QUEST RESOURCE HOLDING CORP, 10-KT filed on 4/15/2013
Annual Transition Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Mar. 15, 2013
Jun. 30, 2012
Entity Information [Line Items]
 
 
 
Document Type
10-KT 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2012 
 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
IRHC 
 
 
Entity Registrant Name
Infinity Resources Holdings Corp. 
 
 
Entity Central Index Key
0001442236 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Smaller Reporting Company 
 
 
Entity Common Stock, Shares Outstanding
 
58,097,034 
 
Entity Public Float
 
 
$ 25,745,096 
CONSOLIDATED BALANCE SHEETS (USD $)
Dec. 31, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 485,728 
$ 1,274,018 
Accounts receivable, less allowance for doubtful accounts of $7,398 and nil as of December 31, 2012 and 2011, respectively
174,013 
75,480 
Inventory
4,292 
 
Prepaid expenses and other assets
38,019 
1,279 
Deferred tax asset - current
 
12,300 
Total current assets
702,052 
1,363,077 
Property and equipment, net
156,688 
204,778 
Intangible assets
128,800 
128,800 
Investment in Quest Resource Management Group, LLC
4,047,615 
2,757,571 
Deferred tax asset - non-current
 
920,400 
Prepaid income taxes
5,440 
89,900 
Security deposits and other assets
221,354 
110,599 
Total Assets
5,261,949 
5,575,125 
Current liabilities
 
 
Accounts payable
316,597 
287,323 
Accrued liabilities
648,153 
582,829 
Deferred revenue
166,362 
244,246 
Long term debt and capital lease obligations - current portion
72,128 
59,127 
Convertible notes payable - short term, net of discount of $33,394 and nil as of December 31, 2012 and 2011, respectively
99,106 
 
Total current liabilities
1,302,346 
1,173,525 
Long term debt and capital lease obligations, less current maturities
 
72,129 
Long term convertible debt - related parties
 
6,276,897 
Long term senior secured convertible note - related party, net of discount $1,313,897 and nil as of December 31, 2012 and 2011, respectively
686,103 
 
Warrant liability
20,233,338 
 
Total liabilities
22,221,787 
7,522,551 
Commitments and contingencies
   
   
Mezzanine financing (nil and 687,051 common shares as of December 31, 2012 and 2011, respectively)
1,375,933 
1,375,933 
Stockholders' deficit
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of December 31, 2012 and 2011
   
   
Common stock, $0.001 par value, 100,000,000 shares authorized, 58,040,230 and 46,847,631 shares issued and outstanding as of December 31, 2012 and 2011, respectively
58,040 
46,848 
Additional paid-in capital
30,708,473 
2,204,651 
Accumulated deficit
(47,726,351)
(5,574,858)
Total stockholders' deficit
(16,959,838)
(3,323,359)
Total liabilities, mezzanine financing and stockholders' deficit
$ 5,261,949 
$ 5,575,125 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Allowance for doubtful accounts receivable
$ 7,398 
    
Convertible notes payable - short term,discount
33,394 
   
Long term senior secured convertible note - related party, discount
$ 1,313,897 
 
Mezzanine financing common shares
687,051 
687,051 
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
58,040,230 
46,847,631 
Common stock, shares outstanding
58,040,230 
46,847,631 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Revenues
$ 1,145,637 
$ 979,833 
Cost of revenue
36,021 
 
Gross profit
1,109,616 
979,833 
Operating expenses:
 
 
Selling, general and administrative
6,848,782 
5,072,380 
Depreciation
68,576 
51,472 
Loss on sale of assets
406 
 
Impairment of goodwill
17,636,569 
 
Total operating expenses
24,554,333 
5,123,852 
Operating loss
(23,444,717)
(4,144,019)
Other (expense):
 
 
Interest expense
(996,924)
(462,906)
Valuation expense - common stock warrants
(1,490,812)
 
Distribution fee- Quest Recycling Group LLC
 
(79,998)
Financing cost for senior convertible note - related party
(17,242,526)
 
Total other expense, net
(19,730,262)
(542,904)
Loss before taxes and equity income
(43,174,979)
(4,686,923)
Equity in Quest Resource Management Group, LLC income
1,964,540 
2,233,028 
Loss before taxes
(41,210,439)
(2,453,895)
Income tax expense (benefit)
941,054 
(874,775)
Net loss
(42,151,493)
(1,579,120)
Net loss applicable to common stockholders
$ (42,151,493)
$ (1,579,120)
Net loss per share
 
 
Basic and Diluted
$ (0.74)
$ (0.03)
Weighted average number of common shares outstanding
 
 
Basic and Diluted
56,988,497 
47,485,357 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (USD $)
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit[Member]
Beginning Balance at Dec. 31, 2010
$ (2,781,474)
$ 46,848 
$ 1,167,416 
$ (3,995,738)
Beginning Balance, Shares at Dec. 31, 2010
 
46,847,631 
 
 
Stock-based compensation expense
1,037,235 
 
1,037,235 
 
Mezzanine financing reclassified to equity
1,375,933 
 
 
 
Mezzanine financing reclassified to equity, Shares
687,051 
 
 
 
Net loss
(1,579,120)
 
 
(1,579,120)
Ending Balance at Dec. 31, 2011
(3,323,359)
46,848 
2,204,651 
(5,574,858)
Beginning Balance, Shares at Dec. 31, 2011
 
46,847,631 
 
 
Stock-based compensation expense
1,661,673 
 
1,661,673 
 
Discount senior secured convertible note
500,000 
 
500,000 
 
Related party notes and interest conversions
6,389,042 
835 
6,388,207 
 
Related party notes and interest conversions, Shares
835,409 
835,409 
 
 
Deferred compensation converted to stock
260,000 
111 
259,889 
 
Deferred compensation converted to stock, Shares
110,490 
110,490 
 
 
Mezzanine financing reclassified to equity
1,375,933 
687 
1,375,246 
 
Mezzanine financing reclassified to equity, Shares
687,051 
687,051 
 
 
Rights offering, net of financing costs
414,300 
491 
413,809 
 
Rights offering, net of financing cost, Shares
491,430 
491,430 
 
 
Common stock issued for loan fees
117,000 
138 
116,862 
 
Common stock issued for loan fees, Shares
138,112 
138,112 
 
 
Shares issued to effect reverse merger
17,332,975 
8,666 
17,324,309 
 
Shares issued to effect reverse merger, Shares
8,666,488 
8,666,488 
 
 
Common stock issued for services
249,025 
108 
248,917 
 
Common stock issued for services, Shares
108,083 
108,083 
 
 
Note conversions and discounts
215,066 
156 
214,910 
 
Note conversions & discounts, Shares
155,536 
155,536 
 
 
Net loss
(42,151,493)
 
 
(42,151,493)
Ending Balance at Dec. 31, 2012
$ (16,959,838)
$ 58,040 
$ 30,708,473 
$ (47,726,351)
Ending Balance, Shares at Dec. 31, 2012
 
58,040,230 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Cash flows from operating activities:
 
 
Net loss
$ (42,151,493)
$ (1,579,120)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation expense
68,576 
51,472 
Amortization of debt discount and deferred financing costs
754,396 
 
Loss on sale of assets
406 
 
Equity in Quest Resource Management Group, LLC income
(1,964,540)
(2,233,028)
Deferred income taxes
932,700 
(838,300)
Provision (benefit) for doubtful accounts
7,398 
(31,863)
Stock-based compensation
1,904,698 
1,037,235 
Valuation expense common stock warrants
1,490,812 
 
Financing costs for senior convertible note - related party
17,242,526 
 
Impairment of goodwill
17,636,569 
 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(105,932)
224,213 
Inventory
123 
 
Prepaid expenses and other assets
(26,238)
39,804 
Prepaid income tax
84,460 
(89,900)
Security deposits and other assets
3,684 
(110,599)
Accounts payable
(26,160)
15,308 
Accrued liabilities
293,686 
30,741 
Deferred revenue
(77,884)
32,880 
Income tax payable
 
(126,000)
Accrued interest - related parties
112,145 
449,810 
Net cash used in operating activities
(3,820,068)
(3,127,347)
Cash flows from investing activities:
 
 
Purchase of property and equipment
(14,760)
(51,522)
Proceeds from sale of property and equipment
100 
 
Proceeds from reverse merger with YouChange
25,269 
 
Distributions received from Quest Resource Management Group, LLC
674,497 
3,368,586 
Net cash provided by investing activities
685,106 
3,317,064 
Cash flows from financing activities:
 
 
Proceeds from senior related party secured convertible note
2,000,000 
 
Repayments of notes payable
(3,333)
(40,000)
Repayments capital lease obligations
(55,795)
(26,564)
Proceeds from sale of common stock
416,300 
863,656 
Financing costs
(10,500)
(101,748)
Net cash provided by financing activities
2,346,672 
695,344 
Net increase (decrease) in cash and cash equivalents
(788,290)
885,061 
Cash and cash equivalents at beginning of period
1,274,018 
388,957 
Cash and cash equivalents at end of period
485,728 
1,274,018 
Supplemental cash flow information:
 
 
Cash paid for interest
114,266 
13,201 
Cash paid for income taxes
 
89,525 
Supplemental non-cash flow activities:
 
 
Common stock issued for deferred compensation
260,000 
 
Common stock issued for services and loan fees
366,025 
 
Common stock warrant liability and revaluations
20,233,338 
 
Mezzanine financing reclassified to additional paid in capital
1,375,933 
1,375,933 
Discount to senior convertible note-related party
2,000,000 
 
Related Party [Member]
 
 
Supplemental non-cash flow activities:
 
 
Common stock issued for conversion of notes payable, including accrued interest
6,389,042 
 
Notes Payable [Member]
 
 
Supplemental non-cash flow activities:
 
 
Common stock issued for conversion of notes payable, including accrued interest
$ 187,466 
 
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.

