UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2016
OR
☒ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 001-13984
MERIDIAN WASTE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
New York |
| 13-3832215 |
(State or other jurisdiction of incorporation) |
| (IRS Employer Identification No.) |
12540 Broadwell Road, Suite 2104
Milton, GA 30004
(Address of principal executive offices)
(Previous address of principal executive offices)
678-871-7454
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes ☐ No ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer | ☐ |
| Accelerated filer | ☐ |
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Non-accelerated filer | ☐ |
| Smaller reporting company | ☑ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☒ No ☐
As of August 19, 2016, there were 25,934,411 shares outstanding of the registrant's common stock.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | |||||
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Item 1. |
| Financial Statements |
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| Unaudited Condensed Consolidated Balance Sheets |
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| Unaudited Condensed Consolidated Statements of Operations |
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| Unaudited Condensed Consolidated Statements of Cash Flows |
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| Notes to the Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
| Management's Discussion and Analysis of Financial Condition and Results of Operations |
| 29 |
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Item 3. |
| Quantitative and Qualitative Disclosures About Market Risk |
| 38 |
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Item 4. |
| Controls and Procedures |
| 39 |
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PART II – OTHER INFORMATION | |||||
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Item 1. |
| Legal Proceedings |
| 40 |
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Item 1A. |
| Risk Factors |
| 40 |
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Item 2. |
| Unregistered Sales of Equity Securities and Use of Proceeds |
| 40 |
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Item 3. |
| Defaults Upon Senior Securities |
| 40 |
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Item 4. |
| Mine Safety Disclosures |
| 40 |
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Item 5. |
| Other Information |
| 40 |
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Item 6. |
| Exhibits |
| 41 |
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Signatures |
| 42 |
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2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MERIDIAN WASTE SOLUTIONS, INC. AND SUBSIDIARIES | ||
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CONDENSED CONSOLIDATED BALANCE SHEETS | ||
JUNE 30, 2016 AND DECEMBER 31, 2015 | ||
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Assets |
June 30, 2016 (UNAUDITED) |
December 31, 2015 (UNAUDITED) |
Current assets: |
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Cash and cash equivalents | $ 1,239,389 | $ 2,729,795 |
Short-term investments - Restricted | 1,951,414 | - |
Accounts receivable, net of allowance | 1,959,772 | 1,707,818 |
Prepaid expenses | 651,696 | 427,615 |
Other current assets | 151,091 | 52,359 |
Total current assets | 5,953,362 | 4,917,587 |
Property, plant and equipment, at cost net of accumulated depreciation | 16,424,943 | 14,433,740 |
Assets held for sale | 395,000 | - |
Other assets: |
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Investment in related party affiliate | 362,080 | 364,185 |
Deposits | 142,953 | 10,954 |
Goodwill | 7,234,420 | 7,479,642 |
Landfill assets, net of accumulated amortization | 3,547,073 | 3,393,476 |
Customer list, net of accumulated amortization | 16,517,857 | 19,500,362 |
Non-compete, net of accumulated amortization | 135,219 | 155,699 |
Website, net of accumulated amortization | 9,512 | 10,904 |
Total other assets | 27,949,114 | 30,915,222 |
Total assets | $ 50,722,419 | $ 50,266,549 |
Liabilities and Shareholders' (Deficit) Equity |
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Current liabilities: |
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Accounts payable | $ 2,774,205 | $ 1,988,050 |
Accrued expenses | 766,825 | 280,069 |
Notes payable, related party | 359,891 | 359,891 |
Deferred compensation | 759,333 | 996,380 |
Deferred revenue | 3,101,394 | 2,912,264 |
Convertible notes due related parties, includes put premiums | 15,065 | 15,065 |
Contingent liability | - | 1,000,000 |
Derivative liability - stock warrants | 2,700,000 | 2,820,000 |
Current portion - long-term debt | 328,589 | 417,119 |
Total current liabilities | 10,805,302 | 10,788,838 |
Long-term liabilities: |
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Asset retirement obligation | 291,841 | 200,252 |
Long-term debt, net of current and net of loan fees of $1,309,241 and $1,416,697, respectively | 41,552,127 | 39,170,796 |
Total long term liabilities | 42,396,212 | 39,371,048 |
Total liabilities | 52,649,270 | 50,159,886 |
Shareholders' (deficit) equity: |
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Preferred Series A stock, par value $.001, 51 shares authorized, issued and outstanding | - | - |
Preferred Series B stock, par value $.001, 71,210 shares authorized, issued and outstanding | 71 | 71 |
Common stock, par value $.025, 75,000,000 shares authorized, 25,634,411 and 21,038,650 shares issued and 25,404,411 and 20,808,650 shares outstanding, respectively | 640,859 | 525,966 |
Treasury stock, at cost, 230,000 shares | (224,250 ) | (224,250 ) |
Additional paid-in capital | 36,048,185 | 27,624,492 |
Accumulated deficit | (38,391,716 ) | (27,819,616 ) |
Total shareholders' (deficit) equity | (1,926,851 ) | 106,663 |
Total liabilities and shareholders' (deficit) equity | $ 50,722,419 | $ 50,266,549 |
See notes to the condensed consolidated financial statements
3
MERIDIAN WASTE SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND JUNE 30, 2015
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Three months ended | |
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JUNE 30, 2016 (UNAUDITED) |
JUNE 30, 2015 (UNAUDITED) |
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Services Revenue | $ 8,006,098 | $ 3,315,290 |
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Cost of sales: |
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Cost of sales and services | 4,748,633 | 2,051,415 |
Depreciation | 810,259 | 396,807 |
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Total cost of sales and services | 5,558,892 | 2,448,222 |
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Gross Profit | 2,447,206 | 867,068 |
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Expenses: |
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Bad debt expense | 10,969 | - |
Compensation and related expense | 2,765,821 | 6,350,937 |
Depreciation and amortization | 990,478 | 728,913 |
Impairment expense | 1,255,269 |
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Selling, general and administrative | 1,590,824 | 767,673 |
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Total expenses | 6,613,361 | 7,847,523 |
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Other income (expenses): |
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Miscellaneous (expense) income | (4,436 ) | 16,926 |
Loss on disposal of assets | 4,504 | 6,250 |
Unrealized gain (loss) on interest rate swap | - | 7,303 |
Unrealized gain on change in fair value of derivative liability | (60,000 ) | - |
Gain on contingent liability | 1,000,000 | - |
Interest income | 4,287 | - |
Interest expense | (1,146,841 ) | (221,209 ) |
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Total other expenses | (202,486 ) | (190,730 ) |
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Net loss | $ (4,368,641 ) | $ (7,171,185 ) |
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Basic net loss per share | $ (0.17 ) | $ (0.56 ) |
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Weighted average number of shares outstanding |
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(Basic and Diluted) | 25,137,450 | 12,883,855 |
See notes to the condensed consolidated financial statements
4
MERIDIAN WASTE SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND JUNE 30, 2015
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JUNE 30, 2016 (UNAUDITED) |
JUNE 30, 2015 (UNAUDITED) |
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Services Revenue | $ 15,494,337 | $ 6,351,109 |
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Cost of sales: |
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Cost of sales and services | 9,218,531 | 3,884,473 |
Depreciation | 1,567,348 | 778,383 |
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Total cost of sales and services | 10,785,879 | 4,662,856 |
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Gross Profit | 4,708,458 | 1,688,253 |
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Expenses: |
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Bad debt expense | 55,558 | 2,738 |
Compensation and related expense | 6,996,589 | 8,380,405 |
Depreciation and amortization | 1,938,492 | 1,454,525 |
Impairment expense | 1,255,269 | - |
Selling, general and administrative | 3,784,698 | 1,353,850 |
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Total expenses | 14,030,606 | 11,191,518 |
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Other income (expenses): |
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Miscellaneous income | 2,264 | 18,023 |
Loss on disposal of assets | 3,053 | 6,250 |
Unrealized gain (loss) on interest rate swap | - | 10,374 |
Unrealized gain on change in fair value of derivative liability | 120,000 | - |
Loss from proportionate share of equity method investment | (2,105 ) | - |
Gain on contingent liability | 1,000,000 | - |
Interest income | 6,426 | - |
Interest expense | (2,379,590 ) | (411,285 ) |
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Total other expenses | (1,249,952 ) | (376,638 ) |
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Net loss | $ (10,572,100 ) | $ (9,879,903 ) |
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Basic net loss per share | $ (0.45 ) | $ (0.83 ) |
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Weighted average number of shares outstanding |
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(Basic and Diluted) | 23,405,701 | 11,872,759 |
See notes to the condensed consolidated financial statements
5
MERIDIAN WASTE SOLUTIONS, INC. AND SUBSIDIARIES | ||
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND JUNE 30, 2015 | ||
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June 30, 2016 (UNAUDITED) |
June 30, 2015 (UNAUDITED) |
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Cash flows from operating activities: |
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Net loss | $ (10,572,100 ) | $ (9,879,903 ) |
Adjustments to reconcile net loss to net cash provided |
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from operating activities: |
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Depreciation and amortization | 3,505,840 | 2,232,907 |
Interest accretion on landfill liabilities | 91,589 | - |
Amortization of capitalized loan fees & debt discount | 272,461 | - |
Unrealized (gain) loss on derivatives | (120,000 ) | - |
Unrealized gain - interest rate swap | - | (10,374 ) |
Stock issued to vendors for services | 778,985 | 242,970 |
Stock issued to employees as incentive compensation | 5,572,098 | 7,356,180 |
Impairment expense | 1,255,269 | - |
Gain on contigent liability | (1,000,000 ) | - |
Loss from proportionate share of equity investment | 2,105 | - |
Loss on disposal of equipment | 3,053 | (6,250 ) |
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Changes in working capital items net of acquisitions: |
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Accounts receivable, net of allowance | (251,954 ) | (33,890 ) |
Prepaid expenses and other current assets | (322,813 ) | 106,381 |
Deposits | (131,999 ) | - |
Accounts payable and accrued expenses | 1,272,911 | 567,672 |
Deferred compensation | (237,047 ) | 340,000 |
Deferred revenue | 189,130 | 89,450 |
Other current liabilities | - | (485,220 ) |
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Net cash provided from operating activities | 307,528 | 519,923 |
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Cash flows from investing activities: |
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Landfill additions | (297,482 ) | - |
Acquisition of property, plant and equipment | (4,047,475 ) | (725,131 ) |
Purchases of short-term investments | (1,951,414 ) | - |
Cash proceeds received from post acquisition settlement | 245,222 | - |
Proceeds from sale of property, plant and equipment | 46,975 | 6,250 |
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Net cash used in investing activities | (6,004,174 ) | (718,881 ) |
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Cash flows from financing activities: |
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Proceeds from loans | 2,150,000 | - |
Proceeds from issuance of common stock | 2,187,502 | - |
Principle payments on notes payable | (131,262 ) | (656,586 ) |
Proceeds from short term bridge financing | - | 750,000 |
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Net cash provided from financing activities | 4,206,240 | 93,414 |
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Net change in cash | (1,490,406 ) | (105,544 ) |
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Beginning cash | 2,729,795 | 438,907 |
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Ending cash | $ 1,239,389 | $ 333,363 |
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Supplemental Disclosures of Cash Flow Information: |
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Cash paid for interest | $ 2,015,540 | $ 404,691 |
Cash paid for taxes | $ - | $ - |
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Supplemental Non-Cash Investing and Financing Information: |
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Disposition of capitalized software in exchange for equal value of equity in acquiring entity | $ - | $ 434,532 |
See notes to the condensed consolidated financial statements
6
NOTE 1 - NATURE OF OPERATIONS AND ORGANIZATION
Basis of Presentation
The accompanying condensed consolidated financial statements of Meridian Waste Solutions, Inc. and its subsidiaries (collectively called the "Company") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC "). The unaudited condensed consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2015 included in our Annual Report on Form 10K for the Company as filed with the SEC. The consolidated balance sheet at December 31, 2015 contained
herein was derived from audited financial statements, but does not include all disclosures included in the Form 10-K for Meridian Waste Solutions, Inc., and applicable under accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, but not required for interim reporting purposes, have been omitted
or condensed.
