Source: http://d1lge852tjjqow.cloudfront.net/CIK-0001442236/9f410271-e332-4345-b880-25cbe1375202.html
Timestamp: 2020-01-24 13:42:40
Document Index: 238049902

Matched Legal Cases: ['arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911', 'arth911']

QUEST RESOURCE HOLDING CORP, 10-Q filed on 8/14/2014
�|�Convertible Note Payable
�|�Convertible Note Payable (Tables)
�|�Convertible Note Payable - Additional...
�|�Convertible Note Payable - Summary...
97,050,674�
$�3,196,877�
Accounts receivable, less allowance for doubtful accounts of $360,887 and $319,735 as of June 30, 2014 and December 31, 2013, respectively
24,220,169�
726,064�
28,143,110�
555,578�
16,312,104�
111,609�
103,459,691�
23,629,752�
2,155,263�
481,958�
Long-term debt and capital lease obligations - current portion
16,418�
Convertible notes payable - short term
31,533,391�
24,793�
Long-term senior secured convertible notes - related parties, net of discount of $3,748,631 and $4,656,934 as of June 30, 2014 and December 31, 2013, respectively
18,251,369�
49,809,553�
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of June 30, 2014 and December 31, 2013, respectively
Common stock, $0.001 par value, 200,000,000 shares authorized, 97,050,674 and 95,814,565 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively
97,051�
122,393,956�
(68,840,869)
53,650,138�
$�103,459,691�
$�360,887�
$�3,748,631�
$�42,514,265�
$�402,014�
$�80,674,315�
$�715,502�
39,005,550�
108,628�
73,833,185�
148,321�
3,508,715�
293,386�
6,841,130�
567,181�
3,491,507�
2,398,731�
6,485,215�
4,657,533�
953,499�
14,813�
1,905,162�
29,793�
4,445,006�
2,413,544�
8,390,377�
4,687,326�
(936,291)
(2,120,158)
(1,549,247)
(4,120,145)
(890,453)
(292,220)
(1,765,920)
(600,634)
Financing cost for senior secured convertible notes - related parties
(2,065,634)
(1,826,744)
(2,412,378)
(3,315,167)
(6,185,779)
103,155�
578,951�
(2,309,223)
(5,606,828)
$�(1,826,744)
$�(2,309,223)
$�(3,315,167)
$�(5,606,828)
96,649,466�
96,237,784�
61,670,008�
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)�(USD $)
520,414�
2,385,000�
2,383,807�
28,978�
23,201�
$�53,650,138�
$�97,051�
$�122,393,956�
$�(68,840,869)
142,461�
1,762,701�
908,303�
478,473�
(578,951)
580,573�
1,573,010�
Financing costs for senior convertible notes - related parties
(3,412,367)
7,392�
(307,861)
7,760�
39,997�
141,204�
(541,332)
240,022�
247,059�
129,454�
(3,866,761)
(2,048,164)
(437,840)
793,507�
4,877,048�
961,429�
519,893�
(293,228)
3,196,877�
192,500�
732,018�
83,792�
178,858�
Discount to senior convertible note - related party
$�29,001�
$�113,993�
The accompanying consolidated financial statements include the accounts of Quest Resource Holding Corporation (“QRHC”), formerly Infinity Resources Holdings Corp., and its subsidiaries, Earth911, Inc. (“Earth911”), Quest Resource Management Group, LLC (“Quest”), Landfill Diversion Innovations, LLC, and Youchange, Inc. (“YouChange”) (collectively, “QRHC”, the “Company”, “we”, “us”, or “our company”). On October 28, 2013, we changed our name to Quest Resource Holding Corporation, increased our shares of common stock authorized for issuance to 200,000,000 and changed our trading symbol to “QRHC.”
On July 16, 2013, we acquired the membership interests of Quest held by Quest Resource Group LLC (“QRG”), comprising 50% of Quest (the “Quest Interests”). Prior to July 16, 2013, our wholly owned subsidiary, Earth911, held the remaining 50% membership interest of Quest. Upon acquisition of the Quest Interests, we assigned the Quest Interests to Earth911 so that Earth911 now owns Quest and Quest is now our indirect wholly owned subsidiary. We consolidated Quest in these financial statements for the quarter ended June 30, 2014.