We were incorporated in Nevada in July 2002 under the name BlueStar Financial Group, Inc. (“BSFG”). Prior to 2010, BSFG was a “shell company” under the rules of the Securities and Exchange Commission (the “SEC”). On March 30, 2010, BSFG (i) closed a transaction to acquire Youchange as a wholly owned subsidiary, (ii) ceased being a shell company, and (iii) experienced a change in control in which the former stockholders of Youchange acquired control of our company. In May 2010, we changed our name to YouChange Holdings Corp.

On October 17, 2012, immediately prior to closing a merger transaction with Earth911, we filed Amended and Restated Articles of Incorporation to (i) change our name to Infinity Resources Holdings Corp., (ii) increase the shares of common stock authorized for issuance to 100,000,000, (iii) authorize a total of 10,000,000 shares of preferred stock to be designated in series or classes as our board of directors may determine, (iv) effect a 1-for-5 reverse split of our common stock, and (v) divide our board of directors into three classes, as nearly equal in number as possible. On October 17, 2012, we closed the 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. Pursuant to the terms of the merger with Earth911, all outstanding common stock of Earth911 (the “Earth911 Shares”) was exchanged for shares of our common stock at a conversion ratio such that the former stockholders of Earth911 would hold an aggregate of 85% of our issued and outstanding common stock. In addition, all outstanding Earth911 options and warrants were exchanged and converted into options and warrants for the purchase of our common stock. Pursuant to this conversion ratio, we subsequently (i) issued 49,110,123 shares of our common stock in exchange for the Earth911 Shares, (ii) reserved for issuance an aggregate of 1,831,115 shares issuable upon the exercise of the Earth911 options, and (iii) reserved for issuance an aggregate of 8,786,689 shares issuable upon the exercise of the Earth911 warrants. On December 11, 2012, our board of directors approved a change to our fiscal year end from June 30 to December 31.

Effect of Merger – Pursuant to the terms of the merger agreement, pursuant to 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 year ended December 31, 2012, we incurred a net loss of $42,151,493 and used cash in operations of $3,820,068. At December 31, 2012, we had negative working capital of $600,294 and cash and cash equivalents of $485,728. 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. We plan to seek to obtain additional working capital by increasing sales, maintaining efficient operating expenses, borrowing on a related party note, 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

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The accompanying consolidated financial statements include the operating activity of Infinity and its subsidiaries, for the years ended December 31, 2012 and 2011, as well as the equity method accounting for its investment in Quest. The Earth911 Merger was deemed to be a reverse acquisition, with Earth911 as the accounting acquirer. As such, the operating activity of Infinity (p/k/n YouChange Holdings Corp.) is consolidated in these consolidated financial statements from the date of the merger, October 17, 2012 to December 31, 2012. The operating activities for Infinity’s Earth911 subsidiary and the investment in Quest, is included for years ended December 31, 2012 and 2011. 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. Certain reclassifications have been made to prior year balances to conform to the current year presentation.

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, contingencies, assumptions used in the valuation and recognition of share-based payments and warrant liability, the realization of goodwill and 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 considered 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 2012 and 2011 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 also recognized ratably, over the term that the advertisement appears on our website. 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.

Accounts Receivable

We follow the allowance method of recognizing uncollectible accounts receivable. The allowance method recognizes bad debt expense based on a review of the individual accounts outstanding and our prior history of uncollectible accounts receivable. Our trade accounts receivable are primarily due from our customers. Credit is extended based on evaluation of each customer’s financial condition and are generally unsecured. Accounts receivable are typically due within 30 days and are stated net of an allowance for doubtful accounts. Accounts are considered past due if outstanding longer than contractual payment terms. We record an allowance on a specific basis by considering a number of factors, including the length of time trade accounts are past due, our previous loss history, the credit-worthiness of individual customers, economic conditions affecting specific customer industries, and economic conditions in general. We charge-off accounts receivable after all reasonable collection methods have been exhausted. Payments subsequently received on such receivables are credited against charge-offs in the period the payment is received.

As of December 31, 2012 and 2011, an allowance of $7,398 and nil, respectively, had been established for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivables only if they are collected.

The changes in our allowance for doubtful accounts for the years ended December 31, 2012 and 2011 were as follows:

 

     Years ended December 31,  
     2012      2011  

Beginning balance

   $ —         $ 31,863   

Bad debt expense (recoveries)

     7,398         —     

Uncollectible accounts written off

     —           (31,863
  

 

 

    

 

 

 

Ending balance

   $ 7,398       $ —      
  

 

 

    

 

 

 

Inventories

Inventories consist of used consumer electronics and computer devices and are stated at the lower of cost (average cost method which approximates first-in, first-out) or market. Cost is determined based on our estimate of the “collection” value of each item, which is what we then pay the supplier. We establish reserves for inventory to reflect situations in which the cost of the inventory is not expected to be recovered. In evaluating whether inventory is stated at the lower of cost or market, we consider such factors as the amount of inventory on hand, estimated time required to sell such inventory and current and expected market conditions. We record provisions for inventory obsolescence as part of cost of products sold. Inventories are presented net of allowances relating to the above provisions, however, as of December 31, 2012 and 2011, no provisions were deemed to be necessary.

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 which 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, warrants issued, and the impairment measurement of goodwill. The valuation methodologies and inputs used are discussed in the respective footnotes.

Stock Options - We estimate 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 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 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.

Goodwill - The fair value of the reporting unit used in the goodwill impairment analysis performed in the current year was determined in contemplation of suspension of funding of future development activities of the reporting unit and anticipated continuing negative cash flows from operations for the unit. These were determined to be level 3 inputs.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided for on the straight-line method, over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the useful life or the remaining term of the related leases. Expenditures for repairs and maintenance are charged to operations as incurred; renewals and betterments are capitalized when they occur. Gains and losses on the disposition of property and equipment are recorded in the period incurred. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Depreciation expense for the years ended December 31, 2012 and 2011 amounted to $68,576 and $51,472, respectively.

The useful lives of property and equipment for purposes of computing depreciation are as follows:

 

Computer equipment

     3 to 5 years   

Office furniture and equipment

     5 to 7 years   

Leasehold improvements

     5 to 7 years   

We review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the asset.

Intangible Assets

Legal fees and similar capitalizable costs relating to patents, copyrights, and trademarks are capitalized as appropriate. As of December 31, 2012 and 2011, our intangible assets consisted of indefinite lived intangibles relative to the Earth911 trademark of $128,800, which were not amortized. We review the carrying amounts of indefinite lived intangible assets at least annually in our fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount of the asset may be impaired. These events or circumstances may include, but are not limited to (i) a significant decrease in the market value of an asset; (ii) a significant adverse change in the extent or manner in which an asset is used; or (iii) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset.

 

Impairment of Long-Lived Assets

Assets that are held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment is recognized when the estimated undiscounted cash flow generated by those assets is less than the carrying amounts of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets. Assets held for sale, if any, are carried at the lower of carrying amount or fair value less selling costs. No impairment charges were recognized during 2012 and 2011.

Goodwill

Goodwill is not amortized; however we annually evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test as of December 31, 2012 and 2011. Our’s test of goodwill by assessing the qualitative factors requires judgment in evaluating economic conditions, industry and market conditions, cost factors and entity-specific events, including overall financial performance. After evaluating these qualitative factors as of December 31, 2012 and 2011, the fair value was determined to not exceed the carrying value of the assets resulting in an impairment loss in 2012. Subsequent increases in goodwill value are not recognized in the consolidated financial statements. See Note 16 regarding the $17,636,569 impairment of goodwill recognized during 2012. No goodwill impairment was recorded as of December 31, 2011.

Taxes Collected From Customers and Remitted To Government Authorities

Taxes collected from customers and remitted to governmental authorities are presented in the accompanying statements of operations on a net basis.

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 2012 and 2011 would be anti-dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes (see Note 14), and total 17,270,346 shares at December 31, 2012, and 1,381,115 shares at December 31, 2011.

Concentrations

Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents and trade accounts receivable. We invest our cash and cash equivalents with commercial banks in Arizona. Cash and cash equivalents are at risk to the extent that they exceed the Federal Deposit Insurance Corporation (“FDIC”) insured level per institution for interest bearing accounts. We have never experienced any losses related to these balances. All of our non-interest bearing cash balances were at FDIC insured institutions through December 31, 2012 and were fully insured due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and our non-interest bearing cash balances may again exceed federally insured limits.

