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EX-32.1 - EXHIBIT 32.1 - EQM Technologies & Energy, Inc.v385586_ex32-1.htm
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EX-31.2 - EXHIBIT 31.2 - EQM Technologies & Energy, Inc.v385586_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - EQM Technologies & Energy, Inc.v385586_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____ to _____

 

Commission File Number:  000-54750

 

EQM Technologies & Energy, Inc.
(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   26-3254908
 (State or Other Jurisdiction of Incorporation or Organization)    (I.R.S. Employer Identification No.)   
     
1800 Carillon Boulevard, Cincinnati, Ohio   45240
(Address of Principal Executive Offices)   (Zip Code)

    

(513) 825-7500
(Registrant’s telephone number, including area code)

 

 
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨  
Non-accelerated filer (Do not check if a smaller reporting company) ¨   Smaller reporting company  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of August 8, 2014, the registrant had 41,473,570 shares of common stock outstanding.

 

 
 

 

EQM TECHNOLOGIES & ENERGY, INC.

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
   
ITEM 1. Financial Statements  
  Condensed Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013 1
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited) 3
  Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2014 (Unaudited) 4
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (Unaudited) 5
  Notes to Consolidated Financial Statements (Unaudited) 7
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 25
     
ITEM 4. Controls and Procedures 25
     
PART II – OTHER INFORMATION  
     
ITEM 1. Legal Proceedings 27
     
ITEM 1A. Risk Factors 28
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
     
ITEM 3. Defaults Upon Senior Securities 28
     
ITEM 4. Mine Safety Disclosures 28
     
ITEM 5. Other Information 28
     
ITEM 6. Exhibits 28
     
SIGNATURES 29

 

 
 

 

EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

   As of 
   June 30, 2014   December 31, 2013 
   (unaudited)     
ASSETS          
Current Assets:          
Cash and cash equivalents  $741,198   $2,374,361 
Accounts receivable, net   8,800,033    8,118,330 
Cost and estimated earnings in excess of billings on uncompleted contracts, net   5,646,438    5,426,552 
Prepaid expenses and other current assets   292,867    1,792,934 
           
Total current assets   15,480,536    17,712,177 
           
Property and equipment, net   512,114    575,845 
Intangible assets, net   3,750,003    3,922,223 
Goodwill   2,762,083    2,762,083 
Other assets   1,126,406    1,237,160 
           
Total assets  $23,631,142   $26,209,488 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

1
 

  

EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

   As of 
   June 30, 2014   December 31, 2013 
   (unaudited)     
LIABILITIES, REDEEMABLE PREFERRED STOCK AND EQUITY          
Current Liabilities:          
Accounts payable  $8,256,369   $9,117,580 
Accrued expenses and other current liabilities   4,729,627    2,414,523 
Billings in excess of costs and estimated earnings on uncompleted contracts   4,391    17,693 
Loan agreement   4,933,669    6,159,530 
Current portion of capitalized lease obligations   27,865    19,223 
Derivative liabilities   -    6,067 
Convertible promissory notes, net   4,972,853    - 
           
Total current liabilities   22,924,774    17,734,616 
           
Long-term liabilities:          
Convertible promissory notes, net   -    4,834,378 
Capitalized lease obligations, less current portion   22,404    10,747 
Deferred rent   96,883    115,112 
Other non-current liabilities   -    1,242,837 
           
Total long-term liabilities   119,287    6,203,074 
           
Total liabilities   23,044,061    23,937,690 
           
Commitments and Contingencies (Note 7)          
           
Equity:          
Series B Convertible Preferred stock, $0.001 par value, 5,000,000 shares authorized: 952,381 shares designated, issued and outstanding at June 30, 2014 at stated value; liquidation preference of $3,000,000   3,000,000    3,000,000 
Common stock, $0.001 par value, 100,000,000 shares authorized; 41,473,570 shares issued and outstanding at June 30, 2014 and December 31, 2013   41,474    41,474 
Additional paid-in capital   7,822,842    7,784,582 
Accumulated deficit   (10,491,057)   (8,777,888)
Total EQM Technologies & Energy, Inc. and Subsidiaries stockholders' equity   373,259    2,048,168 
Noncontrolling interest   213,822    223,630 
Total equity   587,081    2,271,798 
Total liabilities and equity  $23,631,142   $26,209,488 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2
 

  

EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2014   2013   2014   2013 
                 
Revenues  $14,125,089   $14,166,862   $23,145,653   $22,095,483 
                     
Cost of revenues   11,303,284    10,852,808    18,213,078    16,327,664 
Gross profit   2,821,805    3,314,054    4,932,575    5,767,819 
                     
Operating expenses:                    
Selling, general and administrative expenses   2,749,682    2,925,357    5,602,360    6,121,303 
Depreciation and amortization   254,882    365,103    529,863    707,893 
Total operating expenses   3,004,564    3,290,460    6,132,223    6,829,196 
                     
Operating (loss) income   (182,759)   23,594    (1,199,648)   (1,061,377)
                     
Other (expense) income:                    
Change in fair value of derivative liabilities   2,071    15,299    6,067    63,181 
Interest expense   (247,471)   (275,663)   (530,053)   (581,705)
Other income, net   75,960    800    75,041    1,100 
Other (expense) income, net   (169,440)   (259,564)   (448,945)   (517,424)
                     
Loss from continuing operations before income taxes   (352,199)   (235,970)   (1,648,593)   (1,578,801)
                     
Income tax expense from continuing operations   (3,309)   (76,662)   -    (115,537)
                     
Loss from continuing operations  $(348,890)  $(159,308)  $(1,648,593)  $(1,463,264)
Discontinued Operations:                    
Loss from discontinued operations, net of tax   -    -    -    (385,994)
Gain on disposal of Biodiesel Production Facility, net of tax   -    -    -    320,875 
Loss from discontinued operations, net of tax   -    -    -    (65,119)
                     
Net loss   (348,890)   (159,308)   (1,648,593)   (1,528,383)
                     
Net loss attributable to noncontrolling interests   (5,260)   -    (9,808)   - 
                     
Net loss attributable to common stockholders  $(343,630)  $(159,308)  $(1,638,785)  $(1,528,383)
                     
Basic and diluted net loss per share:                    
Continuing operations  $(0.01)  $(0.00)  $(0.04)  $(0.04)
Discontinued operations, net of tax   -    -    -    (0.00)
                     
Net loss per common share  $(0.01)  $(0.00)  $(0.04)  $(0.04)
                     
Weighted average number of common shares outstanding -  basic and diluted   40,650,387    40,650,387    40,650,387    40,650,387 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3
 

  

EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Equity

For the Six Months Ended June 30, 2014

(Unaudited)

 

   EQM Technologies & Energy, Inc. and Subsidiaries Stockholder's Equity         
   Series B Convertible           Additional             
   Preferred Stock   Common Stock   Paid-in   Accumulated   Noncontrolling   Total 
   Shares   Amount   Shares   Amount   Capital   Deficit   Interest   Equity 
                                 
Balance at January 1, 2014   952,381   $3,000,000    41,473,570   $41,474   $7,784,582   $(8,777,888)  $223,630   $2,271,798 
                                         
Stock based compensation - amortization of employee options   -    -    -    -    38,260    -    -    38,260 
Dividends accrued on Series B Convertible Preferred Stock   -    -    -    -    -    (74,384)   -    (74,384)
Net loss   -    -    -    -    -    (1,638,785)   (9,808)   (1,648,593)
                                         
Balance, June 30, 2014   952,381   $3,000,000    41,473,570   $41,474   $7,822,842   $(10,491,057)  $213,822   $587,081 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4
 

 

EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Six Months Ended June 30, 
   2014   2013 
Cash Flows From Operating Activities          
Net loss  $(1,648,593)  $(1,528,383)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:          
Depreciation and amortization   529,863    709,211 
Gain on disposal of Biodiesel Production Facility   -    (320,875)
(Gain) loss on disposal of property and equipment   (801)   (1,100)
Amortization of debt discount   147,920    215,303 
Stock based compensation   38,260    90,142 
Provision(recovery of) for doubtful accounts   94,609    (17,764)
Changes in fair market value of derivative liabilities   (6,067)   (63,181)
Changes in assets and liabilities:          
Accounts receivable   (694,462)   3,364,658 
Costs and estimated earnings in excess of billings on uncompleted contracts   (301,737)   1,148,299 
Inventory   -    106,961 
Prepaid expenses and other current assets   254,527    259,118 
Other assets   (78,347)   (195,388)
Deferred income taxes   -    (124,340)
Accounts payable, accrued expenses and other current liabilities   (175,542)   (3,644,592)
Billings in excess of costs and estimated earnings on uncompleted contracts   (13,302)   92,975 
Other long-term liabilities   284,544    (19,360)
Total adjustments   79,465    1,600,067 
           
