Notes to Consolidated Financial Statements
1. The Company and Description of Business and Future Liquidity Needs
The accompanying consolidated financial statements include the accounts of Infinity Resources Holdings Corp. and its subsidiaries,
Earth911, Inc. (Earth911) and Youchange, Inc. (Youchange) along with the 50% ownership interest in Quest Resource Management Group, LLC (Quest) (collectively, Infinity, the Company,
we, us, or our).
Operations
We are an environmental solutions company that serves as a
single-source provider of recycling and environmental program services and information. We offer innovative, cost-effective, one-stop reuse, recycling, and waste disposal management programs designed to provide regional and national customers with a
single point of contact for managing a variety of recyclables and disposables. We also own the
Earth911.com
website, offering original online environmental related content about reuse, recycling, and disposal of waste and recyclables, and we
own a comprehensive online database of local recycling and proper disposal options. We also offer advertisers the opportunity to target an audience interested in environmental sustainability, recycling, and responsible disposition of waste products.
We license customized logos and internet addresses to manufacturers to place on their products, which provide their customers with information about conveniently situated recycling locations and the proper disposal of various products.
On October 17, 2012, we closed a merger transaction (the Earth911 Merger) to acquire Earth911 as a wholly owned subsidiary and
experienced a change in control in which the former stockholders of Earth911 acquired control of our company. On December 11, 2012, our board of directors approved a change to our fiscal year end from June 30 to December 31. Pursuant
to the terms of the merger agreement, in which we acquired Earth911, the stockholders of Earth911 exchanged their common stock for 85% of the common stock of the post-merger entity. Therefore, the merger for accounting purposes is considered a
reverse merger, with Earth911 treated as the accounting acquirer.
Going Concern -
During the three months ended March 31, 2013,
we incurred a net loss of $3,297,604 and used cash in operations of $949,263. At March 31, 2013, we had negative working capital of $960,947 and cash and cash equivalents of $314,125. As such, our independent registered public accounting firm
has expressed an uncertainty about our ability to continue as a going concern in its opinion attached to our consolidated financial statements for the year ended December 31, 2012, which is more fully discussed in our audited consolidated
financial statements for the year ended December 31, 2012. We plan to 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.
2. Summary of Significant Accounting Policies
Principals of Presentation, Consolidation and Reclassifications
The consolidated financial statements included herein have been prepared by Infinity Resources Holdings Corp. (we, us, our or Company) without audit,
pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC) and should be read in conjunction with the audited financial statements as of December 31, 2012. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, as permitted by the SEC, although we believe the disclosures,
which are made, are adequate to make the information presented not misleading.
The accompanying consolidated financial statements include the
operating activity of Infinity and its subsidiaries, for the three months ended March 31, 2013 and 2012, as well as the equity method accounting for its investment in Quest. The Earth911 Merger, which closed on October 17, 2012, 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 into these consolidated financial statements for the three months ended
March 31, 2013, and excluded from the three months ended March 31, 2012, which occurred prior to the date of the Earth911 merger. The operating activities for Infinitys Earth911 subsidiary and the investment in Quest, is included for
the three months ended March 31, 2013 and 2012. Quest is deemed to be a separate operating unit from Infinity and as such, there are no intercompany transactions that require elimination at this time. All other intercompany accounts and
transactions have been eliminated in consolidation.
6
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
The consolidated financial statements reflect, in the opinion of management, all normal recurring
adjustments necessary to present fairly our financial position at March 31, 2013, and the results of our operations and cash flows for the periods presented. The December 31, 2012 consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
As both Earth911 and Youchange are deemed to be operating as ecology based green service companies, no segment reporting was deemed necessary.
Accounting Estimates
The preparation of financial statements in conformity with
GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could materially differ from those estimates.
Significant estimates are used when
accounting for the collectability of accounts receivable, depreciable lives of fixed assets, accruals, assumptions used in the valuation and recognition of share-based payments and warrant liability, the realization of intangible assets, deferred
tax assets, the equity method investment in Quest, and the application of accounting for the senior secured convertible note, all of which are discussed in their respective notes to the consolidated financial statements.