We sell our products and services primarily to consumers, advertisers and businesses without requiring collateral; however, we routinely assess the financial condition of our customers and maintain allowances for anticipated losses. The following table discloses the number of customers that accounted for more than 10% of our annual revenues and related receivable balances:

 

     Customers Exceeding 10%  
     of Revenues  

Year

   Number of
Customers
     Revenues
Combined Percent
    Accounts Receivable
Combined Percent
 

2012

     —           0     0

2011

     2         20     30

 

The following table discloses the number of customers that accounted for more than 10% of Quest’s annual revenues and receivable their related receivable balances:

 

     Customers Exceeding 10%
of Revenues
 

Year

   Number of
Customers
     Revenues
Combined Percent
    Accounts Receivable
Combined Percent
 

2012

     1         89     71

2011

     1         94     82

We believe we have no significant credit risk in excess of recorded reserves.

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.

We consider whether the fair value of our investment in Quest has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If there is a decline in the fair value below the carrying value of this investment, we will recognize an impairment charge for such difference. We performed an annual impairment analysis as of December 31, 2012 and 2011, resulting in no impairment losses, as we determined the fair value exceeded the carrying value of the assets. We will continue to evaluate our investment for potential impairment based upon any changes to Quest’s operations or its operating business environment. No impairment charges were recognized for our investment in Quest for the years ended December 31, 2012 and 2011.

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.

 

Advertising

Our advertising costs are charged to expense when incurred. During the years ended December 31, 2012 and 2011, advertising expense totaled $108,590 and $14,370, respectively.

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. See Note 13 for a description of our share-based compensation plan and information related to awards granted under the plan.

Reverse Acquisition

We have accounted for the reverse acquisition discussed above in accordance with ASC 805-40 (Reverse Acquisitions). The 8,666,488 shares (post-split) of Infinity outstanding immediately prior to the reverse acquisition represent the consideration transferred for the Earth 911 Merger.

Inventories
Inventories

3. Inventories

As of December 31, 2012, finished goods inventories were $4,292 and consisted of used consumer electronics and computer devices with no reserve for inventory obsolescence. As of December 31, 2011, we had no finished goods inventories.

Property and Equipment
Property and Equipment

4. Property and Equipment

At December 31, 2012 and December 31, 2011, property and equipment consisted of the following:

 

     As of December 31,  
     2012     2011  

Computer equipment

   $ 157,305      $ 145,189   

Office furniture and equipment

     209,026        199,374   

Leasehold improvements

     6,261        6,261   
  

 

 

   

 

 

 
     372,592        350,824   

Less: accumulated depreciation

     (215,904     (146,046
  

 

 

   

 

 

 
   $ 156,688      $ 204,778   
  

 

 

   

 

 

 

We lease certain furniture and fixtures under agreements that are classified as capital leases. The cost of equipment under these capital leases was $187,357 at December 31, 2012 and December 31, 2011 and is included in the consolidated financial statements as property and equipment. Accumulated depreciation of the leased equipment at December 31, 2012 and December 31, 2011 was $85,326 and $48,865, respectively. Interest expense in the amount of approximately $16,200 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:

 

     As of December 31,  
     2012      2011  

Compensation

   $ 191,393       $ 433,821   

Deferred rent obligation

     138,926         101,608   

Professional fees

     302,818         46,000   

Accrued interest and other

     15,016         1,400   
  

 

 

    

 

 

 
   $ 648,153       $ 582,829   
  

 

 

    

 

 

 

In June 2012, deferred compensation of $260,000 was converted into 110,490 shares of our common stock at $2.35 per share.

Convertible Notes Payable
Convertible Notes Payable

6. Convertible Notes Payable

The activity from the date of the merger, October 17, 2012 to December 31, 2012 for convertible notes payable related to Youchange is summarized below. During that period ending December 31, 2012, $142,218 of principal and $7,747 of interest was converted into 118,035 shares of common stock. As of December 31, 2012, the outstanding convertible notes payable and associated accrued interest described below were convertible into a total of approximately 108,680 common shares. 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 December 31, 2012:

 

     As of December 31,  
     2012         2011      

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        —     

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

     132,500        —     

Less: unamortized discounts due to beneficial conversions features

     (33,394     —     
  

 

 

   

 

 

 

Total convertible notes payable - short term, net of discounts

   $ 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. Although this note was past its maturity as of December 31, 2012, the holder converted the note and its accrued interest subsequent to year end 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. Although this note was past its maturity as of December 31, 2012, the holder converted the note and its accrued interest subsequent to year end 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. This note matured in the period subsequent to year end and the holder converted the note and its accrued interest subsequent to year end 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. This note matured in the period subsequent to year end and the holder converted the note and its accrued interest subsequent to year end 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. This note matured in the period subsequent to year end and the holder converted the note and its accrued interest subsequent to year end 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 subsequent to year end, 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 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. Subsequent to December 31, 2012, 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.

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

7. Long Term Debt and Capital Lease Obligations

At December 31, 2012 and December 31, 2011, total debt outstanding consisted of the following:

 

     As of December 31,  
     2012     2011  

Three convertible notes payable to related parties, principal plus accrued interest due July 2013, interest and repayment provisions discussed further below

   $ —        $ 6,276,897   

Senior secured convertible notes payable to a related party, 9% interest due monthly in arrears, due October 2014, repayment provisions discussed further below (Net of discount of $1,313,897 at December 31, 2012)

     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

     72,128        127,923   

Note payable with monthly payments of $3,333 through January 2012

     —          3,333   
  

 

 

   

 

 

 

Total

     758,231        6,408,153   

Less: current maturities

     (72,128     (59,127
  

 

 

   

 

 

 

Long-term portion

   $ 686,103      $ 6,349,026   
  

 

 

   

 

 

 

The three convertible notes payable to related parties in the above table had an annual stated interest rate of 9.0% and were modified as of October 1, 2010 to include a conversion feature to convert the notes into common stock at $0.72 per share. The addition of this substantive conversion feature was recognized in 2010 as an extinguishment, which resulted in a $3,955,644 debt extinguishment charge for the recognition of the convertible notes at fair value, which was based on the underlying shares the notes were convertible into. Following this modification, we have accrued interest at a rate representative of the fair value of the underlying shares the interest is convertible into, or 29.25%. In March 2012, the holders of the three convertible related party notes elected to convert to common stock. This conversion was later modified in June 2012 so that the notes were converted at a rate of $2.35 per share for 835,409 total shares.

On March 22, 2012, Earth 911, Inc., a Delaware corporation and our wholly owned subsidiary (“Earth 911”), entered into a Securities Purchase Agreement with Stockbridge Enterprises, L.P., a related party (“Stockbridge”), pursuant to which Earth 911 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 Earth 911. 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 have also been adjusted for the merger in October 2012. See Note 17 regarding the Second Allonge.

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. 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 reverse merger, the Convertible Note is convertible into our 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 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 Earth 911 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.

 

In connection with the Convertible Note we issued five-year warrants that were subsequently adjusted for the 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 executing 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”); and

 

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

Warrant 1-1 is exercisable at $0.37 per share of common stock, and as of any exercise date following the Triggering Event, the lower of the $0.37 exercise price or the average closing bid price during the ten trading days immediately preceding the exercise date. Warrant 1-5 is exercisable at $0.37 per share of common stock, and as of any exercise date following the Triggering Event, the lower of the $0.37 exercise price or the average closing bid price during the ten trading days immediately preceding the exercise date.

Warrant 1-1 and Warrant 1-5 were exercised in March 2013 as part of the Second Allonge using a cashless exercise formula. In addition, a new warrant was issued upon the signing of the Second Allonge to acquire up to 500,000 shares of our common stock, exercisable immediately upon execution of the amendment (“Warrant 1-6”) under the same exercise price and terms as Warrant 1-5. Warrant 1-6 was also exercised in March 2013. See Note 17 for further discussion.

If the contingent Warrant 1-2, Warrant 1-3 and Warrant 1-4 become exercisable, the exercise price would be $0.37 per share of common stock, and due to the Triggering Event, the lower of the $0.37 exercise price 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.

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 $500,000 draw, which was accounted for as an additional discount and an adjustment to additional paid-in-capital. The Convertible Note discount total of $2,000,000, which is equal to the amount of the funds drawn on the Convertible Note as of December 31, 2012, is being amortized to interest expense over the life of the Convertible Note beginning March 22, 2012. As of December 31, 2012, the unamortized portion of the debt discount was $1,313,897. The amount of interest expense related to the amortization of the discount on the Convertible Note for the period ended December 31, 2012 was $686,103.