In the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair presentation of the unaudited condensed financial statements as of June 30, 2016, and the results of operations and cash flows for the three and six months ended June 30, 2016 have been made. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for a full year.
Basis of Consolidation
The condensed consolidated financial statements for the six months ended June 30, 2016 include the operations of the Company and its wholly-owned subsidiaries, Here To Serve Missouri Waste Division, LLC, Meridian Land Company, LLC, Here to Serve Technology, LLC, Here To Serve Georgia Waste Division, LLC, Brooklyn Cheesecake & Dessert Acquisition Corp, Meridian Waste Missouri, LLC and Christian Disposal, LLC. The following two subsidiaries of the Company, Here To Serve Georgia Waste Division, LLC and Here to Serve Technology, LLC, a Georgia Limited Liability Company had no operations during the period. The consolidated financial statements for the six months ended June 30,, 2015 include the operations of the Company and its wholly-owned subsidiaries, Here To Serve Missouri Waste Division, LLC, Here To Serve Georgia Waste Division, LLC, Brooklyn Cheesecake & Acquisition Corp., and Here to Serve Technology, LLC, a Georgia Limited Liability Company.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Meridian Waste Solutions, Inc. (the "Company" or "Meridian") is currently operating under five separate Limited Liability Companies:
(1) Here To Serve Missouri Waste Division, LLC ("HTSMWD"), a Missouri Limited Liability Company;
(2) Here To Serve Georgia Waste Division, LLC ("HTSGWD"), a Georgia Limited Liability Company;
(3) Meridian Land Company, LLC ("MLC"), a Georgia Limited Liability Company;
(4) Christian Disposal, LLC and subsidiary ("CD"), a Missouri Limited Liability Company.
On January 7, 2015, in an effort to give investors a more concentrated presence in the waste industry the Company sold the assets of HTST to Mobile Science Technologies, Inc., a Georgia corporation (MSTI), a related party due to being owned and managed by some of the shareholders of the Company. On this date HTST ceased operations and became a dormant Limited Liability Company ("LLC"). Currently, Meridian is formalizing plans to dissolve HTST, in which this LLC will cease to exist.
In 2014, HTSMWD purchased the assets of a large solid waste disposal company in the St. Louis, MO market. This acquisition is considered the platform company for future acquisitions in the solid waste disposal industry. HTSGWD was created to facilitate expansion in this industry throughout the Southeast.
The Company is primarily in the business of residential and commercial waste disposal and hauling and has contracts with various cities and municipalities. The majority of the Company's customers are located in the St. Louis metropolitan and surrounding areas.
7
NOTE 1 - NATURE OF OPERATIONS AND ORGANIZATION (CONTINUED)
Acquisition of Christian Disposal, LLC and Eagle Ridge Landfill, LLC
On December 22, 2015, Meridian Waste Solutions, Inc. and subsidiaries (the "Company") completed its acquisition of Christian Disposal LLC, and subsidiary ("Christian Purchase Agreement"). Pursuant to the Christian Purchase Agreement, the Company acquired 100% of the membership interests of Christian Disposal, which is integrated into the operations of the Company; see (note 4).
Simultaneous with the closing thereof, Christian Disposal LLC, and subsidiary, entered into a Lease Agreement, in which, the Company leased 4551 Commerce Avenue, High Ridge, Missouri, for a five-year term at a monthly rent of $6,500. Additionally, the Company entered into an employment agreement with an executive employee for a term of five years.
Concurrently, the Company completed an asset purchase agreement with WCA Waste Corporation (the "Eagle Purchase Agreement"). The Company acquired all of the assets of Eagle Ridge Landfill, LLC ("ERL"), its rights and properties related to such business of ERL, which includes certain assets and operations of the Eagle Ridge Hauling Business ("ERH")
and certain debts, which is now operating under Meridian Land Company, LLC.
Recapitalization
On October 17, 2014 Here to Serve Missouri Waste Division, LLC, (HTSMWD) a Missouri Limited Liability Company, which is the historical business, entered into a Share Exchange Agreement with the Company and the sole member of HTSMWD whereby the Company agreed to acquire the membership interest of HTSMWD, HTST and HTSGWD in exchange for 9,054,134 shares of the Company's common stock. This transaction was closed on October 17, 2014 and HTSMWD became wholly-owned by the Company. The Company is deemed to have issued 1,139,284 shares of common stock which represents the outstanding common shares of the Company just prior to the closing of the transaction.
At closing, the Company issued 9,054,134 shares of its common stock to the sole member of HTSMWD and the shareholders of the sole member who obtained approximately 90% control and management control of the Company. The transaction was accounted for as a reverse acquisition and recapitalization of HTSMWD, HTST and HTSGWD whereby HTSMWD is considered the acquirer for accounting purposes. The consolidated financial statements after the acquisition include the balance sheets of both companies and HTST and HTSGWD at historical cost, the historical results of HTSMWD, HTST and HTSGWD. All share and per share information in the accompanying consolidated financial statements and footnotes has been retroactively restated to reflect the recapitalization (see Explanation of Membership Interest Purchase Agreement below).
Liquidity and Capital Resources
As of June 30, 2016, the Company had negative working capital of $4,851,940. This lack of liquidity is mitigated by the Company's ability to generate positive cash flow from operating activities. In the six months ended June 30, 2016, cash generated from operating activities, was approximately $300,000. In addition, as of June 30, 2016, the Company had approximately $1,200,000 in cash and cash equivalents and $1,951,000 in short-term investments to cover its short term cash requirements. Further, the Company has approximately $12,850,000 of borrowing capacity on its multi-draw term loans and revolving commitments.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Short-term investments consist of investments that have a remaining maturity of less than one year as of the date of the balance sheet.
Short-term Investments
Management determines the appropriate classification of short-term investments at the time of purchase and evaluates such designation as of each balance sheet date. All short-term investments to date have been classified as held-to-maturity and carried at amortized costs, which approximates fair market value, on our Consolidated Balance Sheets. Our short-term investments' contractual maturities occur before March 31, 2017. The short-term investment of $1,951,414 is currently restricted as this amount is collateralizing a letter of credit needed for our performance bond. The letter of credit expires in February of 2017, and the cash is restricted until then.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, short term investments accounts receivable, account payable, accrued expenses, and notes payable. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.
Derivative Instruments
The Company enters into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities ("ASC 815") as well as related interpretations of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering of the rights and obligations of each instrument.
The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as freestanding warrants, the Company generally use the Black Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimates and assumption changes. Under the terms of this accounting standard, increases in the trading price of the Company's common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative loss. Conversely, decreases in the trading price of the Company's common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative gain.
See Note 5 under the heading "Derivative Liability-Warrants" for a description and valuation of the Company's derivative instrument.
9
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of long-lived assets
The Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less that the carrying amount of the asset. The amount of impairment
is measured as the difference between the asset's estimated fair value and its book value. During the six months ended June 30, 2016, the Company experienced impairment expense of its customer lists, see footnote number 4. No other impairments noted during the six months ended June 30, 2016, and June 30, 2015.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of ASC 740-10, "Accounting for Income Taxes," which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized. The company does have deferred tax liabilities related to its intangible assets, which were immaterial as of June 30, 2016.
The Company follows the provisions of the ASC 740 -10 related to, Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
The Company analyzes its tax positions by utilizing ASC 740-10-25 Definition of Settlement, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of June 30, 2016, tax years ended December 31, 2015, 2014, and 2013 are still potentially subject to audit by the taxing authorities.
Use of Estimates
Management estimates and judgments are an integral part of consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). We believe that the critical accounting policies described in this section address the more significant estimates required of management when preparing our consolidated financial statements in accordance with GAAP. We consider an accounting estimate critical if changes in the estimate may have a material impact on our financial condition or results of operations. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustment to these balances in future periods.
10
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassification
Certain reclassifications have been made to previously reported amounts to conform to 2016 amounts. The reclassifications had no impact on previously reported results of operations or stockholders' deficit. The changes were as a result of loan fees being shown net of long term debt, which was retrospectively applied, $1,416,697 of net loans were reclassified in the December 31, 2015 balance sheet to be shown net against long-term debt. This is a result of the Company's adoption of ASU 2015-03.
Accounts Receivable
Accounts receivable are recorded at management's estimate of net realizable value. At June 30, 2016 and December 31, 2015 the Company had approximately $2,027,000 and $2,326,000 of gross trade receivables, respectively.
Our reported balance of accounts receivable, net of the allowance for doubtful accounts, represents our estimate of the amount that ultimately will be realized in cash. We review the adequacy and adjust our allowance for doubtful accounts on an ongoing basis, using historical payment trends and the age of the receivables and knowledge of our individual customers. However, if the financial condition of our customers were to deteriorate, additional allowances may be required. At June 30, 2016 and December 31, 2015 the Company had approximately $67,000 and $618,000 recorded for the allowance for doubtful accounts, respectively.
Property, plant and equipment
The cost of property, plant, and equipment is depreciated over the estimated useful lives of the related assets utilizing the straight-line method of depreciation. The cost of leasehold improvements is depreciated (amortized) over the lesser of the length of the related leases or the estimated useful lives of the assets. Ordinary repairs and maintenance are expensed when incurred and major repairs will be capitalized and expensed if it benefits future periods.
Intangible Assets
Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The Company has intangible assets related to its purchase of Meridian Waste Services, LLC, Christian Disposal LLC and Eagle Ridge Landfill, LLC.
Investment in Related Party Affiliate
The Company has an investment in a privately held corporation in the mobile apps industry. As the Company exercises significant influence on this entity, this investment is recorded using the equity method of accounting. The Company monitors this investment for impairment and makes appropriate reductions in the carrying value if the Company determines that an impairment charge is required based primarily on the financial condition and near-term prospect of this entity.
11
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
Goodwill is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill, but as discussed in the impairment of long lived assets section above, we assess our goodwill for impairment at least annually.
Website Development Costs
The Company accounts for website development costs in accordance with Accounting Standards Codification 350-50 "Website Development Costs". Accordingly, all costs incurred in the planning stage are expensed as incurred, costs incurred in the website application and infrastructure development stage that meet specific criteria are capitalized and costs incurred in the day to day operation of the website are expensed as incurred.