Revenue Recognition
Revenue
Recognition
We recognize revenue only when all of the following criteria have been met:
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persuasive evidence of an arrangement exists;
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delivery has occurred or services have been rendered;
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the fee for the arrangement is fixed or determinable; and
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collectability is reasonably assured.
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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 customers fee is either fixed or determinable under the terms of the quote or accepted customer purchase order.
Collectability Is Reasonably Assured
We assess collectability on a customer by customer basis based on criteria outlined by management.
The revenues reported in 2013 and 2012 are derived primarily from the operations of Earth911 and represent licensing rights. These revenues are
recognized ratably over the term of the license. Some revenues are derived from advertising contracts, which are 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.
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,
7
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities,
Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These
unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability.
Fair
value accounting has been applied to the valuation of stock-based compensation and warrants issued. The valuation methodologies and inputs used are discussed in the respective footnotes.
Stock Options
-
We estimate fair value of stock options using the Black-Scholes valuation model. Significant level 3 assumptions used in the calculation were determined as follows:
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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;
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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;
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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
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Forfeitures are based on the history of cancellations of warrants granted by us and our analysis of potential future forfeitures.
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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.
Net Loss Per Share
We compute basic net loss per share by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. The calculation of
basic loss per share gives retroactive effect to the recapitalization related to our reverse acquisition of Earth911. We have other potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because
their effect in both 2013 and 2012 would be anti-dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes and total 11,782,240 shares at March 31, 2013, and 4,833,951 shares at March 31,
2012.
The following table sets forth the computation of basic and diluted earnings per share:
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For the Three Months Ended March 31,
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2013
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2012
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(Unaudited)
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(Unaudited)
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Net loss applicable to common stockholders - numerator for basic and diluted earnings per share
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$
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(3,297,604
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)
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$
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(2,661,360
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)
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Weighted - average common shares outstanding - denominator for basic earnings per share
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57,961,106
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47,534,682
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Net loss per share:
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Basic
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$
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(0.06
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)
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$
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(0.06
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)
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Diluted
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$
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(0.06
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)
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$
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(0.06
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)
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8
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
The following table sets forth the anti-dilutive securities excluded from diluted earnings per share:
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For the Three Months Ended March 31,
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2013
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2012
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(Unaudited)
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(Unaudited)
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Anti-dilutive securities excluded from diluted earnings per share:
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Stock options
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3,432,115
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1,381,115
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Warrants
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1,381,113
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690,608
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Convertible notes
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6,969,012
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2,762,228
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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 companys 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 companys accounts are not reflected within our balance sheet and statement of operations; however, our share of earnings or losses of the investee company is reflected
in the caption Equity in Quest Resource Management Group, LLC income in our statement of operations. Our carrying value in an equity method investee company is reflected in the caption Investment in Quest Resources Management
Group, LLC in our balance sheets.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the book and tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce a deferred tax asset to the amount
expected to be realized. We assess our ability to realize deferred tax assets based on current earnings performance and on projections of future taxable income in the relevant tax jurisdictions. These projections do not include taxable income from
the reversal of deferred tax liabilities and do not reflect a general growth assumption but do consider known or pending events, such as the passage of legislation. Our estimates of future taxable income are reviewed annually. All tax positions are
first analyzed to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. After the initial analysis,
the tax benefit is measured as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Our income tax returns are subject to adjustment under audit for approximately the last three years.
If we are required to pay interest on the underpayment of income taxes, we recognize interest expense in the first period the interest becomes due
according to the provisions of the relevant tax law.
If we are subject to payment of penalties, we recognize an expense for the amount of the
statutory penalty in the period when the position is taken on the income tax return. If the penalty was not recognized in the period when the position was initially taken, the expense is recognized in the period when we change our judgment about
meeting minimum statutory thresholds related to the initial position taken.
