QUEST RESOURCE HOLDING CORP, 10-Q filed on 8/14/2013
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2013
Aug. 1, 2013
Document Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2013 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q2 
 
Trading Symbol
IRHC 
 
Entity Registrant Name
Infinity Resources Holdings Corp. 
 
Entity Central Index Key
0001442236 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Smaller Reporting Company 
 
Entity Common Stock, Shares Outstanding
 
95,807,463 
CONSOLIDATED BALANCE SHEETS (USD $)
Jun. 30, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 192,500 
$ 485,728 
Accounts receivable, less allowance for doubtful accounts of $8,392 and $7,398 as of June 30, 2013 and December 31, 2012, respectively
165,627 
174,013 
Inventory
3,405 
4,292 
Prepaid expenses and other assets
30,259 
38,019 
Total current assets
391,791 
702,052 
Property and equipment, net
133,388 
156,688 
Intangible assets
128,800 
128,800 
Investment in Quest Resource Management Group, LLC
3,826,566 
4,047,615 
Prepaid income taxes
5,440 
5,440 
Security deposits and other assets
133,467 
221,354 
Total assets
4,619,452 
5,261,949 
Current liabilities:
 
 
Accounts payable
457,801 
316,597 
Accrued liabilities
881,682 
648,153 
Deferred revenue
295,816 
166,362 
Long term debt and capital lease obligations - current portion
33,557 
72,128 
Convertible notes payable - short term, net of discount of $0 and $33,394 as of June 30, 2013 and December 31, 2012, respectively
25,000 
99,106 
Total current liabilities
1,693,856 
1,302,346 
Long term senior secured convertible note - related party, net of discount $1,893,079 and $1,313,897 as of June 30, 2013 and December 31, 2012, respectively
1,106,921 
686,103 
Warrant liability
 
20,233,338 
Total liabilities
2,800,777 
22,221,787 
Commitments and contingencies
   
   
Stockholders' equity (deficit):
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of June 30, 2013 and December 31, 2012
   
   
Common stock, $0.001 par value, 100,000,000 shares authorized, 65,424,851 and 58,040,230 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively
65,425 
58,040 
Additional paid-in capital
55,086,429 
30,708,473 
Accumulated deficit
(53,333,179)
(47,726,351)
Total stockholders' equity (deficit)
1,818,675 
(16,959,838)
Total liabilities and stockholders' equity (deficit)
$ 4,619,452 
$ 5,261,949 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Jun. 30, 2013
Dec. 31, 2012
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts receivable
$ 8,392 
$ 7,398 
Convertible notes payable - short term, discount
33,394 
Long term senior secured convertible note - related party, discount
$ 1,893,079 
$ 1,313,897 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
65,424,851 
58,040,230 
Common stock, shares outstanding
65,424,851 
58,040,230 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Income Statement [Abstract]
 
 
 
 
Revenues
$ 402,014 
$ 236,585 
$ 715,502 
$ 454,357 
Cost of revenue
108,628 
 
148,321 
 
Gross profit
293,386 
236,585 
567,181 
454,357 
Operating expenses:
 
 
 
 
Selling, general and administrative
2,398,731 
1,596,244 
4,657,533 
3,216,133 
Depreciation
14,813 
21,236 
29,793 
45,280 
Loss on sale of assets
 
 
 
406 
Total operating expenses
2,413,544 
1,617,480 
4,687,326 
3,261,819 
Operating loss
(2,120,158)
(1,380,895)
(4,120,145)
(2,807,462)
Other expense:
 
 
 
 
Interest expense
(292,220)
(244,040)
(600,634)
(374,736)
Valuation expense - common stock warrants
 
25,571 
 
25,571 
Financing cost for senior secured convertible note-related party
 
 
(1,465,000)
(2,055,855)
Total other expense, net
(292,220)
(218,469)
(2,065,634)
(2,405,020)
Loss before taxes and equity income
(2,412,378)
(1,599,364)
(6,185,779)
(5,212,482)
Equity in Quest Resource Management Group, LLC income
103,155 
521,771 
578,951 
1,126,329 
Loss before taxes
(2,309,223)
(1,077,593)
(5,606,828)
(4,086,153)
Income tax expense (benefit)
 
(352,700)
 
(699,900)
Net loss
(2,309,223)
(724,893)
(5,606,828)
(3,386,253)
Net loss applicable to common stockholders
$ (2,309,223)
$ (724,893)
$ (5,606,828)
$ (3,386,253)
Net loss per share
 
 
 
 
Basic and Diluted
$ (0.04)
$ (0.02)
$ (0.09)
$ (0.07)
Weighted average number of common shares outstanding
 
 
 
 
Basic and Diluted
65,338,152 
47,534,682 
61,670,008 
47,534,682 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (USD $)
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit[Member]
Beginning Balance at Dec. 31, 2012
$ (16,959,838)
$ 58,040 
$ 30,708,473 
$ (47,726,351)
Beginning Balance, Shares at Dec. 31, 2012
 
58,040,230 
 
 
Stock-based compensation expense
1,394,152 
 
1,394,152 
 
Discount senior secured convertible note-related party
1,000,000 
 
1,000,000 
 
Common stock issued for services
178,858 
62 
178,796 
 
Common stock issued for services, Shares
61,900 
61,900 
 
 
Note conversions and discounts
113,993 
90 
113,903 
 
Note conversions and discounts, Shares
89,942 
89,942 
 
 
Warrant conversions
21,698,338 
7,233 
21,691,105 
 
Warrant conversions, Shares
 
7,232,779 
 
 
Net loss
(5,606,828)
 
 
(5,606,828)
Ending Balance at Jun. 30, 2013
$ 1,818,675 
$ 65,425 
$ 55,086,429 
$ (53,333,179)
Ending Balance, Shares at Jun. 30, 2013
 
65,424,851 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Cash flows from operating activities:
 
 
Net loss
$ (5,606,828)
$ (3,386,253)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation expense
29,793 
45,280 
Amortization of debt discount and deferred financing costs
478,473 
223,699 
Loss on sale of assets
 
406 
Equity in Quest Resource Management Group, LLC income
(578,951)
(1,126,329)
Deferred income taxes
 
(699,900)
Provision (benefit) for doubtful accounts
994 
 
Stock-based compensation
1,573,010 
848,637 
Valuation expense common stock warrants
   
(25,571)
Financing costs for senior convertible note - related party
1,465,000 
2,055,855 
Changes in operating assets and liabilities:
 
 
Accounts receivable
7,392 
(116,054)
Inventory
887 
 
Prepaid expenses and other assets
7,760 
1,279 
Security deposits and other assets
63,626 
3,684 
Accounts payable
141,204 
12,979 
Accrued liabilities
240,022 
40,685 
Deferred revenue
129,454 
143,830 
Accrued interest - related parties
 
112,145 
Net cash used in operating activities
(2,048,164)
(1,865,628)
Cash flows from investing activities:
 
 
Purchase of property and equipment
(6,493)
(12,856)
Proceeds from sale of property and equipment
 
100 
Distributions received from Quest Resource Management Group, LLC
800,000 
300,000 
Net cash provided by investing activities
793,507 
287,244 
Cash flows from financing activities:
 
 
Proceeds from senior secured convertible note-related party
1,000,000 
1,000,000 
Repayments capital lease obligations
(38,571)
(28,174)
Financing costs
   
(8,500)
Net cash provided by financing activities
961,429 
963,326 
Net decrease in cash and cash equivalents
(293,228)
(615,058)
Cash and cash equivalents at beginning of period
485,728 
1,274,018 
Cash and cash equivalents at end of period
192,500 
658,960 
Supplemental cash flow information:
 
 
Cash paid for interest
83,792 
38,891 
Supplemental non-cash flow activities:
 
 
Common stock issued for services and loan fees
178,858 
 
Common stock issued for warrants - cashless exercise
21,698,338 
 
Discount to senior secured convertible note-related party
1,000,000 
500,000 
Related Party [Member]
 
 
Supplemental non-cash flow activities:
 
 
Common stock issued for conversion of notes payable, including accrued interest
$ 113,993 
 
The Company and Description of Business and Future Liquidity Needs
The Company and Description of Business and Future Liquidity Needs

1. The Company and Description of Business and Future Liquidity Needs

The accompanying consolidated financial statements include the accounts of Infinity Resources Holdings Corp. and its subsidiaries, Earth911, Inc. (“Earth911”) and Youchange, Inc. (“Youchange”) along with the 50% ownership interest in Quest Resource Management Group, LLC (“Quest”) (collectively, “Infinity,” the “Company,” “we,” “us,” or “our”).

Operations – We are an environmental solutions company that serves as a single-source provider of recycling and environmental program services and information. We offer innovative, cost-effective, one-stop reuse, recycling, and waste disposal management programs designed to provide regional and national customers with a single point of contact for managing a variety of recyclables and disposables. We also own the Earth911.com website, offering original online environmental related content about reuse, recycling, and disposal of waste and recyclables, and we own a comprehensive online database of local recycling and proper disposal options. We also offer advertisers the opportunity to target an audience interested in environmental sustainability, recycling, and responsible disposition of waste products. We license customized logos and internet addresses to manufacturers to place on their products, which provide their customers with information about conveniently situated recycling locations and the proper disposal of various products.

On October 17, 2012, we closed a merger transaction (the “Earth911 Merger”) to acquire Earth911 as a wholly owned subsidiary and experienced a change in control in which the former stockholders of Earth911 acquired control of our company. On December 11, 2012, our board of directors approved a change to our fiscal year end from June 30 to December 31. Pursuant to the terms of the merger agreement, in which we acquired Earth911, the stockholders of Earth911 exchanged their common stock for 85% of the common stock of the post-merger entity. Therefore, the merger for accounting purposes is considered a reverse merger, with Earth911 treated as the accounting acquirer.