Landfill Accounting
Capitalized landfill costs
Cost basis of landfill assets - We capitalize various costs that we incur to make a landfill ready to accept waste. These costs generally include expenditures for land (including the landfill footprint and required landfill buffer property); permitting; excavation; liner material and installation; landfill leachate collection systems; landfill gas collection systems; environmental monitoring equipment for groundwater and landfill gas; and directly related engineering, capitalized interest, on-site road construction and other capital infrastructure costs. The cost basis of our landfill assets also includes asset retirement costs, which represent estimates of future costs associated with landfill final capping, closure and post-closure activities. These costs are discussed below.
Final capping, closure and post-closure costs - Following is a description of our asset retirement activities and our related accounting:
●
Final capping - Involves the installation of flexible membrane liners and geosynthetic clay liners, drainage and compacted soil layers and topsoil over areas of a landfill where total airspace capacity has been consumed. Final capping asset retirement obligations are recorded on a units-of-consumption basis as airspace is consumed related to the specific final capping event with a corresponding increase in the landfill asset. The final capping is accounted for as a discrete obligation and recorded as an asset and a liability based on estimates of the discounted cash flows and capacity associated with the final capping.
●
Closure - Includes the construction of the final portion of methane gas collection systems (when required), demobilization and routine maintenance costs. These are costs incurred after the site ceases to accept waste, but before the landfill is certified as closed by the applicable state regulatory agency. These costs are recorded as an asset retirement obligation as airspace is consumed over the life of the landfill with a corresponding increase in the landfill asset. Closure obligations are recorded over the life of the landfill based on estimates of the discounted cash flows associated with performing closure activities.
●
Post-closure - Involves the maintenance and monitoring of a landfill site that has been certified closed by the applicable regulatory agency. Generally, we are required to maintain and monitor landfill sites for a 30-year period. These maintenance and monitoring costs are recorded as an asset retirement obligation as airspace is consumed over the life of the landfill with a corresponding increase in the landfill asset. Post-closure obligations are recorded over the life of the landfill based on estimates of the discounted cash flows associated with performing post-closure activities.
12
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
We develop our estimates of these obligations using input from our operations personnel, engineers and accountants. Our estimates are based on our interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value. Absent quoted market prices, the estimate of fair value is based on the best available information, including the results of present value techniques. In many cases, we contract with third parties to fulfill our obligations for final capping, closure and post closure. We use historical experience, professional engineering judgment and quoted and actual prices paid for similar work to determine the fair value of these obligations. We are required to recognize these obligations at market prices whether we plan to contract with third parties or perform the work ourselves. In those instances where we perform the work with internal resources, the incremental profit margin realized is recognized as a component of operating income when the work is performed.
Once we have determined the final capping, closure and post-closure costs, we inflate those costs to the expected time of payment and discount those expected future costs back to present value. During the six months ended June 30, 2016 we inflated these costs in current dollars until the expected time of payment using an inflation rate of 2.5%. Accretion expense was approximately $84,149 for the six months ended June 30, 2016. We discounted these costs to present value using the credit-adjusted, risk-free rate effective at the time an obligation is incurred, consistent with the expected cash flow approach. Any changes in expectations that result in an upward revision to the estimated cash flows are treated as a new liability and discounted at the current rate while downward revisions are discounted at the historical weighted average rate of the recorded obligation. As a result, the credit adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to each individual asset retirement obligation. The weighted average rate applicable to our long-term asset retirement obligations at June 30, 2016 is approximately 8.5%.
We record the estimated fair value of final capping, closure and post-closure liabilities for our landfill based on the capacity consumed through the current period. The fair value of final capping obligations is developed based on our estimates of the airspace consumed to date for the final capping. The fair value of closure and post-closure obligations is developed based on our estimates of the airspace consumed to date for the entire landfill and the expected timing of each closure and post-closure activity. Because these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing of future final capping, closure and post-closure activities could result in a material change in these liabilities, related assets and results of operations. We assess the appropriateness of the estimates used to develop our recorded balances annually, or more often if significant facts change.
Changes in inflation rates or the estimated costs, timing or extent of future final capping, closure and post-closure activities typically result in both (i) a current adjustment to the recorded liability and landfill asset and (ii) a change in liability and asset amounts to be recorded prospectively over either the remaining capacity of the related discrete final capping or the remaining permitted and expansion airspace (as defined below) of the landfill. Any changes related to the capitalized and future cost of the landfill assets are then recognized in accordance with our amortization policy, which would generally result in amortization expense being recognized prospectively over the remaining capacity of the final capping or the remaining permitted and expansion airspace of the landfill, as appropriate. Changes in such estimates associated with airspace that has been fully utilized result in an adjustment to the recorded liability and landfill assets with an immediate corresponding adjustment to landfill airspace amortization expense.
Interest accretion on final capping, closure and post-closure liabilities is recorded using the effective interest method and is recorded as final capping, closure and post-closure expense, which is included in "operating" expenses within our Consolidated Statements of Operations
Amortization of Landfill Assets - The amortizable basis of a landfill includes (i) amounts previously expended and capitalized; (ii) capitalized landfill final capping, closure and post-closure costs, (iii) projections of future purchase and development costs required to develop the landfill site to its remaining permitted and expansion capacity and (iv) projected asset retirement costs related to landfill final capping, closure and post-closure activities.
Amortization is recorded on a units-of-consumption basis, applying expense as a rate per ton. The rate per ton is calculated by dividing each component of the amortizable basis of a landfill by the number of tons needed to fill the corresponding asset's airspace.
●
Remaining permitted airspace - Our management team, in consultation with third-party engineering consultants and surveyors, are responsible for determining remaining permitted airspace at our landfills. The remaining permitted airspace is determined by an annual survey, which is used to compare the existing landfill topography to the expected final landfill topography.
●
Expansion airspace - We also include currently unpermitted expansion airspace in our estimate of remaining permitted and expansion airspace in certain circumstances. First, to include airspace associated with an expansion effort, we must generally expect the initial expansion permit application to be submitted within one year and the final expansion permit to be received within five years. Second, we must believe that obtaining the expansion permit is likely, considering the following criteria:
13
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o
Personnel are actively working on the expansion of an existing landfill, including efforts to obtain land use and local, state or provincial approvals;
o
We have a legal right to use or obtain land to be included in the expansion plan;
o
There are no significant known technical, legal, community, business, or political restrictions or similar issues that could negatively affect the success of such expansion; and
o
Financial analysis has been completed based on conceptual design, and the results demonstrate that the expansion meets the Company's criteria for investment.
For unpermitted airspace to be initially included in our estimate of remaining permitted and expansion airspace, the expansion effort must meet all of the criteria listed above. These criteria are evaluated by our field-based engineers, accountants, managers and others to identify potential obstacles to obtaining the permits. Once the unpermitted airspace is included, our policy provides that airspace may continue to be included in remaining permitted and expansion airspace even if certain of these criteria are no longer met as long as we continue to believe we will ultimately obtain the permit, based on the facts and circumstances of a specific landfill.
When we include the expansion airspace in our calculations of remaining permitted and expansion airspace, we also include the projected costs for development, as well as the projected asset retirement costs related to the final capping, closure and post-closure of the expansion in the amortization basis of the landfill.
Once the remaining permitted and expansion airspace is determined in cubic yards, an airspace utilization factor ("AUF") is established to calculate the remaining permitted and expansion capacity in tons. The AUF is established using the measured density obtained from previous annual surveys and is then adjusted to account for future settlement. The amount of settlement that is forecasted will take into account several site-specific factors including current and projected mix of waste type, initial and projected waste density, estimated number of years of life remaining, depth of underlying waste, anticipated access to moisture through precipitation or recirculation of landfill leachate, and operating practices. In addition, the initial selection of the AUF is subject to a subsequent multi-level review by our engineering group, and the AUF used is reviewed on a periodic basis and revised as necessary. Our historical experience generally indicates that the impact of settlement at a landfill is greater later in the life of the landfill when the waste placed at the landfill approaches its highest point under the permit requirements.
After determining the costs and remaining permitted and expansion capacity at each of our landfill, we determine the per ton rates that will be expensed as waste is received and deposited at the landfill by dividing the costs by the corresponding number of tons. We calculate per ton amortization rates for the landfill for assets associated with each final capping, for assets related to closure and post-closure activities and for all other costs capitalized or to be capitalized in the future. These rates per ton are updated annually, or more often, as significant facts change.
It is possible that actual results, including the amount of costs incurred, the timing of final capping, closure and post-closure activities, our airspace utilization or the success of our expansion efforts could ultimately turn out to be significantly different from our estimates and assumptions. To the extent that such estimates, or related assumptions, prove to be significantly different than actual results, lower profitability may be experienced due to higher amortization rates or higher expenses; or higher profitability may result if the opposite occurs. Most significantly, if it is determined that expansion capacity should no longer be considered in calculating the recoverability of a landfill asset, we may be required to recognize an asset impairment or incur significantly higher amortization expense. If at any time management makes the decision to abandon the expansion effort, the capitalized costs related to the expansion effort are expensed immediately.
14
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the six months ended June 30, 2016 the Company operations related to its landfill assets and liability are presented in the tables below:
|
Six Months Ended June 30, 2016 UNAUDITED |
Year Ended December 31, 2015 UNAUDITED |
|
|
|
Landfill Assets |
|
|
|
|
|
Beginning Balance | $ 3,393,476 | $ 3,396,519 |
Capital Additions | 290,042 | - |
Amortization of landfill assets | (143,885 ) | (3,043 ) |
Asset retirement adjustments | 7,440 | - |
| $ 3,547,073 | $ 3,393,476 |
|
|
|
Landfill Asset Retirement Obligation |
|
|
|
|
|
Beginning Balance | $ 200,252 | $ 196,519 |
Obiligations incurred and capitalized | 7,440 | - |
Obiligations settled | - | - |
Interest accretion | 84,149 | 3,733 |
Revisions in estimates and interest rate assumption | - | - |
| $ 291,841 | $ 200,252 |
Revenue Recognition
The Company recognizes revenue when persuasive evidence of arrangement exists, services have been provided, the seller's price to the buyer is fixed or determinable, and collection is reasonably assured. The majority of the Company's revenues are generated from the fees charged for waste collection, transfer, disposal and recycling. The fees charged for our services are generally defined in service agreements and vary based on contract-specific terms such as frequency of service, weight, volume and the general market factors influencing a region's rate. For example, revenue typically is recognized as waste is collected, tons are received at our landfills or transfer stations.
Deferred Revenue
The Company records deferred revenue for customers that were billed in advance of services. The balance in deferred revenue represents amounts billed in February, March and April for services that will be provided during May, June and July.
Cost of Services
Cost of services include all employment costs associated with waste collection, transfer and disposal, damage claims, landfill costs, personal property taxes associated with collection vehicles and other direct cost of the collection and disposal process.
