a secured promissory note in the principal amount of $2,275,000 bearing an interest rate of 5.25% with a maturity date of September
16, 2019. The note is secured by all assets of the Company and property owned by the Company’s Chief Executive Officer. During
fiscal years 2020 and 2019, the Company made payments of $0 and $905,787, respectively. As of December 31, 2020 and 2019, the note had
a carrying value of $0 and $0, respectively.
On September 30, 2015, the Company entered
into an equipment finance note in the amount of $384,176 bearing an interest rate of 0% with a maturity date of September 30, 2020. There
is a one-time financing fee of $14,276 included in the note. The note is secured against equipment owned by the Company. During fiscal
years 2020 and 2019, the Company made payments of $82,882 and $56,157, respectively. As of December 31, 2020 and 2019, the note had a
carrying value of $0 and $82,882 respectively.
On March 8, 2017, the Company entered into
an equipment finance note in the principal amount of $120,851 with a maturity date of March 15, 2021. The finance and interest charges
were included in the principal amount. The note is secured against equipment owned by the Company. During fiscal years 2020 and 2019,
the Company made payments of $0 and $73,165, respectively, towards the principal balance and $0 and $5,401, respectively, towards interest
and finance charges. As of December 31, 2020 and 2019, the note had a carrying value of $0 and $0, respectively.
On October 9, 2018, the Company entered into
an equipment finance note in the principal amount of $97,574 with a maturity date of October 9, 2023. The finance and interest charges
were included in the principal amount. The note is secured against equipment owned by the Company. During fiscal years 2020 and 2019,
the Company made payments of $0 and $89,462, respectively, towards the principal balance and $0 and $6,605, respectively, towards interest
and finance charges. As of December 31, 2020 and 2019, the note had a carrying value of $0 and $0, respectively.
On December 27, 2018, the Company entered
into a secured promissory note in the amount of $898,000 bearing an interest rate of 9.25% with a maturity date of February 15, 2024.
The note is secured by assets of the Company. During fiscal years 2020 and 2019, the Company made principal payments of $0 and $770,126,
respectively. There was a gain on settlement of $127,874. As of December 31, 2020 and 2019, the note had a carrying value of $0 and $0,
respectively.
On July 5, 2019, the Company entered into
a secured promissory note in amount of $1,360,800 bearing an interest rate of 10.495% with a maturity date of August 5, 2022. There was
an additional financing cost of $11,474 assessed in fiscal year 2020. The note is secured by assets of the Company. During fiscal years
2020 and 2019, the Company made principal payments of $274,058 and $0, respectively, and payments towards interest of $34,020 and $14,715,
respectively. There was a principal addition of $11,474 in fiscal year 2020. As of December 31, 2020 and 2019, the note had a
principal balance of $1,066,864 and $1,360,800. As of December 31, 2020 and 2019, the note had a carrying value of $957,817 and $1,183,481,
respectively.
On August 15, 2019, the Company entered into
a secured promissory note in the amount of $652,680 bearing an interest rate of 10.495% with a maturity date of November 15, 2025. There
was an additional financing cost of $2,313 assessed in fiscal year 2020. The note is secured by assets of the Company. During fiscal
years 2020 and 2019, the Company made principal payments of $58,052 and $0, respectively, and payments towards fees of $9,158 and $0,
respectively. As of December 31, 2020 and 2019, the note had a principal balance of $596,941 and $652,680. As of December 31, 2020 and
2019, the note had a carrying value of $509,324 and $546,808, respectively.
On December 30, 2019, the Company entered
into a secured promissory note in the principal amount of $2,000,000 bearing an interest rate of 4.75% with a maturity date of January
30, 2024. The note is secured by all assets of the Company and property owned by the Company’s Chief Executive Officer. During
fiscal years 2020 and 2019, the Company made principal payments of $392,288 and $0, respectively, and payments towards interest of $90,977
and $0, respectively. As of December 31, 2020 and 2019, the note had a carrying value of $1,607,712 and $2,000,000, respectively.
On December 30, 2019, the Company entered
into a secured, demand promissory note in the principal amount of $1,000,000 bearing an interest rate of 4.75% with a maturity date of
January 30, 2024, of which the Company received proceeds of $197,000 and $945,844 during the years ended December 31, 2020 and 2019,
respectively. Under the terms of the note, any principal amount that is paid off can be reborrowed. The note is secured by all assets
of the Company and property owned by the Company’s Chief Executive Officer. During fiscal years 2020 and 2019, the Company made
principal payments of $192,585 and $0, respectively, and payments towards interest of $26,837 and $0, respectively. As of December 31,
2020 and 2019, the note had a carrying value of $950,260 and $945,844, respectively.