Operations – We are an environmental solutions company that serves as a single-source provider of full service recycling and waste stream management solutions, as well as an environmental program services and information provider. 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. Our principal offices are located in Frisco, Texas.
Pro forma Three and Six Months Ended June 30, 2013 Operating Results – As discussed above and in Note 10 to these financial statements, we previously accounted for Quest as an equity investment. On July 16, 2013, we acquired the remaining 50% membership interests of Quest and now hold 100% of the membership interests of Quest. The accompanying financial statements consolidate the results of operations of Quest for the quarter ended June 30, 2014.
The following table summarizes our pro forma consolidated operating results for the three and six months ended June 30, 2013, assuming Quest had been a wholly owned subsidiary and 100% of Quest’s operations were included in the relevant periods:
$ 32,655,802 $ 63,620,354
2,865,440 6,436,589
(1,821,926 ) 5,493,425
(2,102,913 ) (4,448,926 )
The consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements for the year ended December 31, 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.
The accompanying consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at June 30, 2014, and the results of our operations and cash flows for the periods presented. We derived the December 31, 2013 consolidated balance sheet data from audited financial statements, but did not include all disclosures required by GAAP.
Through July 16, 2013, Quest was deemed to be a separate operating company and as such, there were no intercompany transactions that required elimination at that time. All other intercompany accounts and transactions have been eliminated in consolidation, including transactions between QRHC and Quest subsequent to July 16, 2013. Certain reclassifications have been made to prior year balances to conform to the current year presentation. Interim results are subject to seasonal variations, and the results of operations for the six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.
As Quest, Earth911, and YouChange are operating as ecology based green service companies, we did not deem segment reporting necessary.
We provide businesses with management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their business. We utilize third-party subcontractors to execute the collection, transport, and recycling or disposal of used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as management fees. Generally, when we are primarily obligated in a transaction, have latitude in establishing prices and selecting suppliers, have credit risk, or have several but not all of these indicators, we record revenue gross and record amounts collected from customers for sales tax on a net basis. In a situation where we are not primarily obligated and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, we would record the net amounts as management fees earned. Currently, we have no contracts accounted for as management fees.
Earth911 revenue primarily represents licensing fees that are recognized ratably over the term of the license. We derive some revenue from advertising contracts, which we recognize ratably, over the term that the advertisement appears on our website.
ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value as follows:
Stock Options - We estimate the fair value of stock options on the grant date in accordance with ASC Topic 718 using the Black-Scholes-Merton valuation model. Significant Level 3 assumptions used in the calculation are as follows:
• We determine the expected term using the simplified method for plain vanilla options by averaging the contractual term and vesting period of the award due to the unavailability of appropriate statistical data required to properly estimate the expected term in accordance with SEC Staff Accounting Bulletin No. 107;
• We measure expected volatility using the historical changes in the market price of our common stock and applicable comparison companies, disregarding identifiable periods of extraordinarily volatile share prices due to certain events that are not expected to recur during the expected term;
• We use the risk-free interest rate 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
• We base forfeitures on the history of cancellations of options granted by us and our analysis of potential future forfeitures.
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 2014 and 2013 would be anti-dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes totaled 19,287,215 and 13,107,162 shares at June 30, 2014 and 2013, respectively.
$ (1,826,744 ) $ (2,309,223 ) $ (3,315,167 ) $ (5,606,828 )
Weighted - average common shares outstanding - denominator for basic and diluted earnings per share
96,649,466 65,338,152 96,237,784 61,670,008
$ (0.02 ) $ (0.04 ) $ (0.03 ) $ (0.09 )
4,996,215 3,417,115
3,291,000 1,381,113
11,000,000 8,308,934
19,287,215 13,107,162
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. Prior to July 17, 2013, we accounted for the investment in Quest under the equity method of accounting, in which the investee company’s accounts were not consolidated within our consolidated balance sheet and statement of operations. We reflected our share of earnings or losses of the investee company in the caption “Equity in Quest Resource Management Group, LLC income” in our consolidated statement of operations. Subsequent to our acquisition of the Quest Interests, we have consolidated the operational activity of Quest with our company.