15
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations
The Company maintains its cash and cash equivalents in bank deposit accounts, which could, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts; however, amounts in excess of the federally insured limit may be at risk if the bank experiences financial difficulties. The Company places its cash with high credit quality financial institutions. The Company's accounts at these institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At June 30, 2016, the Company had $1,239,389 of cash in United States bank deposits, of which $938,817 was federally insured and $300,572 was not federally insured.
Financial instruments which also potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable; however, concentrations of credit risk with respect to trade accounts receivables are limited due to generally short payment terms.
For the six months ended June 30, 2016, the Company had one contract that accounted for approximately 12% of the Company's revenue. For the six months ended June 30, 2015, the Company had two contracts that accounted for approximately 51% of the Company's revenue, collectively.
Basic Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing the Company's net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company's net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. At June 30, 2016 the Company had two convertible notes outstanding that are convertible into common shares. Additionally, the Company issued stock warrants for 2,019,036 common shares.
For the six months ended June 30, 2016, the Company had 1,008,333 of weighted-average common shares relating to the convertible debt, under the if-converted method, however, these shares are not dilutive because the Company recorded a loss during the fiscal year.
At June 30, 2016, and December 31, 2015 the Company had a series of convertible notes and warrants outstanding that could be converted into approximately, 3,027,369 and 2,548,559 common shares, respectively. These are not presented in the consolidated statements of operations since the Company incurred a loss and the effect of these shares is anti- dilutive.
Stock-Based Compensation
Stock-based compensation is accounted for at fair value in accordance with ASC Topic 718.
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also require measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
16
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pursuant to ASC Topic 505-50, for share based payments to consultants and other third-parties, compensation expense is determined at the "measurement date." The expense is recognized over the service period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.
The Company recorded stock based compensation expense of $5,572,098 and $7,599,150 during the six months ended June 30, 2016 and 2015, respectively, which is included in compensation and related expense on the statement of operations.
Recent Accounting Pronouncements
ASU 2016-09 "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private companies, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any interim or annual period.
ASU 2016-02 "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:
-A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and
-A right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term.
Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.
Effective for Public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2019 (i.e., January 1, 2020, for a calendar year entity), and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
ASU 2015-17 "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes." The amendments in ASU 2015-17 eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent.
Effective for public business entities for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The amendments may be applied prospectively to all deferred tax liabilities and assets or retrospecitvely to all periods presented.
17
ASU 2014-15 "Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." The amendments in ASU 2014-15 are intended to define management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management's responsibility to evaluate whether there is substantial doubt about the organization's ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization's management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.
Effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued.
The Company is currently assessing the potential impact of the above recent accounting pronouncement.
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant, and equipment-at cost, less accumulated depreciation:
|
June 30, 2016 (UNAUDITED) |
Decemeber 31, 2015 (UNAUDITED) |
Land | $ 1,590,000 | $ 1,690,000 |
Buildings & Building Improvements | 397,156 | 692,156 |
Furniture & office equipment | 386,382 | 258,702 |
Containers | 5,803,043 | 4,453,386 |
Trucks, Machinery, & Equipment | 12,444,325 | 9,948,686 |
|
|
|
Total cost | 20,620,906 | 17,042,930 |
|
|
|
Less accumulated depreciation | (4,195,963 ) | (2,609,190 ) |
|
|
|
Net property and Equipment | $ 16,424,943 | $ 14,433,740 |
As of June 30, 2016, the Company has $395,000 of land and building which are held for sale and included in amounts noted above. These held for sale assets were not depreciated during the six months ended June 30, 2016 . Depreciation expense for the six months ended June 30, 2016 and 2015 was $1,615,150 and $807,335, respectively.
18
NOTE 4 - INTANGIBLE ASSETS AND ACQUISITION
Christian Disposal Acquisition
On December 22, 2015, the Company, in order to expand into new markets and maximize the rate of waste internalization, acquired 100% of the membership interests of Christian Disposal LLC pursuant to that certain Amended and Restated Membership Interest Purchase Agreement, dated October 16, 2015, as amended by that certain First Amendment thereto, dated December 4, 2015.
Eagle Ridge Landfill, LLC and Eagle Ridge Hauling Business
On December 22, 2015, the Company, in order to expand into new markets and maximize the rate of waste internalization, consummated the closing of the certain Asset Purchase Agreement dated November 13, 2015, by and between the Company and Eagle Ridge Landfill, LLC, as amended by the certain Amendment to Asset Purchase Agreement, dated December 18, 2015, to which the Company and WCA Waste Corporation are also party. Pursuant to the Eagle Ridge Purchase Agreement, Meridian Land acquired a landfill located in Pike County, Missouri and certain assets, rights, and properties related to such business of Eagle Ridge, including certain debts.
19
NOTE 4 - INTANGIBLE ASSETS AND ACQUISITION (CONTINUED)
In the six months ended June 30, 2016, customer lists include the intangible assets related to customer relationships acquired through the acquisition of Christian Disposal and Eagle Ridge with a cost basis of $10,180,000. The customer list intangible assets are amortized over their useful life which ranged from 5 to 20 years. Amortization expense, excluding amortization of landfill assets of $136,445, amounted to $1,756,548 and $1,425,573 for the six months ended June 30, 2016 and 2015 respectively. In June of 2016 the Company recorded $1,255,269 of impairment expense against the customer relationships due to the non-renewal of a Christian operating agreement. The Company also wrote off through miscellaneous income the $1,000,000 contingent liability that was recorded in connection with the loss of the potential renewal.
NOTE 5 - NOTES PAYABLE AND CONVERTIBLE NOTES
The Company had the following long-term debt:
| June 30, 2016 (UNAUDITED) | December 31, 2015 (UNAUDITED) |
|
|
|
Goldman Sachs - Tranche A Term Loan - LIBOR Interest | $ 40,000,000 | $ 40,000,000 |
Goldman Sachs - Revolver | 2,150,000 | - |
Goldman Sachs - MDTL | - | - |
Convertible Notes Payable | 1,250,000 | 1,250,000 |
Capitalized lease - financing company, secured by equipment | 31,962 | 37,096 |
Equipment loans | 269,341 | 395,119 |
Notes payable to seller of Meridian, subordinated debt | 1,475,000 | 1,475,000 |
Less: debt issuance cost/fees | (1,309,241 ) | (1,416,697 ) |
Less: debt discount | (1,986,346 ) | (2,152,603 ) |
Total debt | 41,880,716 | 39,587,915 |
Less: current portion | (328,589 ) | (417,119 ) |
Long term debt less current portion | $ 41,552,127 | $ 39,170,796 |
20
NOTE 5 - NOTES PAYABLE AND CONVERTIBLE NOTES (CONTINUED)
Goldman Sachs Credit Agreement
On December 22, 2015, in connection with the closing of acquisitions of Christian Disposal, LLC and certain assets of Eagle Ridge Landfill, LLC, the Company was extended certain credit facilities by Goldman Sachs, consisting of $40,000,000 aggregate principal amount of Tranche A Term Loans, $10,000,000 aggregate principal amount of Multi- Draw Term Loans and
up to $5,000,000 aggregate principal amount of Revolving Commitments. During the six months ended June 30, 2016, the Company borrowed $2,150,000 in relation to the Revolving Commitments. At June 30, 2016, the Company had at total outstanding balance of $42,150,000 consisting of the Tranche A Term Loan and draw of the Revolving Commitments. The loans are collateralized by the assets of the Company. The debt has a maturity date of December 22, 2020 with interest paid monthly at an annual rate of 9%. In addition,
there is a commitment fee paid monthly on the Mutli-Draw Term Loans and Revolving Commitments at an annual rate of 0.5%. The Company has adopted ASU 2015-03 and is showing loan fees net of long-term debt on the balance sheet. As of June 30, 2016 The Company was in violation of a covenant within its agreement with Goldman Sachs. On August 15, 2016, Goldman Sachs and the Company entered into the third amendment to the credit agreement whereby the covenant violation was waived, amended, and the Company is now in
compliance. The Company is in compliance with all covenants, associated with the amended credit agreement.
In addition, in connection with the credit agreement, the Company issued warrants to Goldman Sachs for the purchase of shares of the Company's common stock equivalent to a 6.5% Percentage Interest at a purchase price equal to $449,553, exercisable on or before December 22, 2023. The warrants grant the holder certain other rights, including registration rights, preemptive rights for certain capital raises, board observation rights and indemnification. Due to the put feature contained in the agreement, a derivative liability was recorded for the warrant.
The Company's derivative warrant instrument related to Goldman Sachs has been measured at fair value at June 30, 2016, using the Black-Scholes model. The liability is revalued at each reporting period and changes in fair value are recognized currently in the consolidated statement of operations. Upon the initial recording of the derivative warrant at fair value the
instrument was bifurcated and the Company recorded a debt discount of $2,160,000. This debt discount is being amortized as interest expense using the effective interest rate method over the life of the note, which is 5 years. At June 30, 2016 the balance of the debt discount is $1,986,346. The Company incurred $1,446,515 of issuance cost related to obtaining the notes. These costs are being amortized over the life of the notes. At June 30, 2016, the unamortized balance of the costs was $1,309,241.
21
NOTE 5 - NOTES PAYABLE AND CONVERTIBLE NOTES (CONTINUED)
The key inputs used in the June 30, 2016 and December 31, 2015 fair value calculations were as follows:
|
|
June 30, |
| |
|
|
2016 |
| |
Purchase Price |
| $ | 450,000 |
|
Time to expiration |
|
| 12/22/2023 |
|
Risk-free interest rate |
|
| 1.32 | % |
Estimated volatility |
|
| 60 | % |
Dividend |
|
| 0 | % |
Stock price on June 30, 2016 |
| $ | 1.50 |
|
Expected forfeiture rate |
|
| 0 | % |
The change in the market value for the period ending June 30, 2016 is as follows:
Fair value of warrants @ December 31, 2015 | $ 2,820,000 |
|
|
Unrealized gain on derivative liability | (120,000 ) |
|
|
Fair value of warrants @ June 30, 2016 | $ 2,700,000 |
Convertible Notes Payable
In 2015, as part of the purchase price consideration of the Christian Disposal acquisition, the Company issued a convertible promissory note to seller in the amount of $1,250,000. The note bears interest at 8% and matures on December 31, 2020. The seller may convert all or any part of the outstanding and unpaid amount of this note into fully paid and non-assessable common stock in accordance with the agreement.
Subordinated Debt
In connection with the acquisition with Meridian Waste Services, LLC on May 15, 2014, notes payable to the sellers of Meridian issued five-year term subordinated debt loans paying interest at 8%. At June 30, 2016 and December 31, 2015, the balance on these loans was $1,475,000 and $1,475,000, respectively.
The debt payable to Comerica at December 31, 2015 and the Equipment loans at December 31, 2015 were the debt of Here to Serve- Missouri Waste Division, LLC, a subsidiary of the Company.
Equipment Loans
During the year ended December 31, 2015, the Company entered into four long-term loan agreements in connection with the purchase of equipment with rates between 4% and 5%. In May of 2016 one of these equipment loans was paid in full. At June 30, 2016, the balance of the remaining three loans was $269,341.