Net cash (used in) provided by operating activities   (1,569,128)   71,684 
           
Cash Flows From Investing Activities          
Purchases of property and equipment   (33,882)   (37,556)
Proceeds from sale of property and equipment   801    1,100 
Proceeds from sale of Biodiesel Production Facility   1,245,542    4,904,043 
           
Net cash provided by investing activities   1,212,461    4,867,587 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5
 

  

EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Six Months Ended June 30, 
   2014   2013 
Cash Flows From Financing Activities          
Net repayments under loan agreement   (1,225,861)   (1,354,712)
Repayment of Beacon Merger Notes   -    (1,650,000)
Payment of capital lease obligations   (10,004)   (20,418)
Payment of debt financing costs   (40,631)   (48,945)
           
Net cash used in financing activities   (1,276,496)   (3,074,075)
           
Net (decrease) increase in cash and cash equivalents   (1,633,163)   1,865,196 
           
Cash and cash equivalents, beginning of period   2,374,361    181,794 
           
Cash and cash equivalents, end of period  $741,198   $2,046,990 
           
Supplemental disclosure of cash flow information:          
Cash paid during the period for:          
Interest  $99,274   $402,860 
           
Income taxes  $31,396   $42,052 
           
Non-cash investing and financing activities:          
           
Property and equipment acquired through capital lease  $30,302   $12,450 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6
 

 

NOTE 1 - BUSINESS

 

Overview

 

Environmental Quality Management, Inc. (“EQ”), an Ohio corporation, was formed on September 24, 1990 under the name “Professional Environmental Quality, Inc.” and changed its name to “Environmental Quality Management, Inc.” on September 26, 1990. On February 7, 2011, EQ consummated a “reverse business combination” transaction with Beacon Energy Holdings, Inc. (“Beacon”), a Delaware corporation, and Beacon Acquisition, Inc. (“Acquisition Sub”), an Ohio corporation and a wholly-owned subsidiary of Beacon. EQ merged with and into Acquisition Sub with the result that, on February 7, 2011, EQ became a subsidiary of Beacon (the “Beacon Merger”). Following the Beacon Merger, the former stockholders of EQ owned 78% of the merged company and the former stockholders of Beacon owned 22% of the merged company.

 

Following the Beacon Merger, Beacon changed its name to “EQM Technologies & Energy, Inc.”, which together with its subsidiaries is referred to herein as the “Company” or “EQM”. As a result of the Beacon Merger, EQ’s former stockholders acquired a majority of EQM’s common stock and EQ’s officers and directors became the officers and directors of EQM. For accounting purposes, the Beacon Merger has been treated as an acquisition of Beacon by EQ, whereby EQ was deemed to be the accounting acquirer. The historical consolidated financial statements prior to February 7, 2011 are those of EQ. In connection with the Beacon Merger, EQ has restated its statements of stockholders’ equity and redeemed preferred stock on a recapitalization basis so that all equity accounts are now presented as if the recapitalization had occurred at the beginning of the earliest period presented.

 

EQM’s common stock is quoted on the OTCQB Marketplace under the symbol “EQTE”.

 

The Company is a leading full service provider of environmental consulting, engineering, program management, clean technology, remediation and construction management and technical services to government and commercial business. The Company’s solutions span the entire life cycle of consulting and engineering projects and are designed to help public and private sector organizations manage and control their environmental risks and comply with regulatory requirements.  The Company has longstanding relationships and multi-year contracts with numerous federal agencies, including the Environmental Protection Agency (the “EPA”), the U.S. Department of Defense and the U.S. Army Corps of Engineers, as well as private sector clients across numerous industries. The Company’s focus areas include air and emissions, water and wastewater, industrial hygiene and safety, and emergency response and hazardous waste site cleanup.

 

7
 

 

NOTE 1 – BUSINESS, continued

 

Liquidity and Capital Resources

 

As of June 30, 2014, the Company’s cash on hand was $741,198. The Company incurred a net loss attributable to common stockholders of $343,630 and $1,638,785 for the three and six months ended June 30, 2014. At June 30, 2014, the Company’s accumulated deficit was $10,491,057 and it had total equity of $587,081. As of June 30, 2014, the Company had a deficit in working capital of $7,444,238. The Company has historically met its liquidity requirements through the sale of equity and debt securities, operations and its revolving credit facility.