The following table summarizes future maturities of debt and capital lease obligations, as amended, as of December 31, 2012:

 

Year Ending December 31,

   Amount  

2013

   $ 72,128   

2014

     —      

2015

     2,000,000   
  

 

 

 

Subtotal (assuming repayment in cash)

     2,072,128   

Less discount on Convertible Note

     (1,313,897

Less current maturities

     (72,128
  

 

 

 

Total

   $ 686,103   
  

 

 

 
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 was acquired on August 21, 2008. The financial condition and operating results of Quest for the relevant periods are presented below:

 

     Years ended December 31,  
     2012      2011  

Condensed operating statement information:

     

Net sales

   $ 130,621,675       $ 121,888,280   

Gross margin

     12,934,339         11,430,986   

Income from operations

     4,005,383         4,904,646   

Net income

     3,929,080         4,197,360   

Company’s equity method income allocation

     1,964,540         2,233,028   
     As of December 31,  
     2012      2011  

Condensed balance sheet information:

     

Current assets

   $ 20,718,638       $ 24,916,207   

Long-term assets

     2,118,295         1,885,098   
  

 

 

    

 

 

 

Total Assets

   $ 22,836,933       $ 26,801,305   
  

 

 

    

 

 

 

Current liabilities

   $ 17,925,175       $ 24,067,022   

Long-term liabilities

     —           —     

Equity

     4,911,758         2,734,283   
  

 

 

    

 

 

 

Total liabilities and members’ equity

   $ 22,836,933       $ 26,801,305   
  

 

 

    

 

 

 
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 December 31, 2012, and a valuation allowance of $2,433,000 has 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:

 

     As of December 31,  
     2012     2011  

Deferred tax assets (liabilities):

    

Net operating loss

     1,029,000        332,900   

Stock-based compensation

     1,177,000        414,900   

Accrued interest expense

     155,000        134,300   

Allowance for doubtful accounts

     22,000        12,300   

Deferred lease liability

     50,000        38,300   
  

 

 

   

 

 

 

Total deferred tax assets

     2,433,000        932,700   

Less: valuation allowance

     (2,433,000     —     
  

 

 

   

 

 

 

Net deferred taxes

   $ —        $ 932,700   
  

 

 

   

 

 

 

 

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:

 

     Year Ended December 31,  
     2012     2011  

U.S. federal statutory rate applied to pretax income

   $ (11,713,000   $ (834,000

Permanent differences

     10,344,000        106,000   

State taxes and other

     (123,000     (147,000

Change in valuation allowance

     2,433,000        —     
  

 

 

   

 

 

 
   $ 941,000      $ (875,000
  

 

 

   

 

 

 

At December 31, 2012 we had federal income tax net operating loss carryforwards 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 2012. 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 United States federal and Arizona 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 financial instruments 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 year-end valuations were measured at fair value by utilizing the quoted market price for our common stock and the valuation for the cash-less exercise of Warrant 1-1 and Warrant 1-5 in March 2013, which are Level 1 and Level 2 inputs. These inputs of (i) an observable warrant exercise transaction shortly after year end and (ii) publicly traded market price provided a reasonable basis for valuation for the warrants as of 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 at $0.37 per share of common stock, Warrant 1-1 and Warrant 1-5 had a net number value, as described in Note 17, of $20,233,338. See Note 17 regarding the exercise of these warrants.

The following table summarizes the warranty liability valuation for the twelve months ended December 31, 2012:

 

Description

   Fair Value Measurements
Warrant Liability
 

Beginning balance, December 31, 2011

   $ —     

Issuances (Level 3)

     18,742,526   

Total (gains) or losses (Level 1 and 2)

     1,490,812   
  

 

 

 

Ending balance, December 31, 2012

   $ 20,233,338   
  

 

 

 
Commitments and Contingencies
Commitments and Contingencies

11. Commitments and Contingencies

We lease corporate office space in Scottsdale, Arizona under a 66 month, non-cancelable operating lease. The lease expires in March 2017 and provides for a renewal option of 60 months. In addition, we lease office and warehouse space in Tempe, Arizona under a 39 month, non-cancellable operating lease, which expires in July 2015. Lease expense totaled $287,806 and $184,872 for the years ended December 31, 2012 and 2011, respectively. The following is a schedule, by year, of future minimum rental payments required under the operating lease agreement as of December 31, 2012:

 

Year Ended December 31,

   Amount  

2013

   $ 301,396   

2014

     315,517   

2015

     305,320   

2016

     286,870   

2017

     72,832   
  

 

 

 
   $ 1,281,935   
  

 

 

 

Our operating lease agreement contains a provision that abate rent payments for a period of five months. The total amount of rental payments due over the lease term is being charged to rent expense on the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is charged to accrued liabilities in the accompanying balance sheets.

Indemnifications

During the normal course of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These may include (i) intellectual property indemnities to customers in connection with the use, sales, and/or license of products and services; (ii) indemnities to customers in connection with losses incurred while performing services on their premises; (iii) indemnities to vendors and service providers pertaining to claims based on negligence or willful misconduct; and (iv) indemnities involving the representations and warranties in certain contracts. In addition, under our bylaws we are committed to our directors and officers for providing for payments upon the occurrence of certain prescribed events. The majority of these indemnities and commitments do not provide for any limitation on the maximum potential for future payments that we could be obligated to make. We have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2012.

Mezzanine Financing
Mezzanine Financing

12. Mezzanine Financing

During October 2010, a $0.72 conversion feature was added to three related party notes payable more fully described in Note 7. The three related party notes payable were originally funded from January through December 2009 and the conversion feature was understood to have been part of the notes; however, when the notes were formalized, this conversion feature was omitted in error. Because this error was discovered in September 2010, the notes were amended to include the $0.72 conversion feature. This conversion feature was not disclosed in the private placement and we determined to present the issuance of the 687,000 shares of our common stock from the private placement as mezzanine financing on the accompanying December 31, 2011 balance sheet.

 

During June 2012, the note holders agreed to modify the conversion price of the notes to $2.35 per share of common stock from $0.72 per share of common stock and the notes were converted. As a result of this modification, we have reclassified the proceeds and the common stock from this private placement from mezzanine financing to permanent equity at the time of the modification in June 2012.

Stockholders' Equity
Stockholders' Equity

13. Stockholders’ Equity

Preferred Stock - Our authorized preferred stock consists of 10,000,000 shares of preferred stock with a par value of $.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 $.001 with 58,040,230 and 46,847,631 issued and outstanding as of December 31, 2012 and 2011, respectively.

During 2012, we issued shares of common stock as follows:

 

     Common Stock         
     Shares      Amount  

Related party notes conversions (See Note 7)

     835,409       $ 6,389,042   

Deferred compensation converted to stock

     110,490         260,000   

Mezzanine financing reclassified to equity (See Note 7 and 12)

     687,051         1,375,933   

Rights offering

     491,430         414,300   

Common stock issued for loan fees

     138,112         117,000   

Shares issued to effect reverse merger

     8,666,488         17,332,975   

Common stock issued for services

     108,083         249,025   

Note conversions and discounts (see Note 6)

     155,536         215,066   
  

 

 

    

 

 

 
     11,192,599       $ 26,353,341   
  

 

 

    

 

 

 

 

   

Deferred Compensation - In June 2012, deferred compensation of $260,000 was converted into 110,490 shares of our common stock at $2.35 per share.

 

   

Rights Offering and Subscription Agreement– In August 2012, the Board of Directors approved a rights offering for up to 2,500,000 shares of our common stock to all of our accredited stockholders, officers and directors, employees, certain persons with whom we have relationships, and any others who had expressed an interest in purchasing our shares. The price of the shares was the lesser of (i) $2.00 per share or (ii) 60% of the average closing price of YouChange common stock for the ten days prior to closing of the merger with YouChange times 5 to reflect the 1-for-5 reverse split of YouChange common stock that occurred immediately prior to the closing of the merger. Prior to the merger, we received subscription agreements of $416,300 less financing fees of $2,000 for a total of $414,300. The price of the shares for the rights offering was approximately $1.17 per share and a total of 491,430 shares were issued in conjunction with the rights offering. The rights offering also contains an anti-dilution provision that will provide additional shares of common stock if in the 12 months following the merger we complete a stock offering of $5 million or more at a per share price lower than the rights offering price of approximately $1.17 per share.

 

   

Common Stock for Loans Fees – Pursuant to the amendment to the Convertible Note on October 10, 2012, we issued 138,112 shares of common stock

 

   

Reverse Stock Split – We effected a 1 for 5 reverse split that was effective on October 17, 2012 associated with the reverse merger with Earth 911. As a result of the reverse split, each five shares of our common stock outstanding at the time of the reverse split was automatically changed into one share of common stock, and the total number of common stock shares outstanding were reduced from approximately 43.4 million shares to approximately 8.6 million shares post-split. The reverse stock split resulted in the same adjustment to our convertible notes outstanding. No fractional shares were issued in connection with the reverse stock split. Fractional shares were rounded up to the next whole share. All per share amounts and outstanding shares, including all common stock equivalents (convertible securities and stock options) have been restated in the consolidated financial statements, the notes to the consolidated financial statements and the loss per share for all periods presented to reflect the reverse stock split.

 

   

Common Stock for Services - We issued 108,083 shares of common stock to employees and consultants during the 12 months ended December 31, 2012 for $249,025 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. See the discussion under Note 7 and Note 17 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 December 31, 2012:

 

Warrants Issued and Outstanding as of December 31, 2012

 
     Date of      Exercise
Price
     Shares of  

Description

   Issuance      Expiration         Common Stock  

Exercisable warrants

           

Warrant 1-1

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

Warrant 1-5

     10/10/2012         10/9/2017       $ 0.37         5,524,461   
           

 

 

 

Total exercisable warrants

              6,905,576   

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

  

        8,286,689   
           

 

 

 

Stock Option Plan - In October 2012, we adopted our 2012 Incentive Compensation Plan as the sole plan for providing equity-based incentive compensation to our employees, non-employee directors and other service providers. The plan allows for the grant of stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards and other incentive awards to our employees, non-employee directors and other service providers who are in a position to make a significant contribution to our success and our affiliates. The purposes of the plan are to attract and retain individuals, further align employee and stockholder interests, and closely link compensation with our performance. The plan is administered by the Board of Directors. Our policy is to fulfill any exercise of options from common stock that is authorized and unissued. The maximum number of shares of common stock available for grant under the plan is 7,500,000. 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.