We recognize deferred tax assets and liabilities 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. We establish valuation allowances 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. We review our estimates of future taxable income annually. We first analyze all tax positions 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, we measure the tax benefit 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 subject to payment of penalties, we recognize an expense for the amount of the statutory penalty in the period when we take the position on the income tax return. If we did not recognize the penalty in the period when we initially took the position, we recognize the expense in the period when we change our judgment about meeting minimum statutory thresholds related to the initial position taken.
We expense all share-based grants to employees, including grants of employee stock options, based on their estimated fair values at grant date, in accordance with ASC Topic 718. We record compensation expense for stock options over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes-Merton 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.
As of June 30, 2014 and December 31, 2013, finished goods inventories were nil and $3,251, respectively, and consisted of composite heaters, with no reserve for inventory obsolescence at either date.
At June 30, 2014 and December 31, 2013, property and equipment consisted of the following:
$ 544,984 $ 544,984
727,648 790,987
329,210 239,662
479,135 458,257
17,830 12,363
2,098,807 2,046,253
(1,543,229 ) (1,400,768 )
$ 555,578 $ 645,485
We lease certain computer equipment under agreements that are classified as capital leases. The cost of equipment under these capital leases was $50,470 and $49,163 at June 30, 2014 and December 31, 2013, respectively, and we record it in the consolidated financial statements as property and equipment. Accumulated depreciation of the leased equipment at June 30, 2014 and December 31, 2013 was $5,047, and $1,402, respectively.
June 30, 2014 Estimated
5 years $ 12,720,000 $ 2,438,000 $ 10,282,000
7 years 6,230,000 852,917 5,377,083
7 years 230,683 230,683 —
7 years 437,841 1,254 436,587
5 years 307,153 90,719 216,434
$ 19,925,677 $ 3,613,573 $ 16,312,104
June 30, 2014 and December 31, 2013 Estimated
We compute amortization using the straight-line method over the estimated useful lives of the assets. The amortization expense related to intangible assets was $880,605 for the quarter ended June 30, 2014 and $1,762,701 for the six months ended June 30, 2014, with no comparable expense for the comparable periods ended June 30, 2013. We have no indefinite-lived intangible assets other than goodwill. The goodwill is not deductible for tax purposes.
$ 820,020 $ 1,114,252
752,787 930,274
178,278 484,134
164,959 40,241
239,219 56,206
$ 2,155,263 $ 2,673,770
On December 15, 2010, Quest entered into a Revolving Credit Note and Loan Agreement with Regions Bank (“Regions”), a national banking association. This agreement provides Quest with a loan facility up to $10,000,000 for working capital with advances generally limited to 80% of eligible accounts receivable from Quest’s largest customer and 85% of all other eligible accounts receivable. The interest on the outstanding principal amount accrues daily and is payable monthly based on a fluctuating interest rate per annum, which is the base rate plus 1.50% (2.65% as of June 30, 2014). The base rate for any day is the greater of (a) the Federal funds rate plus one-half of 1%, (b) Region’s published effective prime rate, or (c) the Eurodollar rate for such day based on an interest period of one month. To secure the amounts due under the agreement, Quest granted Regions a security interest in all of its assets. Quest had $5,250,000 outstanding and $4,097,235 available to be borrowed as of June 30, 2014.
On May 9, 2014, Quest entered into a Sixth Amendment to the Loan Agreement with Regions Bank. The Loan Agreement was amended to, among other things, (i) add a $5.0 million accordion feature, (ii) increase the Borrowing Base, (iii) reduce the Applicable Margin for Eurodollar Rate Loans by 1% per annum, (iv) add an unused fee of 0.25% per annum, (v) extend the maturity date to May 31, 2015, (vi) release the Guaranty of our Chief Executive Officer previously executed in favor of the Lender, (vii) add our company and our wholly owned subsidiary, Earth911, Inc., as Guarantors, (viii) allow for Permitted Acquisitions, and (ix) delete two of the financial covenants and modify the other financial covenants in certain respects.
