NOTE 3 - ACQUISITIONS

The CFS Group Acquisition (Discontinued Operations)

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 the 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.

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:

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

As discussed in Note 1, during the fourth quarter the Company made a strategic shift that included the decision to dispose of the waste management business including the business and the assets acquired in this acquisition.

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 of 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.

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.

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.

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

	Prior to Acquisition		Net Effect of Acquisition		Post- Acquisition
Total Sales	$	31,727,673	$	-	$	31,727,673
Net Loss	$	17,671,669	$	22,812	$	17,694,481

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	)

DxT Medical, LLC

On October 16, 2017, (the “Closing Date”), Mobile Science Technologies, Inc., a wholly owned subsidiary of the Company entered into a Membership Interest Purchase Agreement by and among, an individual residing in the State of South Carolina, and Corral Court Capital LLC, a Georgia limited liability company, as sellers (together, the “Seller”), the Company, as parent, and Mobile Science Technologies, Inc., as buyer (“Buyer”), pursuant to which Buyer will acquire from Seller all of Seller’s right, title and interest in and to 100% of the membership interests (the “Membership Interests”) of DxT Medical, LLC, a South Carolina limited liability company that owns and operates a national healthcare distribution business. As consideration for the Membership Interests, the Company issued to the Seller an aggregate of 350,000 restricted shares of the Company’s common stock, par value $0.025 per share, allocated in accordance with the terms of the Purchase Agreement. The shares were valued at market at the date of the closing, fair value of $318,500.

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

Restricted stock consideration			318,500
Total		$	318,500

As noted in the table above, the Company issued 350,000 restricted shares of common stock as consideration, which was valued at market at the date of the closing, fair value of $318,500.

The following table summarizes the estimated fair value of the DxT Medical, LLC assets acquired and liabilities assumed at the date of acquisition:

Goodwill			318,500
Total		$	318,500

Revenue and net loss included in the year ended December 31, 2017 consolidated financial statements attributable to the DxT Medical, LLC is approximately $0 and $390,000, respectively.

WelNess Benefits, LLC/Integrity Lab Solutions, LLC

On November 1, 2017, (the “Closing Date”), the Company entered into a membership interest purchase agreement (the “Purchase Agreement”) pursuant to which the Company acquired 100% of the membership interests (the “Membership Interests”) of WelNess Benefits, LLC (“WelNess”), an Oklahoma limited liability company, and Integrity Lab Solutions, LLC, an Oklahoma limited liability company, that together own and operate laboratory marketing, management, and testing businesses. WelNess owns 71.64% membership interest in LGMG, LLC d/b/a Verifi Resource Group. The Company seeks to utilize these businesses and their technologies to expand into the healthcare technology arena.

As consideration for the Membership Interests, the Company issued 1,000,000 shares of its restricted common shares.

In addition, the Purchase Agreement provides for an earn-out opportunity, payable in cash to the sellers on the sixtieth (60th) day after the first anniversary of the Closing Date, and again on the sixtieth (60th) day after second anniversary of Closing Date, each equal to twenty five percent (25%) of the combined earnings before interest, taxes and depreciation, excluding Accounts Receivables and capital expenditures, of the Operating Companies (as defined in the Purchase Agreement) (the “CA EBITDA”) for the immediately preceding 12-month period ending on October 31 of such year. On the sixtieth (60th) day after the third full anniversary of the Closing, the Buyer shall pay a cash bonus (the “Third Year Cash Bonus”) to Sellers equal twenty five percent (25%) of the combined earnings before interest, taxes and depreciation, excluding Accounts Receivables which are more than 120 days old and capital expenditures, of the Operating Companies (the “Last Year CA EBITDA”) for immediately preceding 12-month period ending on October 31 of such year.

As an additional earn-out opportunity, the Company shall issue to sellers shares of the Company’s restricted common stock (the “Tranche III Shares”) as follows: (i) on the ninetieth (90th) day after first anniversary of the Closing (“First Anniversary Earnout Payment Date”), Tranche III Shares in the amount equal to 500% of the CA EBITDA for the immediately preceding 12-month period ending on October 31 of such year, less the amount of the cash bonus paid on the First Bonus Payment Date, if any; and (ii) on the ninetieth (90th) day after the second, third, fourth, and fifth anniversaries of the Closing (each an “Anniversary Earnout Payment Date”), Tranche III Shares in the amount equal to the product of the Applicable Year Multiplier (as hereinafter defined) multiplied by the difference between the CA EBITDA for the immediately preceding 12-month period ending on October 31 of such year, less the amount of the applicable cash bonus, if any, paid on the immediately preceding Bonus Payment Date, (the “Adjusted CA EBITDA”) and less (x) the previous year’s Adjusted CA EBITDA on the second and third Anniversary Earnout Payment Date, or (y) the previous year’s CA EBITDA on the fourth and fifth Anniversary Earnout Payment Date. The “Applicable Year Multiplier” to be used in calculating the Tranche III Share Values shall be 4 for the second Anniversary Earnout Payment Date, 3 for the third Anniversary Earnout Payment Date, 2 for the fourth Anniversary Earnout Payment Date, and 1 for the fifth Anniversary Earnout Payment Date. The number of Tranche III Shares to be issued on any Anniversary Earnout Payment Date shall be calculated by dividing the Tranche III Share Value for the applicable Anniversary Earnout Payment Date by (a) the VWAP of the Company’s restricted common stock as of the last Trading Day prior to the applicable Anniversary Earnout Payment Date, or (b) $1.09, whichever is greater.

Finally, as additional consideration, the Company issued to sellers, on the Closing Date, an aggregate of 1,000,000 five year warrants to purchase shares of Common Stock at an exercise price of $1.00 per share, exercisable beginning six months after the date of issuance thereof (the “Seller Warrants”).