Following is a summary of stock option activity from January 1, 2010 through December 31, 2012:

 

     Stock Options  
                   Weighted-  
            Exercise      Average  
     Number      Price Per      Exercise Price  
     of Shares      Share      Per Share  

Outstanding at January 1, 2010

     —         $ —         $ —     

Granted

     1,381,115         2.35         2.35   

Canceled/Forfeited

     —           —           —     
  

 

 

       

Outstanding at December 31, 2011

     1,381,115         2.35         2.35   

Granted

     1,969,000         2.00 - 2.79         2.10   

Canceled/Forfeited

     —           —           —     
  

 

 

       

Outstanding at December 31, 2012

     3,350,115         2.00 - 2.79         2.20   
  

 

 

       

 

The weighted-average grant-date fair value of options granted was $2.10 and $2.35 for the years ended December 31, 2012 and 2011, respectively.

For the year ended December 31, 2012, the intrinsic value of options outstanding was $2,331,698 and of options exercisable was $1,199,613. The following additional information applies to options outstanding at December 31, 2012:

 

Ranges of

Exercise

Prices

     Outstanding at
December 31,
2012
       Weighted-
Average
Remaining
Contractual
Life
       Weighted-
Average
Exercise
Price
       Excercisable at
December 31,
2012
       Weighted-
Average
Exercise
Price
 

$2.00 - $2.79

       3,350,115           9.6         $ 2.20           1,922,782         $ 2.27   

Stock-based compensation expense was $1,661,673 and $1,037,235 for the years ended December 31, 2012 and December 31, 2011, respectively. At December 31, 2012, 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 $2,435,000. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately three years.

Stock-Based Compensation - We account for all share-based payment awards made to employees and directors including stock options and employee stock purchases based on estimated fair values. We estimate the fair value of share-based payment awards on the date of grant using an option-pricing model and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period, net of forfeitures.

We use the Black-Scholes option-pricing model (“Black-Scholes”) as our method of valuation. The fair value is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair value of share-based payment awards on the date of grant as determined by the Black-Scholes model is affected by our stock price as well as other assumptions. These assumptions include, but are not limited to, the expected stock price volatility over the term of the awards, the actual and projected employee stock option exercise behaviors, and an estimated forfeiture rate.

The weighted-average estimated value of employee stock options granted during the years ended December 31, 2012 and 2011 was estimated using the Black-Scholes model with the following weighted-average assumptions:

 

     Year Ended December 31,  
     2012     2011  

Expected volatility

     155     66

Risk-free interest rate

     0.70     1.81

Expected dividends

     0.00     0.00

Expected term in years

     5.4        5.4   
Net Earnings per Share
Net Earnings per Share

14. Net Earnings per Share

Basic earnings per share (“EPS”) is calculated by dividing net income or loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated by using the weighted-average number of common shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued. Dilutive potential shares of common stock include options, warrants and convertible notes that are exercisable during the year. For 2012 and 2011, the computation of diluted loss per share excludes the options, warrants, and convertible notes as they are anti-dilutive.

 

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

 

    Year ended December 31,  
    2012     2011  

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

  $ (42,151,493   $ (1,579,120
 

 

 

   

 

 

 

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

    56,988,497        47,485,357   

Net loss per share:

   

Basic

  $ (0.74   $ (0.03
 

 

 

   

 

 

 

Diluted

  $ (0.74   $ (0.03
 

 

 

   

 

 

 

The weighted average common shares outstanding for the year ended December 31, 2011 included the weighted average common shares from the mezzanine financing and from stockholders’ deficit.

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

 

Anti-dilutive securities excluded from diluted earnings per share:

     

Stock options

     3,350,115         1,381,115   

Warrants

     8,286,689         —     

Convertible notes

     5,633,542         —     
Related Party Transactions
Related Party Transactions

15. Related Party Transactions

As discussed in Note 7, in March 2012, the three convertible related party notes elected to convert to common stock. This conversion was later modified in June 2012 so that the notes were converted at a rate of $2.35 per share for 835,409 total shares.

In March 2012, we entered into a Senior Secured Convertible Note (the “Convertible Note”) with Stockbridge Enterprises, LP, a related party. In connection with the issuance of the Convertible Note, we issued four warrants (Warrants1-1 through 1-4) in March 2012. 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 and then amended to October 1, 2015 in March 2013. 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. See Note 7 for a discussion of the Convertible Note and Note 17 for a discussion of the subsequent amendment and exercise of warrants in March 2013.

Effective October 18, 2012, we entered into a one year marketing agreement with Infinity Solutions & Consultants, controlled by an affiliate of a related party. Under the marketing agreement commission is paid on revenue achieved from approved leads and stock options issued for achieving sales targets. In addition, a ten year stock option was granted to purchase 100,000 shares of our common stock at $2.10 per share, which was market value at the time of grant, with vesting concurrent with signing of the marketing agreement.

Goodwill and Valuation Impairment
Goodwill and Valuation Impairment

16. Goodwill and Valuation Impairment

We primarily employ two methodologies for determining the fair value of a long-lived asset: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; or (ii) the present value of expected future cash flows grouped at the lowest level for which there are identifiable independent cash flows.

In connection with the Earth911 Merger, we recognized $17,636,569 of goodwill. Due to capital constraints, we have slowed down the planned expansion of Youchange, and we are not able to quantify with any certainty the future cash flows and therefore the value of the goodwill as of December 31, 2012. We have reviewed the fair value of the goodwill as of December 31, 2012 and have taken an impairment loss of $17,636,569 during the year then ended.

Subsequent Events
Subsequent Events

17. Subsequent Events

Short Term Notes Payable.

Subsequent to year end, certain short term notes payable and interest totaling $61,461 were converted into 47,917 shares of common stock. See Note 6 for further details.

Second Allonge to the Convertible Note.

As discussed in Note 7, on March 22, 2012, Earth911, Inc., a Delaware corporation and our wholly owned subsidiary (“Earth911”), entered into a Securities Purchase Agreement with Stockbridge Enterprises, L.P., a Nevada limited partnership (“Stockbridge”), pursuant to which Earth911 issued a convertible note and four warrants to Stockbridge. On each of October 10, 2012 (the “Allonge”) and 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 a Second Allonge to the Convertible Note (the “Second Allonge”), pursuant to which the parties agreed to (i) amend 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 merger 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.

On March 29, 2013, Stockbridge elected to exercise Warrants 1-1, 1-5 and 1-6 with exercisable rights in total to purchase 7,405,576 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 = (A x B) – (A x C)

D

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 the 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 the common stock on the date of exercise of the warrant.

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

Quest Option Agreement.

Effective January 15, 2013, Quest Resources Group, LLC (“QRG”) entered into an Option Agreement with Earth911 to acquire from QRG the remaining 50% of the issued and outstanding membership interests of Quest not already held by Earth911. Upon exercise of the option, Quest would become a wholly owned subsidiary of Earth911. The Option Agreement shall terminate automatically if Earth911 has not exercised the option and the closing shall not have occurred on or before April 30, 2013 (subject to extension or such later date as shall have been agreed to by the parties). Upon the exercise of the option, Quest’s Chief Executive Officer will enter into a five-year employment agreement as CEO and Quest’s President will enter into a five-year consulting agreement. Both will enter into six-year non-competition agreements.

Summary of Significant Accounting Policies (Policies)

Principals of Presentation, Consolidation and Reclassifications

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The accompanying consolidated financial statements include the operating activity of Infinity and its subsidiaries, for the years ended December 31, 2012 and 2011, as well as the equity method accounting for its investment in Quest. The Earth911 Merger was deemed to be a reverse acquisition, with Earth911 as the accounting acquirer. As such, the operating activity of Infinity (p/k/n YouChange Holdings Corp.) is consolidated in these consolidated financial statements from the date of the merger, October 17, 2012 to December 31, 2012. The operating activities for Infinity’s Earth911 subsidiary and the investment in Quest, is included for years ended December 31, 2012 and 2011. 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. Certain reclassifications have been made to prior year balances to conform to the current year presentation.

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, contingencies, assumptions used in the valuation and recognition of share-based payments and warrant liability, the realization of goodwill and 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 considered 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 2012 and 2011 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 also recognized ratably, over the term that the advertisement appears on our website. 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.

Accounts Receivable

We follow the allowance method of recognizing uncollectible accounts receivable. The allowance method recognizes bad debt expense based on a review of the individual accounts outstanding and our prior history of uncollectible accounts receivable. Our trade accounts receivable are primarily due from our customers. Credit is extended based on evaluation of each customer’s financial condition and are generally unsecured. Accounts receivable are typically due within 30 days and are stated net of an allowance for doubtful accounts. Accounts are considered past due if outstanding longer than contractual payment terms. We record an allowance on a specific basis by considering a number of factors, including the length of time trade accounts are past due, our previous loss history, the credit-worthiness of individual customers, economic conditions affecting specific customer industries, and economic conditions in general. We charge-off accounts receivable after all reasonable collection methods have been exhausted. Payments subsequently received on such receivables are credited against charge-offs in the period the payment is received.

As of December 31, 2012 and 2011, an allowance of $7,398 and nil, respectively, had been established for potentially uncollectible accounts receivable. We record delinquent finance charges on outstanding accounts receivables only if they are collected.