On April 19, 2020, the Company received proceeds
of $500,000 from an Economic Injury Disaster Loan (“EIDL”) note. The note has a maturity date of April 19, 2040 and bears
3.75% interest per annum. As of December 31, 2020, the Company owed $500,000 in principal and $13,151 in accrued interest on this
note.
On April 20, 2020, the Company received proceeds
of $543,000 from a Paycheck Protection Program (“PPP”) note. The note has a maturity date of April 20, 2022 and bears 1% interest
per annum. As of December 31, 2020, the Company owed $543,000 in principal and $3,794 in accrued interest on this note. On April 1, 2021,
the Small Business Administration forgave all principal and interest due under this note.
On August 12, 2020, the Company entered into
a secured promissory note in the amount of $335,760, bearing an interest rate of 10.495% with a maturity date of September 12, 2024.
The note is secured by assets of the Company. During fiscal year 2020, the Company made principal payments of $20,985. As of December
31, 2020 and 2019, the note had a principal balance of $314,755 and $0. As of December 31, 2020, the note had a carrying value of $259,757.
On October 28, 2020, the Company entered into
a secured promissory note in the amount of $273,960 bearing an interest rate of 10.015% with a maturity date of November 5, 2023. The
note is secured by assets of the Company. During fiscal year 2020, the Company made principal payments of $0. As of December 31, 2020,
the note had a principal balance of $273,960. As of December 31, 2020, the note had a carrying value of $237,109.
There were interest expense of $233,394 and
$1,092,173 for the years ended December 31, 2019 and 2020, respectively.
The following is a summary of the notes
payable balances at December 31, 2020 and 2019:
| |
2020 | | |
2019 | |
Note balance | |
$ | 5,564,978 | | |
| 6,491,702 | |
Less: current portion | |
| (1,924,645 | ) | |
| (2,895,500 | ) |
Long-term portion | |
$ | 3,640,333 | | |
$ | 3,596,202 | |
Aggregate
minimum future principal payment maturities at December 31, 2020 were as follows:
Year ended December 31, | |
| |
2021 | |
$ | 1,924,645 | |
2022 | |
| 1,734,112 | |
2023 | |
| 1,081,821 | |
2024 | |
| 341,261 | |
2025 | |
| 80,619 | |
Thereafter | |
| 402,520 | |
Total principal payments | |
$ | 5,564,978 | |
NOTE 9 – LEASES
Property Leases (Operating Leases)
The
Company leases its facilities and certain office equipment under operating leases which expire on various dates through 2025. The Company
determines if an arrangement is a lease at inception and whether they are finance or operating leases. Right of Use (“ROU”)
assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation
to make lease payments from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease
based on the present value of lease payments over the lease term. When readily determinable, the Company uses the implicit rate in determining
the present value of lease payments. The ROU asset also includes any fixed lease payments, including in-substance fixed lease payments
and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease term
is determined at lease commencement and includes any non-cancellable period for which the Company has the right to use the underlying
asset, together with any options to extend that the Company is reasonably certain to exercise.
On April
16, 2016, the Company entered into a lease agreement for the leasing of an automobile. Under the terms of the lease, the Company is required
to pay $10,000 for the first month and $725 per month thereafter for 47 months. The lease expires on April 16, 2020 and the Company does
not have an option to renew or extend. The Company is responsible to any damage to the automobile under the terms of the lease.
On December
29, 2017, the Company entered into a lease agreement for the leasing of an automobile. Under the terms of the lease, the Company is required
to pay $7,500 for the first month and $700 per month thereafter for 47 months. The lease expires on December 29, 2021 and the Company
does not have an option to renew or extend. The Company is responsible to any damage to the automobile under the terms of the lease.
Effective
January 1, 2019, the Company entered into leasing agreements with a company owned by the Chief Executive Officer of Empire for the leasing
of the Company’s metal recycling locations. Under the terms of the leases, the Company is required to pay an aggregate of $137,450
per month for the facilities beginning January 1, 2019 and increasing by 3% on the first of every year thereafter. The leases expire
on January 1, 2024 and the Company has two options to extend the leases by 5 years per option. In the event the Company does not exercise
the options, the leases will continue on a month-to-month basis. The Company cannot sublease any of the properties under the lease agreements.
On February
18, 2019, the Company entered into a lease agreement for the leasing of an automobile. Under the terms of the lease, the Company is required
to pay $18,200 for the first month and $750 per month thereafter for 59 months. The lease expires on February 18, 2025 and the Company
does not have an option to renew or extend. The Company is responsible to any damage to the automobile under the terms of the lease.