Going Concern – During the six months ended June 30, 2013, we incurred a net loss of $5,606,828 and used cash in operations of $2,048,164. At June 30, 2013, we had negative working capital of $1,302,065 and cash and cash equivalents of $192,500. As such, our independent registered public accounting firm has expressed an uncertainty about our ability to continue as a going concern in its opinion attached to our consolidated financial statements for the year ended December 31, 2012, which is more fully discussed in our audited consolidated financial statements for the year ended December 31, 2012. We plan to obtain additional working capital by increasing sales, maintaining efficient operating expenses, receiving distributions from Quest, and through other initiatives. We may require additional working capital to support operations and the expansion of sales channels and market distribution, to develop and introduce new products and services, to enhance existing product offerings, to address unanticipated competitive threats or technical problems, and for potential acquisition transactions. There can be no assurance that additional financing will be available to us on acceptable terms, or at all. Additional equity financing may involve substantial dilution to our then existing stockholders. In the event we are unable to raise additional capital or execute other alternatives, we may be required to sell portions of our business, or substantially reduce or curtail our activities. Such actions could result in charges that could be material to our results of operations and financial position. Our consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principals of Presentation, Consolidation and Reclassifications

The consolidated financial statements included herein have been prepared by Infinity Resources without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements for the year ended December 31, 2012. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.

The accompanying consolidated financial statements include the operating activity of Infinity and its subsidiaries, for the three and six months ended June 30, 2013 and 2012, as well as the equity method of accounting for its investment in Quest. The Earth911 Merger, which closed on October 17, 2012, was deemed to be a reverse merger, with Earth911 as the accounting acquirer. As such, the operating activity of Infinity (p/k/n YouChange Holdings Corp.) is consolidated into these consolidated financial statements for the three and six months ended June 30, 2013, and excluded from the three and six months ended June 30, 2012, which occurred prior to the date of the Earth911 Merger. The separate operating activities for Earth911 and the investment in Quest, are included for the three and six months ended June 30, 2013 and 2012. Quest is deemed to be a separate operating unit from Infinity and as such, there are no intercompany transactions that require elimination at this time. All other intercompany accounts and transactions have been eliminated in consolidation.

 

The consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at June 30, 2013, and the results of our operations and cash flows for the periods presented. The December 31, 2012 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Interim results are subject to seasonal variations and the results of operations for the six months ended June 30, 2013, are not necessarily indicative of the results to be expected for the full year.

As both Earth911 and Youchange are deemed to be operating as ecology based green service companies, no segment reporting was deemed necessary.

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

Significant estimates are used when accounting for the collectability of accounts receivable, depreciable lives of fixed assets, accruals, assumptions used in the valuation and recognition of share-based payments and warrant liability, the realization of intangible assets, deferred tax assets, the equity method investment in Quest, and the application of accounting for the senior secured convertible note, all of which are discussed in their respective notes to the consolidated financial statements.

Revenue Recognition

Revenue Recognition – We recognize revenue only when all of the following criteria have been met:

 

   

persuasive evidence of an arrangement exists;

 

   

delivery has occurred or services have been rendered;

 

   

the fee for the arrangement is fixed or determinable; and

 

   

collectability is reasonably assured.

Persuasive Evidence of an Arrangement – We document all terms of an arrangement in a quote signed or confirmed by the customer prior to recognizing revenue.

Delivery Has Occurred or Services Have Been Performed – We perform all services or deliver all products prior to recognizing revenue. Services are deemed to be performed when the services are complete.

The Fee for the Arrangement is Fixed or Determinable – Prior to recognizing revenue, a customer’s fee is either fixed or determinable under the terms of the quote or accepted customer purchase order.

Collectability Is Reasonably Assured – We assess collectability on a customer by customer basis based on criteria outlined by management.

The revenues reported in 2013 and 2012 are derived primarily from the operations of Earth911 and represent licensing rights. These revenues are recognized ratably over the term of the license. Some revenues are derived from advertising contracts, which are alsorecognized ratably, over the term that the advertisement appears on our website. In addition, advertising revenues are not recognized until such time as persuasive evidence of an agreement exists, the price is fixed or determinable, and collectability is reasonably assured.

 

Cash and Cash Equivalents

We consider all highly liquid instruments with a remaining maturity of three months or less when purchased to be cash equivalents.

Fair Value Measurements

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities,

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or 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 assets or liabilities,

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability.

Fair value accounting has been applied to the valuation of stock-based compensation and warrants issued. The valuation methodologies and inputs used are discussed in the respective footnotes.

Stock Options We estimate the fair value of stock options using the Black-Scholes valuation model. Significant Level 3 assumptions used in the calculation were determined as follows:

 

   

Expected term is determined under the simplified method using an average of the contractual term and vesting period of the award as appropriate statistical data required to properly estimate the expected term was not available;

 

   

Expected volatility is measured using the historical changes in the market price of our common stock, disregarding identifiable periods of time in which share price was extraordinarily volatile due to certain events that are not expected to recur during the expected term;

 

   

Risk-free interest rate is used to approximate the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards; and

 

   

Forfeitures are based on the history of cancellations of warrants granted by us and our analysis of potential future forfeitures.

Warrants – We estimate the fair value of the warrant liability using Level 3 inputs for the initial valuation of the warrants using the Black-Scholes valuation model. The Level 1 and 2 inputs utilized the March 29, 2013 cashless exercise value calculated from the exercise of all warrants that were exercisable on that date and the quoted common stock market price. See Note 7.

Net Loss Per Share

We compute basic net loss per share by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. The calculation of basic loss per share gives retroactive effect to the recapitalization related to our reverse acquisition of Earth911. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2013 and 2012 would be anti-dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes and total 13,107,162 shares at June 30, 2013, and 4,833,951 shares at June 30, 2012.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

     For the Three Months Ended June 30,     For the Six Months Ended June 30,  
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Net loss applicable to common stockholders—numerator for basic and diluted earnings per share

   $ (2,309,223   $ (724,893   $ (5,606,828   $ (3,386,253
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted—average common shares outstanding—denominator for basic earnings per share

     65,338,152        47,534,682        61,670,008        47,534,682   

Net loss per share:

        

Basic

   $ (0.04   $ (0.02   $ (0.09   $ (0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.04   $ (0.02   $ (0.09   $ (0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the anti-dilutive securities excluded from diluted earnings per share:

 

     For the Six Months Ended June 30,  
     2013      2012  
     (Unaudited)      (Unaudited)  

Anti-dilutive securities excluded from diluted earnings per share:

     

Stock options

     3,417,115         1,381,115   

Warrants

     1,381,113         690,608   

Convertible notes

     8,308,934         2,762,228   
  

 

 

    

 

 

 
     13,107,162         4,833,951   
  

 

 

    

 

 

 

Investment in Quest

Investee companies that are not consolidated, but over which we exercise significant influence, are accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to an investee depends on an evaluation of several factors, including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Under the equity method of accounting, an investee company’s accounts are not reflected within our balance sheet and statement of operations; however, our share of earnings or losses of the investee company is reflected in the caption “Equity in Quest Resource Management Group, LLC income” in our statement of operations. Our carrying value in an equity method investee company is reflected in the caption “Investment in Quest Resources Management Group, LLC” in our balance sheets.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the book and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce a deferred tax asset to the amount expected to be realized. We assess our ability to realize deferred tax assets based on current earnings performance and on projections of future taxable income in the relevant tax jurisdictions. These projections do not include taxable income from the reversal of deferred tax liabilities and do not reflect a general growth assumption but do consider known or pending events, such as the passage of legislation. Our estimates of future taxable income are reviewed annually. All tax positions are first analyzed to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. After the initial analysis, the tax benefit is measured as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Our income tax returns are subject to adjustment under audit for approximately the last three years.

If we are required to pay interest on the underpayment of income taxes, we recognize interest expense in the first period the interest becomes due according to the provisions of the relevant tax law.

 

If we are subject to payment of penalties, we recognize an expense for the amount of the statutory penalty in the period when the position is taken on the income tax return. If the penalty was not recognized in the period when the position was initially taken, the expense is recognized in the period when we change our judgment about meeting minimum statutory thresholds related to the initial position taken.

Stock-Based Compensation

All share-based payments to employees, including grants of employee stock options, are expensed based on their estimated fair values at grant date, in accordance with ASC 718. Compensation expense for stock options is recorded over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes model. We classify all share-based awards as equity instruments and recognize the vesting of the awards ratably over their respective terms.

Inventories
Inventories

3. Inventories

As of June 30, 2013 and December 31, 2012, finished goods inventories were $3,405 and $4,292, respectively, and consisted of used consumer electronics and computer devices with no reserve for inventory obsolescence.

Property and Equipment
Property and Equipment

4. Property and Equipment

At June 30, 2013 and December 31, 2012, property and equipment consisted of the following:

 

     June 30,     December 31,  
     2013     2012  
     (Unaudited)        

Computer equipment

   $ 157,305      $ 157,305   

Office furniture and equipment

     215,518        209,026   

Leasehold improvements

     6,261        6,261   
  

 

 

   

 

 

 
     379,084        372,592   

Less: accumulated depreciation

     (245,696     (215,904
  

 

 

   

 

 

 
   $ 133,388      $ 156,688   
  

 

 

   

 

 

 

We lease certain furniture and fixtures under agreements that are classified as capital leases. The cost of equipment under these capital leases was $187,356 at June 30, 2013 and December 31, 2012 and is included in the consolidated financial statements as property and equipment. Accumulated depreciation of the leased equipment at June 30, 2013 and December 31, 2012 was $98,664 and $85,337, respectively. Interest expense in the amount of approximately $3,544 is expected to be recognized over the remainder of the lease term.