Stock-Based Compensation
All share-based payments to employees, including grants of employee stock options, are expensed based on their estimated fair values at grant date, in
accordance with ASC 718. Compensation expense for stock options is recorded over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes model. We classify all share-based awards as equity
instruments and recognize the vesting of the awards ratably over their respective terms.
3. Inventories
As of March 31, 2013 and December 31, 2012, finished goods inventories were $2,910 and $4,292, respectively, and consisted of
used consumer electronics and computer devices with no reserve for inventory obsolescence.
9
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
4. Property and Equipment
At March 31, 2013 and December 31, 2012, property and equipment consisted of the following:
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March 31,
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December 31,
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2013
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2012
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(Unaudited)
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Computer equipment
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$
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157,305
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$
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157,305
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Office furniture and equipment
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213,140
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209,026
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Leasehold improvements
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6,261
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6,261
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376,706
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372,592
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Less: accumulated depreciation
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(230,884
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)
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(215,904
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)
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$
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145,822
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$
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156,688
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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 March 31, 2013 and December 31, 2012 and is included in the consolidated financial statements as property and equipment. Accumulated depreciation of the leased equipment at March 31, 2013 and
December 31, 2012 was $92,000 and $85,326, respectively. Interest expense in the amount of approximately $8,817 is expected to be recognized over the remainder of the lease term.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
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March 31,
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December 31,
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2013
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2012
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(Unaudited)
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Compensation
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$
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176,824
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$
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191,393
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Deferred rent obligation
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135,624
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138,926
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Professional fees
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360,318
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302,818
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Accrued interest and other
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29,338
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15,016
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$
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702,104
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$
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648,153
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6. Convertible Notes Payable
The activity from December 31, 2012 to March 31, 2013 for convertible notes payable related to Youchange is summarized below.
During the period ending March 31, 2013, $57,500 of principal and $3,961 of interest was converted into 47,917 shares of common stock. As of March 31, 2013, the outstanding convertible notes payable and associated accrued interest
described below were convertible into a total of approximately 62,935 common shares. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the
convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective
interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing
the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.
10
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
The following convertible notes payable were outstanding as of March 31, 2013 and December 31,
2012:
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March 31,
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December 31,
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2013
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2012
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(Unaudited)
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Convertible note payable to unrelated parties, issuance date of October 2011
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$
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$
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10,000
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Convertible note payable to unrelated parties, issuance date of April 2012
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5,000
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Convertible note payable to unrelated parties, issuance date of August 2012
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10,000
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Convertible note payable to unrelated parties, issuance date of September 2012
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10,000
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Convertible note payable to unrelated parties, issuance date of September 2012
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12,500
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Convertible note payable to unrelated parties, issuance date of September 2012
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25,000
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25,000
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Convertible note payable to unrelated parties, issuance date of October 2012
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25,000
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25,000
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Convertible note payable to unrelated parties, issuance date of October 2012
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10,000
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Convertible note payable to unrelated parties, issuance date of October 2012
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25,000
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25,000
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Total convertible notes payable - short term
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75,000
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132,500
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Less: unamortized discounts due to beneficial conversions features
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(1,393
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)
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(33,394
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)
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Total convertible notes payable - short term, net of discounts
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$
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73,607
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$
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99,106
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Further details for the outstanding notes payable are as follows:
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During October 2011, we issued a $10,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matured three months
from the date of issuance and was extended by an additional 30 days. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock
at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $5,200 for this convertible note. The holder converted the note and its accrued interest during
the period ended March 31, 2013 into 9,278 shares of common stock.
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During April 2012, we issued a $5,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matured six months from
the date of issuance and was extended by an additional 30 days. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a
rate of $1.75 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $2,712 for this convertible note. The holder converted the note and its accrued interest during the
period ended March 31, 2013 into 3,130 shares of common stock.
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During August 2012, we issued a $10,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months from
the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares of
our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $6,400 for this convertible note. The holder converted the note and its accrued
interest during the period ended March 31, 2013 into 8,460 shares of common stock.
