Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.7.0.1
Acquisitions
6 Months Ended
Jun. 30, 2017
Acquisitions [Abstract]  
ACQUISITIONS

NOTE 3 – ACQUISITIONS

 

The CFS Group Acquisition

 

On February 15, 2017, the Company, in order to expand its geographical footprint to new markets outside of the state of Missouri, acquired 100% of the membership interests of The CFS Group, LLC, The CFS Group Disposal & Recycling Services, LLC and RWG5, LLC (“The CFS Group”) pursuant to a Membership Interest Purchase Agreement, dated February 15, 2017. This acquisition was consummated to further define the Company’s growth strategy of targeting and expanding within vertically integrated markets and serve as a platform for further growth.

 

The acquisition was accounted for by the Company using acquisition method under business combination accounting. Under this method, the purchase price paid by the acquirer is allocated to the assets acquired and liabilities assumed as of the acquisition date based on the fair value. Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions. Measurement period adjustments were recorded in the period in which the adjustments to the provisional amounts are determined. During the three months ended June 30, 2017, finalized valuations were performed on certain assets resulting measurement period adjustments:

 

Landfill assets increased   $ 4,200,000     to   $ 31,766,000  
Customer relationships increased   $ 1,940,000     to   $ 2,500,000  
Trade names and trademarks decreased   $ (570,000 )   to   $ 210,000  
Non-controlling interest increased   $ (69,000 )   to   $ 140,000  
Goodwill decreased   $ (5,640,000 )   to   $ 6,014,000  
Purchase price – restricted stock decreased   $ 139,000     to   $ 39,284,000  

 

Additionally the changes in these provisional amounts resulted in an increase in depreciation and amortization expense of $248,000, of which $93,000 relates to the previous quarter.

 

All fair value measurements of acquired assets and liabilities assumed are non-recurring in nature and classified as level 3 on the fair value hierarchy.

 

The calculation of purchase price, including measurement period adjustments, is as follows:

 

Cash consideration   $ 3,933,000  
Debt assumed - as consideration     34,100,000  
Restricted stock consideration     1,251,000  
Total   $ 39,284,000  

 

As noted in the table above, the Company issued 500,000 restricted shares of common stock as consideration which was valued at market at the date of the closing, fair value of approximately $1,251,000. A 10% discount to the trading price of the stock was taken to account for the restricted nature of the shares.

 

The following table summarizes the estimated fair value of The CFS Group assets acquired and liabilities assumed at the date of acquisition, including measurement period adjustments:

 

Accounts receivable     2,793,000  
Prepaid expenses and other current assets     845,000  
Property, plant and equipment     14,179,000  
Trade names and trademarks     210,000  
Landfill permits     31,766,000  
Customer relationships     2,500,000  
Accounts payable and accrued liabilities     (2,654,000 )
Capital leases payable     (6,896,000 )
Mortgage payable     (1,429,000 )
Asset retirement obligations     (7,904,000 )
Non-controlling interest     (140,000 )
Goodwill     6,014,000  
Total   $ 39,284,000  

 

Revenue and net loss included in the six months ended June 30, 2017 financial statements attributable to the CFS Group is approximately $8,200,000 and $2,800,000, respectively.

 

The following unaudited pro forma information below presents the consolidated results operations data as if the acquisition of the CFS Group took place on January 1, 2016:

 

    Six Months Ended
June 30,
2016
    Six Months Ended
June 30,
2017
 
             
Total Revenue   $ 25,888,000     $ 27,850,000  
Net Loss   $ (14,770,000 )   $ (11,338,000 )
Basic Net Loss Per Share   $ (12.62 )   $ (1.89 )

 

Mobile Science Technologies, Inc.

 

On April 21, 2017, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with MSTI and its shareholders. MSTI is a technology service provider and builder of mobile applications that enable efficient two-way communications between organizations and entities such as municipalities and their respective customers or citizens. The Company seeks to utilize the technology underlying MSTI’s current applications to develop an enhanced communication system between the Company and its customers.

 

Pursuant to the Share Exchange Agreement, the Company purchased 100% of the outstanding stock (28,333,333 common shares) of MSTI in exchange for 1,083,017 shares of the Company’s common stock (the “Purchase Shares”). In accordance with the payment schedule contained in the Share Exchange Agreement, 403,864 of the Purchase Shares were issued as of the closing date, with the remaining 679,153 Purchase Shares to be issued upon certain milestones; however, if the milestones are not attained, such Purchase Shares will be issued on April 21, 2018. Such ‘to be issued’ shares are shown within equity in the Consolidated Balance Sheets. The Selling Shareholders were mainly comprised Walter H. Hall, Jr., the Company’s President, Chief Operating Officer and a director, and four limited liability companies managed by Jeffrey Cosman, the Company’s Chief Executive Officer and Chairman. Such selling shareholders also have controlling financial interest of the Company. Accordingly, the acquisition of MSTI was deemed to be a transaction between entities under common control and thus the assets and liabilities of MSTI were transferred at their historical cost with prior periods retrospectively adjusted to include the historical financial results of MSTI. The equity accounts of the entities are combined and the par value of the shares issued by the Company is recognized.

 

Upon closing of the Share Exchange Agreement, the Company assumed all financial and contractual obligations of MSTI incurred both prior to and after the closing. Prior to its entering into the Share Exchange Agreement, the Company owned 5,000,000 shares of MSTI, or 15% of the issued and outstanding stock of MSTI, which was accounted for as an equity method investment. Originally, the Company transferred the assets of MSTI for its initial 15% investment, and then repurchased those assets with additional shares of stock of the Company. As a result of the closing of the Share Exchange Agreement the Company became the owner of 100% of the shares of MSTI.

 

In June of 2017, the Company recorded $221,146 of impairment expense on the MSTI capitalized software. 

 

Prior to the approval of the Share Exchange Agreement by the Company’s Board of Directors and prior to the Company’s entry into the Share Exchange Agreement, the Company obtained a fairness opinion from a third party investment bank opining that the consideration to be paid by the Company in the Share Exchange Agreement is fair from a financial point of view.

 

The following table includes the financial information originally reported and the net effect of the acquisition for the six months ended June 30, 2016:

 

    Prior to Acquisition     Net Effect of Acquisition     Post-Acquisition  
Total Sales   $ 15,494,337     $ 0     $ 15,494,337  
Net Loss   $ 10,572,100     $ 14,033     $ 10,586,133  

 

The following table includes the financial information originally reported and the net effect of the acquisition as of December 31, 2016:

 

    Prior to Acquisition     Net Effect of Acquisition     Post-Acquisition  
Total Assets   $ 49,201,572     $ (2,940 )   $ 49,198,632  
                         
Total Equity     (10,319,514 )   $ (9,766 )   $ (10,329,280 )