ROU
assets and liabilities consist of the following:
| |
December 31,
2020 | | |
December 31,
2019 | |
Operating leases - ROU assets (included in Other assets) | |
$ | 4,533,747 | | |
$ | 5,777,550 | |
| |
| | | |
| | |
Current portion of lease liabilities | |
$ | 1,766,552 | | |
$ | 1,776,726 | |
Long term lease liabilities, net of current portion | |
| 2,911,556 | | |
| 4,086,922 | |
Total lease liabilities | |
$ | 4,678,108 | | |
$ | 5,863,648 | |
Aggregate minimum future commitments under
non-cancelable operating leases and other obligations at December 31, 2020 were as follows:
Year ended December 31, | |
| |
2021 | |
$ | 1,766,552 | |
2022 | |
| 1,811,352 | |
2023 | |
| 1,865,412 | |
2024 | |
| 9,000 | |
2025 | |
| 750 | |
Total Minimum Lease Payments | |
$ | 5,453,066 | |
Less: Imputed Interest | |
$ | 774,958 | |
Present Value of Lease Payments | |
$ | 4,678,108 | |
Less: Current Portion | |
$ | 1,766,552 | |
Long Term Portion | |
$ | 2,911,556 | |
The Company leases its facilities, automobiles,
and offices under operating leases which expire on various dates through 2024. Rent expense related to these leases is recognized based
on the payment amount charged under the lease. Rent expense for the years ended December 31, 2020 and 2019 was $1,776,726 and $1,783,949,
respectively. At December 31, 2020, the leases had a weighted average remaining lease term
of 3.0 years and a weighted average discount rate of 10%.
NOTE 10 – CONCENTRATIONS OF REVENUE
Customer Concentrations
The Company has a concentration of customers.
For the fiscal year ended December 31, 2020, one customer represented approximately 93% of revenue. For the fiscal year ended December
31, 2019, two customers represented approximately 89% and 8% of revenue each. Sims Metal Management accounted for $11,098,172 and $15,302,399
in revenue in 2020 and 2019, respectively, and Techemet LP accounted for $1,115,724 and $1,386,223 in revenue in 2020 and 2019, respectively.
The Company’s sales are concentrated
in the Virginia and northeastern North Carolina markets.
NOTE 11 – STOCKHOLDERS’ EQUITY
The Company is authorized
to issue 5,000 shares of common stock, par value $1.00 per share. There were 1,000 shares of common stock outstanding at December 31,
2019, and December 31, 2020.
During the year ended December 31, 2020, there
were contributions for lease rent of $1,718,463 and cash contributions of $1,529,080. During the year ended December 31, 2019, there
contribution for lease rent of $1,692,201 and cash distributions of $4,149,883.
NOTE 12 – WARRANTS
The Company does not have any outstanding
warrants to purchase common stock.
NOTE 13 – STOCK OPTIONS
The Company does not
have any outstanding options to purchase shares of common stock.
NOTE 14 –
INCOME TAXES
The Company, with
stockholder’s consent, has elected to be taxed as an “S Corporation” under the provisions of the Internal Revenue Code
and comparable state income tax law. As an S Corporation, the Company is generally not subject to corporate income taxes and the Company’s
net income or loss is reported on the individual tax return of the stockholder of the Company. Therefore, no provision or liability for
income taxes is reflected in the financial statements.
The Company has not
been audited by the Internal Revenue Service, and accordingly the business tax returns since 2016 are open to examination. Management
has evaluated its tax positions and has concluded that the Company had taken no uncertain tax positions that could require adjustment
or disclosure in the financial statements to comply with provisions set forth in Accounting Standards Codification (ASC) Section 740,
Income Taxes.
NOTE 15 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred
after the balance sheet date but before the financial statements are issued.
On March 16, 2021, the Company received a
$543,275 Paycheck Protection Program loan.
On April 1, 2021, the Small Business Administration
forgave the Company’s Paycheck Protection Program loan in the principal amount of $543,000 and accrued interest of $5,219.
On September 30, 2021, MassRoots, Inc. entered
into definitive agreements to acquire the Company for consideration of (i) 482,504,742 shares of
Common Stock, (ii) within 3 business days of the closing of the Company’s next capital raise, repayment of a $1 million advance
made to purchase Empire’s Virginia Beach location and (iii) a promissory note in the principal amount of $3.7 million with a maturity
date of September 30, 2023. The acquisition was effective October 1, 2021 upon the effectiveness of a Certificate of Merger in Virginia.
15,238,461
Shares of Common Stock
PROSPECTUS
May 2, 2022