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During September 2012, we issued a $10,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months
from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares
of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $8,600 for this convertible note. The holder converted the note and its
accrued interest during the period ended March 31, 2013 into 8,339 shares of common stock.
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During September 2012, we issued a $12,500 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months
from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares
of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $10,750 for this convertible note. The holder converted the note and its
accrued interest during the period ended March 31, 2013 into 10,418 shares of common stock.
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11
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
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During September 2012, we issued a $25,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months
from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares
of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $17,500 for this convertible note. Although this note is past its maturity
in the period ended March 31, 2013, the holder is expected to exercise the conversion feature.
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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. This note matured in the period
subsequent to the period ended March 31, 2013 and the holder converted the note and its accrued interest subsequently into 21,031 shares of common stock.
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During October 2012, we issued a $10,000 convertible note to an unrelated, accredited third party in exchange for cash. The note matures six months
from the date of issuance and may be extended by an additional 30 days at our discretion. The note bears interest at a rate of 10.0% per annum and is convertible at any time, with accrued interest, at the discretion of the investor into shares
of our common stock at a rate of $1.25 per share. Based on our share price at the time the note agreement was entered into, we recognized a beneficial conversion feature of $2,400 for this convertible note. During the period ended March 31,
2013, the holder converted the note and its accrued interest into 8,292 shares of common stock.
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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. Although this note is past its maturity
in the period ended March 31, 2013, the holder is expected to exercise the conversion feature.
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7. Long Term Debt and Capital Lease Obligations
At March 31, 2013 and December 31, 2012, total long-term debt outstanding consisted of the following:
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March 31,
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December 31,
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2013
|
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|
2012
|
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|
|
(Unaudited)
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|
|
|
Senior secured convertible notes payable to a related party, 9% interest due monthly in arrears, due October 2015, repayment
provisions discussed further below (Net of discount of $1,601,302 and $1,313,897 as of March 31, 2013 and December 31, 2012, respectively)
|
|
$
|
898,698
|
|
|
$
|
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
|
|
|
53,903
|
|
|
|
72,128
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
952,601
|
|
|
|
758,231
|
|
Less: current maturities
|
|
|
(53,903
|
)
|
|
|
(72,128
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
898,698
|
|
|
$
|
686,103
|
|
|
|
|
|
|
|
|
|
|
12
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
On March 22, 2012, Earth911 entered into a Securities Purchase Agreement with Stockbridge
Enterprises, L.P., a related party (Stockbridge), pursuant to which Earth911 issued a senior secured convertible note (the Convertible Note) and an initial four warrants to Stockbridge. The Convertible Note is secured by all
the assets of Earth911. On each of October 10, 2012 and March 29, 2013, the terms of the note and the warrants were amended and additional warrants were issued to Stockbridge (the Allonge and the Second Allonge).
The Convertible Note and warrants have also been adjusted for the Earht911 Merger in October 2012.
The amended Convertible Note provides for
up to $3,000,000 principal with a maturity date of October 1, 2015, which may be extended under certain circumstances. 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 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 Earth911 or any of its subsidiaries or affiliated companies closes a financing or funding transaction exceeding $100,000, at the election of Stockbridge, certain
percentages of the proceeds of such transaction shall be applied to redeem the outstanding principal amounts of the Convertible Note.
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 execution of the Convertible Note (Warrant
1-1);
|
|
(ii)
|
three contingent warrants issued March 2012 exercisable only in the event that all outstanding principal and accrued interest on the Convertible Note is not paid in
full at such dates as follows: a warrant to acquire up to 345,278 shares of our common stock, exercisable at the conclusion of forty-two (42) months after the issuance date of the warrant (Warrant 1-2); a warrant to acquire up to
345,278 shares of our common stock, exercisable at the conclusion of forty-five (45) months after the issuance date of the warrant (Warrant 1-3); and a warrant to acquire up to 690,557 shares of our common stock, exercisable at the
conclusion of forty-eight (48) months after the issuance date of the warrant (Warrant 1-4);
|
|
(iii)
|
a warrant issued October 2012 upon execution of the Allonge to acquire up to 5,524,461 shares of our common stock, exercisable immediately (Warrant 1-5);
and
|
|
(iv)
|
a warrant issued March 2013 upon execution of the Second Allonge to acquire up to 500,000 shares of our common stock and exercisable immediately (Warrant
1-6).
|
Warrant 1-1 is exercisable at the lower of $0.37 per share or the average closing bid price during the ten trading
days immediately preceding the exercise date. Warrant 1-5 is exercisable at the lower of the $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date.