8. Convertible Note Payable
During the six months ended June 30, 2014, $25,000 of principal and $4,001 of interest was converted into 23,201 shares of our common stock. We treat the intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which we do not bifurcate, separately from the convertible note payable, and we may not settle in cash upon conversion, as a discount to the convertible note payable. We amortize this discount over the period from the date of issuance to the date the note is due using the effective interest method. If we retire the note payable prior to the end of its contractual term, we expense the unamortized discount in the period of retirement to interest expense. In general, we measure the beneficial conversion feature 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 note payable was outstanding as of June 30, 2014 and December 31, 2013:
— $ 25,000
During September 2012, we issued for cash a $25,000 convertible note to an unrelated, accredited third party. The note matured six months from the date of issuance. The note bore interest at a rate of 10.0% per annum and was 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 we entered into the note agreement, we recognized a beneficial conversion feature of $17,500 for this convertible note.
At June 30, 2014 and December 31, 2013, total long-term debt outstanding consisted of the following:
Secured convertible notes payable to related parties, 7% interest due monthly in arrears, due July 2016, repayment provisions discussed further below (Net of discount of $3,748,631 and $4,656,934 as of June 30, 2014 and December 31, 2013, respectively)
$ 18,251,369 $ 17,343,066
41,211 49,163
18,292,580 17,392,229
(16,418 ) (16,096 )
$ 18,276,162 $ 17,376,133
Convertible Secured Promissory Notes – Quest Acquisition - In connection with our acquisition of Quest on July 16, 2013, we issued convertible secured promissory notes with a total principal amount of $22,000,000 to the owners of QRG: the Chief Executive Officer of Quest and the former President of Quest, who are also related parties of our company. The convertible secured promissory notes (collectively, the “Sellers Notes”) are each secured by a first-priority security interest in a 25% membership interest held by Earth911 in Quest (comprising a total of 50% of the membership interests of Quest), as set forth in security and membership interest pledge agreements, by and between Earth911 and the sellers. The Sellers Notes accrue interest at a rate of 7% per annum and are payable on a monthly basis on the 5th day of the month beginning on September 5, 2013. The principal amount will be due and payable in one installment on July 16, 2016.
The Sellers Notes are convertible at any time, in the sole discretion of the holders, into shares of our common stock at a price of $2.00 per share. In addition, the Sellers Notes are convertible, in our sole discretion, into shares of our common stock at a price of $2.00 per share at any time (i) after the two year anniversary of the Notes, (ii) the principal amount of each Sellers Notes has been paid down by $5,000,000 as a result of the first capital raise, (iii) our common stock trades on the Nasdaq Stock Market, the New York Stock Exchange, or NYSE MKT, and (iv) our common stock has traded at four times the $2.00 conversion price, as adjusted for any stock splits, reverse stock splits, or both. Based on our share price at the time we entered into the Sellers Notes agreement, we recognized a beneficial conversion feature of $5,500,000 and discounted the Sellers Notes. As of June 30, 2014, the unamortized discount on the Sellers Notes was $3,748,631. The amount of interest expense related to the Sellers Notes for the quarter ended June 30, 2014 was $763,671. The amount of interest expense related to the amortization of the discount on the Sellers Notes for the quarter ended June 30, 2014 was $908,303.
The amended Convertible Note provided for up to $3,000,000 principal with a maturity date of October 1, 2015, which was extendable under certain circumstances. As of June 30, 2013, the full amount of the principal had been drawn. The annual interest rate was adjusted in October 2012 to 9.0% from the original 6.0%, and was due monthly in arrears. Reflecting the adjustment for the Earth911 Merger, the Convertible Note was convertible into shares of our common stock at $0.362 per share prior to 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 was lower than the conversion price in effect immediately prior to such issue or sale (the “Fixed Conversion Price”). As a result of the Earth911 Merger, a United States exchange listed our common stock, which was a Triggering Event under the Convertible Note; therefore the conversion price was the lower of the Fixed Conversion Price or the average closing bid price during the ten trading days immediately preceding the conversion date.
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. See Note 12 regarding the valuations of the warrant liability.
Net Number of Shares to Issue = (A x B) – (A x C)
Prior to July 16, 2013, we held a 50% ownership interest in Quest, which Earth911 acquired on August 21, 2008. On July 16, 2013, we acquired all of the Quest Interests, held by QRG, comprising 50% of the membership interests of Quest. The purchase price for the Quest Interests consisted of 22,000,000 shares of our common stock issued at a fair market value of $2.50 per share based on the closing price of the stock on the date of the transaction and the Sellers Notes in the aggregate principal amount of $22,000,000. We paid the total purchase price of $77,000,000 to the owners of QRG and related parties: the Chief Executive Officer of Quest and the President of Quest. After the close of the transaction, the Chief Executive Officer of Quest became the President, Chief Executive Officer, and member of the Board of Directors of our company. Subsequent to our purchase of the Quest Interests on July 16, 2013, we consolidated 100% of the operating activity of Quest into the operations of our company and reflected the adjustments for the ownership purchase and valuation of goodwill.
