6. NOTES PAYABLE AND CONVERTIBLE NOTES

9 Months Ended

Sep. 30, 2015

Debt Disclosure [Abstract]

6. NOTES PAYABLE AND CONVERTIBLE NOTES

The Company issued two promissory notes to related parties during the year ended December 31, 2014. These notes totaled $125,000 and are generally convertible into common stock of the Company at discounts of 20 % to 25% of the lowest average trading prices for the stock during periods five to one day prior to the conversion date. These notes bears interest at 10% to 12%, are unsecured, and matures within one year of the date issued. The notes were issued to provide working capital for the Company.  These notes are considered a stock settled debt in accordance with ASC 480 since any future stock issued upon conversion will have a fixed monetary value.  Due to the conversion feature included in the notes, the Company has recorded a premium on the notes totaling $31,250 as of December 31, 2014.  This amount has been charged to interest expense by the Company.

In previous periods the Company issued two other notes to other related parties. These notes totaled $110,000 and are generally convertible into common stock of the Company at discounts of 20% to 25% of the lowest average trading prices for the stock during periods five to one day prior to the conversion date.  These notes bear interest at 10% to 12%, are unsecured, and mature within one year of the date issued. The notes were issued to provide working capital for the Company.   These notes are considered a stock settled debt in accordance with ASC 480 since any future stock issued upon conversion will have a fixed monetary value.  Due to the conversion feature included in the notes, the Company has recorded a premium on the notes totaling $35,833 as of December 31, 2014.  This amount has been charged to interest expense by the Company.

At September 30, 2015 the Company had $75,000 in convertible notes to related parties which includes $15,000 in put premiums.

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.  This note was paid in January, 2015.  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 which totaled $376,585.  The balance of these notes payable was $322,141 and $526,585 at September 30, 2015 and December 31, 2014, respectively.

The Company had the following long-term debt

	September 30, 2015			December 31, 2014
Debt payable to Comerica Bank, senior debt	$	-		$	8,708,333
Debt payable to Praesidian Capital Opportunity Fund III, senior lender		7,815,529			-
Debt payable to Praesidian Capital Opportunity Fund III-A, senior lender		3,029,471			-
Equipment loans		425,149			-
Notes payable to seller of Meridian, subordinated debt		1,475,000			1,475,000
Less: debt discount		(876,707	)		-
Total debt		11,868,442			10,183,333
Less: current portion		(107,050	)		(1,357,143	)
Long term debt less current portion	$	11,761,392		$	8,826,190

The debt payable to Comerica at December 31, 2014 and the Equipment loans at September 30, 2015 were the debt of Here to Serve-Missouri Waste Division, LLC, a subsidiary of the Company.

On August 6, 2015, the Company refinanced its long-term debt payable to Comerica Bank.  Proceeds from notes issued by the Company to Praesidian Capital Opportunity Fund III, LP and Praesidian Capital Opportunity Fund III-A, LP (together referred to as Praesidian) were $10,845,000.  These funds were distributed as follows:

Payoff of short term bridge financing	$	432,938
Payoff of lines of credit with Commerica Bank		1,745,799
Payoff of senior debt to Comerica Bank		7,953,433
Refinancing fees		712,830
	$	10,845,000

The debt to Praesidian matures on August 6, 2020 with interest paid monthly at an annual rate of 14%.  In addition to the 14% interest rate, the Company issued to Praesidian warrants to purchase 1,293,022 shares of Common Stock of the Company.  The difference between the market price and the exercise price per the warrant was recorded as debt discount and will be amortized over the term of the debt.  Debt discount amortization for the nine months ended September 30, 2015 was $27,720.  See Derivative Liability below.

In connection with the merger with Meridian Waste Services, LLC on May 15, 2014, notes payable to the sellers of Meridian were five-year term subordinated debt loans paying interest at 8%.

The Company’s Senior Secured Loan with Comerica Bank had an interest rate LIBOR plus 4.25% with a two-year term based on a seven-year amortization schedule.  In addition, the Company had a working capital line of credit with Comerica Bank of $1,250,000 at 4.75% of which the Company had drawn down $1,185,081 and $1,085,160 as of August 6, 2015 and December 31, 2014, respectively.  There is CAPEX line of credit of $750,000, of which the Company had drawn down $560,718 and $590,000 as of August 6, 2015 and December 31, 2014, respectively; again at 4.75% interest.

Finally, during the nine months ending September 30, 2015, the Company entered into four long-term loan agreements in connection with the purchase of equipment with rates between 4% and 5%.  At September 30, 2015, the balance of these four loans was $425,149.

Derivative Liability - Warrants

As indicated above, the Company issued warrants to purchase shares of Common Stock.  Due to the put feature contained in the agreement, a derivative liability was recorded for the warrants.   The Company’s derivative warrant instruments have been measured at fair value at September 30, 2015 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.

The Company has used the Black-Scholes pricing model to calculate the fair value as of September 30, 2015.  The Back-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future and the dividend rate.  The key inputs used in the September 30, 2015 fair value calculations were as follows:

	September 30, 2015
Current exercise price	$	0.025
Time to expiration	8/6/2016
Risk-free interest rate		0.35	%
Estimated volatility		210	%
Dividend		0
Stock price on September 30, 2015	$	0.72
Expected forfeiture rate		0	%

The change in the market value for the period ending September 30, 2015 is as follows:

Fair value of warrants @ August 6, 2015	$	904,427
Unrealized gain on derivative liability		346,963
Fair value of warrants @ September 30, 2015	$	557,464

Derivative Liability – Interest Rate Swap

The Company sometimes borrows at variable rates and uses interest rate swaps as cash flow hedges of future interest payments, which have the economic effect of converting borrowings from floating rates to fixed rates.  The interest rate swaps allow the Company to raise long-term borrowings at floating rates and swap them into fixed rates that are lower than those available if it borrowed at fixed rates directly.  Under the interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts.

At December 31, 2014, the Company had $5,414,634 of non-amortizing variable rate debt outstanding with interest payments due on a monthly basis.  The note accrues interest at the 1-month LIBOR plus 4.25%.  In order to hedge interest rate risk, the Company entered into an interest rate swap for a notional amount of $5,414,634 at fixed rate of 4.75%.  Under the swap agreement, the Company pays the fixed rate on the $5,414,634 notional amount on a monthly basis, and receives the 1-month LIBOR plus 4.25% on a monthly basis.  Payments are settled on a net basis, and the Company has effectively converted its variable-rate debt into fixed-rate debt with an effective interest rate of 4.75%.  , The net settlement amount of the interest rate swap as of September 30, 2015 and December 31, 2014 was $0 and $40,958, respectively.  The Company no longer has this swap as it was settled in the debt restructuring discussed above.