Warrant 1-1, Warrant 1-5, and Warrant 1-6 were exercised in March 2013 as part of the Second Allonge using a cashless exercise formula.
If the contingent Warrant 1-2, Warrant 1-3 and Warrant 1-4 become exercisable, the exercise price would be the lower of $0.37 per share or the average
closing bid price during the ten trading days immediately preceding the exercise date. The exercise price for all of the warrants is also subject to a downward formula-based adjustment for future issuances of common stock or stock equivalents under
certain conditions whereby the issue price is lower than the exercise price in effect immediately prior to such issue or sale.
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
13
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
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 March 31, 2013 and
December 31, 2012, the unamortized portion of the debt discount was $1,601,302 and $1,313,897, respectively. The amount of interest expense related to the amortization of the discount on the Convertible Note for the period ended March 31,
2013 and December 31, 2012 was $898,698 and $686,103, respectively.
On March 29, 2013, Stockbridge elected to exercise Warrant 1-1,
Warrant 1-5, and Warrant 1-6 with exercisable rights in total to purchase 7,405,576 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 Warrant 1-1, Warrant 1-5, and Warrant 1-6 yielded a net number value of $21,698,338. The
net number value equaled 7,232,779 shares of common stock issued at $3.00 per share under the cashless exercise option.
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:
|
|
|
|
|
|
|
|
|
|
|
Three Months ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Condensed operating statement information:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
30,651,064
|
|
|
$
|
32,313,907
|
|
Gross margin
|
|
|
3,297,354
|
|
|
|
3,320,492
|
|
Income from operations
|
|
|
1,075,048
|
|
|
|
1,343,531
|
|
Net income
|
|
|
951,592
|
|
|
|
1,209,117
|
|
|
|
|
Companys equity method income allocation
|
|
|
475,796
|
|
|
|
604,558
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Condensed balance sheet information:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
22,997,033
|
|
|
$
|
20,718,638
|
|
Long-term assets
|
|
|
2,085,416
|
|
|
|
2,118,295
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
25,082,449
|
|
|
$
|
22,836,933
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
19,799,723
|
|
|
$
|
17,925,175
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Equity
|
|
|
5,282,726
|
|
|
|
4,911,758
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
25,082,449
|
|
|
$
|
22,836,933
|
|
|
|
|
|
|
|
|
|
|
14
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
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. As amended on April 29, 2013, the Option Agreement shall terminate automatically if Earth911 has not
exercised the option and the closing shall not have occurred on or before May 15, 2013 (subject to extension or such later date as shall have been agreed to by the parties). Upon exercise of the option, Quests Chief Executive Officer will
enter into a five-year employment agreement as CEO of Quest and Quests President will enter into a five-year consulting agreement. Both will enter into six-year non-competition agreements.
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 carryforward is not reasonably assured as of March 31, 2013 and December 31, 2012, and valuation allowances of
$3,064,000 and $2,433,000, respectively, have been provided against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated financial statements.