The changes in our allowance for doubtful accounts for the years ended December 31, 2012 and 2011 were as follows:

 

     Years ended December 31,  
     2012      2011  

Beginning balance

   $ —         $ 31,863   

Bad debt expense (recoveries)

     7,398         —     

Uncollectible accounts written off

     —           (31,863
  

 

 

    

 

 

 

Ending balance

   $ 7,398       $ —      
  

 

 

    

 

 

 

Inventories

Inventories consist of used consumer electronics and computer devices and are stated at the lower of cost (average cost method which approximates first-in, first-out) or market. Cost is determined based on our estimate of the “collection” value of each item, which is what we then pay the supplier. We establish reserves for inventory to reflect situations in which the cost of the inventory is not expected to be recovered. In evaluating whether inventory is stated at the lower of cost or market, we consider such factors as the amount of inventory on hand, estimated time required to sell such inventory and current and expected market conditions. We record provisions for inventory obsolescence as part of cost of products sold. Inventories are presented net of allowances relating to the above provisions, however, as of December 31, 2012 and 2011, no provisions were deemed to be necessary.

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 which 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, warrants issued, and the impairment measurement of goodwill. The valuation methodologies and inputs used are discussed in the respective footnotes.

Stock Options - We estimate 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 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 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.

Goodwill - The fair value of the reporting unit used in the goodwill impairment analysis performed in the current year was determined in contemplation of suspension of funding of future development activities of the reporting unit and anticipated continuing negative cash flows from operations for the unit. These were determined to be level 3 inputs.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided for on the straight-line method, over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the useful life or the remaining term of the related leases. Expenditures for repairs and maintenance are charged to operations as incurred; renewals and betterments are capitalized when they occur. Gains and losses on the disposition of property and equipment are recorded in the period incurred. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Depreciation expense for the years ended December 31, 2012 and 2011 amounted to $68,576 and $51,472, respectively.

The useful lives of property and equipment for purposes of computing depreciation are as follows:

 

Computer equipment

     3 to 5 years   

Office furniture and equipment

     5 to 7 years   

Leasehold improvements

     5 to 7 years   

We review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the asset.

Intangible Assets

Legal fees and similar capitalizable costs relating to patents, copyrights, and trademarks are capitalized as appropriate. As of December 31, 2012 and 2011, our intangible assets consisted of indefinite lived intangibles relative to the Earth911 trademark of $128,800, which were not amortized. We review the carrying amounts of indefinite lived intangible assets at least annually in our fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount of the asset may be impaired. These events or circumstances may include, but are not limited to (i) a significant decrease in the market value of an asset; (ii) a significant adverse change in the extent or manner in which an asset is used; or (iii) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset.

Impairment of Long-Lived Assets

Assets that are held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment is recognized when the estimated undiscounted cash flow generated by those assets is less than the carrying amounts of such assets. The amount of impairment is the excess of the carrying amount over the fair value of such assets. Assets held for sale, if any, are carried at the lower of carrying amount or fair value less selling costs. No impairment charges were recognized during 2012 and 2011.

Goodwill

Goodwill is not amortized; however we annually evaluate qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test as of December 31, 2012 and 2011. Our’s test of goodwill by assessing the qualitative factors requires judgment in evaluating economic conditions, industry and market conditions, cost factors and entity-specific events, including overall financial performance. After evaluating these qualitative factors as of December 31, 2012 and 2011, the fair value was determined to not exceed the carrying value of the assets resulting in an impairment loss in 2012. Subsequent increases in goodwill value are not recognized in the consolidated financial statements. See Note 16 regarding the $17,636,569 impairment of goodwill recognized during 2012. No goodwill impairment was recorded as of December 31, 2011.

Taxes Collected From Customers and Remitted To Government Authorities

Taxes collected from customers and remitted to governmental authorities are presented in the accompanying statements of operations on a net basis.

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 2012 and 2011 would be anti-dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes (see Note 14), and total 17,270,346 shares at December 31, 2012, and 1,381,115 shares at December 31, 2011.

Concentrations

Financial instruments that potentially subject us to credit risk consist principally of cash, cash equivalents and trade accounts receivable. We invest our cash and cash equivalents with commercial banks in Arizona. Cash and cash equivalents are at risk to the extent that they exceed the Federal Deposit Insurance Corporation (“FDIC”) insured level per institution for interest bearing accounts. We have never experienced any losses related to these balances. All of our non-interest bearing cash balances were at FDIC insured institutions through December 31, 2012 and were fully insured due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and our non-interest bearing cash balances may again exceed federally insured limits.

We sell our products and services primarily to consumers, advertisers and businesses without requiring collateral; however, we routinely assess the financial condition of our customers and maintain allowances for anticipated losses. The following table discloses the number of customers that accounted for more than 10% of our annual revenues and related receivable balances:

 

     Customers Exceeding 10%  
     of Revenues  

Year

   Number of
Customers
     Revenues
Combined Percent
    Accounts Receivable
Combined Percent
 

2012

     —           0     0

2011

     2         20     30

 

The following table discloses the number of customers that accounted for more than 10% of Quest’s annual revenues and receivable their related receivable balances:

 

     Customers Exceeding 10%
of Revenues
 

Year

   Number of
Customers
     Revenues
Combined Percent
    Accounts Receivable
Combined Percent
 

2012

     1         89     71

2011

     1         94     82

We believe we have no significant credit risk in excess of recorded reserves.

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.

We consider whether the fair value of our investment in Quest has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If there is a decline in the fair value below the carrying value of this investment, we will recognize an impairment charge for such difference. We performed an annual impairment analysis as of December 31, 2012 and 2011, resulting in no impairment losses, as we determined the fair value exceeded the carrying value of the assets. We will continue to evaluate our investment for potential impairment based upon any changes to Quest’s operations or its operating business environment. No impairment charges were recognized for our investment in Quest for the years ended December 31, 2012 and 2011.

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.

Advertising

Our advertising costs are charged to expense when incurred. During the years ended December 31, 2012 and 2011, advertising expense totaled $108,590 and $14,370, respectively.

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. See Note 13 for a description of our share-based compensation plan and information related to awards granted under the plan.

Reverse Acquisition

We have accounted for the reverse acquisition discussed above in accordance with ASC 805-40 (Reverse Acquisitions). The 8,666,488 shares (post-split) of Infinity outstanding immediately prior to the reverse acquisition represent the consideration transferred for the Earth 911 Merger.

Summary of Significant Accounting Policies (Tables)

The changes in our allowance for doubtful accounts for the years ended December 31, 2012 and 2011 were as follows:

 

     Years ended December 31,  
     2012      2011  

Beginning balance

   $ —         $ 31,863   

Bad debt expense (recoveries)

     7,398         —     

Uncollectible accounts written off

     —           (31,863
  

 

 

    

 

 

 

Ending balance

   $ 7,398       $ —      
  

 

 

    

 

 

 

The useful lives of property and equipment for purposes of computing depreciation are as follows:

 

Computer equipment

     3 to 5 years   

Office furniture and equipment

     5 to 7 years   

Leasehold improvements

     5 to 7 years   

The following table discloses the number of customers that accounted for more than 10% of our annual revenues and related receivable balances:

 

     Customers Exceeding 10%  
     of Revenues  

Year

   Number of
Customers
     Revenues
Combined Percent
    Accounts Receivable
Combined Percent
 

2012

     —           0     0

2011

     2         20     30

The following table discloses the number of customers that accounted for more than 10% of Quest’s annual revenues and receivable their related receivable balances:

 

     Customers Exceeding 10%
of Revenues
 

Year

   Number of
Customers
     Revenues
Combined Percent
    Accounts Receivable
Combined Percent
 

2012

     1         89     71

2011

     1         94     82
Property and Equipment (Tables)
Components of Property and Equipment

At December 31, 2012 and December 31, 2011, property and equipment consisted of the following:

 

     As of December 31,  
     2012     2011  

Computer equipment

   $ 157,305      $ 145,189   

Office furniture and equipment

     209,026        199,374   

Leasehold improvements

     6,261        6,261   
  

 

 

   

 

 

 
     372,592        350,824   

Less: accumulated depreciation

     (215,904     (146,046
  

 

 

   

 

 

 
   $ 156,688      $ 204,778   
  

 

 

   

 

 

 
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:

 

     As of December 31,  
     2012      2011  

Compensation

   $ 191,393       $ 433,821   

Deferred rent obligation

     138,926         101,608   

Professional fees

     302,818         46,000   

Accrued interest and other

     15,016         1,400   
  

 

 

    

 

 

 
   $ 648,153       $ 582,829   
  

 

 

    

 

 

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

The following convertible notes payable were outstanding as of December 31, 2012:

 

     As of December 31,  
     2012         2011      

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        —     

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

     132,500        —     

Less: unamortized discounts due to beneficial conversions features

     (33,394     —     
  

 

 

   

 

 

 

Total convertible notes payable - short term, net of discounts

   $ 99,106      $ —     
  

 

 

   

 

 

 
Long Term Debt and Capital Lease Obligations (Tables)

At December 31, 2012 and December 31, 2011, total debt outstanding consisted of the following:

 

     As of December 31,  
     2012     2011  

Three convertible notes payable to related parties, principal plus accrued interest due July 2013, interest and repayment provisions discussed further below