Concurrently with our acquisition of the Quest Interests, we assigned the Quest Interests to Earth911, our wholly owned subsidiary, which now holds 100% of Quest. We accounted for the acquisition of Quest under ASC Topic 805; thereby the acquisition accounting for the acquired Quest Interests and the step up basis of the previously owned 50% interest resulted in the following total purchase price for Quest as follows:
We primarily employed two methodologies that yielded substantially the same results to determine the fair value of our preexisting equity interest in Quest, which we re-measured as a non-controlling interest independent of the acquired controlling interest as of the effective date of the acquisition: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; and (ii) the present value of expected future cash flows of Quest, which are level 2 and level 3 inputs, respectively.
In connection with the fair value adjustment to the Investment in Quest due to the acquisition, we recorded in 2013 a gain on investment in Quest of $23,449,372, the difference between the fair value and the carrying amount of the asset on the date of the acquisition. In addition, we recognized $26,850,039 of goodwill impairment based on our goodwill impairment testing. We determined that the carrying amount of the reporting unit exceeded the fair value and recorded a goodwill impairment charge. The impact of the goodwill impairment and the gain on investment was a net expense of $3,400,667 included in the operating loss for the year ended December 31, 2013.
$ 42,326,342 $ 32,253,788 $ 80,298,981 $ 62,904,852
3,320,873 2,572,054 6,465,796 5,869,408
(89,557 ) 298,232 (68,195 ) 1,373,280
(139,405 ) 206,310 (161,691 ) 1,157,902
We compute income taxes using the asset and liability method in accordance with ASC Topic 740. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. In our opinion, realization of our net operating loss carry forward is not reasonably assured as of June 30, 2014 and December 31, 2013, and we have recorded a valuation allowance of $7,534,000 and $6,582,000 respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated financial statements.
$ 4,857,000 $ 4,212,000
2,322,000 2,103,000
205,000 150,000
64,000 47,000
86,000 70,000
7,534,000 6,582,000
(7,534,000 ) (6,582,000 )
$ (1,127,157 ) $ (6,051,780 )
308,823 2,739,048
(133,666 ) 1,597,415
952,000 1,715,317
As of December 31, 2013, 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 2014. We classify interest and penalties on income taxes as penalties expense.
• a decision to classify a transaction, entity, or other position in a tax return as tax exempt.
We are potentially subject to tax audits for federal and state tax returns for tax years ended 2013 to 2011. 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, we allocated our taxable income or loss to our members in accordance with their respective percentage ownership.
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, convertible notes payable, notes payable, and warrant liability. We do not believe that we are exposed to significant interest, currency, or credit risks arising from these financial instruments. With the exception of the warrant liability, the fair values of these financial instruments approximates their carrying values using Level 3 inputs, based on their short maturities or, for long-term debt based on borrowing rates currently available to us for loans with similar terms and maturities. Gains and losses recognized on changes in fair value of convertible notes and warrant liability are reported in other income (expense).
We issued on April 18, 2014 an aggregate 1,141,000 warrants along with our issuance of 1,192,500 shares of common stock. We measured the warrants issued along with the common stock issuance during the quarter ended June 30, 2014 at fair value by applying the Black-Scholes-Merton option valuation model, which utilizes Level 3 inputs. The assumptions used in the Black-Scholes-Merton option valuation for the warrants are as follows: volatility of 99.3%; risk free interest rate of 0.2%; expected term of 1.5 years; and expected dividend yield of 0%. The grant date fair value of the initial warrant valuation described above was $0.99 per warrant. We base the risk free interest rate on U.S. Treasury rates with maturity dates approximating the expected term of the warrants. We base 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.