Also at the time of closing, the Company paid certain operating expenses totaling approximately $60,000 incurred by the acquirees.

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:

Stock consideration	$	1,000,000
Warrant consideration		896,645
Contingent consideration		2,220,683
Total	$	4,117,328

As noted in the table above, the Company issued 1,000,000 shares of common stock as consideration, which was valued based on the trading price of the stock on the date of close ($1.00 per share). The warrant consideration was measured using the Black Scholes Merton valuation model with the following significant assumptions: (1) stock price - $1.00; (2) exercise price - $1.00; (3) term – 5 years; (4) risk free interest rate – 2.01%; and (5) stock volatility of 143%. The contingent consideration was valued using a monte carlo simulation with simulations of expected future revenue amounts, growth rates and related expenses. The model also simulated future stock prices based off the following key assumptions: (1) starting price $1.00; (2) term – 1–5 years; (3) risk free interest rate – 2.01%; and (4) volatility of 143.46%. The simulation estimates that approximately 2,031,000 common stock shares may be required to be issued over the next five years related to this contingent consideration.

The contingent consideration is measured both initially and subsequently at fair value until settlement. The key assumptions for the subsequent December 31, 2017 valuation of $1.9 million were: (1) starting price $1.06; (2) term – 1-5 years; (3) risk free interest rate – 2.20%; and (4) volatility of 157.53%. The change in fair value is recognized in the consolidated statement of operations as unrealized gain from change in fair value of contingent consideration. The simulation estimates that approximately 1,605,000 common stock shares may be required to be issued over the next five years related to this contingent consideration.

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 following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

Property, plant and equipment		134,825
Customer list		2,809,000
Accounts payable		(583,746	)
Capital lease		(25,999	)
Notes payable – bank		(1,942,771	)
Non-controlling interest		(1,234,688	)
Goodwill		4,960,707
Total	$	4,117,328

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

	Year ended December 31, 2016			Year Ended December 31, 2017

Total Revenue	$	2,202,020		$	7,927,580
Consolidated Net Loss	$	(19,160,723	)	$	(33,137,052	)
Basic Net Loss Per Share	$	(8.45	)	$	(3.82	)

Advanced Lignin Biocomposites, LLC

On November 30, 2017, the Company entered into a Membership Interest Purchase Agreement (this “Purchase Agreement”) to acquire all of the issued and outstanding membership interests of Advanced Lignin Biocomposites, LLC, (“ALB”). The Company concluded that substantially all of the fair value of the gross assets acquired (patents with related licenses) from ALB are concentrated in a group of similar identifiable assets and thus the Company treated this transaction as an asset acquisition. The assets were recorded at cost.

As consideration for the acquisition of these assets, the Company issued an aggregate of 800,000 shares of its common shares, which had a fair value of $1,032,000 based off the closing trading price of the common stock on November 30, 2017. In addition, a reconciliation is available for the Sellers in the event that, beginning on the first anniversary of the closing of the Purchase Agreement, the sellers have sold such shares in good faith and received gross proceeds of less than $4.00 per share, pursuant to which the Company could become obligated to issue additional shares to the sellers (“Shortfall Provision”). The number of shares required to be issued will be determined based on the amount of shortfall ($4.00 less proceeds received) divided by the volume weighted average price of the common stock as of the last trading day preceding the first anniversary of the closing. This Shortfall Provision is a conditional obligation that the issuer must settle in a variable number of shares and the monetary value is predominantly varying inversely in relation to the issuer’s equity shares. Accordingly, the Company is accounting for this provision as a fair value liability under ASC 480, Distinguishing Liabilities from Equity. The fair value of the Shortfall Provision was at acquisition date was approximately $2.1 million and was determined using a Monte Carlo Stock Path Simulation with the following key assumptions: (1) starting price - $1.29; (2) term – one year; (3) risk free interest rate – 1.61%; and (4) volatility – 152.15%.

The Shortfall Provision is measured both initially and subsequently at fair value until settlement. The key assumptions for the December 31, 2017 valuation of $2.3 million were as follows: (1) starting price $1.06; (2) term – .88 years; (3) risk free interest rate – 1.76%; and (4) volatility of 135.99%. The change in fair value of the Shortfall Provision is included in unrealized gain (loss) on change in fair value of derivative liabilities.

American Science and Technology Corporation License Agreement and Lease

On November 9, 2017, the Company entered into a Patent License Agreement with American Science and Technology Corporation (“AST”). Effective January 1, 2018, the Company will have exclusive commercial license to the licensed patents for a term of 24 months, unless terminated earlier. In addition, the Company entered into a commercial lease with AST for certain property and equipment.

Pursuant to the Patent License Agreement, on January 1, 2018, the Company will pay to AST $200,000 and the Company will issue to AST 200,000 shares of the Company’s common stock, and, beginning effective January 1, 2019, the Company will pay to AST a monthly license fee of $50,000. Pursuant to the commercial lease, on January 1, 2018, the Company will pay to AST $300,000 and the Company will issue to AST 300,000 shares of the Company’s restricted common stock, and, beginning effective January 1, 2019, the Company will pay to AST a monthly rent of $75,000. Pursuant to these agreements, the Company and AST also entered into an Option Agreement (the “Option”), granting the Company the option to purchase the assets of AST for $2,500,000, in addition to certain royalty and other future payments.

Under these arrangements, the Company paid $500,000 to AST during 2017 (comprising of the required $200,000 and $300,000 payments cited above, respectively). This amount is classified as a contract deposit in the Consolidated Balance Sheet.