NOTE 13 – VARIABLE INTEREST ENTITY

American Science and Technology Corporation – Variable Interest Entity

On November 9, 2017, the Company entered into a Patent License Agreement with American Science and Technology Corporation (“AST”). Consistent with the terms of this agreement, effective January 1, 2018, the Company gained the exclusive commercial license to certain licensed patents of AST for a term of 24 months. In addition, the Company entered into a commercial lease with AST for certain property and equipment which comprised the entirety of the operational assets of AST for a term of 24 months.

Pursuant to these agreements, the Company paid $500,000 and issued 500,000 shares of the Company stock. In addition, effective January 1, 2019, the Company will pay to AST monthly license and lease payments of $125,000 for twelve months.

In addition, the Company and AST also entered into an Option Agreement (the “Option”), granting the Company the option to purchase outright the assets (patents and property and equipment) of AST for $2,500,000, and certain future royalty payments consisting of two tenths of a percent (0.2%) of all the Company’s Biomass Feedstock Costs incurred in operating the Property as a biorefinery which has incorporated the technology contained in the Biorefinery Patents in its design, construction or operations. Also, the Company will pay $250,000 for any third party owned biorefinery constructed, with the Company’s written consent, employing the technology contained in the Biorefinery Patents. The option is exercisable from date of execution through December 31, 2019.

As noted above, the license and lease agreements cover the entirety of the assets of AST and effectively result in the Company taking control of the AST business. Management evaluated this arrangement and determined that AST was a variable interest entity to which the Company had a variable interest and is the primary beneficiary of AST as the result of these agreements. Accordingly, management determined that AST should be consolidated by the Company in these condensed financial statements.

The Company acquired AST to further its footprint in the bio-renewable space. AST business is focused on the conversion of lignocellulosic biomass into high-value chemicals and products. The acquisition of this variable interest entity 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. Certain amounts below are provisional based on our best estimates using information available as of the reporting date. The Company is waiting for information to become available to finalize its valuation of certain elements of this transaction. Specifically, the assigned values for property, plant and equipment, patents, lease payments payable, non-controlling interest and goodwill are provisional in nature and subject to change upon the completion of the final valuation of such elements. 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.

Although structured as leases, the purchase price consideration was deemed to be the upfront cash and common stock payments, along with the monthly payments required to be made in 2019. The option to purchase is considered a call option over the non-controlling interest in AST which was evaluated to discern whether it required any accounting under ASC 480 or ASC 815. As a result of this evaluation, the option agreement was considered to be an equity item embedded within the noncontrolling interest.

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

Cash consideration	$	500,000
Stock consideration		540,000
Lease payments consideration (provisional)		1,358,942
Total	$	2,398,942

As noted in the table above, the Company issued 500,000 shares of common stock as consideration, which was valued based on the trading price of the stock on the effective date of the transaction ($1.08 per share). The lease payment consideration is provisionally valued based off the present value of the future cash flows discounted at a market participant expected cost of debt.

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

Property, plant and equipment (provisional)		2,749,020
Patents (provisional)		1,832,680
Non-controlling interest		(2,182,758	)
Goodwill		-
Total	$	2,398,942

The following unaudited pro forma information below presents the consolidated results operations data for the three months ended March 31, 2017 as if the acquisition took place on January 1, 2017:

	Three Months Ended March 31, 2017

Total Revenue	$	1,028,000
Consolidated Net Loss	$	(3,233,000	)
Basic Net Loss Per Share	$	(0.62	)

Note: The acquisition was effective January 1, 2018, thus the consolidated statements of operations for the three months ended March 31, 2018 include the results of AST for the entire period.

Tri-City Recycling Center

Included within the operations from discontinued operations is a consolidated variable interest entity. The CFS Group owns 20% of the Tri-City Recycling Center, (“TCR”), which has been treated as a variable interest entity in these condensed consolidated financial statements. TCR leases a facility to the Company used in the operation of the Tri-City Regional Landfill in Petersburg. The sole source of TCR’s revenues is lease payments from the Company. While the creditors of TCR do not have general recourse to the assets of the Company, there is an obligation to perform by the Company under the leases which collateralize mortgage obligations. The terms of the lease are for a period of 20 years with a 10 year renewal option. The lease includes an annual escalation in rent payments of 1.5%. The equity, income and any contributions or distributions of equity are reported under non-controlling interest in the condensed consolidated financial statements of the Company. Total assets held for sale, liabilities held for sale, and gain or loss from discontinued operations of TCR in the consolidated financial statements at December 31, 2017 are approximately $400,000, $1,240,000, and $40,000, respectively.

See below for a roll-forward of the Company’s Non-controlling Interests:

Balance, December 31, 2017	$	1,459,407
Tri-City Recycling Center - net income		42,704
Tri-City dividend distribution		(36,928	)
LGMG, LLC - net loss		(113,768	)
AST - intial balance		2,182,758
AST - net loss		(70,807	)
Balance, March 31, 2018	$	3,463,366