 

During the six months ended June 30, 2014, cash flows used in operating activities were $1,569,128, consisting primarily of a net loss of $1,648,593.

 

During the six months ended June 30, 2014, cash flows provided by investing activities were $1,212,461, consisting primarily of $1,245,542 that the Company received in January 2014 as contingent consideration in connection with sale of its biodiesel production facility and related assets in January 2013 related to the reinstatement of the federal biodiesel blender’s tax credit with respect to the year 2012.

 

During the six months ended June 30, 2014, cash flows used in financing activities were $1,276,496, consisting primarily of $1,225,861 of net repayments of the Company’s revolving credit facility and $40,631 paid for debt financing costs.

 

The Company currently has Private Placement Notes (as defined in Note 6) and related accrued interest with aggregate obligations of principal and interest of $5,047,838 and $1,555,052, respectively, outstanding as of June 30, 2014. The Private Placement Notes were modified on December 31, 2013 to extend their maturities to April 30, 2015. Pursuant to the terms of the Private Placement Notes, holders may convert the principal and accrued interest into common stock at any time at a conversion price of $0.40 per share. The Company is in discussions with certain holders of the Private Placement Notes and expects that the holders of the Private Placement Notes would provide their consent to a further extension of the maturity of the Private Placement Notes. However, the Company has not secured any such consents at this time, nor can it provide any assurance that such consents will be obtained on commercially acceptable terms, or at all.

 

The Company has a Loan Agreement with a balance of $4,933,669 outstanding as of June 30, 2014 (as discussed in Note 5), which expires on April 15, 2015. On April 8, 2014, in connection with an amendment to the Loan Agreement effective April 1, 2014, among other modifications, the bank (i) increased by $1,000,000 the amount of revolving loan availability through May 31, 2014 for the fiscal quarters ending June 30, 2014, and (ii) set the fixed asset coverage ratio at 1.2 to 1. The Company is in discussions with its lender regarding a further extension of the Loan Agreement and expects to be able to extend the Loan Agreement; however, the Company has not secured any such commitment at this time, nor can it provide any assurance that such commitment will be obtained on commercially acceptable terms, or at all.

 

Management believes that the Company’s cash on hand, cash flows expected to be generated from operations, and borrowings available under the Company’s credit facility (after its terms are extended), will be sufficient to fund the Company’s operations. If the terms of the Loan Agreement and the Private Placement Notes are not extended, the Company will need to seek alternative sources of funding. If the Company is not successful in either case, this may have an impact on the Company’s financial position.

 

On March 26, 2013, the Company received a letter from the Air Force seeking reimbursement of approximately $3.69 million related to the FOB Hope Project and a subsequent letter on June 4, 2014 reducing the amount claimed to $2.63 million, including $440,409 in overbillings voluntarily disclosed and agreed upon by the Company (as discussed in Note 7). The Company’s management believes that it will be successful in defending its position with the Air Force. However, if the Company is not successful in defending its position, the outcome may have a material adverse effect on the Company’s financial position.

 

8
 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal accruals) considered for a fair presentation have been included. Operating results for the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2013 and related notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on April 14, 2014.

 

As a result of the December 31, 2012 entry into an agreement to sell its biodiesel production facility and related assets, the Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 and the Condensed Consolidated Statements of Operations for the six months ended June 30, 2014 and 2013 present the results and accounts of the Biodiesel Production business as discontinued operations. All prior periods presented in the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Operations discussed herein have been restated to conform to such presentation.

 

Net Loss per Common Share

 

Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s convertible preferred stock, convertible notes payable, and warrants (using the if-converted method). The computation of basic loss per share for the three and six months ended June 30, 2014 and 2013 excludes potentially dilutive securities. At June 30, 2014 and 2013, the Company excluded potentially dilutive securities of 31,500,402 and 29,043,641, respectively, because their inclusion would be antidilutive. As a result, the computations of net loss per share for each period presented is the same for both basic and fully diluted. Weighted average shares outstanding includes warrants to purchase 176,817 shares of common stock at an exercise price per share of $0.01 in accordance with Accounting Standards Codification (“ASC”) 260, “Earnings per Share”, as the shares underlying these warrants can be issued for little consideration.

 

Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive.