Accrued Expenses and Other Current Liabilities
Accrued Expenses and Other Current Liabilities

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

     June 30,      December 31,  
     2013      2012  
     (Unaudited)         

Compensation

   $ 159,660       $ 191,393   

Deferred rent obligation

     132,322         138,926   

Professional fees

     527,818         302,818   

Accrued interest and other

     61,882         15,016   
  

 

 

    

 

 

 
   $ 881,682       $ 648,153   
  

 

 

    

 

 

 
Convertible Notes Payable - Current
Convertible Notes Payable - Current

6. Convertible Notes Payable - Current

The activity from December 31, 2012 to June 30, 2013 for convertible notes payable related to Youchange is summarized in the following paragraphs.

During the period ended June 30, 2013, $107,500 of principal and $6,493 of interest was converted into 89,942 shares of our common stock. As of June 30, 2013, the outstanding convertible notes payable and associated accrued interest described below were convertible into a total of approximately 21,641 shares of our common stock. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.

The following convertible notes payable were outstanding as of June 30, 2013 and December 31, 2012:

 

    June 30,     December 31,  
    2013     2012  
    (Unaudited)        

Convertible note payable to unrelated parties, issuance date of October 2011

  $ —        $ 10,000   

Convertible note payable to unrelated parties, issuance date of April 2012

    —          5,000   

Convertible note payable to unrelated parties, issuance date of August 2012

    —          10,000   

Convertible note payable to unrelated parties, issuance date of September 2012

    —          10,000   

Convertible note payable to unrelated parties, issuance date of September 2012

    —          12,500   

Convertible note payable to unrelated parties, issuance date of September 2012

    25,000        25,000   

Convertible note payable to unrelated parties, issuance date of October 2012

    —          25,000   

Convertible note payable to unrelated parties, issuance date of October 2012

    —          10,000   

Convertible note payable to unrelated parties, issuance date of October 2012

    —          25,000   
 

 

 

   

 

 

 

Total convertible notes payable—short term

    25,000        132,500   

Less: unamortized discounts due to beneficial conversion features

    —          (33,394
 

 

 

   

 

 

 

Total convertible notes payable—short term, net of discounts

  $ 25,000      $ 99,106   
 

 

 

   

 

 

 

Further details for the outstanding notes payable are as follows:

• During October 2011, we issued a $10,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matured three months from the date of issuance and was extended by an additional 30 days. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $5,200 for this convertible note. The holder converted the note and its accrued interest during the period ended June 30, 2013 into 9,278 shares of common stock.

• During April 2012, we issued a $5,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matured six months from the date of issuance and was extended by an additional 30 days. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.75 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $2,712 for this convertible note. The holder converted the note and its accrued interest during the period ended June 30, 2013 into 3,130 shares of common stock.

 

• During August 2012, we issued a $10,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $6,400 for this convertible note. The holder converted the note and its accrued interest during the period ended June 30, 2013 into 8,460 shares of common stock.

• During September 2012, we issued a $10,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $8,600 for this convertible note. The holder converted the note and its accrued interest during the period ended June 30, 2013 into 8,339 shares of common stock.

• During September 2012, we issued a $12,500 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $10,750 for this convertible note. The holder converted the note and its accrued interest during the period ended June 30, 2013 into 10,418 shares of common stock.

• During September 2012, we issued a $25,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $17,500 for this convertible note. Although this note is past its maturity in the period ended June 30, 2013, the holder is expected to exercise the conversion feature.

• During October 2012, we issued a $25,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $11,000 for this convertible note. During the period ended June 30, 2013, the holder converted the note and its accrued interest into 21,031 shares of common stock.

• During October 2012, we issued a $10,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $2,400 for this convertible note. During the period ended June 30, 2013, the holder converted the note and its accrued interest into 8,292 shares of common stock.

• During October 2012, we issued a $25,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $13,000 for this convertible note. During the period ended June 30, 2013, the holder converted the note and its accrued interest into 20,994 shares of common stock.

Long Term Debt and Capital Lease Obligations
Long Term Debt and Capital Lease Obligations

7. Long Term Debt and Capital Lease Obligations

At June 30, 2013 and December 31, 2012, total long-term debt outstanding consisted of the following:

 

    June 30,     December 31,  
    2013     2012  
    (Unaudited)        

Senior secured convertible notes payable to a related party, 9% interest due monthly in arrears, due October 2015, repayment provisions discussed further below

   

(Net of discount of $1,893,079 and $1,313,897 as of June 30, 2013 and December 31, 2012, respectively)

  $ 1,106,921      $ 686,103   

Capital lease obligations, imputed interest at 43.0% to 46.0%, with monthly payments of $8,540 through December 2013, secured by office furniture and fixtures

    33,557        72,128   
 

 

 

   

 

 

 

Total

    1,140,478        758,231   

Less: current maturities

    (33,557     (72,128
 

 

 

   

 

 

 

Long-term portion

  $ 1,106,921      $ 686,103   
 

 

 

   

 

 

 

On March 22, 2012, Earth911 entered into a Securities Purchase Agreement with Stockbridge Enterprises, L.P., a related party (“Stockbridge”), pursuant to which Earth911 issued a senior secured convertible note (the “Convertible Note”) and an initial four warrants to Stockbridge. The Convertible Note is secured by all the assets of Earth911. On each of October 10, 2012 and March 29, 2013, the terms of the note and the warrants were amended and additional warrants were issued to Stockbridge (the “Allonge” and the “Second Allonge”). The Convertible Note and warrants were also adjusted for the Earth911 Merger in October 2012.

The amended Convertible Note provides for up to $3,000,000 principal with a maturity date of October 1, 2015, which may be extended under certain circumstances. As of June 30, 2013, the full amount of the principal has been drawn. The annual interest rate was adjusted in October 2012 to 9.0% from the original 6.0%, and is due monthly in arrears. Reflecting the adjustment for the Earth911 Merger, the Convertible Note is convertible into shares of our common stock at $0.362 per share prior to the maturity date and $0.181 per common share after the maturity date, subject to a downward formula-based adjustment for future issuances of common stock or stock equivalents under certain conditions whereby the issue price is lower than the conversion price in effect immediately prior to such issue or sale (the “Fixed Conversion Price”). As a result of the Earth911 Merger, our common stock is listed on a United States exchange (a “Triggering Event”), therefore the conversion price is the lower of the Fixed Conversion Price or the average closing bid price during the ten trading days immediately preceding the conversion date. In the event that Earth911 or any of its subsidiaries or affiliated companies closes a financing or funding transaction exceeding $100,000, at the election of Stockbridge, certain percentages of the proceeds of such transaction shall be applied to redeem the outstanding principal amounts of the Convertible Note. Subsequent to June 30, 2013, Stockbridge elected to convert $3 million in principal and accrued interest of $34,500 into 8,382,597 shares of common stock.

In connection with the Convertible Note, we issued five-year warrants that were subsequently adjusted for the Earth911 Merger and consist of the following:

 

  (i) a warrant issued March 2012 to acquire up to 1,381,115 shares of our common stock, exercisable immediately upon execution of the Convertible Note (“Warrant 1-1”);

 

  (ii) three contingent warrants issued March 2012, exercisable only in the event that all outstanding principal and accrued interest on the Convertible Note is not paid in full at such dates, as follows: a warrant to acquire up to 345,278 shares of our common stock, exercisable at the conclusion of forty-two (42) months after the issuance date of the warrant (“Warrant 1-2”); a warrant to acquire up to 345,278 shares of our common stock, exercisable at the conclusion of forty-five (45) months after the issuance date of the warrant (“Warrant 1-3”); and a warrant to acquire up to 690,557 shares of our common stock, exercisable at the conclusion of forty-eight (48) months after the issuance date of the warrant (“Warrant 1-4”);

 

  (iii) a warrant issued October 2012 upon execution of the Allonge to acquire up to 5,524,461 shares of our common stock, exercisable immediately (“Warrant 1-5”); and

 

  (iv) a warrant issued March 2013 upon execution of the Second Allonge to acquire up to 500,000 shares of our common stock, exercisable immediately (“Warrant 1-6”).

Warrant 1-1 was exercisable at the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date. Warrant 1-5 was exercisable at the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date. Warrant 1-6 was exercisable at the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date.

Warrant 1-1, Warrant 1-5, and Warrant 1-6 were exercised in March 2013 as part of the Second Allonge using a cashless exercise formula.

If the contingent Warrant 1-2, Warrant 1-3, and Warrant 1-4 become exercisable, the exercise price would be the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date. The exercise price for all of the warrants is also subject to a downward formula-based adjustment for future issuances of common stock or stock equivalents under certain conditions whereby the issue price is lower than the exercise price in effect immediately prior to such issue or sale. These warrants were cancelled when the Convertible Note was converted subsequent to June 30, 2013. (See Note 13)

In connection with the issuance of the Convertible Note, Warrant 1-1 and Warrant 1-5 were initially valued and accounted for as a warrant liability of $18,742,526 and allocated as a discount to the Convertible Note of $1,500,000 with the remainder of $17,242,526 expensed as a financing cost. As of December 31, 2012, the warrants were valued at $20,233,338, increasing the warrant liability by $1,490,812 and recording a valuation loss of $1,490,812. See Note 10 regarding the valuations of the warrant liability.

The Convertible Note increased by another $1,000,000 draw during the six months ended June 30, 2013, which was accounted for as an additional discount and an adjustment to additional paid-in-capital. The Convertible Note discount total of $3,000,000, which is equal to the amount of the funds drawn on the Convertible Note as of June 30, 2012, is being amortized to interest expense over the life of the Convertible Note beginning March 22, 2012. As of June 30, 2013 and December 31, 2012, the unamortized portion of the debt discount was $1,893,079 and $1,313,897, respectively. The amount of interest expense related to the amortization of the discount on the Convertible Note for the six months ended June 30, 2013 and June 30, 2012 was $420,818 and $221,347, respectively.