Other Debts
Convertible notes due related parties
In 2015, approximately $225,000 of the issued promissory notes were converted into approximately 461,000 shares at the contractual conversion price. At June 30, 2016 the Company had $15,065 remaining in convertible notes to related parties, which includes $5,065 in put premiums and accrued interest and is included in current liabilities on the consolidated balance sheet.
Notes Payable, related party
At December 31, 2014 the Company had a short term, non-interest bearing note payable of $150,000 which was incurred in connection with the Membership Interest Purchase Agreement discussed above. The Company also had a loan from Here to Serve Holding Corp. due to expenses paid by Here to Serve on behalf of the Company prior to the recapitalization. This loan totaled $376,585 bringing total notes payable to $526,585. In 2015, the short term, non-interest bearing note was paid off, and at June 30, 2016, the Company's loan from Here to Serve Holding Corp. was $359,891, and is included in current liabilities on the consolidated balance sheet.
Total interest expense for the three and six months ended June 30, 2016 was $1,146,841 and $2,379,590, respectively. Amortization of debt discount was $84,089 and $165,838, respectively. Amortization of capitalized loan fees was $54,367 and $107,221, respectively. Interest expense on debt was $1,008,385 and
$2,106,531, respectively.
22
NOTE 6- SHAREHOLDERS' EQUITY
Common Stock
The Company has authorized 75,000,000 shares of $0.025 par common stock. At June 30, 2016 and December 31, 2015 there were 25,634,411 and 21,038,650 shares issued and outstanding.
Treasury Stock
During 2014, the Company's Board of Directors authorized a stock repurchase of 230,000 shares of its common stock for approximately $230,000 at an average price of $1.00 per share. At June 30, 2016 and December 31, 2015 the Company holds 230,000 shares of its common stock in its treasury.
Preferred Stock
The Company has authorized 5,000,000 shares of Preferred Stock, for which two classes have been designated to date. Series A has 51 shares issued and outstanding and Series B has 71,210 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively.
Each share of Series A Preferred Stock has no conversion rights, is senior to any other class or series of capital stock of the Company and has special voting rights. Each one (1) share of Series A Preferred Stock shall have voting rights equal to (x) 0.019607 multiplied by the total issued and outstanding Common Stock eligible to vote at the time of the respective vote (the "Numerator"), divided by (y) 0.49, minus (z) the Numerator.
Holders of Series B Preferred Stock shall be entitled to receive when and if declared by the Board of Directors cumulative dividends at the rate of twelve percent (12%) of the Original Issue Price. In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series B Preferred Stock shall be entitled to receive, immediately prior and in preference to any distribution to holders of the Company's common stock, an amount per share equal to the sum of $100.00 and any accrued and unpaid dividends of the Series B Preferred Stock. Each share of Series B Preferred Stock may be converted at the option of the holder into the Company's Common stock. The shares shall be converted using the "Conversion Formula": divide the Original Issue Price by 75% of the average closing bid price of the Common Stock for the five (5) consecutive trading days ending on the trading day of the receipt by the Company of the notice of conversion.
At June 30, 2016 and December 31, 2015, the Company's Series B Preferred Stock dividends in arrears on the 12% cumulative preferred stock were approximately $1,459,805 ($20.50 per share) and $1,033,000 ($14.50 per share), respectively.
Common Stock Transactions
During the six months ended June 30, 2016 and the year ended December 31, 2015, the Company issued, 4,595,761 and 11,075,232 shares of common stock, respectively. The fair values of the shares of common stock were based on the quoted trading price on the date of issuance. Of the 4,595,761 shares issued for the six months ended June 30, 2016, the Company:
1.
Issued 517,188 of these shares were issued to vendors for services rendered generating a professional fees expense of $778,985;
2.
Issued 2,000,000 of these shares to officers and employees as incentive compensation resulting in compensation expense of $3,100,000;
3.
Issued 2,053,573 shares of common stock as part of a private placement offering to accredited investors for aggregate gross proceeds to the Company of $2,342,500. The Company capitalized certain issuance costs associated with this offering of $155,000, including the fair value of 25,000 common shares issued to the placement agent. These common shares include a top-off provision. Specifically,
if a subscriber were to sell the common shares within a 1 year period from the subscription agreement and such sales proceeds do not equal the investment amount of the subscriber, a warrant will vest. The Company accounted for this top-off provision as a separate liability with a fair value of 0 at June 30, 2016.
The Company has issued and outstanding warrants of 2,019,036 common shares, as adjusted, with the current exercise price of $0.22, as adjusted, expiring December 31, 2023.
23
NOTE 6- SHAREHOLDERS' EQUITY (CONTINUED)
There were no outstanding warrants at June 30, 2015. A summary of the status of the Company's outstanding stock warrants for the period ended June 30, 2016 is as follows:
|
Number of Shares |
Average Exercise Price |
If Exercised |
Expiration Date |
Outstanding - December 31, 2015 | 1,673,559 | - | 449,518 | - |
Granted - Goldman Sachs | 345,477 | $ 0.220 | - | - |
Forfeited | - | - | - | - |
Exercised | - | - | - | - |
Outstanding, June 30, 2016 | 2,019,036 | $ - | $ 449,518 |
|
Warrants exercisable at June 30, 2016 | 2,019,036 |
|
|
|
NOTE 7 - FAIR VALUE MEASUREMENT
ASC Topic 820 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data and requires disclosures for assets and liabilities measured at fair value based on their level in the hierarchy. Also, ASC Topic 820 provides clarification that in circumstances, in which a quoted price in an active market for the identical liabilities is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update.
The standard describes a fair value hierarchy based on three levels of input, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
Level 1 - Quoted prices in active markets for identical assets and liabilities.
Level 2 - Input other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets of liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
asset or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following table sets forth the liabilities at June 30 , 2016 and 2015 , which is recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy. As required, these are classified based on the lowest level of input that is significant to the fair value measurement:
24
NOTE 7 - FAIR VALUE MEASUREMENT (CONTINUED)
|
|
Fair Value Measurements at Reporting Date Using | ||
|
|
Quoted Prices in |
Significant Other |
Signifcant |
|
|
Active Markets for |
Observable |
Unobservable |
|
|
Identical Assets |
Inputs |
Inputs |
| December 31, 2015 |
(Level 1) |
(Level 2) |
(Level 3) |
Derivative liability | $ 2,820,000 | $ - | $ - | $ 2,820,000 |
|
|
|
|
|
Stock settled debt | 12,500 | 10,000 | - | 2,500 |
|
|
|
|
|
| $ 2,832,500 | $ 10,000 | $ - | $ 2,822,500 |
|
|
Fair Value Measurements at Reporting Date Using | ||
|
|
Quoted Prices in |
Significant Other |
Signifcant |
|
|
Active Markets for |
Observable |
Unobservable |
|
June 30, 2016 |
Identical Assets |
Inputs |
Inputs |
|
(UNAUDITED) |
(Level 1) |
(Level 2) |
(Level 3) |
Derivative liability | $ 2,700,000 |
| $ - | $ 2,700,000 |
|
|
|
|
|
Stock settled debt | 12,500 | 10,000 | - | 2,500 |
|
|
|
|
|
| $ 2,712,500 | $ 10,000 | $ - | $ 2,702,500 |
NOTE 8 - LEASES
The Company's has entered into non-cancellable leases for its office, warehouse facilities and some equipment. These lease agreements commence on various dates from September 1, 2010 to December 2015 and all expires on or before December, 2023. Future minimum lease payments at March 31, 2016 are as follows:
2016 | $ 255,072 |
2017 | 492,943 |
2018 | 231,693 |
2019 | 178,303 |
2020 | 138,700 |
Thereafter | 151,200 |
Total | $ 1,447,911 |
The Company has also entered into various other leases on a month to month basis for machinery and equipment. Rent expense amounted to $262,491 and $160,184 for the six months ended June 30, 2016 and 2015 , respectively.
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NOTE 9 - BONDING
In connection with normal business activities of a company in the solid waste disposal industry, Meridian may be required to acquire a performance bond. As part of the Company's December 22, 2015 acquisitions of Christian Disposal, LLC and Eagle Ridge Landfill, LLC, Meridian acquired a performance bond in the approximate amount of $7,400,000 with annual expenses of $221,000. For the six months ended June 30, 2016 , the Company had approximately $85,000 of expenses related to this performance bond and for the six months ended June 30, 2015 , the Company was not required to obtain a performance bond.
Note 10 - LITIGATION
The Company is involved in various lawsuits related to the operations of its subsidiaries which arise in the normal course of business. Management believes that it has adequate insurance coverage and/or has appropriately accrued for the settlement of these claims. If applicable, claims that exceed amounts accrued and/or that are covered by insurance, management believes they are without merit and intends to vigorously defend and resolve with no material impact on financial condition.
NOTE 11 - RELATED PARTY TRANSACTIONS
Sale of Capitalized Software
On January 7, 2015, in an effort to give investors a more concentrated presence in the waste industry the Company sold the capitalized software assets of Here to Serve Technology, LLC (HTST) to Mobile Science Technologies, Inc., a Georgia corporation (MSTI), a related party due to being owned by some of the shareholders of the Company. No gain or loss was recognized on this transaction as the Company received equity equal to book value ($434,532) of the capitalized software in the exchange. This represents approximately 15% of the equity of MSTI and is reflected in the accompanying balance sheet as "investment in related party affiliate". The Company's investment of 15% of the common stock of MSTI is accounted for under the equity method because the company exercises significant influence over its operating and financial activities. Significant influence is exercised because both Companies have a Board Member in common. Accordingly, the investment in MSTI is carried at cost, adjusted for the Company's proportionate share of earnings or losses.
26
NOTE 11 - RELATED PARTY TRANSACTIONS (CONTINUED)
The following presents unaudited summary financial information for MSTI. Such summary financial information has been provided herein based upon the individual significance of this unconsolidated equity method investment to the consolidated financial information of the Company.
Following is a summary of financial position and results of operations of MSTI:
Summary of Statements of Financial Condition | Six Months Ended |
| June 30, 2016 |
Assets |
|
Current assets | $ 3,609 |
Noncurrent assets | 2,877,313 |
Total assets | 2,880,922 |
|
|
Liabilities and Equity |
|
Current liabilities | 236,562 |
Noncurrent liabilities | - |
Equity | 2,644,360 |
Total liabilities and equity | $ 2,880,922 |
|
|
Summary of Statements of Operations |
|
|
|
Revenues | $ 177 |
Expense | 16,410 |
Net loss | $ (16,233 ) |
The Company recorded losses from its investment in MSTI, accounted for under the equity method, of approximately $2,100 for the six months ended June 30, 2016 . The charge reflected the Company's share of MSTI losses recorded in that period. While the Company has ongoing agreements with MSTI relating to the use of MSTI's software technology, the Company has no obligation to otherwise support the activities of MSTI.