 

   At June 30, 
   2014   2013 
Private Placement Notes – principal   12,619,595    12,619,595 
Private Placement Notes – accrued interest   3,873,424    2,489,217 
Series B Stock   8,571,429    - 
Series B Stock – accrued dividends   271,234    - 
Series A Stock   -    8,571,429 
Stock options   3,157,400    4,288,400 
Warrants to purchase common stock   2,007,320    75,000 
Sandoval Shares   1,000,000    1,000,000 
Total potentially dilutive securities   31,500,402    29,043,641 

 

9
 

  

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with financial institutions, and accounts receivable. At times, the Company’s cash in banks is in excess of the FDIC insurance limit. The Company has not experienced any loss as a result of these deposits. As of June 30, 2014 and December 31, 2013, one customer, who was a government customer, accounted for 45% and 44% respectively, of the Company’s trade receivables. The Company has not experienced losses on the accounts for this customer, and management believes that the Company’s risk resulting from this concentration is limited because this customer represents an agency of the U.S. federal government. The Company does not generally require collateral or other security to support client receivables. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required.

 

Fair Value Measurements

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities, approximate fair value due to the short-term nature of these instruments.

 

Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

·Level 1. Quoted prices in active markets for identical assets or liabilities.

·Level 2. Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.

·Level 3. Significant unobservable inputs that cannot be corroborated by market data.

 

The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the assets that are measured at fair value on a recurring basis.

 

   Consolidated
Balance Sheet
   Quoted Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level 1)
   Quoted Prices
for Similar
Assets or
Liabilities in
Active
Markets
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Derivative Liabilities:                    
June 30, 2014  $-   $-   $-   $- 
December 31, 2013  $6,067   $-   $-   $6,067 

 

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:

 

   For the Six Months Ended
June 30, 2014
 
Beginning balance at January 1, 2014  $6,067 
Aggregate fair value of conversion features upon issuance   - 
Change in fair value of conversion features   (6,067)
Ending balance at June 30, 2014  $- 

 

10
 

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Fair Value Measurements, continued

 

The derivative conversion feature liabilities are measured at fair value using the Black-Scholes pricing model and are classified within Level 3 of the valuation hierarchy. The significant assumptions and valuation methods that the Company used to determine fair value and the change in fair value of the Company’s derivative financial instruments are provided below:

 

   June 30, 2014 
Stock price  $0.17 
Expected volatility   31.1%
Risk-free interest rate   0.29%
Dividend yield   0%
Weighted average contractual term   0.8 years 

 

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, which reports to the Chief Financial Officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department with support from the Company’s consultants and are approved by the Chief Financial Officer.

 

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

 

The Company uses the Black-Scholes option valuation model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility.

 

A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in change in fair value of derivative liabilities within other expense (income) on the Company’s consolidated statements of operations. As the Company’s common stock does not have sufficient trading volume, the Company determines volatility by measuring the volatility of a representative group of its peers. At June 30, 2014, the peer group consisted solely of companies operating in the environmental services sector.

 

As of June 30, 2014, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

 

The Company presented the conversion feature liabilities at fair value on its consolidated balance sheet, with the corresponding changes in fair value recorded in the Company’s consolidated statement of operations for the applicable reporting periods. The Company computed the fair value of the derivative liability at the reporting dates of June 30, 2014 and December 31, 2013 using the Black-Scholes option pricing model.

 

The fair value of the Company’s common stock was derived from the valuation of the Company using a combination of the discounted cash flows method and comparable companies’ methods that included multiples based upon the last twelve months and forward revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”). Management determined that the results of its valuation are reasonable. The term represents the remaining contractual term of the derivative. The volatility rate was developed based on analysis of the historical volatility rates of several other similarly situated companies (using a number of observations that was at least equal to or exceeded the number of observations in the life of the derivative financial instrument at issue). The risk free interest rates were obtained from publicly available US Treasury yield curve rates. The dividend yield is zero because the Company has not paid dividends and does not expect to pay dividends in the foreseeable future.

 

Income Taxes

 

Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. As of June 30, 2014 and December 31, 2013, no liability for unrecognized tax benefits was required to be reported. The guidance also discusses the classification of related interest and penalties on income taxes. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the six months ended June 30, 2014 and 2013.

11
 

  

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Management’s Evaluation of Subsequent Events

 

Management evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, management did not identify any recognized or nonrecognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.