On March 29, 2013, Stockbridge elected to exercise Warrant 1-1, Warrant 1-5, and Warrant 1-6 with exercisable rights in total to purchase 7,405,576 shares of our common stock at $0.37 per share under the cashless exercise option of the Second Allonge. The net number share calculation in the “Cashless Exercise” formula, as amended and restated, is as follows:

 

Net Number =

  LOGO   

For purposes of the foregoing formula as of March 29, 2013:

A = 7,406,576, the total number of warrant shares with respect to which these warrants were then being exercised.

B = $3.30, the closing price of our common stock plus 10.0% on the date of exercise of the warrant.

C = $0.37, the warrant exercise price then in effect for the applicable warrant shares at the time of such exercise.

D = $3.00, the closing price of our common stock on the date of exercise of the warrant.

Based on the cashless exercise formula, on March 29, 2013 Warrant 1-1, Warrant 1-5, and Warrant 1-6 yielded a net number value of $21,698,338. The net number value equaled 7,232,779 shares of our common stock issued at $3.00 per share under the cashless exercise option.

Investment in Quest Resource Management Group, LLC
Investment in Quest Resource Management Group, LLC

8. Investment in Quest Resource Management Group, LLC

We hold a 50% ownership interest in Quest, which we acquired on August 21, 2008. The financial condition and operating results of Quest for the relevant periods are presented below:

 

     Three Months ended June 30,      Six Months ended June 30,  
     2013      2012      2013      2012  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Condensed operating statement information:

           

Net sales

   $ 32,253,788       $ 33,815,671       $ 62,904,852       $ 66,129,578   

Gross margin

     2,572,054         3,495,146         5,869,408         6,815,638   

Income from operations

     298,232         1,522,872         1,373,280         2,866,403   

Net income

     206,310         1,043,542         1,157,902         2,252,659   

Company’s equity method income allocation

     103,155         521,771         578,951         1,126,329   

 

     June 30,      December 31,  
     2013      2012  
     (Unaudited)         

Condensed balance sheet information:

     

Current assets

   $ 23,575,354       $ 20,718,638   

Long-term assets

     2,097,982         2,118,295   
  

 

 

    

 

 

 

Total Assets

   $ 25,673,336       $ 22,836,933   
  

 

 

    

 

 

 

Current liabilities

   $ 21,268,430       $ 17,925,175   

Long-term liabilities

     —           —     

Equity

     4,404,906         4,911,758   
  

 

 

    

 

 

 

Total liabilities and members’ equity

   $ 25,673,336       $ 22,836,933   
  

 

 

    

 

 

 

See Note 13 regarding the purchase of the remaining 50% interest of Quest, subsequent to June 30, 2013.

Income Taxes
Income Taxes

9. Income Taxes

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. In our opinion, realization of our net operating loss carry forward is not reasonably assured as of June 30, 2013 and December 31, 2012, and valuation allowances of $3,903,000 and $2,433,000, respectively, have been provided against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated financial statements. The components of net deferred taxes are as follows:

 

     June 30,     December 31,  
     2013     2012  
     (Unaudited)        

Deferred tax assets (liabilities):

    

Net operating loss

   $ 1,861,000      $ 1,029,000   

Stock-based compensation

     1,806,000        1,177,000   

Accrued interest expense

     150,000        155,000   

Allowance for doubtful accounts

     33,000        22,000   

Deferred lease liability

     53,000        50,000   
  

 

 

   

 

 

 

Total deferred tax assets

     3,903,000        2,433,000   

Less: valuation allowance

     (3,903,000     (2,433,000
  

 

 

   

 

 

 

Net deferred taxes

   $ —        $ —     
  

 

 

   

 

 

 

 

The reconciliation between the income tax expense (benefit) calculated by applying statutory rates to net loss and the income tax benefit reported in the accompanying consolidated financial statements is as follows:

 

     June 30,     December 31,  
     2013     2012  
     (Unaudited)        

U.S. federal statutory rate applied to pretax income

   $ (1,906,000   $ (11,713,000

Permanent differences

     652,000        10,344,000   

State taxes and other

     (216,000     (123,000

Change in valuation allowance

     1,470,000        2,433,000   
  

 

 

   

 

 

 
   $ —        $ 941,000   
  

 

 

   

 

 

 

As of December 31, 2012, we had federal income tax net operating loss carry forwards of approximately $2,600,000, which expire at various dates beginning in 2031. We are subject to limitations existing under Internal Revenue Code Section 382 (Change of Control) relating to the availability of the operating loss.

As of December 31, 2012, we did not recognize any assets or liabilities relative to uncertain tax positions, nor do we anticipate any significant unrecognized tax benefits will be recorded during 2013. It is our policy to classify interest and penalties on income taxes as interest expense or penalties expense.

Tax positions are positions taken in a previously filed tax return or positions expected to be taken in a future tax return that are reflected in measuring current or deferred income tax assets and liabilities reported in the financial statements. Tax positions include, but are not limited to, the following:

 

   

an allocation or shift of income between taxing jurisdictions;

 

   

the characterization of income or a decision to exclude reportable taxable income in a tax return; or

 

   

a decision to classify a transaction, entity, or other position in a tax return as tax exempt.

We are potentially subject to tax audits for federal and state tax returns for tax years ended 2012 to 2010. Tax audits by their very nature are often complex and can require several years to complete. Prior to July 13, 2010, as a limited liability company, we were not a tax paying entity for federal and state income tax purposes. Accordingly, our taxable income or loss was allocated to our members in accordance with their respective percentage ownership.

Fair Value of Financial Instruments
Fair Value of Financial Instruments

10. Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, convertible notes payable, notes payable, and warrant liability. We do not believe that we are exposed to significant interest, currency, or credit risks arising from these financial instruments. With the exception of the warrant liability, the fair values of these financial instruments approximates their carrying values using Level 3 inputs, based on their short maturities or, for long-term debt based on borrowing rates currently available to us for loans with similar terms and maturities. Gains and losses recognized on changes in fair value of convertible notes and warrant liability are reported in other income (expense).

Our initial warrant valuation was measured at fair value by applying the Black-Scholes option valuation model, which utilizes Level 3 inputs. The assumptions used in the Black-Scholes option valuation for the warrants are as follows: volatility of 66%; risk free interest rate of 1%; expected term of 5 years; and expected dividend yield of 0%. The grant date fair value of the initial warrant valuation described above was $2.56 per warrant. The risk free interest rate is based on United States Treasury rates with maturity dates approximating the expected term of the warrants. At the time of the initial warrant valuation, we were a private company and common stock transactions were too infrequent, therefore we could not practicably estimate the expected volatility of our own stock. Accordingly, we have substituted the historical volatility of a relevant sector index, which we have generated from companies that are publicly traded and do business within the industry we operate.

 

The March 29, 2013 and December 31, 2012 valuations were measured at fair value by utilizing the quoted market price for our common stock and the valuation for the cashless exercise of Warrant 1-1, Warrant 1-5, and Warrant 1-6 in March 2013, which are Level 1 and Level 2 inputs. These inputs of (i) an observable warrant exercise transaction and (ii) publicly traded market price provided a reasonable basis for valuation for the warrants as of March 29, 2013 and December 31, 2012. Based on that valuation using the $3.00 closing market price and exercisable rights in total to purchase 6,905,576 shares of our common stock at $0.37 per share, Warrant 1-1 and Warrant 1-5 had a net number value of $20,233,338. Using the same valuation method, Warrant 1-6 had a net number value of $1,465,000 upon issuance on March 29, 2013. All three warrants were exercised on March 29, 2013. See Note 7 and Note 11 for further discussion regarding the cashless exercise of these warrants.

The following table summarizes the warranty liability valuation for the six months ended June 30, 2013:

 

     Fair Value
Measurements
 

Description

   Warrant
Liability
 

Beginning balance, December 31, 2012

   $ 20,233,338   

Issuances (Level 1 & 2)

     1,465,000   

Less exercise of warrants

     (21,698,338
  

 

 

 

Ending balance, June 30, 2013

   $ —     
  

 

 

 
Stockholders' Equity
Stockholders' Equity

11. Stockholders’ Equity

Preferred Stock Our authorized preferred stock consists of 10,000,000 shares of preferred stock with a par value of $0.001, of which no shares have been issued or outstanding.

Common Stock Our authorized common stock consists of 100,000,000 shares of common stock with a par value of $0.001 with 65,424,581 shares and 58,040,230 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively.

During the six months ended June 30, 2013, we issued shares of common stock as follows:

 

     Common
Stock
        
     Shares      Amount  

Warrant exercise

     7,232,779       $ 21,698,338   

Common stock issued for services

     61,900         178,858   

Note conversions and discounts (see Note 6)

     89,942         113,993   
  

 

 

    

 

 

 
     7,384,621       $ 21,991,189   
  

 

 

    

 

 

 

 

   

See Note 7 regarding the cashless exercise of Warrant 1-1, Warrant 1-5, and Warrant 1-6 on March 29, 2013.

 

   

Common Stock for Services – We issued 61,900 shares of common stock to employees and consultants during the six months ended June 30, 2013 for $178,858 of services.

Warrants At December 31, 2012, we had outstanding exercisable warrants, as adjusted, to purchase 6,905,576 shares of common stock at $0.37 per share. On March 29, 2013, we issued an exercisable warrant to purchase 500,000 shares of common stock at $0.37 per share. As of June 30, 2013, there were no outstanding exercisable warrants remaining after the exercise of the warrants on March 29, 2013. At June 30, 2013 and December 31, 2012, we had outstanding contingent warrants, as adjusted, to purchase 1,381,113 shares of common stock at $0.37 per share, which were cancelled subsequent to June 30, 2013. See Note 13. See the discussion under Note 7 for further details regarding the issued warrants related to the Convertible Note, subsequent amendment, and exercise of warrants.

