NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
UNAUDITED
(1) Summary of Significant Accounting Policies
Organization
Majic Wheels Corp. (“Majic Wheels” or the “Company”) is a Delaware corporation. The Company was incorporated under the laws of the State of Delaware on March 15, 2007. The business plan of the Company was to develop a radio-controlled toy vehicle utilizing a patent pertaining to unique adhesive wheels. In July 2010, there was a change in control of the Company and its focus is now waste management. In 2012, the Company started operations in the waste management business through its wholly-owned subsidiary, MW Dumpster Services, Inc. (“MWDS”). In March 2012, the Company purchased the exclusive franchise rights of College Hunks Haul Junk and College Hunks Moving for Charlotte and Lee Counties located in Southwest Florida and created a wholly-owned subsidiary for its operations, CHHJ of Lee and Charlotte County, Inc. The accompanying consolidated financial statements of Majic Wheels Corp. were prepared from the accounts of the Company under the accrual basis of accounting.
On January 25, 2012, the Company filed with the Secretary of the State of Delaware to increase the authorized capital of the Corporation to be 5,000,000,000 shares of common stock plus 10,000,000 shares of preferred stock, both with a par value of $0.0001 per share.
Basis of Presentation-Successor
The accompanying unaudited consolidated balance sheet as of September 30, 2012 included herein has been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2012 and the results of its operations and its cash flows for the three and seven months ended September 30, 2012. These results are not necessarily indicative of the results expected for the calendar year ending December 31, 2012. The accompanying consolidated financial statements and notes thereto do not reflect all disclosures required under accounting principles generally accepted in the United States of America. Refer to the Company’s audited financial statements as of December 31, 2011, filed with the SEC for additional information, including significant accounting policies.
Basis of Presentation-Predecessor
The accompanying unaudited balance sheet as of December 31, 2011, the statement of operations and the statement of cash flows for the three and nine months ended September 30, 2011 include the accounts of Mark’s Dumpster Services Inc. The accompanying statement of operations and the statement of cash flows for the two months ended February 29, 2012 include the accounts of Mark’s Dumpster Services Inc and MW Dumpster Service Inc. These predecessor financial statements are disclosed in the Company’s Form 10-Q for purposes of complying with the rules and regulations of the Securities and Exchange Commission as required by S-X Rule 8-02. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America using Mark’s Dumpster Services and MW Dumpster Service Inc specific information where available. These financial statements should be read in conjunction with Company’s Form 8-K filed on March 2, 2012.
Accounts Receivable and Allowance for Doubtful Accounts
Customers generally pay invoices between the time of order to 30 days after the service has commenced. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the specific supplier’s current ability to pay its obligation to the Company and the condition of the general economy and the industry as a whole. At
September
30, 2012 and December 31, 2011, the allowance for doubtful accounts was $0 and $18,726, respectively.
Property and Equipment
Property and equipment, including significant improvements, are recorded at cost. Repairs and maintenance and any gains or losses on dispositions are recognized as incurred. Depreciation is provided for on a straight-line basis to allocate the cost of depreciable assets to operations over their estimated service lives.
|
Asset Category
|
|
Depreciation Period
|
|
|
|
|
|
Dumpsters
|
|
10 Years
|
|
Machinery & equipment
|
|
5 Years
|
|
Trailers
|
|
5 Years
|
|
Transportation equipment
|
|
5 Years
|
|
Used vehicles
|
|
5 Years
|
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets and the related estimated remaining lives at each balance sheet date. The Company records an impairment or change in useful life whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. For the nine months ended
September
30, 2012, no events or circumstances occurred for which an evaluation of the recoverability of long-lived assets was required.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Dumpster rental revenues are recognized at the end of the rental term. Upon pickup of the dumpster, additional charges such as rental fees, may be billed to the customer. The Company provides certain labor services and the revenue for these services is recognized when the service is complete. Advance payments from customer are deferred and revenue is recognized when service is complete. Deferred revenue as of September 30, 2012 and December 31, 2011 was $0 and $37,535, respectively.