   $ —        $ 6,276,897   

Senior secured convertible notes payable to a related party, 9% interest due monthly in arrears, due October 2014, repayment provisions discussed further below (Net of discount of $1,313,897 at December 31, 2012)

     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

     72,128        127,923   

Note payable with monthly payments of $3,333 through January 2012

     —          3,333   
  

 

 

   

 

 

 

Total

     758,231        6,408,153   

Less: current maturities

     (72,128     (59,127
  

 

 

   

 

 

 

Long-term portion

   $ 686,103      $ 6,349,026   
  

 

 

   

 

 

 

The following table summarizes future maturities of debt and capital lease obligations, as amended, as of December 31, 2012:

 

Year Ending December 31,

   Amount  

2013

   $ 72,128   

2014

     —      

2015

     2,000,000   
  

 

 

 

Subtotal (assuming repayment in cash)

     2,072,128   

Less discount on Convertible Note

     (1,313,897

Less current maturities

     (72,128
  

 

 

 

Total

   $ 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:

 

     Years ended December 31,  
     2012      2011  

Condensed operating statement information:

     

Net sales

   $ 130,621,675       $ 121,888,280   

Gross margin

     12,934,339         11,430,986   

Income from operations

     4,005,383         4,904,646   

Net income

     3,929,080         4,197,360   

Company’s equity method income allocation

     1,964,540         2,233,028   
     As of December 31,  
     2012      2011  

Condensed balance sheet information:

     

Current assets

   $ 20,718,638       $ 24,916,207   

Long-term assets

     2,118,295         1,885,098   
  

 

 

    

 

 

 

Total Assets

   $ 22,836,933       $ 26,801,305   
  

 

 

    

 

 

 

Current liabilities

   $ 17,925,175       $ 24,067,022   

Long-term liabilities

     —           —     

Equity

     4,911,758         2,734,283   
  

 

 

    

 

 

 

Total liabilities and members’ equity

   $ 22,836,933       $ 26,801,305   
  

 

 

    

 

 

 
Income Taxes (Tables)

The components of net deferred taxes are as follows:

 

     As of December 31,  
     2012     2011  

Deferred tax assets (liabilities):

    

Net operating loss

     1,029,000        332,900   

Stock-based compensation

     1,177,000        414,900   

Accrued interest expense

     155,000        134,300   

Allowance for doubtful accounts

     22,000        12,300   

Deferred lease liability

     50,000        38,300   
  

 

 

   

 

 

 

Total deferred tax assets

     2,433,000        932,700   

Less: valuation allowance

     (2,433,000     —     
  

 

 

   

 

 

 

Net deferred taxes

   $ —        $ 932,700   
  

 

 

   

 

 

 

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:

 

     Year Ended December 31,  
     2012     2011  

U.S. federal statutory rate applied to pretax income

   $ (11,713,000   $ (834,000

Permanent differences

     10,344,000        106,000   

State taxes and other

     (123,000     (147,000

Change in valuation allowance

     2,433,000        —     
  

 

 

   

 

 

 
   $ 941,000      $ (875,000
  

 

 

   

 

 

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

The following table summarizes the warranty liability valuation for the twelve months ended December 31, 2012:

 

Description

   Fair Value Measurements
Warrant Liability
 

Beginning balance, December 31, 2011

   $ —     

Issuances (Level 3)

     18,742,526   

Total (gains) or losses (Level 1 and 2)

     1,490,812   
  

 

 

 

Ending balance, December 31, 2012

   $ 20,233,338   
  

 

 

 
Commitments and Contingencies (Tables)
Schedule of Future Minimum Rental Payments for Operating Leases

The following is a schedule, by year, of future minimum rental payments required under the operating lease agreement as of December 31, 2012:

 

Year Ended December 31,

   Amount  

2013

   $ 301,396   

2014

     315,517   

2015

     305,320   

2016

     286,870   

2017

     72,832   
  

 

 

 
   $ 1,281,935   
  

 

 

 
Stockholders' Equity (Tables)

During 2012, we issued shares of common stock as follows:

 

     Common Stock         
     Shares      Amount  

Related party notes conversions (See Note 7)

     835,409       $ 6,389,042   

Deferred compensation converted to stock

     110,490         260,000   

Mezzanine financing reclassified to equity (See Note 7 and 12)

     687,051         1,375,933   

Rights offering

     491,430         414,300   

Common stock issued for loan fees

     138,112         117,000   

Shares issued to effect reverse merger

     8,666,488         17,332,975   

Common stock issued for services

     108,083         249,025   

Note conversions and discounts (see Note 6)

     155,536         215,066   
  

 

 

    

 

 

 
     11,192,599       $ 26,353,341   
  

 

 

    

 

 

 

The following table summarizes the warrants issued and outstanding as of December 31, 2012:

 

Warrants Issued and Outstanding as of December 31, 2012

 
     Date of      Exercise
Price
     Shares of  

Description

   Issuance      Expiration         Common Stock  

Exercisable warrants

           

Warrant 1-1

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

Warrant 1-5

     10/10/2012         10/9/2017       $ 0.37         5,524,461   
           

 

 

 

Total exercisable warrants

              6,905,576   

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

  

        8,286,689   
           

 

 

 

Following is a summary of stock option activity from January 1, 2010 through December 31, 2012:

 

     Stock Options  
                   Weighted-  
            Exercise      Average  
     Number      Price Per      Exercise Price  
     of Shares      Share      Per Share  

Outstanding at January 1, 2010

     —         $ —         $ —     

Granted

     1,381,115         2.35         2.35   

Canceled/Forfeited

     —           —           —     
  

 

 

       

Outstanding at December 31, 2011

     1,381,115         2.35         2.35   

Granted

     1,969,000         2.00 - 2.79         2.10   

Canceled/Forfeited

     —           —           —     
  

 

 

       

Outstanding at December 31, 2012

     3,350,115         2.00 - 2.79         2.20   
  

 

 

       

The following additional information applies to options outstanding at December 31, 2012:

 

Ranges of

Exercise

Prices

     Outstanding at
December 31,
2012
       Weighted-
Average
Remaining
Contractual
Life
       Weighted-
Average
Exercise
Price
       Excercisable at
December 31,
2012
       Weighted-
Average
Exercise
Price
 

$2.00 - $2.79

       3,350,115           9.6         $ 2.20           1,922,782         $ 2.27   

The weighted-average estimated value of employee stock options granted during the years ended December 31, 2012 and 2011 was estimated using the Black-Scholes model with the following weighted-average assumptions:

 

     Year Ended December 31,  
     2012     2011  

Expected volatility

     155     66

Risk-free interest rate

     0.70     1.81

Expected dividends

     0.00     0.00

Expected term in years

     5.4        5.4   
Net Earnings per Share (Tables)

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

 

    Year ended December 31,  
    2012     2011  

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

  $ (42,151,493   $ (1,579,120
 

 

 

   

 

 

 

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

    56,988,497        47,485,357   

Net loss per share:

   

Basic

  $ (0.74   $ (0.03
 

 

 

   

 

 

 

Diluted

  $ (0.74   $ (0.03
 

 

 

   

 

 

 

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

 

Anti-dilutive securities excluded from diluted earnings per share:

     

Stock options

     3,350,115         1,381,115   

Warrants

     8,286,689         —     

Convertible notes

     5,633,542         —     
The Company and Description of Business and Future Liquidity Needs - Additional Information (Detail) (USD $)
1 Months Ended 12 Months Ended
Oct. 17, 2012
Dec. 31, 2012
Directors
Dec. 31, 2011
Oct. 18, 2012
Dec. 31, 2010
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Common stock, shares authorized
 
100,000,000 
100,000,000 
100,000 
 
Preferred stock, shares authorized
 
10,000,000 
10,000,000 
 
 
Percentage of common stock held
 
85.00% 
 
 
 
Reverse split for common stock
1 for 5 reverse split 
 
 
 
 
Number of classes of directors
 
 
 
 
Net loss incurred
 
$ 42,151,493 
$ 1,579,120 
 
 
Cash in operations
 
(3,820,068)
(3,127,347)
 
 
Working capital
 
600,294 
 
 
 
Cash and cash equivalents
 
485,728 
1,274,018 
 
388,957 
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% 
 
 
 
Net loss incurred
 
$ (3,929,080)
$ (4,197,360)
 
 
Amended And Restated [Member]
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Common stock, shares authorized
 
100,000,000 
 
 
 
Preferred stock, shares authorized
 
10,000,000 
 
 
 
Common Stock [Member]
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Shares of common stock issued exchanged
 
49,110,123 
 
 
 
Reverse split for common stock
 
1:5 
 
 
 
Options Held [Member]
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Reserved for issuance an aggregate of shares issuable upon the exercise of options and warrants
 
1,831,115 
 
 
 
Warrant [Member]
 
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
Reserved for issuance an aggregate of shares issuable upon the exercise of options and warrants
 
8,786,689 
 
 
 
Summary of Significant Accounting Policies - Additional Information (Detail) (USD $)
12 Months Ended
Dec. 31, 2012
D
Dec. 31, 2011
Dec. 31, 2010
Significant Accounting Policies [Line Items]
 
 
 
Accounts receivable, due period
30 
 
 
Allowance for accounts receivable
$ 7,398 
    
$ 31,863 
Provisions on inventories
 
Depreciation expense
68,576 
51,472 
 
Impairment charges recognized on long-lived assets
 
Goodwill Impairment recognized
17,636,569 
 
 
Potentially dilutive securities include options, warrants, and convertible promissory notes
17,270,346 
1,381,115 
 