We issued on May 7, 2014 an aggregate 200,000 warrants for services during the quarter ended June 30, 2014. We measured the warrants at fair value by applying the Black-Scholes-Merton option valuation model, which utilizes Level 3 inputs. The assumptions used in the Black-Scholes-Merton option valuation for the warrants are as follows: volatility of 97.6%; risk free interest rate of 0.9%; expected term of 3.0 years; and expected dividend yield of 0%. The grant date fair value of the initial warrant valuation described above was $1.61 per warrant. We base the risk free interest rate on U.S. Treasury rates with maturity dates approximating the expected term of the warrants. We base 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.
We measured warrants issued in connection with the Stockbridge Senior Secured Convertible notes at fair value by applying the Black-Scholes-Merton option valuation model, which utilizes Level 3 inputs. The assumptions used in the Black-Scholes-Merton 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. We base the risk free interest rate on U.S. 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.
We measured the March 29, 2013 fair value by utilizing the quoted market price for our common stock and the valuation for the cashless exercise of Warrant 1-1, Warrant 1-5, and Warrant 1-6 in March 2013, which are Level 1 and Level 2 inputs. These inputs of (i) an observable warrant exercise transaction and (ii) publicly traded market price provided a reasonable basis for valuation for the warrants as of March 29, 2013. Based on that valuation using the $3.00 closing market price and exercisable rights in total to purchase 6,905,576 shares of our common stock at $0.37 per share, Warrant 1-1 and Warrant 1-5 had a net number value of $20,233,338. Using the same valuation method, Warrant 1-6 had a net number value of $1,465,000 upon issuance on March 29, 2013. All three warrants were exercised on March 29, 2013. See Note 9 for further discussion regarding the cashless exercise of these warrants.
Common Stock - Our authorized common stock consists of 200,000,000 shares of common stock with a par value of $0.001 with 97,050,674 shares and 95,814,565 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively.
During the six months ended June 30, 2014, we issued shares of common stock as follows:
1,192,500 $ 2,385,000
23,201 29,001
20,408 50,000
1,236,109 $ 2,464,001
Common Stock for Services – We issued 20,408 shares of common stock to consultants for $50,000 of services, which $33,333 was expensed during the six months ended June 30, 2014 and $16,667 was prepaid for services in the subsequent period. We issued 17,226 shares of common stock to employees and consultants for $50,780 of services during the six months ended June 30, 2013.
Sale of Common Stock and Warrants – On April 18, 2014, we issued an aggregate of 1,192,500 units (the “Units”) to several accredited investors, for an aggregate purchase price of $2,385,000, with each Unit consisting of one share of our common stock and a warrant to purchase one share of our common stock for $2.00 per share. An additional 248,500 warrants were issued as finder’s fees to third parties. Therefore, in total we issued 1,192,500 shares of common stock and 1,441,000 warrants with a right to purchase one share of common stock for $2.00 per share. Each warrant may be exercised by the holder thereof, in such holder’s sole discretion, in whole or in part, any time prior to April 1, 2017.
Warrants for Services - On May 7, 2014, we issued to a third party for services an aggregate of 200,000 warrants to purchase one share of our common stock for $2.65 per share. Of the 200,000 warrants, 100,000 of the warrants were exercisable immediately and the remaining warrants become exercisable one year from grant based on performance conditions. We recorded stock-based compensation expense of $187,783 for the three months ended June 30, 2014 related to these warrants.
On May 28, 2014, we issued to a third party for services an aggregate of 1,650,000 contingent warrants to purchase one share of our common stock for $4.31 per share. The warrants become exercisable at various times after achieving future performance conditions related to services and revenue targets for Earth911. We recorded no stock-based compensation expense for the three months ended June 30, 2014 related to these warrants due to the uncertainty of attaining any of the performance conditions.
At June 30, 2014, we had outstanding exercisable warrants to purchase 1,541,000 shares of common stock and contingent warrants to purchase 1,750,000 shares of common stock.