NOTE 12 – EQUITY AND INCENTIVE PLANS
Effective March 10, 2016, the Board of Directors (the "Board") of the Company approved, authorized and adopted the 2016 Equity and Incentive Plan (the " Plan") and certain forms of ancillary agreements to be used in connection with the issuance of stock and/or options pursuant to the Plan (the "Plan Agreements"). The Plan provides for the issuance of up to 7,500,000 shares of common stock, par value $.025 per share (the "Common Stock"), of the Company through the grant of nonqualified options (the "Non-qualified options"), incentive options (the "Incentive Options" and together with the Non-qualified Options, the "Options") and restricted stock (the "Restricted Stock") to directors, officers, consultants, attorneys, advisors and employees.
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NOTE 12 – EQUITY AND INCENTIVE PLANS (CONTINUED)
On March 11, 2016, the Company entered into a restricted stock agreement with Mr. Jeff Cosman, CEO, (the "Cosman Restricted Stock Agreement"), pursuant to which 4,253,074 shares of the Company's common stock, subject to certain restrictions set forth in the Cosman Restricted Stock Agreement, were issued to Mr. Cosman pursuant to the Cosman Employment Agreement and the Plan.
The entire 4,253,074 shares fully cliff vests on January 1, 2017 if continuous employment and the Company reaches certain performance goals. As of June 30, 2016, the Company has recognized approximately $2,500,000 in compensation expense of a potential total expense of $6,592,000. The total expense of $6,592,265 is being expensed ratably from the original
agreement date of March 11, 2016 to the end date of January 1, 2017.
Effective July 20, 2016, pursuant to the filing of a Certificate of Amendment to the Company's Certificate of Incorporation with the Secretary of State of the State or New York, the Company authorized 67,361 shares of Series C Preferred Stock (the "Series C Preferred Stock") and set forth the designations, rights and preferences thereof (the "Series C Designations"), having a stated value of equal to $100 per share and a par value of $0.001 per share and providing for dividends at a rate of 8% per annum. Shares of the Series C Preferred Stock are convertible into shares of the Company's common stock, par value $0.025 per share at the price of $1.12. In the event of a Qualified Offering, as defined in the Series C Designations, the shares of Series C Preferred Stock will be automatically converted at the lower of $1.12 per share or the per share price that reflects a 20% discount to the price of the Common Stock pursuant to such Qualified Offering. Additionally, the Series C Designations provide for Additional Shortfall Conversions, as defined in the Series C Designations, pursuant to which holders of Series C Preferred Stock may, subject to certain conditions, be issued additional shares of Common Stock by the Company. Series C Preferred Stock has voting rights on an "as converted basis."
As of August 13, 2016, the Company completed closing of a private placement offering to accredited investors of up to $4,000,000 of Series C Preferred Stock, pursuant to which the Company entered into definitive securities purchase agreements (the "Securities Purchase Agreements") with four accredited investors, and issued an aggregate of 7,750 shares of Series C Preferred Stock for aggregate gross proceeds to the Company of $775,000, and aggregate net proceeds to the Company of $751,563, after deducting fees paid by the Company to its placement agent for such offering.
In July of 2016 the Company issued 300,000 shares of common stock to an employee, these share will be recorded at fair value as stock based compensation.
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We intend for this discussion to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those consolidated financial statements, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our consolidated financial statements. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes for the three and six months ended June 30, 2016, included elsewhere in this report.
Plan of Operation
The platform operation of the Company is our subsidiary Here To Serve Missouri Waste Division, LLC ("HTS Waste"). HTS Waste is in the business of collection of non-hazardous solid waste. Our revenue is generated primarily by collection services provided to residential customers, as well as commercial and temporary roll-off customers. The Company's agreement with Goldman Sachs Specialty Lending Group, has allowed the Company to focus on pursuing waste solutions opportunities in the Midwest, in order to differentiate itself from its larger competitors. With respect to our platform operation in St. Louis, the Company is focused on building in and around this initial marketplace. We are continuing to evaluate our infrastructure needs, placing importance on revenue and cash-flow growth. The Company is specifically focused on bidding on municipal contracts in the St. Louis market, as well as acquisitions throughout the Midwest to drive this plan. The Company plans to remain vigilant in understanding the many solutions in the waste industry and adapting to the changing landscape in order to maximize the returns of its capital in the marketplace. The Company has executed its first step with its agreement with Goldman Sachs Specialty Lending Group to build the capital structure needed to execute its forward strategy.
29
The following table reflects the total revenue of the Company for the six months ending June 30, 2016, annualized, the year ended December 31, 2015, and the combined revenues for HTS Waste and Meridian Waste Services for the year ended December 31, 2014 (dollars in thousands):
|
| Annualized through June 30, 2016 |
|
| 2015 |
|
| 2014 |
| |||||||||||||||
|
|
|
|
| % |
|
|
|
|
| % |
|
|
|
|
| % |
| ||||||
|
| $ |
|
| increase |
|
| $ |
|
| increase |
|
| $ |
|
| Increase |
| ||||||
Revenue |
|
| 31,000 |
|
|
| 130 | % |
|
| 13,506 |
|
|
| 11 | % |
|
| 12,202 |
|
|
| 8 | % |
Our annualized 2016 revenue has grown significantly due to the acquisitions of Christian Disposal and Meridian Land Company. As our revenues continue to grow in this existing market, we plan to increase the rate of this growth by increasing our presence in the commercial and "roll-off" business. Roll-off service is the hauling and disposal of large waste containers (typically between 10 and 40 cubic yards) that are loaded on to and off of the collection vehicle. Management also expects continued growth through additional mergers and acquisitions. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the related notes thereto.
Results of Operations
Summary of Statements of Operations for the Three Months Ended June 30, 2016 and 2015:
|
Three Months Ended | |
|
June 30, 2016 |
June 30, 2015 |
Revenue | $ 8,006,098 | $ 3,315,290 |
Gross profit | $ 2,447,206 | $ 867,068 |
Operating expenses | $ 6,613,361 | $ 7,847,523 |
Other expenses, net | $ 202,486 | $ 190,730 |
Net loss | $ 4,368,641 | $ 7,171,185 |
Basic net loss per share | $ 0.17 | $ 0.56 |
Revenue
The Company's revenue for the three months ended June 30, 2016 was $8,006,098, a 141% increase over the three months ended June 30, 2015 of $3,315,290. This increase is due to the continued growth of HTS Waste and the acquisitions of Christian Disposal and Eagle Ridge. Christian Disposal revenue for the three months ended June 30, 2016 was approximately $3,500,000
and Eagle Ridge revenue for the same period was approximately $900,000.
Gross Profit
Gross profit percentage for the three months ended June 30, 2016 is 31%. This is an increase of approximately 5% from the three months ended June 30, 2015. The increase is significant in that it shows management's ability to improve efficiencies of operations. In addition, there was a decrease in landfill costs as the company began internalizing its waste. The increase in margin would have been even larger if not for an increase in depreciation expense included in cost of sales. The increase in depreciation expense is due to addition of new equipment.
Operating Expenses
Operating expenses were $6,613,361, or 83% of revenue, for the three months ended June 30, 2016 as compared to $7,847,523, or 236% of revenue, for the three months ended June 30, 2015. The high level of operating expenses in both periods is due to recurring costs of operations, including professional fees, compensation and general and administrative expenses, including insurance and rental expense and certain other incremental items relating to the acquisitions in December 2015, primarily including payments to third party professionals for accounting and valuation services.
30
Other expenses
Other expense for the three months ended June 30, 2016, was $202,846 , as compared to $190,730 for the three months ended June 30, 2015. The change is attributable to an approximate increase in interest expense of $900,000 and increase in gain on contingent liability of $1,000,000. The increase in the interest expense was due primarily to our increase in debt of approximately $33,000,000.
Net Loss
Net loss for three months ended June 30, 2016, was $4,368,641 or loss per share of $0.1 7, as compared to $7,171,185 or loss per share of $0.56 , for the three months ended June 30, 2015.
Summary of Statements of Operations for the Six Months Ended June 30, 2016 and 2015:
|
Six Months Ended | |
|
June 30, 2016 |
June 30, 2015 |
Revenue | $ 15,494,337 | $ 6,351,109 |
Gross profit | $ 4,708,458 | $ 1,688,253 |
Operating expenses | $ 14,030,606 | $ 11,191,518 |
Other expenses | $ 1,249,952 | $ 376,638 |
Net loss | $ 10,572,100 | $ 9,879,903 |
Basic net loss per share | $ 0.45 | $ 0.83 |
Revenue
The Company's revenue for the six months ended June 30, 2016 was $15,494,337, a 144% increase over the six months ended June 30, 2015 of $6,351,109. This increase is due to the continued growth of HTS Waste and the acquisitions of Christian Disposal and Eagle Ridge. Christian Disposal revenue for the six months ended June 30, 2016 was approximately $6,800,000
and Eagle Ridge revenue for the same period was approximately $1,700,000.
Gross Profit
Gross profit percentage for the six months ended June 30, 2016 is 30%. This is an increase of approximately 3% from the six months ended June 30, 2015. The increase is significant in that it shows management's ability to improve efficiencies of operations. In addition, there was a decrease in landfill costs as the Company began internalizing its waste. The increase in margin would have been even larger if not for an increase in depreciation expense included in cost of sales. The increase in depreciation expense is due to addition of new equipment.
Operating Expenses
Operating expenses were $14,030,606, or 91% of revenue, for the six months ended June 30, 2016, as compared to $11,191,518, or 176% of revenue, for the six months ended June 30, 2015. The high level of operating expenses in both periods is due to recurring costs of operations, including professional fees, compensation and general and administrative expenses, including insurance and rental expense and certain other incremental items relating to the acquisitions in December 2015, primarily including payments to third party professionals for accounting and valuation services.
31
Other expenses
Other expense for the six months ended June 30, 2016, was $1,249,952 , as compared to $376,638 for the six months ended June 30, 2015. The change is attributable to an approximate increase in interest expense of $2,000,000 and increase in gain on contingent liability of $1,000,000. Lastly, there was an unrealized gain on change in fair value of derivative liability of $120,000 for the six months ended June 30,2016 with no such amount for the six months ended June 30, 2016.
Net Loss
Net loss for six months ended June 30, 2016, was $10,572,100 or loss per share of $0.4 5, as compared to $9,879,903 or loss per share of $0.83 , for the six months ended June 30, 2015.
Segment Information
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at June 30, 2016, compared to December 31, 2015:
|
June 30, 2016 |
December 31, 2015 |
Increase/Decrease |
Current Assets | $ 5,953,362 | $ 4,917,587 | $ 1,035,775 |
Current Liabilities | $ 10,805,302 | $ 10,788,838 | $ 16,464 |
Working capital (Deficit) | $ (4,851,940) | $ (5,871,251) | $ (1,019,311 ) |
The change in working capital (deficit) is due primarily to the following changes to current assets and current liabilities. The increase in short-term investments of approximately $2,000,000 offset by a decrease in cash of approximately $1,500,000. Accounts Receivable and other assets increased by approximately $500,000. Contingent liability decreased
by $1,000,000 offset by an increase of approximately $1,200,000 in accounts payable and accrued expenses.
Short-term investments increased due to the Company needing to collateralize a letter of credit for a performance bond. Cash decreased primarily because of the acquisition of equipment. Accounts receivable increased due to increased sales. The contingent liability decrease is the result of the loss of a potential renewal as part of the Christian disposal acquisition.