 

The following table summarizes the warrants issued and outstanding as of June 30, 2013:

 

Warrants Issued and Outstanding as of June 30, 2013

 
     Date of      Exercise      Shares of  

Description

   Issuance      Expiration      Price      Common Stock  

Exercisable warrants

           

Warrant 1-1

     03/22/12         03/21/17       $ 0.37         1,381,115   

Warrant 1-5

     10/10/12         10/09/17       $ 0.37         5,524,461   

Warrant 1-6

     03/29/13         03/21/17       $ 0.37         500,000   

Less warrants exercised

              (7,405,576
           

 

 

 

Total exercisable warrants

              —     

Contingent warrants

           

Warrant 1-2

     03/22/12         03/21/17       $ 0.37         345,278   

Warrant 1-3

     03/22/12         03/21/17       $ 0.37         345,278   

Warrant 1-4

     03/22/12         03/21/17       $ 0.37         690,557   
           

 

 

 

Total contingent warrants

              1,381,113   
           

 

 

 

Total warrants issued and outstanding

  

           1,381,113   
           

 

 

 

Stock Option Plan In October 2012, we adopted our 2012 Incentive Compensation Plan (the “2012 Plan”) as the sole plan for providing equity-based incentive compensation to our employees, non-employee directors, and other service providers. The maximum number of shares of common stock available for grant under the plan is 7,500,000. Stock compensation expense prior to October 2012 is related to options granted prior to the Earth911 Merger that was superseded by the 2012 Plan at the time of the Earth911 Merger. The number of shares available for award under the plan is subject to adjustment for certain corporate changes in accordance with the provisions of the plan. Stock-based compensation expense was $1,573,010 and $848,637 for the six months ended June 30, 2013 and 2012, respectively.

Following is a summary of stock option activity subsequent to December 31, 2012 through June 30, 2013:

 

     Stock Options  
                  Weighted-  
                  Average  
     Number    

Exercise

Price Per

     Exercise
Price
 
     of Shares     Share      Per Share  

Outstanding at December 31, 2012

     3,350,115        2.00—2.79         2.20   

Granted

     108,000        2.65—2.65         2.65   

Canceled/Forfeited

     (41,000     2.10—2.79         2.24   
  

 

 

      

Outstanding at June 30, 2013

     3,417,115        2.65—2.65         2.22   
  

 

 

      

As of June 30, 2013, the intrinsic value of options outstanding was $2,468,448 and the intrinsic value of options exercisable was $1,634,218. The following additional information applies to options outstanding at June 30, 2013:

 

Ranges of Exercise Prices

 

Outstanding at June 30,
2013

 

Weighted-Average
Remaining Contractual
Life

 

Weighted-Average
Exercise Price

 

Excercisable at June 30,
2013

 

Weighted-Average
Exercise Price

$2.00—$2.79

  3,417,115   8.2   $2.22   1,989,449   $2.27

At June 30, 2013, the balance of unearned stock-based compensation to be expensed in future periods related to unvested share-based awards, as adjusted for expected forfeitures, was approximately $1,195,331.

Related Party Transactions
Related Party Transactions

12. Related Party Transactions

Convertible Note In March 2012, we entered into the Convertible Note with Stockbridge, a related party. In connection with the issuance of the Convertible Note, we issued four warrants (Warrants1-1 through1-4) in March 2012.

Allonge to the Convertible Note – In October 2012, we amended the Convertible Note. The original principal amount was increased to $3,000,000 from the original $1,000,000 amount. The maturity of the note was changed to October 1, 2014. The conversion rate of the Convertible Note was changed to $.50 per common share prior to the maturity date and $.25 per common share after the maturity, subject to certain adjustments. In connection with the amendment, we issued Warrant 1-5 in October 2012 and issued 100,000 shares of our common stock.

Second Allonge to the Convertible Note On March 29, 2013, the terms of the note and the warrants were amended and additional warrants were issued to Stockbridge. Under the amendment on March 29, 2013, Earth911 and Stockbridge entered into the Second Allonge, pursuant to which the parties agreed to (i) change all references to common stock, options, warrants, warrant shares, or convertible securities of Earth911 in the original note documents and the Allonge documents to common stock, options, warrants, warrant shares, or convertible securities, respectively, of Infinity, and (ii) expand all references to a “Triggering Event” in the original note documents and the Allonge documents to include any exchanges on which the Infinity common stock may be listed or quoted for trading. The parties also (i) amended how the fair market value of the Infinity common stock, on the date of exercise, would be defined in a formula used to calculate the net number of shares that Stockbridge would receive upon a cashless exercise, (ii) extended the maturity date of the Convertible Note to October 1, 2015, (iii) revised the terms of Warrant 1-5 to apply the conversion rate from the Earth911 to the number of shares of Infinity common stock underlying Warrant 1-5 and the exercise price at which such shares would be issued upon the exercise date, and (iv) amended the exercisable dates of the contingent Warrant 1-2, the contingent Warrant 1-3, and the contingent Warrant 1-4 to be exercisable 42 months, 45 months, and 48 months, respectively, following the issuance date of the contingent warrants. Finally, Stockbridge retroactively agreed to waive its right to effect a partial conversion of the Convertible Note, with such waiver to be effective for a period of 12 months from October 17, 2012.

To effect the changes in the Second Allonge, we issued to Stockbridge an additional warrant to purchase 500,000 shares of our common stock (“Warrant 1-6”). Warrant 1-6 is exercisable at or after the date of the Second Allonge, and is in the same form as Warrant 1-5, as amended by the Second Allonge. Warrant 1-6 will expire five years from the date of issuance.

See Note 7 for a discussion of the Convertible Note and of the exercise of the related exercisable warrants in March 2013.

See Note 13 for a discussion regarding conversion of convertible note and interest subsequent to June 30, 2013.

Subsequent Events
Subsequent Events

13. Subsequent Events

Securities Purchase Agreement – Subsequent to June 30, 2013, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with QRG, pursuant to which we acquired all of the issued and outstanding membership interests of Quest, held by QRG, comprising 50% of the membership interests of Quest (the “Quest Interests”). Earth911 has held the remaining 50% of the membership interests of Quest for several years. Concurrently with the execution of the Securities Purchase Agreement, we assigned the Quest Interests to Earth911 so that Earth911 now holds 100% of the issued and outstanding membership interests of Quest. Quest engages in the business of recycling management for large and mid-size corporations in the automotive aftermarket, fleet, municipal, food service, hospitality, retail, office building, construction, hospital, and manufacturing industries.

The purchase price for the Quest Interests consisted of the following: (i) 12,000,000 shares of our common stock issued to Brian Dick, a 50% owner of QRG and Chief Executive Officer of Quest; (ii) 10,000,000 shares of our common stock issued to Jeff Forte, a 50% owner of QRG and President of Quest; (iii) a convertible secured promissory note in the principal amount of $11,000,000 payable to Mr. Dick; and (iv) a convertible secured promissory note in the principal amount of $11,000,000 payable to Mr. Forte. The convertible secured promissory notes issued to each of Messrs. Dick and Forte (collectively, the “Notes”) are each secured by a first-priority security interest in a 25% membership interest held by Earth911 in Quest (comprising a total of 50% of the membership interests of Quest) (the “Collateral”), as set forth in security and membership interest pledge agreements, by and between Earth911 and each of Messrs. Dick and Forte (collectively, the “Security Agreements”). The Securities Purchase Agreement provides that the Audit Committee of our Board of Directors has the sole authority and discretion to authorize payments due and owing under the Notes and to take any actions and make all decisions related to the Notes and the Security Agreements, and requires that we (a) deposit in escrow the total interest for the following month from our initial cash receipts from any source, including, without limitation, receivables, loans, sale of assets, or sale of securities, and (b) maintain a reserve of $1.5 million under our line of credit at all times to be used to make interest payments on the Notes, as determined in the sole discretion of the Audit Committee of our Board of Directors.

 

The Securities Purchase Agreement provides that QRG and Messrs. Dick and Forte may not engage or become financially interested in any Competitive Business within the Restricted Territory (each as defined in the Securities Purchase Agreement) for a period of five years. The Securities Purchase Agreement also provides restrictions with respect to customers of Quest and non-solicitation of employees of Quest for a period of five years. The Securities Purchase Agreement further provides that if there is an event of default on the Notes, QRG and Messrs. Dick and Forte may compete with us and solicit customers, provided that they resign from all positions held with us.

Stockbridge Convertible Note – On July 17, 2013, Stockbridge elected to convert the Convertible Note of $3,000,000 in principal and $34,500 of accrued interest into 8,382,597 shares of our common stock. With the conversion of the Convertible Note, the contingent Warrants 1-2, 1-3 and 1-4 were cancelled.

Summary of Significant Accounting Policies (Policies)

Principals of Presentation, Consolidation and Reclassifications

The consolidated financial statements included herein have been prepared by Infinity Resources without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements for the year ended December 31, 2012. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.

The accompanying consolidated financial statements include the operating activity of Infinity and its subsidiaries, for the three and six months ended June 30, 2013 and 2012, as well as the equity method of accounting for its investment in Quest. The Earth911 Merger, which closed on October 17, 2012, was deemed to be a reverse merger, with Earth911 as the accounting acquirer. As such, the operating activity of Infinity (p/k/n YouChange Holdings Corp.) is consolidated into these consolidated financial statements for the three and six months ended June 30, 2013, and excluded from the three and six months ended June 30, 2012, which occurred prior to the date of the Earth911 Merger. The separate operating activities for Earth911 and the investment in Quest, are included for the three and six months ended June 30, 2013 and 2012. Quest is deemed to be a separate operating unit from Infinity and as such, there are no intercompany transactions that require elimination at this time. All other intercompany accounts and transactions have been eliminated in consolidation.