Warrants Issued and Outstanding as of June 30, 2014
Issuance Expiration
Warrants 10 - 24
4/18/14 4/1/17 $ 2.00 1,441,000
5/7/2014 5/7/17 $ 2.65 100,000
Warrant 26
5/28/2014 10/31/16 $ 4.31 450,000
Warrants 28 - 34
5/28/2014 10/31/18 $ 4.31 1,200,000
Stock Option Plan - In October 2012, we adopted our 2012 Incentive Compensation Plan, which was subsequently amended in September 2013 (the “2012 Plan”). The 2012 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, dividend equivalents, other stock-based awards, and performance awards that may be settled in cash, stock, or other property to our officers, directors, employees, and consultants who are natural persons providing bona fide services to us or our subsidiaries and other designated affiliates, which we refer to as “Related Entities.” The purpose of the 2012 Plan is to assist us and our Related Entities in attracting, motivating, retaining, and rewarding high-quality executives and other employees, officers, directors, and individual consultants who provide services to us or our Related Entities, by enabling such persons to acquire or increase a proprietary interest in our company in order to strengthen the mutuality of interests between such persons and our stockholders, and providing such persons with performance incentives to expend their maximum efforts in the creation of stockholder value. The 2012 Plan is administered by the compensation committee of our Board of Directors or a subcommittee thereof formed by the compensation committee, except to the extent our Board of Directors elects to administer the 2012 Plan (subject to limitations described in the 2012 Plan). 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. Stock compensation expense prior to October 2012 is related to options granted prior to the Earth911 Merger that the 2012 Plan superseded at the time of the Earth911 Merger. The number of shares available for award under the plan is subject to adjustment for certain corporate changes in accordance with the provisions of the plan. Employee stock-based compensation expense was $359,456 and $1,573,010 for the six months ended June 30, 2014 and 2013, respectively.
Restricted Stock Units - During the quarter ended June 30, 2014, we granted restricted stock units representing 132,600 hypothetical shares of common stock under the 2012 Incentive Compensation Plan. The restricted stock units vested based on a combination of financial performance factors and continued service. The financial performance factors are based on the revenue generated by new business activity of one of our subsidiaries. All payouts of restricted stock units that vest will be exercisable immediately and will be paid in the form of common stock. While we do not anticipate issuing dividends, the restricted stock unit awards will not participate in any dividends prior to vesting.
We determined the fair value of the restricted stock unit awards granted based on the market value of the Company’s common stock on the date of grant, which was $3.75 per share. The company assumed a forfeiture rate of 0%. For the quarter ended June 30, 2014, the Company did not determine that it was probable that the restricted stock units would vest and recognized no compensation expense for the quarter.
Stock Options - Following is a summary of stock option activity subsequent to December 31, 2013 through June 30, 2014:
4,141,948 $ 2.00 - 3.25 $ 2.48
780,000 $ 2.90 - 3.75 $ 3.66
(58,333 ) $ 2.05 - 2.05 $ 2.05
4,863,615 $ 2.00 - 3.75 $ 2.70
As of June 30, 2014, the intrinsic value of options outstanding was $12,331,935 and the intrinsic value of options exercisable was $8,699,835.
The following additional information applies to options outstanding at June 30, 2014:
4,863,615 7.3 $ 2.70 3,266,115 $ 2.63
At June 30, 2014, 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 $2,019,103.
Stockbridge Convertible Note - In March 2012, we issued the Convertible Note to Stockbridge, a related party. In connection with the issuance of the Convertible Note, we issued four warrants (Warrants1-1 through 1-4) in March 2012. On July 16, 2013, Stockbridge elected to convert $3,000,000 in principal and $34,500 of accrued interest of the Convertible Note into 8,382,597 shares of our common stock. With the conversion, the contingent Warrants 1-2, 1-3, and 1-4 were cancelled.
Allonge to the Convertible Note - In October 2012, we amended the Convertible Note. We increased the original principal amount to $3,000,000 from the original $1,000,000 amount. We changed the maturity of the note to October 1, 2014. We changed the conversion rate of the Convertible Note 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.
convertible securities of Earth911 in the original note documents and the Allonge documents to our common stock, options, warrants, warrant shares, or convertible securities, respectively, and (ii) expand all references to a “Triggering Event” in the original note documents and the Allonge documents to include any exchanges on which our common stock may be listed or quoted for trading. The parties also (i) amended how the fair market value of our 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 shares of Earth911 to the number of shares of our 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.