The components of net deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
1,363,000
|
|
|
$
|
1,029,000
|
|
Stock-based compensation
|
|
|
1,470,000
|
|
|
|
1,177,000
|
|
Accrued interest expense
|
|
|
152,000
|
|
|
|
155,000
|
|
Allowance for doubtful accounts
|
|
|
28,000
|
|
|
|
22,000
|
|
Deferred lease liability
|
|
|
51,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,064,000
|
|
|
|
2,433,000
|
|
Less: valuation allowance
|
|
|
(3,064,000
|
)
|
|
|
(2,433,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation between the income tax expense (benefit) calculated by applying statutory rates to net loss and the
income tax benefit reported in the accompanying consolidated financial statements is as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(Unaudited)
|
|
|
|
|
U.S. federal statutory rate applied to pretax income
|
|
$
|
(1,121,000
|
)
|
|
$
|
(11,713,000
|
)
|
Permanent differences
|
|
|
581,000
|
|
|
|
10,344,000
|
|
State taxes and other
|
|
|
(91,000
|
)
|
|
|
(123,000
|
)
|
Change in valuation allowance
|
|
|
631,000
|
|
|
|
2,433,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
941,000
|
|
|
|
|
|
|
|
|
|
|
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.
15
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
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.
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 March 29, 2013 and the December 31, 2012 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, Warrant 1-5, and Warrant 1-6 in March 2013, which are Level 1 and Level 2 inputs. These inputs of (i) an observable warrant exercise transaction and (ii) publicly traded market
price provided a reasonable basis for valuation for the warrants as of March 29, 2013 and December 31, 2012. Based on that valuation using the $3.00 closing market price and exercisable rights in total to purchase 6,905,576 shares at $0.37
per share of common stock, Warrant 1-1 and Warrant 1-5 had a net number value of $20,233,338. Using the same valuation method, Warrant 1-6 had a net number value of $1,465,000 upon issuance on March 29, 2013. All three warrants were exercised
on March 29, 2013. See Note 7 and Note 11 for further discussion regarding the cashless exercise of these warrants.
The following table
summarizes the warranty liability valuation for the three months ended March 31, 2013:
|
|
|
|
|
Description
|
|
Fair Value Measurements
Warrant Liability
|
|
Beginning balance, December 31, 2012
|
|
$
|
20,233,338
|
|
Issuances (Level 1 & 2)
|
|
|
1,465,000
|
|
Less exercise of warrants
|
|
|
(21,698,338
|
)
|
|
|
|
|
|
Ending balance, March 31, 2013
|
|
$
|
|
|
|
|
|
|
|
16
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
11. 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 65,338,152 shares and 58,040,230 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively.
During the three months ended March 31 2013, we issued shares of common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
Warrant exercise
|
|
|
7,232,779
|
|
|
$
|
21,698,338
|
|
Common stock issued for services
|
|
|
17,226
|
|
|
|
50,780
|
|
Note conversions and discounts (see Note 6)
|
|
|
47,917
|
|
|
|
61,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,297,922
|
|
|
$
|
21,810,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 7 regarding the cashless exercise of Warrant 1-1, Warrant 1-5, and Warrant 1-6 on March 29, 2013.
|
|
|
|
Common Stock for Services - We issued 17,226 shares of common stock to employees and consultants during the three months ended March 31, 2013 for
$50,780 of services.