Accounts payable and accrued expenses increased as a result of increased sales.
At June 30, 2016, we had a working capital deficit of $4,851,940 , as compared to a working capital deficit of $5,871,251 , at December 31, 2015, a decrease of $1,019,311 . This lack of liquidity is mitigated by the Company's ability to generate positive cash flow from operating activities. In the six months ended June 30, 2016, cash generated from operating activities, was approximately $300,000. In addition, as of June 30, 2016, the Company had approximately $1,200,000 in cash and cash equivalents and $1,951,000 in short-term investments to cover its short term cash requirements. Further, the Company has approximately $10,000,000 of borrowing capacity on its multi-draw term loans and revolving commitments with Goldman Sachs as discussed below.
The Company purchased approximately $4 million of new equipment while increasing long term debt by approximately $2,400,000 during the six months ended June 30, 2016. The increase in debt was due to the Company borrowing on its revolving commitments with Goldman Sachs as discussed below. Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis.
Our primary uses of cash have been for working capital purposes to support our operations and our efforts to become a reporting company with the SEC. All funds received have been expended in the furtherance of growing our business operations, establishing our brand and making sure our work is completed with efficiency and of the highest quality. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
o | An increase in working capital requirements to finance additional marketing efforts, |
o | Increases in advertising, public relations and sales promotions for existing customers and to attract new customers as the company expands, and |
o | The cost of being a public company. |
We are not aware of any known trends or any known demands, commitments or events that will result in our liquidity increasing or decreasing in any material way. We are not aware of any matters that would have an impact on future operations.
Our net revenues have been sufficient to fund our operating expenses. At June 30, 2016, we had total cash of $1,239,389, the majority of which was funded by Goldman Sachs from the draw on the revolving commitments of $2,150,000 and $1,100,000 from a private placement stock offering.
32
During the 3 months ending September 30, 2015, the Company eliminated its Credit Facility with Comerica Bank (see Debt Restructuring with Praesidian Capital Opportunity Fund III, LP below). In December 2015, the Company subsequently refinanced its debt with Praesidian in connection with the acquisitions of Christian Disposal and Eagle Ridge (see Goldman Sachs Credit Agreement below).
We currently have no material commitments for capital expenditures and believe that our cash requirements over the next 12 months will be approximately $1,000,000. In order to fund future growth and expansion through acquisitions and capital expenditures, the Company may be required to raise capital through the sale of its securities. We expect cash, short-term investments,
cash flow from operations and access to capital markets to continue to be sufficient to fund our operations.
In order to fund future expansion through acquisitions and capital expenditures, the Company may raise additional capital through the sale of its securities on the public market.
Debt Restructuring with Praesidian Capital Opportunity Fund III, LP
On August 6, 2015, the Company entered into a financing agreement with Praesidian Capital Opportunity Fund III, LP whereby the Comerica facilities described below and other short term bridge financing were paid. Total proceeds from this financing were used to eliminate this debt.
Goldman Sachs Credit Agreement
On December 22, 2015, in connection with the closing of acquisitions of Christian Disposal, LLC and certain assets of Eagle Ridge Landfill, LLC, the Company was extended certain credit facilities by Goldman Sachs, consisting of $40,000,000 aggregate principal amount of Tranche A Term Loans, $10,000,000 aggregate principal amount of Multi- Draw Term Loans and up to $5,000,000 aggregate principal amount of Revolving Commitments. During the three months ended March 31, 2016, the Company borrowed $2,150,000 in relation to the Revolving Commitments. At June 30, 2016, the Company had at total outstanding balance of $42,900,000 consisting of the Tranche A Term Loan and draw of the Revolving Commitments. The loans are collateralized by the assets of the Company. The debt has a maturity date of December 22, 2020 with interest paid monthly at an annual rate of 9%. In addition, there is a commitment fee paid monthly on the Mutli-Draw Term Loans and Revolving Commitments at an annual rate of 0.5%.
The proceeds of the loans were used to partially fund the acquisitions referenced above and refinance existing debt with Praesidian, among other things. The Company re-paid in full and terminated its agreements with Praesidian which effected the cancellation of certain warrants that the Company issued to Fund III for the purchase of 931,826 shares of the Company's common stock and to Fund III-A for the purchase of 361,196 shares of the Company's common stock. In consideration for the cancellation of the Praesidian Warrants, the Company issued to Praesidian Capital Opportunity Fund III, LP, 1,153,052 shares of common stock and issued to Praesidian Capital Opportunity Fund III-A, LP, 446,948 shares of common stock. Due to the early termination of the notes and cancellation of the warrants, the Company recorded a loss on extinguishment of debt of $1,899,161 in the year ended December 31, 2015.
In addition, in connection with the credit agreement, the Company issued warrants to Goldman Sachs for the purchase of shares of the Company's common stock equivalent to a 6.5% Percentage Interest at a purchase price equal to $449,553, exercisable on or before December 22, 2023. The warrants grant the holder certain other rights, including registration rights, preemptive rights for certain capital raises, board observation rights and indemnification. See discussion of warrants below.
Inflation and Seasonality
Based on our industry and our historic trends, we expect our operations to vary seasonally. Typically, revenue will be highest in the second and third calendar quarters and lowest in the first and fourth calendar quarters. These seasonal variations result in fluctuations in waste volumes due to weather conditions and general economic activity. We also expect that our operating expenses may be higher during the winter months due to periodic adverse weather conditions that can slow the collection of waste, resulting in higher labor and operational costs.
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Critical Accounting Policies
Basis of Consolidation
The consolidated financial statements for the six months ended June 30, 2016 include the operations of the Company and its wholly-owned subsidiaries, Here To Serve Missouri Waste Division, LLC, Meridian Land Company, LLC, Here to Serve Technology, LLC and Christian Disposal, LLC. The following two subsidiaries of the Company, Here To Serve Georgia Waste Division, LLC and Here to Serve Technology, LLC, a Georgia Limited Liability Company had no operations during the period.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Impairment of long-lived assets
The Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less that the carrying amount of the asset. The amount of impairment is measured as the difference between the asset's estimated fair value and its book value.
Use of Estimates
Management estimates and judgments are an integral part of consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). We believe that the critical accounting policies described in this section address the more significant estimates required of management when preparing our consolidated financial statements in accordance with GAAP. We consider an accounting estimate critical if changes in the estimate may have a material impact on our financial condition or results of operations. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustment to these balances in future periods.
Accounts Receivable
Accounts receivable are recorded at management's estimate of net realizable value. Our reported balance of accounts receivable, net of the allowance for doubtful accounts, represents our estimate of the amount that ultimately will be realized in cash. We review the adequacy and adjust our allowance for doubtful accounts on an ongoing basis, using historical payment trends and the age of the receivables and knowledge of our individual customers. However, if the financial condition of our customers were to deteriorate, additional allowances may be required.
Revenue Recognition
The Company follows the guidance of ASC 605 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable and collectability is reasonably assured.
We generally provide services under contracts with municipalities or individual customers. Municipal and commercial contracts are generally long-term and often have renewal options. Advance billings are recorded as deferred revenue, and revenue is recognized over the period services are provided. We recognize revenue when all four of the following criteria are met:
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Persuasive evidence of an arrangement exists such as a service agreement with a municipality, a hauling customer or a disposal customer;
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Services have been performed such as the collection and hauling of waste;
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The price of the services provided to the customer is fixed or determinable. and
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Collectability is reasonably assured.
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Intangible Assets
Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually.
Goodwill
Goodwill is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill, but as discussed in the Asset Impairments section below, we assess our goodwill for impairment at least annually.
Landfill Accounting
Capitalized landfill costs
Cost basis of landfill assets - We capitalize various costs that we incur to make a landfill ready to accept waste. These costs generally include expenditures for land (including the landfill footprint and required landfill buffer property); permitting; excavation; liner material and installation; landfill leachate collection systems; landfill gas collection systems; environmental monitoring equipment for groundwater and landfill gas; and directly related engineering, capitalized interest, on-site road construction and other capital infrastructure costs. The cost basis of our landfill assets also includes asset retirement costs, which represent estimates of future costs associated with landfill final capping, closure and post-closure activities. These costs are discussed below.
Final capping, closure and post-closure costs - Following is a description of our asset retirement activities and our related accounting:
● | Final capping - Involves the installation of flexible membrane liners and geosynthetic clay liners, drainage and compacted soil layers and topsoil over areas of a landfill where total airspace capacity has been consumed. Final capping asset retirement obligations are recorded on a units-of-consumption basis as airspace is consumed related to the specific final capping event with a corresponding increase in the landfill asset. The final capping is accounted for as a discrete obligation and recorded as an asset and a liability based on estimates of the discounted cash flows and capacity associated with the final capping. |
● | Closure - Includes the construction of the final portion of methane gas collection systems (when required), demobilization and routine maintenance costs. These are costs incurred after the site ceases to accept waste, but before the landfill is certified as closed by the applicable state regulatory agency. These costs are recorded as an asset retirement obligation as airspace is consumed over the life of the landfill with a corresponding increase in the landfill asset. Closure obligations are recorded over the life of the landfill based on estimates of the discounted cash flows associated with performing closure activities. |
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● | Post-closure - Involves the maintenance and monitoring of a landfill site that has been certified closed by the applicable regulatory agency. Generally, we are required to maintain and monitor landfill sites for a 30-year period. These maintenance and monitoring costs are recorded as an asset retirement obligation as airspace is consumed over the life of the landfill with a corresponding increase in the landfill asset. Post-closure obligations are recorded over the life of the landfill based on estimates of the discounted cash flows associated with performing post-closure activities. |
We develop our estimates of these obligations using input from our operations personnel, engineers and accountants. Our estimates are based on our interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value. Absent quoted market prices, the estimate of fair value is based on the best available information, including the results of present value techniques. In many cases, we contract with third parties to fulfill our obligations for final capping, closure and post closure. We use historical experience, professional engineering judgment and quoted and actual prices paid for similar work to determine the fair value of these obligations. We are required to recognize these obligations at market prices whether we plan to contract with third parties or perform the work ourselves. In those instances where we perform the work with internal resources, the incremental profit margin realized is recognized as a component of operating income when the work is performed.
Once we have determined the final capping, closure and post-closure costs, we inflate those costs to the expected time of payment and discount those expected future costs back to present value. During the year ended December 31, 2015 we inflated these costs in current dollars until the expected time of payment using an inflation rate of 2.5%. We discounted these costs to present value using the credit-adjusted, risk-free rate effective at the time an obligation is incurred, consistent with the expected cash flow approach. Any changes in expectations that result in an upward revision to the estimated cash flows are treated as a new liability and discounted at the current rate while downward revisions are discounted at the historical weighted average rate of the recorded obligation. As a result, the credit-adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to each individual asset retirement obligation. The weighted average rate applicable to our long-term asset retirement obligations at December 31, 2015 is approximately 8.5%.