 

The consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at June 30, 2013, and the results of our operations and cash flows for the periods presented. The December 31, 2012 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Interim results are subject to seasonal variations and the results of operations for the six months ended June 30, 2013, are not necessarily indicative of the results to be expected for the full year.

As both Earth911 and Youchange are deemed to be operating as ecology based green service companies, no segment reporting was deemed necessary.

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

Significant estimates are used when accounting for the collectability of accounts receivable, depreciable lives of fixed assets, accruals, assumptions used in the valuation and recognition of share-based payments and warrant liability, the realization of intangible assets, deferred tax assets, the equity method investment in Quest, and the application of accounting for the senior secured convertible note, all of which are discussed in their respective notes to the consolidated financial statements.

Revenue Recognition

Revenue Recognition – We recognize revenue only when all of the following criteria have been met:

 

   

persuasive evidence of an arrangement exists;

 

   

delivery has occurred or services have been rendered;

 

   

the fee for the arrangement is fixed or determinable; and

 

   

collectability is reasonably assured.

Persuasive Evidence of an Arrangement – We document all terms of an arrangement in a quote signed or confirmed by the customer prior to recognizing revenue.

Delivery Has Occurred or Services Have Been Performed – We perform all services or deliver all products prior to recognizing revenue. Services are deemed to be performed when the services are complete.

The Fee for the Arrangement is Fixed or Determinable – Prior to recognizing revenue, a customer’s fee is either fixed or determinable under the terms of the quote or accepted customer purchase order.

Collectability Is Reasonably Assured – We assess collectability on a customer by customer basis based on criteria outlined by management.

The revenues reported in 2013 and 2012 are derived primarily from the operations of Earth911 and represent licensing rights. These revenues are recognized ratably over the term of the license. Some revenues are derived from advertising contracts, which are alsorecognized ratably, over the term that the advertisement appears on our website. In addition, advertising revenues are not recognized until such time as persuasive evidence of an agreement exists, the price is fixed or determinable, and collectability is reasonably assured.

Cash and Cash Equivalents

We consider all highly liquid instruments with a remaining maturity of three months or less when purchased to be cash equivalents.

Fair Value Measurements

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities,

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or 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 assets or liabilities,

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability.

Fair value accounting has been applied to the valuation of stock-based compensation and warrants issued. The valuation methodologies and inputs used are discussed in the respective footnotes.

Stock Options We estimate the fair value of stock options using the Black-Scholes valuation model. Significant Level 3 assumptions used in the calculation were determined as follows:

 

   

Expected term is determined under the simplified method using an average of the contractual term and vesting period of the award as appropriate statistical data required to properly estimate the expected term was not available;

 

   

Expected volatility is measured using the historical changes in the market price of our common stock, disregarding identifiable periods of time in which share price was extraordinarily volatile due to certain events that are not expected to recur during the expected term;

 

   

Risk-free interest rate is used to approximate the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards; and

 

   

Forfeitures are based on the history of cancellations of warrants granted by us and our analysis of potential future forfeitures.

Warrants – We estimate the fair value of the warrant liability using Level 3 inputs for the initial valuation of the warrants using the Black-Scholes valuation model. The Level 1 and 2 inputs utilized the March 29, 2013 cashless exercise value calculated from the exercise of all warrants that were exercisable on that date and the quoted common stock market price. See Note 7.

Net Loss Per Share

We compute basic net loss per share by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. The calculation of basic loss per share gives retroactive effect to the recapitalization related to our reverse acquisition of Earth911. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2013 and 2012 would be anti-dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes and total 13,107,162 shares at June 30, 2013, and 4,833,951 shares at June 30, 2012.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

     For the Three Months Ended June 30,     For the Six Months Ended June 30,  
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Net loss applicable to common stockholders—numerator for basic and diluted earnings per share

   $ (2,309,223   $ (724,893   $ (5,606,828   $ (3,386,253
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted—average common shares outstanding—denominator for basic earnings per share

     65,338,152        47,534,682        61,670,008        47,534,682   

Net loss per share:

        

Basic

   $ (0.04   $ (0.02   $ (0.09   $ (0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.04   $ (0.02   $ (0.09   $ (0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the anti-dilutive securities excluded from diluted earnings per share:

 

     For the Six Months Ended June 30,  
     2013      2012  
     (Unaudited)      (Unaudited)  

Anti-dilutive securities excluded from diluted earnings per share:

     

Stock options

     3,417,115         1,381,115   

Warrants

     1,381,113         690,608   

Convertible notes

     8,308,934         2,762,228   
  

 

 

    

 

 

 
     13,107,162         4,833,951   
  

 

 

    

 

 

 

Investment in Quest

Investee companies that are not consolidated, but over which we exercise significant influence, are accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to an investee depends on an evaluation of several factors including among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Under the equity method of accounting, an investee company’s accounts are not reflected within our balance sheet and statement of operations; however, our share of earnings or losses of the investee company is reflected in the caption “Equity in Quest Resource Management Group, LLC income” in our statement of operations. Our carrying value in an equity method investee company is reflected in the caption “Investment in Quest Resources Management Group, LLC” in our balance sheets.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the book and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce a deferred tax asset to the amount expected to be realized. We assess our ability to realize deferred tax assets based on current earnings performance and on projections of future taxable income in the relevant tax jurisdictions. These projections do not include taxable income from the reversal of deferred tax liabilities and do not reflect a general growth assumption but do consider known or pending events, such as the passage of legislation. Our estimates of future taxable income are reviewed annually. All tax positions are first analyzed to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. After the initial analysis, the tax benefit is measured as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Our income tax returns are subject to adjustment under audit for approximately the last three years.

If we are required to pay interest on the underpayment of income taxes, we recognize interest expense in the first period the interest becomes due according to the provisions of the relevant tax law.

If we are subject to payment of penalties, we recognize an expense for the amount of the statutory penalty in the period when the position is taken on the income tax return. If the penalty was not recognized in the period when the position was initially taken, the expense is recognized in the period when we change our judgment about meeting minimum statutory thresholds related to the initial position taken.

Stock-Based Compensation

All share-based payments to employees, including grants of employee stock options, are expensed based on their estimated fair values at grant date, in accordance with ASC 718. Compensation expense for stock options is recorded over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes model. We classify all share-based awards as equity instruments and recognize the vesting of the awards ratably over their respective terms.

Summary of Significant Accounting Policies (Tables)

The following table sets forth the computation of basic and diluted earnings per share:

 

     For the Three Months Ended June 30,     For the Six Months Ended June 30,  
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Net loss applicable to common stockholders—numerator for basic and diluted earnings per share

   $ (2,309,223   $ (724,893   $ (5,606,828   $ (3,386,253
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted—average common shares outstanding—denominator for basic earnings per share

     65,338,152        47,534,682        61,670,008        47,534,682   

Net loss per share:

        

Basic

   $ (0.04   $ (0.02   $ (0.09   $ (0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.04   $ (0.02   $ (0.09   $ (0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the anti-dilutive securities excluded from diluted earnings per share:

 

     For the Six Months Ended June 30,  
     2013      2012  
     (Unaudited)      (Unaudited)  

Anti-dilutive securities excluded from diluted earnings per share:

     

Stock options

     3,417,115         1,381,115   

Warrants

     1,381,113         690,608   

Convertible notes

     8,308,934         2,762,228   
  

 

 

    

 

 

 
     13,107,162         4,833,951   
  

 

 

    

 

 

 
Property and Equipment (Tables)
Components of Property and Equipment

At June 30, 2013 and December 31, 2012, property and equipment consisted of the following:

 

     June 30,     December 31,  
     2013     2012  
     (Unaudited)        

Computer equipment

   $ 157,305      $ 157,305   

Office furniture and equipment

     215,518        209,026   

Leasehold improvements

     6,261        6,261   
  

 

 

   

 

 

 
     379,084        372,592   

Less: accumulated depreciation

     (245,696     (215,904
  

 

 

   

 

 

 
   $ 133,388      $ 156,688   
  

 

 

   

 

 

 
Accrued Expenses and Other Current Liabilities (Tables)
Summary of Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

     June 30,      December 31,  
     2013      2012  
     (Unaudited)         

Compensation

   $ 159,660       $ 191,393   

Deferred rent obligation

     132,322         138,926   

Professional fees

     527,818         302,818   

Accrued interest and other

     61,882         15,016   
  

 

 

    

 

 

 
   $ 881,682       $ 648,153   
  

 

 

    

 

 

 
Convertible Notes Payable - Current (Tables)
Summary of Convertible Notes Payable Outstanding

The following convertible notes payable were outstanding as of June 30, 2013 and December 31, 2012:

 

    June 30,     December 31,  
    2013     2012  
    (Unaudited)        

Convertible note payable to unrelated parties, issuance date of October 2011

  $ —        $ 10,000   

Convertible note payable to unrelated parties, issuance date of April 2012

    —          5,000   

Convertible note payable to unrelated parties, issuance date of August 2012

    —          10,000   

Convertible note payable to unrelated parties, issuance date of September 2012

    —          10,000   

Convertible note payable to unrelated parties, issuance date of September 2012

    —          12,500   

Convertible note payable to unrelated parties, issuance date of September 2012

    25,000        25,000   

Convertible note payable to unrelated parties, issuance date of October 2012

    —          25,000   

Convertible note payable to unrelated parties, issuance date of October 2012

    —          10,000   

Convertible note payable to unrelated parties, issuance date of October 2012

    —          25,000   
 

 

 

   

 

 

 

Total convertible notes payable—short term

    25,000        132,500   

Less: unamortized discounts due to beneficial conversion features

    —          (33,394
 

 

 

   

 

 

 

Total convertible notes payable—short term, net of discounts

  $ 25,000      $ 99,106  
Long Term Debt and Capital Lease Obligations (Tables)
Summary of Long Term Debt