 

NOTE 3 – INVESTMENT IN GAS ASSETS

 

On September 13, 2013, the Company formed EQGP, LLC (“EQGP”) for the purpose of creating a joint venture with third party investors to develop one of the projects included in the landfill gas assets acquired by the Company in connection with its acquisition of Vertterre Corp. (“Vertterre”), a mechanical and electrical engineering services firm, on December 27, 2012 (the “Landfill Gas Facility”). On October 3, 2013, EQGP was capitalized with investments of $475,000 (representing a 63.3% ownership stake in EQGP) and $275,000 from EQ and certain third parties, respectively. On October 3, 2013, Vertterre sold its wholly-owned subsidiary that owned the Landfill Gas Facility, Grand Prairie Landfill Gas Production, LLC (“GPLGP”), to EQGP and third party investors for no consideration, for the purpose of facilitating the investment by EQGP and its third party partners in developing, constructing and operating a landfill gas to electricity facility in Grand Prairie, Texas. The Company will provide engineering services and equipment to GPLGP. On October 3, 2013, EQGP contributed $750,000 in cash to GPLGP.

 

As of June 30, 2014, GPLGP had begun construction of the Landfill Gas Facility, with estimated completion projected during the third quarter of 2014.

 

For the three months ended June 30, 2014, the Company has recorded a loss on the investment in GPLGP of $13,845, and for the six months ended June 30, 2014, the Company has recorded a loss on the investment in GPLGP of $26,250, which is included in other income, net. For the three months ended June 30, 2014, the Company recorded a net loss attributable to noncontrolling interests of $5,260 and for the six months ended June 30, 2014, the Company recorded a net loss attributable to noncontrolling interests of $9,808, reflected in the consolidated statements of operations.

 

The components of our investment in the joint venture are summarized below: 

 

   For the Six
Months Ended
June 30, 2014
 
Investment in joint venture, January 1, 2014     
Investment in Landfill Gas Facility  $610,027 
Equity in net loss of Landfill Gas Facility for the six months ended June 30, 2014   - 
Investment in joint venture, June 30, 2014   (26,250)
   $583,777 

 

As of June 30, 2014, the investment in the Landfill Gas Facility was $583,777 and was reflected within other assets, and noncontrolling interests of $213,822 was reflected as noncontrolling interests, on the consolidated balance sheet.

 

The following table is a summary of key financial data for EQGP:

 

   As of and for the
Six Months Ended
June 30, 2014
 
Current assets  $- 
Noncurrent assets  $583,777 
Current liabilities  $500 
Noncurrent liabilities  $- 

 

   For the Three
Months Ended
June, 30, 2014
   For the Six
Months Ended
June 30, 2014
 
Net revenue  $-   $- 
Net loss  $14,345   $26,750 

 

12
 

 

NOTE 4 - DISCONTINUED OPERATIONS

 

On December 31, 2012, in connection with the execution of the Purchase and Sale Agreement, dated as of December 31, 2012 (the “Biodiesel Purchase Agreement”), with Delek Renewables, LLC (“Biodiesel Buyer”), a wholly-owned subsidiary of Delek US Holdings, Inc., pursuant to which the Company sold to Biodiesel Buyer its biodiesel production facility and related assets, constituting substantially all of the assets of the Company’s former Biodiesel Production segment, the assets, liabilities and operating results of the Biodiesel Production segment were reclassified to discontinued operations.

 

There were no results of discontinued operations during the six months ended June 30, 2014. Results of discontinued operations for the three and six months ended June 30, 2013 are as follows:

 

   For the Three Months
Ended June 30, 2013
   For the Six Months
Ended June 30, 2013
 
Revenues  $-   $35,958 
Loss from operations  $-   $(386,437)
Loss before tax  $-   $(64,949)
Loss, net of tax  $-   $(65,119)

 

There were no assets and liabilities included in discontinued operations as of June 30, 2014 or December 31, 2013.

 

NOTE 5 – LOAN AGREEMENT

 