Stock-based compensation
Accounting Standards Codification (“ASC”) 718, “Accounting for Stock-Based Compensation" established financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for an employee stock option or similar equity instrument. The Company accounts for compensation cost for stock option plans and for share based payments to non-employees in accordance with ASC 718. Accordingly, employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. Additionally, share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value. The Company accounts for share based payments to non-employees in accordance with ASC 505-50 “Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.
Embedded conversion features
The Company evaluates embedded conversion features within convertible debt and convertible preferred stock under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
Fair Value of Measurement
As defined in ASC 820 “Fair Value Measurements”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of
September
30, 2012. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
|
As of September 30, 2012
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical
Instruments
Level 1
|
|
Significant
Other
Observable
Inputs
Level 2
|
|
Significant Unobservable Inputs Level 3
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
2,873,501
|
|
|
|
|
|
$
|
2,873,501
|
|
(2) Development Stage Activities and Going Concern
From the date of inception, March 15, 2007, through the date of the acquisition of assets (see Note 5), the Company was in the development stage as defined in ASC 915, Accounting and Reporting by Development Stage Enterprises”. As a result of the acquisition, the Company has begun to generate revenue from operations and has emerged from the development stage.
While management of the Company believes that it will be successful in its capital formation and planned operating activities, there can be no assurance that the Company will be able to raise additional equity capital or that its new business focus of waste management will generate sufficient revenues to sustain the operations of the Company.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has incurred an operating loss since inception, had negative working capital as of
September 30, 2012
, and the cash resources of the Company were insufficient to meet its planned business objectives. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
(3) Promissory Notes
In December 2010, the Company issued a promissory note of $62,500 to American Settlement. The note accrues interest at 20% and is payable on demand. In June 2012, American Settlement sold the whole $62,500 debt to Garlette, LLC.
The Company then executed an amended and restated convertible debenture agreement to clarify the amount owed.
See discussion about the amended convertible debt agreement and debt modification in Note 4.
On January 4, 2012, the Company issued one promissory note of $32,400 as payment for an accounts payable invoice. The note accrues interest at 20%, unsecured and is payable on demand.
On March 29, 2012, the Company entered into a debt agreement with GE Capital. This agreement is for the purchase of equipment. The Company promises to pay the Lender principal $54,475 plus pre-computed interest for a total of $59,021 in 26 monthly installments. The proceeds of the debt will be disbursed as follows: $190 to Florida Department of Revenue and $54,285 to Apex Equipment Sales, Inc. During the nine months ended September 30, 2012, the Company paid $10,476 principal to GE Capital.
On March 30, 2012, the Company issued two promissory notes totaling $30,337 to two third parties as payment for reimbursement of expenses incurred on behalf of the Company. The notes accrue interest at 20%, unsecured and are payable on demand.
On April 4, 2012, the Company entered into another debt agreement with GE Capital. This agreement is additional consideration due for the purchase of the College Hunks franchise as discussed in Note 1. The Company promises to pay the Lender principal of $47,658 plus pre-computed interest for a total of $55,610 in 48 monthly installments. The proceeds of the agreement will be disbursed as follows: $166 to Florida Department of Revenue, $30,216 to GE Capital, and $17,276 to CHHJ of Southwest Florida LLC. This debt agreement includes the purchase of a 2009 Isuzu truck.
On May 29, 2012, the Company entered into a future receivable purchase and sale agreement with a third party. The Company sold future receivables of $11,960 for a price of $8,000. The Company recognized the difference of $3,960 between the value of future receivables and sale price as interest expenses during the seven months ended September 30, 2012. During the nine months ended September 30, 2012, the Company paid $11,463 the third party.