At June 30, 2013 and December 31, 2012, total long-term debt outstanding consisted of the following:

 

    June 30,     December 31,  
    2013     2012  
    (Unaudited)        

Senior secured convertible notes payable to a related party, 9% interest due monthly in arrears, due October 2015, repayment provisions discussed further below

   

(Net of discount of $1,893,079 and $1,313,897 as of June 30, 2013 and December 31, 2012, respectively)

  $ 1,106,921      $ 686,103   

Capital lease obligations, imputed interest at 43.0% to 46.0%, with monthly payments of $8,540 through December 2013, secured by office furniture and fixtures

    33,557        72,128   
 

 

 

   

 

 

 

Total

    1,140,478        758,231   

Less: current maturities

    (33,557     (72,128
 

 

 

   

 

 

 

Long-term portion

  $ 1,106,921      $ 686,103  
Investment in Quest Resource Management Group, LLC (Tables)
Summary of Financial Condition and Operating Results of Quest

The financial condition and operating results of Quest for the relevant periods are presented below:

 

     Three Months ended June 30,      Six Months ended June 30,  
     2013      2012      2013      2012  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Condensed operating statement information:

           

Net sales

   $ 32,253,788       $ 33,815,671       $ 62,904,852       $ 66,129,578   

Gross margin

     2,572,054         3,495,146         5,869,408         6,815,638   

Income from operations

     298,232         1,522,872         1,373,280         2,866,403   

Net income

     206,310         1,043,542         1,157,902         2,252,659   

Company’s equity method income allocation

     103,155         521,771         578,951         1,126,329   

 

     June 30,      December 31,  
     2013      2012  
     (Unaudited)         

Condensed balance sheet information:

     

Current assets

   $ 23,575,354       $ 20,718,638   

Long-term assets

     2,097,982         2,118,295   
  

 

 

    

 

 

 

Total Assets

   $ 25,673,336       $ 22,836,933   
  

 

 

    

 

 

 

Current liabilities

   $ 21,268,430       $ 17,925,175   

Long-term liabilities

     —           —     

Equity

     4,404,906         4,911,758   
  

 

 

    

 

 

 

Total liabilities and members’ equity

   $ 25,673,336       $ 22,836,933   
  

 

 

    

 

 

 
Income Taxes (Tables)

The components of net deferred taxes are as follows:

 

     June 30,     December 31,  
     2013     2012  
     (Unaudited)        

Deferred tax assets (liabilities):

    

Net operating loss

   $ 1,861,000      $ 1,029,000   

Stock-based compensation

     1,806,000        1,177,000   

Accrued interest expense

     150,000        155,000   

Allowance for doubtful accounts

     33,000        22,000   

Deferred lease liability

     53,000        50,000   
  

 

 

   

 

 

 

Total deferred tax assets

     3,903,000        2,433,000   

Less: valuation allowance

     (3,903,000     (2,433,000
  

 

 

   

 

 

 

Net deferred taxes

   $ —        $ —  

The reconciliation between the income tax expense (benefit) calculated by applying statutory rates to net loss and the income tax benefit reported in the accompanying consolidated financial statements is as follows:

 

     June 30,     December 31,  
     2013     2012  
     (Unaudited)        

U.S. federal statutory rate applied to pretax income

   $ (1,906,000   $ (11,713,000

Permanent differences

     652,000        10,344,000   

State taxes and other

     (216,000     (123,000

Change in valuation allowance

     1,470,000        2,433,000   
  

 

 

   

 

 

 
   $ —        $ 941,000   
  

 

 

   

 

 

 
Fair Value of Financial Instruments (Tables)
Summary of Company's Warrant Liability

The following table summarizes the warranty liability valuation for the six months ended June 30, 2013:

 

     Fair Value
Measurements
 

Description

   Warrant
Liability
 

Beginning balance, December 31, 2012

   $ 20,233,338   

Issuances (Level 1 & 2)

     1,465,000   

Less exercise of warrants

     (21,698,338
  

 

 

 

Ending balance, June 30, 2013

   $ —     
Stockholders' Equity (Tables)

During the six months ended June 30, 2013, we issued shares of common stock as follows:

 

     Common
Stock
        
     Shares      Amount  

Warrant exercise

     7,232,779       $ 21,698,338   

Common stock issued for services

     61,900         178,858   

Note conversions and discounts (see Note 6)

     89,942         113,993   
  

 

 

    

 

 

 
     7,384,621       $ 21,991,189   
  

 

 

    

 

 

 

 

The following table summarizes the warrants issued and outstanding as of June 30, 2013:

 

Warrants Issued and Outstanding as of June 30, 2013

 
     Date of      Exercise      Shares of  

Description

   Issuance      Expiration      Price      Common Stock  

Exercisable warrants

           

Warrant 1-1

     03/22/12         03/21/17       $ 0.37         1,381,115   

Warrant 1-5

     10/10/12         10/09/17       $ 0.37         5,524,461   

Warrant 1-6

     03/29/13         03/21/17       $ 0.37         500,000   

Less warrants exercised

              (7,405,576
           

 

 

 

Total exercisable warrants

              —     

Contingent warrants

           

Warrant 1-2

     03/22/12         03/21/17       $ 0.37         345,278   

Warrant 1-3

     03/22/12         03/21/17       $ 0.37         345,278   

Warrant 1-4

     03/22/12         03/21/17       $ 0.37         690,557   
           

 

 

 

Total contingent warrants

              1,381,113   
           

 

 

 

Total warrants issued and outstanding

  

           1,381,113   

Following is a summary of stock option activity subsequent to December 31, 2012 through June 30, 2013:

 

     Stock Options  
                  Weighted-  
                  Average  
     Number    

Exercise

Price Per

     Exercise
Price
 
     of Shares     Share      Per Share  

Outstanding at December 31, 2012

     3,350,115        2.00—2.79         2.20   

Granted

     108,000        2.65—2.65         2.65   

Canceled/Forfeited

     (41,000     2.10—2.79         2.24   
  

 

 

      

Outstanding at June 30, 2013

     3,417,115        2.65—2.65         2.22

The following additional information applies to options outstanding at June 30, 2013:

 

Ranges of Exercise Prices

 

Outstanding at June 30,
2013

 

Weighted-Average
Remaining Contractual
Life

 

Weighted-Average
Exercise Price

 

Excercisable at June 30,
2013

 

Weighted-Average
Exercise Price

$2.00—$2.79

  3,417,115   8.2   $2.22   1,989,449   $2.27
The Company and Description of Business and Future Liquidity Needs - Additional Information (Detail) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Dec. 31, 2012
Dec. 31, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
 
Percentage of common stock held
 
 
 
 
85.00% 
 
Net loss incurred
$ 2,309,223 
$ 724,893 
$ 5,606,828 
$ 3,386,253 
 
 
Cash in operations
 
 
2,048,164 
1,865,628 
 
 
Working capital
1,302,065 
 
1,302,065 
 
 
 
Cash and cash equivalents
192,500 
658,960 
192,500 
658,960 
485,728 
1,274,018 
Quest Resource Management Group, LLC [Member]
 
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
 
Percentage of ownership interest held by company
50.00% 
 
50.00% 
 
 
 
Net loss incurred
$ (206,310)
$ (1,043,542)
$ (1,157,902)
$ (2,252,659)
 
 
Summary of Significant Accounting Policies - Additional Information (Detail)
6 Months Ended 12 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Dec. 31, 2012
Minimum [Member]
Dec. 31, 2012
Maximum [Member]
Significant Accounting Policies [Line Items]
 
 
 
 
Potentially dilutive securities include options, warrants, and convertible promissory notes
13,107,162 
4,833,951 
 
 
Percentage of voting right
 
 
20.00% 
50.00% 
Tax benefit percentage of being realized upon ultimate settlement
50.00% 
 
 
 
Summary of Significant Accounting Policies - Schedule of Computation of Basic and Diluted Earnings Per Share (Detail) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Earnings Per Share [Abstract]
 
 
 
 
Net loss applicable to common stockholders - numerator for basic and diluted earnings per share
$ (2,309,223)
$ (724,893)
$ (5,606,828)
$ (3,386,253)
Weighted - average common shares outstanding - denominator for basic earnings per share
65,338,152 
47,534,682 
61,670,008 
47,534,682 
Basic
$ (0.04)
$ (0.02)
$ (0.09)
$ (0.07)
Diluted
$ (0.04)
$ (0.02)
$ (0.09)
$ (0.07)
Summary of Significant Accounting Policies - Schedule of Anti-dilutive Securities Excluded from Diluted Earnings Per Share (Detail)
6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
13,107,162 
4,833,951 
Stock Option [Member]
 
 
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
3,417,115 
1,381,115 
Warrants [Member]
 
 
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
1,381,113 
690,608 
Convertible Notes [Member]
 
 
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
8,308,934 
2,762,228 
Inventories - Additional Information (Detail) (USD $)
Jun. 30, 2013
Dec. 31, 2012
Inventory Disclosure [Abstract]
 
 
Finished goods inventory
$ 3,405 
$ 4,292 
Reserve for inventory obsolescence of consumer electronics and computer devices
$ 0 
 
Property and Equipment - Components of Property and Equipment (Detail) (USD $)
Jun. 30, 2013
Dec. 31, 2012
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
$ 379,084 
$ 372,592 
Less: accumulated depreciation
(245,696)
(215,904)
Property plant and equipment Net
133,388 
156,688 
Computer equipment [Member]
 
 
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
157,305 
157,305 
Office furniture and equipment [Member]
 
 
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
215,518 
209,026 
Leasehold improvements [Member]
 
 
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
$ 6,261 
$ 6,261 
Property and Equipment - Additional Information (Detail) (USD $)
6 Months Ended
Jun. 30, 2013
Dec. 31, 2012
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Accumulated depreciation of leased equipment
$ 98,664 
$ 85,337 
Interest expense
3,544 
 