Acquisition of the Quest Interests - On July 16, 2013, we acquired all of the Quest Interests held by QRG, comprising 50% of the membership interests of Quest. The purchase price for the Quest Interests consisted of 22,000,000 shares of our common stock issued at a fair market value of $2.50 per share based on the closing price of the stock on the date of the transaction and the Sellers Notes as described in Note 10 in the aggregate principal amount of $22,000,000. The total purchase price of $77,000,000 was paid to the owners of QRG who at the time of the transaction were related parties: the Chief Executive Officer of Quest and the President of Quest. After the close of the transaction, the Chief Executive Officer of Quest became the President, Chief Executive Officer and member of the Board of Directors of our company. Unpaid interest related to the Sellers Notes at June 30, 2014 and December 31, 2013 is $126,575 and $132,878, respectively.
Increased common stock shares authorized
Warrant conversions, amount
Warrant to purchase common stock, description
A warrant to purchase one share of our common stock for $2.00 per share�
42,326,342�
32,253,788�
80,298,981�
62,904,852�
3,320,873�
2,572,054�
6,465,796�
5,869,408�
298,232�
1,373,280�
206,310�
1,157,902�
32,655,802�
63,620,354�
2,865,440�
6,436,589�
(1,821,926)
5,493,425�
$�(2,102,913)
$�(4,448,926)
19,287,215�
13,107,162�
4,996,215�
3,417,115�
8,308,934�
$�2,098,807�
(1,543,229)
727,648�
329,210�
479,135�
$�17,830�
$�5,047�
$�50,470�
$�19,925,677�
3,613,573�
2,438,000�
10,282,000�
852,917�
5,377,083�
437,841�
436,587�
90,719�
$�216,434�
$�880,605�
$�1,762,701�
$�820,020�
752,787�
164,959�
239,219�
$�2,155,263�
4,097,235�
The base rate for any day is the greater of (a) the Federal funds rate plus one-half of 1%, (b) Region's published effective prime rate, or (c) the Eurodollar rate for such day based on an interest period of one month.�
May 31, 2015�
The Loan Agreement was amended to, among other things, (i)�add a $5.0 million accordion feature, (ii)�increase the Borrowing Base, (iii)�reduce the Applicable Margin for Eurodollar Rate Loans by 1%�per annum, (iv)�add an unused fee of 0.25%�per annum, (v)�extend the maturity date to May�31, 2015, (vi)�release the Guaranty of our Chief Executive Officer previously executed in favor of the Lender, (vii)�add our company and our wholly owned subsidiary, Earth911, Inc., as Guarantors, (viii)�allow for Permitted Acquisitions, and (ix)�delete two of the financial covenants and modify the other financial covenants in certain respects.�
Percentage of membership interest pledged to guarantee loan obligation
Convertible Note Payable - Additional Information (Detail)�(USD $)
6 Months Ended 6 Months Ended 1 Months Ended
Convertible Note Payable - Summary of Convertible Note Payable Outstanding (Detail)�(USD $)
Total convertible notes payable-short term
Long-Term Debt and Capital Lease Obligations - Summary of Long-Term Debt (Detail)�(USD $)
$�18,292,580�
$�17,392,229�
18,276,162�
17,376,133�
Capital lease obligations, imputed interest at 4.75% [Member]
49,163�
7% Secured Notes Due 2016 [Member]
Secured convertible notes payable to related parties
$�18,251,369�
$�17,343,066�
Long-Term Debt and Capital Lease Obligations - Summary of Long-Term Debt (Parenthetical) (Detail)�(USD $)
Imputed interest rate for capital lease obligation
$�1,507�
July 2016�
Debt instrument, net of discount
0 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended 0 Months Ended 6 Months Ended 6 Months Ended 6 Months Ended 6 Months Ended 6 Months Ended
President of Quest [Member]
Stockbridge Senior Secured Convertible Note [Member]
Debt_Instruments
42 Month Warrant [Member]
45 Month Warrant [Member]
48 Month Warrant [Member]
Principal amount of each sellers note paid down by first capital rise
Convertible note beneficial conversion feature
Common stock conversion adjusted
Common stock has traded at four times the $2.00 conversion price, as adjusted for any stock splits, reverse stock splits, or both.�
Unamortized discount on sellers notes
3,748,631�
Interest expense on seller notes
890,453�
292,220�
1,765,920�
600,634�
Amortization of discount on sellers notes
Convertible note accrued interest
34,500�
Convertible note converted into common stock
8,382,597�
Senior secured convertible notes issued
Senior secured convertible warrants issued