On June 30, 2012, the Company issued two promissory notes totaling $15,645 to two third parties as payment for reimbursement of expenses incurred on behalf of the Company. The notes accrue interest at 20%, unsecured and are payable on demand.
On June 30, 2012, the Company issued a promissory note for $18,992 to a third party as payment for reimbursement of expenses incurred on behalf of the Company. This note accrues interest at 20%, is payable in one year, unsecured, and is convertible after six months
into common stock at the conversion rate of 25% of the average of the five lowest closing prices during the 30 trading days prior to notice of conversion. As of September 30, 2012, the note is not convertible yet.
On July 24, 2012, the Company issued a promissory note of $32,500 to Asher Enterprise, Inc. The note accrues at 8%, is unsecured and due on April 23, 2013, and is convertible after 180 days of the debt issuance into the Company’s restricted common stock. The conversion price is 58% of the average of the three lowest closing bid prices during the 10 trading days prior to notice of conversion. Asher agreed to restrict its ability to convert the note and receive shares of the Company if the number of shares of common stock beneficially held by Asher and its affiliates in the aggregate after such conversion exceeds 4.99% of the then outstanding shares of common stock. As of September 30, 2012, the note is not convertible yet.
On August 22, 2012, American Settlement sold a promissory note of $36,182 to Asher Enterprises, Inc. The note was originally issued by the Company on December 31, 2010, accrued interest at 20% and was payable on demand. The Company then executed an amended and restated convertible debenture agreement with Asher Enterprises, Inc. See discussion in Note 4.
On September 30, 2012, the Company issued three promissory notes totaling $10,597 to three third parties as payment for reimbursement of expenses incurred on behalf of the Company. The notes accrue interest at 20%, unsecured and are payable on demand.
(4) Convertible Debt and Debt Modification
Connied, Inc
On February 29, 2012, the Company issued one promissory note of $837,519 to Connied, Inc for acquisition of assets used for the expansion of its waste management and site work division (see discussion in Note 6). The note accrues interest at 20%, is payable on February 28, 2014, secured by the assets that were purchased. In August, 2012, after six months of the debt issuance, it became convertible and was reclassified from nonconvertible promissory note to convertible note. The conversion price is 25% of the average closing prices for the Company’s stock during the previous 10 trading days at date of conversion.
In May 2012, the Company issued a $20,500 convertible debenture Connied, Inc to purchase equipment. The convertible debenture matures two years from the date of issuance and bears interest at a 20% rate per annum, is unsecured, and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 25% of the average of the five lowest closing prices during the 30 trading days prior to notice of conversion.
The Company analyzed the conversion option of both Connied, Inc debts for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The instrument is measured at fair value at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings. The fair value of the embedded conversion options resulted in full discounts of $837,519 and $20,500 to Connied notes issued in February, 2012 and May 2012, respectively. The discounts will be amortized over the term of the notes to interest expense. As of September 30, 2012, $52,780 of the discounts had been amortized to interest expense. See Note 5 for additional information on the derivative liabilities.
Garlette, LLC
In June 2012, as discussed in Note 3, American Settlement sold its $62,500 promissory note plus $18,562 of accrued interest to Garlette, LLC. The Company then executed an amended and restated convertible debenture agreement to clarify the amount owed. The amended and restated convertible debenture has a principal of $81,062, bears interest at a 20% rate per annum, is unsecured, payable on June 26, 2013 and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 25% of the average of the five lowest closing prices during the 30 trading days prior to notice of conversion.
The Company analyzed the modification of the term under ASC 470-50 “Debt Modifications and Extinguishment”. The Company determined the debt holder has not granted a concession under the amended terms. As the modification adds a new conversion option to the debt, the Company concluded the modification is substantial and should be accounted as debt extinguishment.
The Company also analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The instrument is measured at fair value at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings. The fair value of the embedded conversion option resulted in a full discount of $81,062 to the note on the debt modification date. The discount will be amortized over the term of the note to interest expense.