Office furniture and equipment [Member]
 
 
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Capital leases is included in the financial Statements
$ 187,356 
$ 187,356 
Accrued Expenses and Other Current Liabilities - Summary of Accrued Expenses and Other Current Liabilities (Detail) (USD $)
Jun. 30, 2013
Dec. 31, 2012
Payables And Accruals [Abstract]
 
 
Compensation
$ 159,660 
$ 191,393 
Deferred rent obligation
132,322 
138,926 
Professional fees
527,818 
302,818 
Accrued interest and other
61,882 
15,016 
Accrued Liabilities, Total
$ 881,682 
$ 648,153 
Convertible Notes Payable - Additional Information (Detail) (USD $)
6 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended
Jun. 30, 2013
Mar. 29, 2013
Dec. 31, 2012
Jun. 30, 2013
Convertible Notes Payable [Member]
Jun. 30, 2013
Convertible Notes Payable [Member]
Accrued Interest [Member]
Oct. 31, 2011
Convertible note payable to unrelated parties, issuance date of October 2011 [Member]
Jun. 30, 2013
Convertible note payable to unrelated parties, issuance date of October 2011 [Member]
Accrued Interest [Member]
Apr. 30, 2012
Convertible note payable to unrelated parties, issuance date of April 2012 [Member]
Jun. 30, 2013
Convertible note payable to unrelated parties, issuance date of April 2012 [Member]
Accrued Interest [Member]
Aug. 31, 2012
Convertible note payable to unrelated parties, issuance date of August 2012 [Member]
Jun. 30, 2013
Convertible note payable to unrelated parties, issuance date of August 2012 [Member]
Accrued Interest [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Jun. 30, 2013
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Accrued Interest [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Jun. 30, 2013
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Accrued Interest [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Oct. 31, 2012
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Jun. 30, 2013
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Accrued Interest [Member]
Oct. 31, 2012
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Jun. 30, 2013
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Accrued Interest [Member]
Oct. 31, 2012
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Jun. 30, 2013
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Accrued Interest [Member]
Notes Payable [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt instrument maturity, Starting date
 
 
 
Dec. 31, 2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt instrument maturity, Ending date
 
 
 
Jun. 30, 2013 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt instrument principal amount
 
 
 
$ 107,500 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt instrument interest amount
 
 
 
6,493 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares converted in to common stock
 
 
 
89,942 
21,641 
 
9,278 
 
3,130 
 
8,460 
 
8,339 
 
10,418 
 
 
21,031 
 
8,292 
 
20,994 
Convertible notes issued during the period
 
 
 
 
 
10,000 
 
5,000 
 
10,000 
 
10,000 
 
12,500 
 
25,000 
25,000 
 
10,000 
 
25,000 
 
Debt instrument maturity date extended
 
 
 
 
 
30 days 
 
30 years 
 
30 days 
 
30 days 
 
30 days 
 
30 days 
30 days 
 
30 days 
 
30 days 
 
Debt instrument interest rate
 
 
 
 
 
10.00% 
 
10.00% 
 
10.00% 
 
10.00% 
 
10.00% 
 
10.00% 
10.00% 
 
10.00% 
 
10.00% 
 
Common Stock value per share
$ 0.001 
$ 3.00 
$ 0.001 
 
 
$ 1.25 
 
$ 1.75 
 
$ 1.25 
 
$ 1.25 
 
$ 1.25 
 
$ 1.25 
$ 1.25 
 
$ 1.25 
 
$ 1.25 
 
Debt instrument beneficial conversion feature amount
 
 
 
 
 
$ 5,200 
 
$ 2,712 
 
$ 6,400 
 
$ 8,600 
 
$ 10,750 
 
$ 17,500 
$ 11,000 
 
$ 2,400 
 
$ 13,000 
 
Convertible Notes Payable - Summary of Convertible Notes Payable Outstanding (Detail) (USD $)
Jun. 30, 2013
Dec. 31, 2012
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
$ 25,000 
$ 132,500 
Less: unamortized discounts due to beneficial conversion features
(33,394)
Total convertible notes payable - short term, net of discounts
25,000 
99,106 
Convertible note payable to unrelated parties, issuance date of October 2011 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
 
10,000 
Convertible note payable to unrelated parties, issuance date of April 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
 
5,000 
Convertible note payable to unrelated parties, issuance date of August 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
 
10,000 
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
 
10,000 
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
 
12,500 
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
25,000 
25,000 
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
 
25,000 
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
 
10,000 
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
 
$ 25,000 
Long Term Debt and Capital Lease Obligations - Summary of Long Term Debt (Detail) (USD $)
Jun. 30, 2013
Dec. 31, 2012
Long Term Debt And Equity Financings [Line Items]
 
 
Debt and Capital lease obligation, Total
$ 1,140,478 
$ 758,231 
Less: current maturities
(33,557)
(72,128)
Long-term portion
1,106,921 
686,103 
Senior Notes [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Senior secured convertible notes payable to a related party, 9% interest due monthly in arrears, due October 2015, repayment provisions discussed further below (Net of discount of $1,893,079 and $1,313,897 as of June 30, 2013 and December 31, 2012, respectively)
1,106,921 
686,103 
Capital lease obligations, Imputed interest at 43.0% to 46.0% [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Capital lease obligations, imputed interest at 43.0% to 46.0%, with monthly payments of $8,540 through December 2013, secured by office furniture and fixtures
$ 33,557 
$ 72,128 
Long Term Debt and Capital Lease Obligations - Summary of Long Term Debt (Parenthetical) (Detail) (USD $)
6 Months Ended
Jun. 30, 2013
Dec. 31, 2012
Long Term Debt And Equity Financings [Line Items]
 
 
Debt Instrument Net of discount
$ 1,893,079 
$ 1,313,897 
Imputed interest rate for capital lease obligation, minimum
43.00% 
 
Imputed interest rate for capital lease obligation, maximum
46.00% 
 
Monthly installment capital lease obligation
$ 8,540 
 
Senior Notes [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Debt instrument, maturity date
October 2015 
 
Convertible Notes Payable [Member] |
Senior Notes [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Interest rate on convertible notes
9.00% 
 
Long Term Debt and Capital Lease Obligations - Additional Information (Detail) (USD $)
1 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended 6 Months Ended 3 Months Ended 3 Months Ended 3 Months Ended 6 Months Ended 12 Months Ended
Mar. 29, 2013
Jun. 30, 2013
Jun. 30, 2012
Dec. 31, 2012
Mar. 31, 2012
Warrant
Mar. 29, 2013
Stockbridge Enterprises, LP [Member]
Oct. 31, 2012
Stockbridge Enterprises, LP [Member]
Jun. 30, 2013
Stockbridge Enterprises, LP [Member]
Oct. 31, 2012
Stockbridge Enterprises, LP [Member]
Convertible Notes Payable [Member]
Oct. 31, 2012
Stockbridge Enterprises, LP [Member]
Convertible Notes Payable [Member]
Amendment [Member]
Jun. 30, 2013
Before Maturity Period [Member]
Oct. 31, 2012
Before Maturity Period [Member]
Jun. 30, 2013
After Maturity Period [Member]
Oct. 31, 2012
After Maturity Period [Member]
Jun. 30, 2013
Stockbridge Convertible Note [Member]
Jun. 30, 2013
Convertible Debt [Member]
Jun. 30, 2012
Convertible Debt [Member]
Dec. 31, 2012
Convertible Debt [Member]
Mar. 31, 2012
Forty Two Month Warrant [Member]
Mar. 31, 2012
Forty Five Month Warrant [Member]
Mar. 31, 2012
Forty Eight Month Warrant [Member]
Jun. 30, 2013
Initial Warrant [Member]
Mar. 31, 2013
Warrant 1-6 [Member]
Mar. 29, 2013
Warrant 1-6 [Member]
Mar. 31, 2013
Warrant 1-1 [Member]
Mar. 31, 2012
Warrant 1-1 [Member]
Mar. 31, 2013
Warrant 1-5 [Member]
Oct. 31, 2012
Warrant 1-5 [Member]
Jun. 30, 2013
Warrant 1-2 [Member]
Jun. 30, 2013
Warrant 1-3 [Member]
Jun. 30, 2013
Warrant 1-4 [Member]
Mar. 31, 2013
Warrant [Member]
Dec. 31, 2012
Warrant [Member]
Long Term Debt Maturity [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note
 
 
 
 
 
 
 
$ 3,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note maturity period
 
 
 
 
 
 
 
Oct. 01, 2015 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annual interest rate on convertible note
 
 
 
 
 
 
 
 
9.00% 
6.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conversion price of notes to common stock
 
 
 
 
 
 
 
 
 
 
$ 0.362 
$ 0.50 
$ 0.181 
$ 0.25 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrant to acquire
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
345,278 
345,278 
690,557 
100,000 
500,000 
 
 
1,381,115 
 
5,524,461 
 
 
 
 
 
Number of trading days for calculating average bid price
 
10 days 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible debt principal amount
 
3,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible debt interest accrued
 
34,500 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Converted common stock
 
8,382,597 
 
 
 
 
 
 
 
 
 
 
 
 
8,382,597 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tenure of warrant issued
 
5 years 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of contingent warrants issued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrant exercisable per common share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 0.37 
 
$ 0.37 
 
$ 0.37 
 
$ 0.37 
$ 0.37 
$ 0.37 
 
 
Convertible debt principal amount
 
3,000,000 
 
 
 
 
3,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrant liability accounted in connection with issuance of convertible note
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18,742,526 
 
Warrant liability allocated as discount to convertible note
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,500,000 
 
Warrant liability expensed as financing cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17,242,526 
 
Value of Warrants
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20,233,338 
Increase in warrant liability
 
   
(25,571)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,490,812 
Valuation loss due to increase in warrant liability