Insurance coverage
250,000 
 
 
Impairment charges recognized for investment
 
Tax benefit percentage of being realized upon ultimate settlement
50.00% 
 
 
Advertising expense
108,590 
14,370 
 
Infinity outstanding shares prior reverse acquisition
8,666,488 
 
 
Minimum [Member]
 
 
 
Significant Accounting Policies [Line Items]
 
 
 
Percentage of voting right
20.00% 
 
 
Maximum [Member]
 
 
 
Significant Accounting Policies [Line Items]
 
 
 
Percentage of voting right
50.00% 
 
 
Trademark [Member]
 
 
 
Significant Accounting Policies [Line Items]
 
 
 
Indefinite lived intangible assets
128,800 
128,800 
 
Ancept Asset[Member]
 
 
 
Significant Accounting Policies [Line Items]
 
 
 
Goodwill Impairment recognized
$ 17,636,569 
$ 0 
 
Summary of Significant Accounting Policies - Changes in Allowance for Doubtful Accounts (Detail) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Allowance For Doubtful Accounts Receivable [Line Items]
 
 
Beginning balance
    
$ 31,863 
Bad debt expense (recoveries)
7,398 
 
Uncollectible accounts written off
 
(31,863)
Ending balance
$ 7,398 
    
Summary of Significant Accounting Policies - Schedule of Property and Equipment Useful Lives (Detail)
12 Months Ended
Dec. 31, 2012
Minimum [Member]
Computer equipment [Member]
Dec. 31, 2012
Minimum [Member]
Office furniture and equipment [Member]
Dec. 31, 2012
Minimum [Member]
Leasehold improvements [Member]
Dec. 31, 2011
Maximum [Member]
Computer equipment [Member]
Dec. 31, 2011
Maximum [Member]
Office furniture and equipment [Member]
Dec. 31, 2011
Maximum [Member]
Leasehold improvements [Member]
Significant Accounting Policies [Line Items]
 
 
 
 
 
 
Useful lives of property and equipment
3 years 
5 years 
5 years 
5 years 
7 years 
7 years 
Summary of Significant Accounting Policies - Schedule of Number of Customers that Accounted for More than Ten Percentage of Annual Sales and Receivable Balances (Detail)
Dec. 31, 2012
Dec. 31, 2011
Person
Unusual Risk or Uncertainty [Line Items]
 
 
Customer Exceeding 10% of Revenues, Number of Customers
 
Customers Exceeding 10% of Revenues, Accounts Receivable Combined Percent
0.00% 
20.00% 
Customers Exceeding 10% of Revenues, Accounts Receivable Combined Percent
0.00% 
30.00% 
Quest Resource Management Group, LLC [Member]
 
 
Unusual Risk or Uncertainty [Line Items]
 
 
Customer Exceeding 10% of Revenues, Number of Customers
Customers Exceeding 10% of Revenues, Accounts Receivable Combined Percent
89.00% 
94.00% 
Customers Exceeding 10% of Revenues, Accounts Receivable Combined Percent
71.00% 
82.00% 
Inventories - Additional Information (Detail) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Inventories Net [Line Items]
 
 
Finished goods inventory
$ 4,292 
$ 0 
Reserve for inventory obsolescence of consumer electronics and computer devices
$ 0 
 
Property and Equipment - Components of Property and Equipment (Detail) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
$ 372,592 
$ 350,824 
Less: accumulated depreciation
(215,904)
(146,046)
Property plant and equipment Net
156,688 
204,778 
Computer equipment [Member]
 
 
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
157,305 
145,189 
Office furniture and equipment [Member]
 
 
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Property plant and equipment Gross
209,026 
199,374 
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 $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Cost And Accumulated Depreciation And Amortization Of Property Plant And Equipment [Line Items]
 
 
Accumulated depreciation of leased equipment
$ 85,326 
$ 48,865 
Interest expense
16,200 
 
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
$ 187,357 
$ 187,357 
Accrued Expenses and Other Current Liabilities - Summary of Accrued Expenses and Other Current Liabilities (Detail) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Schedule Of Accrued Liabilities [Line Items]
 
 
Compensation
$ 191,393 
$ 433,821 
Deferred rent obligation
138,926 
101,608 
Professional fees
302,818 
46,000 
Accrued interest and other
15,016 
1,400 
Accrued Liabilities, Total
$ 648,153 
$ 582,829 
Accrued Expenses and Other Current Liabilities - Additional Information (Detail) (USD $)
1 Months Ended
Jun. 30, 2012
Schedule Of Accrued Liabilities [Line Items]
 
Deferred compensation
$ 260,000 
Common Stock [Member]
 
Schedule Of Accrued Liabilities [Line Items]
 
Number of shares converted
110,490 
Per share value of common stock
$ 2.35 
Convertible Notes Payable - Additional Information (Detail) (USD $)
12 Months Ended 1 Months Ended
Dec. 31, 2012
Oct. 18, 2012
Dec. 31, 2011
Oct. 1, 2010
Dec. 31, 2012
Convertible Notes Payable [Member]
Dec. 31, 2012
Convertible Notes Payable [Member]
Accrued Interest [Member]
Oct. 31, 2011
Convertible note payable to unrelated parties, issuance date of October 2011 [Member]
Oct. 31, 2011
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]
Apr. 30, 2012
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]
Aug. 31, 2012
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]
Sep. 30, 2012
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]
Sep. 30, 2012
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]
Oct. 31, 2012
Convertible note payable to unrelated parties, issuance date of October 2012 [Member]
Oct. 31, 2012
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]
Notes Payable [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt instrument maturity, Starting date
 
 
 
 
Oct. 17, 2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt instrument maturity, Ending date
 
 
 
 
Dec. 31, 2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt instrument principal amount
 
 
 
 
$ 142,218 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt instrument interest amount
 
 
 
 
7,747 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares converted in to common stock
 
 
 
 
118,035 
108,680 
 
9,278 
 
3,130 
 
8,460 
 
8,339 
 
10,418 
 
 
 
8,292 
 
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 
$ 2.10 
$ 0.001 
$ 0.72 
 
 
$ 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 $)
Dec. 31, 2012
Dec. 31, 2011
Notes Payable [Line Items]
 
 
Total convertible notes payable - short term
$ 132,500 
 
Less: unamortized discounts due to beneficial conversions features
(33,394)
 
Total convertible notes payable - short term, net of discounts
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 
 
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 $)
Dec. 31, 2012
Dec. 31, 2011
Long Term Debt And Equity Financings [Line Items]
 
 
Three convertible notes payable to related parties, principal plus accrued interest due July 2013, interest and repayment provisions discussed further below
 
$ 6,276,897 
Note payable with monthly payments of $3,333 through January 2012
 
3,333 
Debt and Capital lease obligation, Total
758,231 
6,408,153 
Less: current maturities
(72,128)
(59,127)
Long-term portion
686,103 
6,349,026 
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 2014, repayment provisions discussed further below (Net of discount of $1,313,897 at December 31, 2012)
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
$ 72,128 
$ 127,923 
Long Term Debt and Capital Lease Obligations - Summary of Long Term Debt (Parenthetical) (Detail) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Long Term Debt And Equity Financings [Line Items]
 
 
Debt instrument, maturity date
July 2013 
 
Debt Instrument Net of discount
$ 1,313,897 
 
Interest rate on convertible notes
9.00% 
 
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 
$ 3,333 
Senior Notes [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Debt instrument, maturity date
October 2014 
 
Long Term Debt and Capital Lease Obligations - Additional Information (Detail) (USD $)
1 Months Ended 12 Months Ended 1 Months Ended 12 Months Ended 12 Months Ended 1 Months Ended 12 Months Ended 12 Months Ended 12 Months Ended 12 Months Ended
Jun. 30, 2012
Oct. 31, 2010
Dec. 31, 2012
Oct. 18, 2012
Mar. 31, 2012
Warrant
Dec. 31, 2011
Oct. 1, 2010
NotesPayable
Oct. 31, 2012
Stockbridge Enterprises, LP [Member]
Dec. 31, 2012
Stockbridge Enterprises, LP [Member]
Mar. 29, 2013
Stockbridge Enterprises, LP [Member]
Dec. 31, 2012
Before Maturity Period [Member]
Oct. 31, 2012
Before Maturity Period [Member]
Dec. 31, 2012
After Maturity Period [Member]
Oct. 31, 2012
After Maturity Period [Member]
Dec. 31, 2012
Convertible Debt [Member]
Oct. 31, 2012
Amendment [Member]
Stockbridge Enterprises, LP [Member]
Dec. 31, 2012
Warrant 1-5 [Member]
Oct. 31, 2012
Warrant 1-5 [Member]
Dec. 31, 2012
Warrant 1-1 [Member]
Mar. 31, 2012
Warrant 1-1 [Member]
Dec. 31, 2012
Warrant 1-2 [Member]
Dec. 31, 2012
Warrant 1-3 [Member]
Dec. 31, 2012
Warrant 1-4 [Member]
Dec. 31, 2012
Warrant 1-6 [Member]
Dec. 31, 2012
Warrant [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]
Dec. 31, 2012
Initial Warrant [Member]
Long Term Debt Maturity [Line Items]