On the debt issuance date, the Company converted the $2,462 convertible note into 9,117,185 common shares. As of September 30, 2012, $23,135 of the discount had been amortized to interest expense. See Note 5 for additional information on the derivative liabilities.
Asher Enterprises, Inc.
On August 22, 2012, as discussed in Note 3, American Settlements sold its $36,182 promissory note to Asher Enterprises, Inc.
The Company then executed an amended and restated convertible debenture agreement. The amended and restated convertible debenture bears interest at a 10% rate per annum, is unsecured, payable on demand and is convertible into the Company’s common stock upon the issuance of the debt.
The conversion price is 58% of the average of the three lowest closing bid prices of the common stock during the 10 trading days prior to conversion.
The Company analyzed the modification of the term under ASC 470-50 “Debt Modifications and Extinguishment”. The Company determined the debt holder has not granted a concession under the amended terms. As the modification adds a new conversion option to the debt, the Company concluded the modification is substantial and should be accounted as debt extinguishment.
The Company also analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The instrument is measured at fair value at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings. The fair value of the embedded conversion option resulted in a full discount of $36,182 to the note on the debt modification date. The discount will be amortized over the term of the note to interest expense.
In August and September 2012, the Company converted a total of $14,000 of the convertible note into 53,421,053 common shares. As of September 30, 2012, $20,604 of the discount had been amortized to interest expense. See Note 5 for additional information on the derivative liabilities.
Parlette Revocable Trust
On August 20, 2012, the Company issued a convertible promissory note of $11,000 to Parlette Revocable Trust as payment for reimbursement of expenses incurred on behalf of the Company. This note accrues interest at 20%, is payable in one year, unsecured, and is convertible
into common stock upon the issuance of the debt. The conversion price is 25% of the average of the five lowest closing prices during the 30 trading days prior to notice of conversion.
The Company analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The instrument is measured at fair value at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings. The fair value of the embedded conversion option resulted in a full discount of $11,000 to the note on the debt issuance date. The discount will be amortized over the term of the note to interest expense.
As of September 30, 2012, $1, 236 of the discount had been amortized to interest expense. See Note 5 for additional information on the derivative liabilities.
CHHJ of Southwest Florida LLC
On March 26, 2012, the Company issued a $75,000 promissory note to CHHJ of Southwest Florida LLC for the exclusive franchise rights of College Hunks Haul Junk and College Hunks Moving for Charlotte and Lee Counties located in Southwest Florida. The note accrues interest at 3%, is payable in two years, unsecured and became convertible in September, 2012, after six months of the debt issuance. The conversion price is the lowest closing price of the Company’s common stock during the previous 10 trading days prior to conversion notice. The related cost is recorded as an operating expense during the seven months ended September 30, 2012 due to uncertainty of the future expected cash flows to be derived from these rights.
The Company analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The instrument is measured at fair value at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings. The fair value of the embedded conversion option resulted in a debt discount of $73,250 to the note on the debt issuance date. The discount will be amortized over the term of the note to interest expense.
As of September 30, 2012, $537 of the discount had been amortized to interest expense. See Note 5 for additional information on the derivative liabilities.
Other Convertible Notes
In August 2010, the Company issued a $120,695 convertible debenture in settlement of a debt that was owed to a former related party that was assigned to a third party in July 2010.
The convertible debenture matures two years from the date of issuance and bears interest at a 20% rate per annum, is unsecured, payable on August 1, 2012 and is convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 25% of the average of the five lowest closing prices during the 30 trading days prior to notice of conversion.
In February 2012, the convertible debt holder sold $90,200 of its convertible note to six other parties. The Company then executed an amended and restated convertible debenture agreement with each of these companies to clarify the amount owed to each. The Company also executed an amended and restated convertible debenture agreement with the original debt holder for the remaining balance. The amended and restated convertible debentures bear interest at a 20% rate per annum, are unsecured, payable on February 24, 2014 and are convertible into the Company’s common stock at any time at the holder’s option, at the conversion rate of 25% of the average of the five lowest closing prices during the 30 trading days prior to notice of conversion. Subsequently, conversions occurred on five of the seven notes, for total share issuances of 158,723,570 for $25,472 of debt conversions.