|
Warrants -
At December 31, 2012, we had outstanding exercisable warrants, as
adjusted, to purchase 6,905,576 shares of common stock at $0.37 per share. On March 29, 2013, we issued an exercisable warrant to purchase 500,000 shares of common stock at $0.37 per share. As of March 31, 2013, there were no outstanding
exercisable warrants remaining after the exercise of the warrants on March 29, 2013. At March 31, 2013 and December 31, 2012, we had outstanding contingent warrants, as adjusted, to purchase 1,381,113 shares of common stock at $0.37
per share. See the discussion under Note 7 for further details regarding the issued warrants related to the Convertible Note, subsequent amendment, and exercise of warrants. The following table summarizes the warrants issued and outstanding as of
March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Issued and Outstanding as of
March 31, 2013
|
|
|
|
Date of
|
|
|
Exercise
|
|
|
Shares of
|
|
Description
|
|
Issuance
|
|
|
Expiration
|
|
|
Price
|
|
|
Common Stock
|
|
Exercisable warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant 1-1
|
|
|
03/22/12
|
|
|
|
03/21/17
|
|
|
$
|
0.37
|
|
|
|
1,381,115
|
|
Warrant 1-5
|
|
|
10/10/12
|
|
|
|
10/09/17
|
|
|
$
|
0.37
|
|
|
|
5,524,461
|
|
Warrant 1-6
|
|
|
03/29/13
|
|
|
|
03/21/17
|
|
|
$
|
0.37
|
|
|
|
500,000
|
|
Less warrants exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,405,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exercisable warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant 1-2
|
|
|
03/22/12
|
|
|
|
03/21/17
|
|
|
$
|
0.37
|
|
|
|
345,278
|
|
Warrant 1-3
|
|
|
03/22/12
|
|
|
|
03/21/17
|
|
|
$
|
0.37
|
|
|
|
345,278
|
|
Warrant 1-4
|
|
|
03/22/12
|
|
|
|
03/21/17
|
|
|
$
|
0.37
|
|
|
|
690,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contingent warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,381,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total warrants issued and outstanding
|
|
|
|
|
|
|
|
1,381,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plan
-
In October 2012, we adopted our 2012 Incentive Compensation Plan (the 2012
Plan) as the sole plan for providing equity-based incentive compensation to our employees, non-employee directors, and other service providers. The maximum number of shares of common stock available for grant under the plan is 7,500,000. Stock
compensation expense prior to the October 2012 is related to options granted prior to the Earth911 Merger that was superseded by the 2012 Plan at the time of the Earth911 Merger. The number of shares available for award under the plan is subject to
adjustment for certain corporate changes in accordance with the provisions of the plan. Stock-based compensation expense was $784,105 and $424,318 for the three months ended March 31, 2013 and 2012, respectively.
17
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
Following is a summary of stock option activity subsequent to December 31, 2012 through
March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
|
Number
of Shares
|
|
|
Exercise Price
Per Share
|
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
Outstanding at December 31, 2012
|
|
|
3,350,115
|
|
|
$
|
2.00 - 2.79
|
|
|
$
|
2.20
|
|
|
|
|
|
Granted
|
|
|
108,000
|
|
|
|
2.65 - 2.65
|
|
|
|
2.65
|
|
Canceled/Forfeited
|
|
|
(26,000
|
)
|
|
|
2.10 - 2.79
|
|
|
|
2.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2013
|
|
|
3,432,115
|
|
|
|
2.65 - 2.65
|
|
|
|
2.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013, the intrinsic value of options outstanding was $ $2,686,975 and the intrinsic value of options
exercisable was $1,451,892. The following additional information applies to options outstanding at March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ranges of
Exercise
Prices
|
|
Outstanding at
March 31,
2013
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Exercisable at
March 31,
2013
|
|
|
Weighted-
Average
Exercise
Price
|
|
$2.00 - $2.79
|
|
|
3,432,115
|
|
|
|
8.5
|
|
|
$
|
2.22
|
|
|
|
1,989,449
|
|
|
$
|
2.27
|
|
12. Related Party Transactions
Convertible Note
-
In March 2012, we entered into the Convertible Note with Stockbridge, a related party. In connection
with the issuance of the Convertible Note, we issued four warrants (Warrants1-1 through1-4) in March 2012. 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 extended 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.
Second Allonge to the Convertible Note
-
On March 29, 2013, the terms of the note and the warrants were amended and additional warrants were issued to Stockbridge. Under the amendment
on March 29, 2013, Earth911 and Stockbridge entered into the Second Allonge, pursuant to which the parties agreed to (i) 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.
18
Infinity Resources Holdings Corp.
Notes to Consolidated Financial Statements - Continued
See Note 7 for a discussion of the Convertible Note and of the subsequent exercise of the related
exercisable warrants in March 2013.
13. Subsequent Events
Short Term Notes Payable.
Subsequent to March 31, 2013, certain short term notes payable and interest totaling $26,289 were converted into 21,031 shares of common stock. See Note 6 for further details.
19
Infinity Resources Holdings Corp.