We record the estimated fair value of final capping, closure and post-closure liabilities for our landfills based on the capacity consumed through the current period. The fair value of final capping obligations is developed based on our estimates of the airspace consumed to date for the final capping. The fair value of closure and post-closure obligations is developed based on our estimates of the airspace consumed to date for the entire landfill and the expected timing of each closure and post-closure activity. Because these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing of future final capping, closure and post-closure activities could result in a material change in these liabilities, related assets and results of operations. We assess the appropriateness of the estimates used to develop our recorded balances annually, or more often if significant facts change.
Changes in inflation rates or the estimated costs, timing or extent of future final capping, closure and post-closure activities typically result in both (i) a current adjustment to the recorded liability and landfill asset and (ii) a change in liability and asset amounts to be recorded prospectively over either the remaining capacity of the related discrete final capping or the remaining permitted and expansion airspace (as defined below) of the landfill. Any changes related to the capitalized and future cost of the landfill assets are then recognized in accordance with our amortization policy, which would generally result in amortization expense being recognized prospectively over the remaining capacity of the final capping or the remaining permitted and expansion airspace of the landfill, as appropriate. Changes in such estimates associated with airspace that has been fully utilized result in an adjustment to the recorded liability and landfill assets with an immediate corresponding adjustment to landfill airspace amortization expense.
● | Remaining permitted airspace - Our engineers, in consultation with third-party engineering consultants and surveyors, are responsible for determining remaining permitted airspace at our landfills. The remaining permitted airspace is determined by an annual survey, which is used to compare the existing landfill topography to the expected final landfill topography. |
● | Expansion airspace - We also include currently unpermitted expansion airspace in our estimate of remaining permitted and expansion airspace in certain circumstances. First, to include airspace associated with an expansion effort, we must generally expect the initial expansion permit application to be submitted within one year and the final expansion permit to be received within five years. Second, we must believe that obtaining the expansion permit is likely, considering the following criteria: |
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o | Personnel are actively working on the expansion of an existing landfill, including efforts to obtain land use and local, state or provincial approvals; |
o | We have a legal right to use or obtain land to be included in the expansion plan; |
o | There are no significant known technical, legal, community, business, or political restrictions or similar issues that could negatively affect the success of such expansion; and |
o | Financial analysis has been completed based on conceptual design, and the results demonstrate that the expansion meets the Company's criteria for investment. |
For unpermitted airspace to be initially included in our estimate of remaining permitted and expansion airspace, the expansion effort must meet all of the criteria listed above. These criteria are evaluated by our field-based engineers, accountants, managers and others to identify potential obstacles to obtaining the permits. Once the unpermitted airspace is included, our policy provides that airspace may continue to be included in remaining permitted and expansion airspace even if certain of these criteria are no longer met as long as we continue to believe we will ultimately obtain the permit, based on the facts and circumstances of a specific landfill.
When we include the expansion airspace in our calculations of remaining permitted and expansion airspace, we also include the projected costs for development, as well as the projected asset retirement costs related to the final capping, closure and post-closure of the expansion in the amortization basis of the landfill.
Once the remaining permitted and expansion airspace is determined in cubic yards, an airspace utilization factor ("AUF") is established to calculate the remaining permitted and expansion capacity in tons. The AUF is established using the measured density obtained from previous annual surveys and is then adjusted to account for future settlement. The amount of settlement that is forecasted will take into account several site-specific factors including current and projected mix of waste type, initial and projected waste density, estimated number of years of life remaining, depth of underlying waste, anticipated access to moisture through precipitation or recirculation of landfill leachate, and operating practices. In addition, the initial selection of the AUF is subject to a subsequent multi-level review by our engineering group, and the AUF used is reviewed on a periodic basis and revised as necessary. Our historical experience generally indicates that the impact of settlement at a landfill is greater later in the life of the landfill when the waste placed at the landfill approaches its highest point under the permit requirements.
After determining the costs and remaining permitted and expansion capacity at our landfill, we determine the per ton rates that will be expensed as waste is received and deposited at the landfill by dividing the costs by the corresponding number of tons. We calculate per ton amortization rates for the landfill for assets associated with each final capping, for assets related to closure and post-closure activities and for all other costs capitalized or to be capitalized in the future. These rates per ton are updated annually, or more often, as significant facts change.
It is possible that actual results, including the amount of costs incurred, the timing of final capping, closure and post-closure activities, our airspace utilization or the success of our expansion efforts could ultimately turn out to be significantly different from our estimates and assumptions. To the extent that such estimates, or related assumptions, prove to be significantly different than actual results, lower profitability may be experienced due to higher amortization rates or higher expenses; or higher profitability may result if the opposite occurs. Most significantly, if it is determined that expansion capacity should no longer be considered in calculating the recoverability of a landfill asset, we may be required to recognize an asset impairment or incur significantly higher amortization expense. If at any time management makes the decision to abandon the expansion effort, the capitalized costs related to the expansion effort are expensed immediately.
Derivative Instruments
The Company enters into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities ("ASC 815") as well as related interpretations of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering of the rights and obligations of each instrument.
The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as freestanding warrants, the Company generally use the Black Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimates and assumption changes. Under the terms of this accounting standard, increases in the trading price of the Company's common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative loss. Conversely, decreases in the trading price of the Company's common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative gain.
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Deferred Revenue
The Company records deferred revenue for customers that were billed in advance of services. The balance in deferred revenue represents amounts billed in October, November and December for services that will be provided during January, February and March.
Stock-Based Compensation
Stock-based compensation is accounted for at fair value in accordance with ASC Topic 718. To date, the Company has not adopted a stock option plan and has not granted any stock options.
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also require measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share based payments to consultants and other third-parties, compensation expense is determined at the "measurement date." The expense is recognized over the service period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation
expense based on the fair value of the award at the reporting date. During the six months the Company has warrants outstanding with an estimated fair value of $2,700,000. In addition, the Company issued restricted shares during the six months ended, June 30, 2016 with an estimated value of approximately $6,300,000.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the quarter ended June 30, 2016 and 2015 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We do not hold any derivative instruments and do not engage in any hedging activities.
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Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures .
At the conclusion of the period ended June 30, 2016 we conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer whom is also acting as Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer determined that our controls to ensure that the accounting department has adequate resources for public company external reporting was not adequate. Currently, the Company does not have an Audit Committee to oversee the financial reporting process. Accordingly, based on these material weaknesses, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective during the period covered by this report, June 30, 2016, to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules.
The Company's management is addressing these weaknesses by starting the process of seeking to recruit independent Directors so that the Company will have an Audit Committee that meets regulatory requirements for independence and financial expert experience. The Company also started the process of retaining additional staff to assist its internal staff with compliance issues.
Management believes that the material weaknesses set forth above did not have an effect on our company's financial results.
(b) Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries' officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors.
We believe there are no changes that constitute material changes from the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2015, filed with the SEC on April 14, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
From April 1, 2016 through April 8, 2016, the Board issued an aggregate of 446,429 shares of restricted Common Stock pursuant to subscriptions by three accredited investors under a private placement offering of such shares at the price of $1.12 per share.
From April 1, 2016 through April 8, 2016, the Board issued an aggregate of 7,812 shares of restricted Common Stock to the Company's placement agent and/or its designees, pursuant to subscriptions under a private placement offering during such period.
From June 3, 2016 through June 28, 2016, the Board issued an aggregate of 625,000 shares of restricted Common Stock, together with warrants, pursuant to subscriptions by seven accredited investors under a private placement offering of such shares at the price of $1.12 per share.
From June 3, 2016 through June 28, 2016, the Board issued an aggregate of 10,937 shares of restricted Common Stock to the Company's placement agent and/or its designees, pursuant to subscriptions under a private placement offering during such period.
The securities issued pursuant to the above offerings were not registered under the Securities Act of 1933, as amended (the "Securities Act"), but qualified for exemption under Section 4(a)(2) of the Securities Act and/or Regulation D. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a "public offering," as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, these shareholders had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since they agreed to, and received, share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a "public offering." Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities.
There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
There is no other information required to be disclosed under this item which was not previously disclosed.
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Item 6. Exhibits.
Exhibit No. |
| Description |
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3.1 |
| Certificate of Amendment to Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Meridian Waste Solutions, Inc. Current Report on Form 8-K filed with the SEC on July 25, 2016) |
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4.1 |
| F orm of Warrant (incorporated herein by reference to Exhibit to the Meridian Waste Solutions, Inc. Current Report on Form 8-K filed with the SEC on June 9, 2016) |
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4.2 |
| S econd Amendment to Credit and Guaranty Agreement, dated as of July 19, 2016, entered into by and among Here to Serve – Missouri Waste Division, LLC, Here to Serve – Georgia Waste Division, LLC, Brooklyn Cheesecake & Desserts Acquisition Corp., Meridian Land Company, LLC, Christian Disposal, LLC, and FWCD, LLC, Meridian Waste Solutions, Inc. ("Holdings") and certain subsidiaries of Holdings, as Guarantors, the Lenders party hereto from time to time and Goldman Sachs Specialty Lending Group, L.P., as Administrative Agent, Collateral Agent, and Lead Arranger* (incorporated herein by reference to Exhibit 4.1 to the Meridian Waste Solutions, Inc. Current Report on Form 8-K filed with the SEC on July 25, 2016) |
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4.3 |
| A mended and Restated Purchase Warrant for Common Shares issued in favor of Goldman, Sachs & Co., dated July 19, 2016 (incorporated herein by reference to Exhibit 4.2 to the Meridian Waste Solutions, Inc. Current Report on Form 8-K filed with the SEC on July 25, 2016) |
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10.1 |
| Form of Subscription Agreement (incorporated herein by reference to Exhibit 10.1 to the Meridian Waste Solutions, Inc. Current Report on Form 8-K filed with the SEC on March 29, 2016) |
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10.2 |
| F orm of Subscription Agreement (incorporated herein by reference to Exhibit 10.1 to the Meridian Waste Solutions, Inc. Current Report on Form 8-K filed with the SEC on June 9, 2016) |
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10.3 |
| F orm of First Amendment to Subscription Agreement (incorporated herein by reference to Exhibit 10.2 to the Meridian Waste Solutions, Inc. Current Report on Form 8-K filed with the SEC on June 17, 2016) |
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10.4 |
| F orm of Subscription Agreement (incorporated herein by reference to Exhibit 10.3 to the Meridian Waste Solutions, Inc. Current Report on Form 8-K filed with the SEC on June 17, 2016) |
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10.5 |
| F orm of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the Meridian Waste Solutions, Inc. Current Report on Form 8-K filed with the SEC on July 25, 2016) |
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31.1 |
| Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).* |
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31.2 |
| Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).* |
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32.1 |
| Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
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32.2 |
| Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
101.INS |
| XBRL Instance Document* |
101.SCH |
| XBRL Taxonomy Extension Schema Document* |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document* |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document* |
* |
| Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MERIDIAN WASTE SOLUTIONS, INC. | |
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Date: August [●], 2016 | By: | /s/ Jeffrey Cosman |
| Name: | Jeffrey Cosman |
| Title: | Chief Executive Officer |
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| (Principal Executive Officer) |
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| (Principal Financial Officer) |
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| (Principal Accounting Officer) |
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