The Company analyzed the modification of the term under ASC 470-60 “Trouble Debt Restructurings”. The Company determined the debtor is experiencing financial difficulty and the creditor has a granted a concession under the modified terms and concluded the modification should be accounted under ASC 470-60 “Trouble Debt Restructurings”. The total future cash payments specified by the new terms is greater than the carrying amount of the promissory note of $157,665 (including accrued interest) prior to the modification. Accordingly, the Company did not change the carrying amount of the convertible debt at the date of modification.
The Company also analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as a liability due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the convertible promissory note and to fair value the instrument as of each subsequent balance sheet date or termination of the instrument with the change in fair value recorded to earnings.
Summary of the convertible debentures at September 30, 2012 is as follows:
|
Convertible debenture – short term
Garlette, LLC
|
|
$
|
78,600
|
|
|
Parlette Revocable Trust
|
|
|
11,000
|
|
|
Asher Enterprises
|
|
|
22,182
|
|
|
Less unamortized debt discount
|
|
|
(83,270
|
)
|
|
Net
|
|
|
28,512
|
|
|
|
|
|
|
|
|
Convertible debentures – long term
|
|
|
|
|
|
Connied, Inc
|
|
$
|
858,019
|
|
|
CHHJ of Southwest Florida, LLC
|
|
|
75,000
|
|
|
Others
|
|
|
95,223
|
|
|
Less unamortized debt discount
|
|
|
(919,324
|
)
|
|
Net
|
|
|
108,918
|
|
(5) Derivative Liabilities
The Company valued the embedded derivatives (see discussion below) using the Black Scholes Option Pricing Model based on the following assumptions:
|
Dividend yield:
|
|
|
0
|
%
|
|
Volatility
|
|
|
308.49%-527.28
|
%
|
|
Risk free rate
|
|
|
0.12%-0.34
|
%
|
Connied, Inc
As discussed in Note 4, the Company determined that the instruments embedded in the convertible note should be classified as liabilities and recorded at fair value due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The Company valued the embedded derivative on the debt issuance date.
The fair value of the conversion option of the note issued on February 29, 2012 was determined to be $6,640,933 on August 29, 2012, the date the note became convertible, of which $837,519 was recorded as debt discount and $5,803,414 was recognized as loss on derivatives. The Company revalued the embedded derivatives as of September 30, 2012. The fair value of the instruments was determined to be $2,201,867 as of September 30, 2012, and the decrease from August 22, 2012 was allocated to current period operations as a gain on derivative of $4,439,066.
The fair value of the conversion option of the note issued in May, 2012 was determined to be $81,638 as of the debt issuance date, of which $20,500 was recorded as debt discount and $61,138 was recognized as loss on derivatives. The Company revalued the embedded derivatives as of September 30, 2012. The fair value of the instruments was determined to be $57,824, and the decrease from the debt issuance date was allocated to current period operations as a gain on derivative of $23,814.
Garlette, LLC
As discussed in Note 4, the Company determined that the instruments embedded in the convertible note should be classified as liabilities and recorded at fair value due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The Company valued the embedded derivative on the debt issuance date. The fair value of the instruments was determined to be $737,843 as of the debt issuance date, of which $81,062 was recorded as debt discount and $656,781 was recognized as loss on derivatives.
As a result of the note conversion on debt issuance date, under ASC 815-15 “Derivatives and Hedging”, the instrument is measured at fair value at the date of the termination with the change in fair value recorded to earnings. The fair value of the instruments on conversion date was $737,843 of which $22,410 was reclassified out of liabilities to equity.
The Company revalued the embedded derivatives as of September 30, 2012. The fair value was determined to be $218, 240, and the decrease from the debt issuance date was allocated to current period operations as a gain on derivative of $497,193.
Asher Enterprises, Inc.
As discussed in Note 4, the Company determined that the instruments embedded in the convertible note should be classified as liabilities and recorded at fair value due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The Company valued the embedded derivative on the debt issuance date. The fair value of the instruments was determined to be $205,550 as of the debt issuance date, of which $36,182 was recorded as interest expense and $169,368 was recognized as loss on derivatives.
As a result of multiple note conversions in August and September, 2012, under ASC 815-15 “Derivatives and Hedging”, the instrument is measured at fair value at the date of the termination with the change in fair value recorded to earnings. During the nine months ended September 30, 2012, $31,066 was reclassified out of liabilities to equity,
The Company revalued the instrument as of September 30, 2012. The fair value of the instruments was determined to be $23,094 and the decrease from the debt issuance date was allocated to current period operations as a gain on derivative of $151,390.
Parlette Revocable Trust
As discussed in Note 4, the Company determined that the instruments embedded in the convertible note should be classified as liabilities and recorded at fair value due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The Company valued the embedded derivative on the debt issuance date. The fair value of the instruments was determined to be $55,762 as of the debt issuance date, of which $11,000 was recorded as debt discount and $44,762 was recognized as loss on derivatives.
The Company revalued the embedded derivatives as of September 30, 2012. The fair value of the instruments was determined to be $30,753 as of September 30, 2012, and the decrease from the debt issuance date was allocated to current period operations as a gain on derivative of $25,009.
CHHJ of Southwest Florida, LLC
As discussed in Note 4, the Company determined that the instruments embedded in the convertible note should be classified as liabilities and recorded at fair value due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The Company valued the embedded derivative on the debt issuance date. The fair value of the instruments was determined to be $73,250 as of the debt issuance date, which was recorded as debt discount.
The Company revalued the embedded derivatives as of September 30, 2012. The fair value of the instruments was determined to be $73,348 as of September 30, 2012, and the increase from the debt issuance date was allocated to current period operations as a loss on derivative of $98.
Other Convertible Notes
As discussed in Note 4, the Company determined that the instruments embedded in the convertible notes should be classified as liabilities and recorded at fair value due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options
As a result of the note conversions, under ASC 815-15 “Derivatives and Hedging”, the instrument is measured at fair value at the date of the termination with the change in fair value recorded to earnings. During the nine months ended September 30, 2012, $135,780 was reclassified out of liabilities to equity.
The Company revalued the embedded derivatives as of September 30, 2012. The fair value of the embedded derivative was determined to be $268,374. The decrease from December 31, 2011 was recognized as a gain on derivative of $555,067 with gain of $1,212,191 allocated to the seven months ended September 30, 2012.
The following tables summarize the derivative liabilities included in the consolidated balance sheet:
|
Derivative Liabilities
|
|
|
|
|
Balance at December 31, 2011 (Successor)
|
|
$
|
959,221
|
|
|
ASC 815-15 addition
(Connied, Inc)
|
|
|
6,722,571
|
|
|
ASC 815-15 addition
(Garlette, LLC)
|
|
|
737,843
|
|
|
ASC 815-15 addition
(Asher Enterprises)
|
|
|
205,550
|
|
|
ASC 815-15 addition
(Parlette Revocable Trust)
|
|
|
55,762
|
|
|
ASC 815-15 addition
(CHHJ of Southwest Florida, LLC)
|
|
|
73,250
|
|
|
ASC 815-15 deletions
(Garlette, LLC)
|
|
|
(22,410
|
)
|
|
ASC 815-15 deletions
(Asher)
|
|
|
(31,066
|
)
|
|
ASC 815-15 deletions
(Other)
|
|
|
(135,780
|
)
|
|
Change in fair value
|
|
|
(5,691,440
|
)
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
$
|
2,873,501
|
|
The following table summarizes the derivative (gain) or loss for the seven months period ended September 30, 2012 recorded as a result of the derivative liabilities above:
|
Derivative Liabilities
|
|
|
|
|
Balance at March 1, 2012 (Successor)
|
|
$
|
-
|
|
|
Excess of fair value of the derivative over note payable (Connied, Inc)
|
|
|
5,864,552
|
|
|
Excess of fair value of the derivative over note payable (Garlette, LLC)
|
|
|
656,781
|
|
|
Excess of fair value of the derivative over note payable (Asher)
|
|
|
169,368
|
|
|
Excess of fair value of the derivative over note payable (Parlette Revocable Trust)
|
|
|
44,762
|
|
|
Change in fair value
|
|
|
(6,348,025
|
)
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
$
|
378,438
|
|
(6) Asset Purchase Agreement
In February 2012, the Company completed the acquisition of assets to be used for the expansion of its waste management and site work division. The assets include 140 roll-off dumpsters, 3 roll-off trucks, and construction and site-clearing equipment, including a Bobcat and a grading tractor. As discussed in Note 4, the assets were purchased from Connied, Inc. for a purchase price of $837,519, which was paid with a Promissory Note. Connied, Inc obtained the assets in December 2011 through foreclosure on a loan from Mark’s Dumpster Services, Inc. (“MDS”), an entity controlled by the Company’s officers and directors. However on the date of acquisition, MDS were not control by the Company. The Company determined the purchase of the assets qualifies as a business under ASC 805 “Business Combinations”. The purchase price was allocated 100% to fixed assets and the Company did not identify any intangible assets and assume any liabilities from the predecessor. Additionally, the Company determined they succeeded to the business of MDS and therefore will be required to comply with the rules and regulations of the SEC as required by S-X Rule 8-02 for the presentation of predecessor financial statements. Accordingly, the interim financial statements as of September 30, 2011 and December 31, 2011 are that of MDS, the interim financial statements as of February 29, 2012 are that of MDS and MWDS, and the interim financial statements as of September 30, 2012 are that of the Company.
(7) Preferred Stock
On September 30, the Company issued 500,000 Series A convertible preferred shares to Denise Houghtaling to settle salary payable of $205,124 accrued from January 1, 2011 to December 31, 2011. The CFO has the right to convert all (but not part) of her shares of Series A convertible preferred stock into 51% of the Company’s common stock issued as of the conversion date. The Series A preferred shares are not redeemable by either the Company or the shareholder, pays zero dividend and carries the right, voting with the holders of the Company’s common shares as if all shares of Series A preferred shares would convert.
The Company evaluated the application of ASC 815-15 and ASC 815-40 for the embedded conversion feature of Series A preferred stock and concluded the embedded conversion feature should be classified as equity and not be bifurcated.
(8) Common Stock
Shares issued for convertible notes:
During the nine months ended September 30, 2012, the Company converted a total of $41,934 convertible debt into 221,261,808 common shares. See discussion in Note 4.
On July 30, 2012, the Company issued 1,000,000 and 500,000 common shares to Denise Houghtaling and Mark Houghtaling, respectively, per terms of their employment agreements dated July 23, 2010. The Company issued 143,300,820 common shares to Denise Houghtaling as the settlement of salary payable accrued from July 23, 2010 to December 31, 2010, per terms of her employment agreement dated July 23, 2010. The fair value of the 144,800,820 common shares issued was determined to be $130,246, out of which $93,146 was recorded as reduction of salary payable and $37,100 was recorded as stock compensation expense in the seven months ended September 30, 2012.
(9) Related Party Transactions
As of September 30, 2012, the Company had a balance due from related parties of $14,203, which is non-interest bearing, unsecured and due on demand.
(10) Subsequent Events
In October and November 2012, three debt holders converted $11,169 of debt into 135,929,193 shares of common stock.
PART I