On September 28, 2012, EQ and EQE entered into a loan agreement (as amended, the “Loan Agreement”) with a bank (the “Bank”) providing for a revolving credit facility and a letter of credit facility. On February 27, 2013, EQ, EQE and Vertterre (together, the “Borrowers”) entered into a First Amendment to Loan Agreement with the Bank to add Vertterre as a borrower under the Loan Agreement. On December 31, 2013, the Borrowers entered into a Second Amendment to Loan Agreement to extend the termination date under the Loan Agreement to April 15, 2015 and obtain a consent by the Bank to the Note Modifications (as described in Note 6 – Convertible Promissory Notes), among other matters. On April 8, 2014, the Borrowers entered into a Third Amendment to Loan Agreement to increase by $1,000,000 the amount of revolving loan availability through May 31, 2014, change the required fixed charge coverage ratio to 1.2 to 1, and increase the annual capital expenditures threshold from $250,000 to $500,000, among other things. The Loan Agreement provides for maximum borrowings under the credit facility of up to $10,000,000, including a letter of credit sub-limit of $2,000,000. Funds drawn under the revolving credit facility bear interest at the one month London Inter-Bank Offered Rate (“LIBOR”), plus 3.0% (interest rate of 3.15% as of June 30, 2014). The Loan Agreement is secured by the assets of the Borrowers, is guaranteed by the Company and the subsidiaries of Vertterre (supported by a pledge of all issued and outstanding stock of EQ, Vertterre and Vertterre’s subsidiaries) and expires on April 15, 2015.

 

The Loan Agreement contains a variety of affirmative and negative covenants, including, but not limited to, financial covenants that (i) require the Borrowers to maintain specified fixed charge coverage ratios, and (ii) limit certain capital expenditures by the Borrowers to $500,000 per fiscal year ending on or after December 31, 2014. Fees under the Loan Agreement include (i) a $750 per month collateral monitoring fee, (ii) an unused commitment fee of 0.25% per annum, and (iii) a letter of credit fee of 2.0% per annum.

 

As of June 30, 2014, the available borrowing base under the Loan Agreement totaled approximately $8,092,000, including $1,500,000 attributable to obligations under outstanding letters of credit. As of June 30, 2014, $4,933,669 was outstanding under the Loan Agreement.

 

As of and for the quarterly period ended June 30, 2014, the Borrowers were in compliance with all financial covenants under the Loan Agreement.

 

The Company is in discussions with its lender regarding a further extension of the Loan Agreement; however, the Company has not secured any such commitment at this time, nor can it provide any assurance that such commitment will be obtained on commercially acceptable terms, or at all.

 

13
 

  

NOTE 6 – CONVERTIBLE PROMISSORY NOTES

 

Private Placement Notes

 

On March 15, 2011 (“March 15 Notes”), May 13, 2011 (“May 13 Notes”), December 30, 2011 (“December 30 Notes”) and March 30, 2012 (“March 2012 Note”), pursuant to the terms of note purchase agreements by and between the Company and each investor (each a “Private Placement Note Purchase Agreement”), the Company completed the sale of $2,500,000, $500,000, $1,858,879, and $188,959 aggregate principal amount of subordinated convertible notes (collectively, the “Private Placement Notes”), respectively, to accredited investors in private placements. The aggregate amount of accrued and unpaid interest under the Private Placement Notes as of June 30, 2014 and December 31, 2013 was $1,555,052 and $1,255,320, respectively.

 

The March 15 Notes and the May 13 Notes bear interest at a rate of 15% per annum and the December 30 Notes and March 2012 Note bear interest at a rate of 10% per annum, with such rate set to increase to 15% on December 30, 2014 in accordance with the Note Modification discussed below. The Private Placement Notes are due and payable on April 30, 2015, and are unsecured and subordinate to the Company’s obligations to its senior lender. The principal and accrued interest of the Private Placement Notes are convertible, at the option of the holder, into a total of 12,619,595 and 3,873,424 shares, respectively, as of June 30, 2014, and 12,619,595 and 3,137,724 shares, respectively, as of December 31, 2013, at a conversion price of $0.40 per share (subject to adjustment in accordance with the terms of the Private Placement Notes). More specifically, the weighted average down round ratchet provision compensates the holder for certain dilutive events. The Private Placement Notes also provide for customary events of default, the occurrence of which may result in all of the Private Placement Notes then outstanding becoming immediately due and payable.

 

At any time after the one-year anniversary after the issuance of a March 15 Note or May 13 Note, if and only if the Company’s common stock has traded at an average price per share that is above two times the conversion price for 60 consecutive days, the Company may, in its discretion, convert any March 15 Note or May 13 Note into shares of the Company’s common stock in full satisfaction of such March 15 Note or May 13 Note. Additionally, in connection with the sale of the May 13 Notes, the Company and the holders of the May 13 Notes entered into a registration rights agreement, dated as of May 13, 2011, providing for certain piggyback registration rights with respect to the shares of common stock underlying the May 13 Notes.

 

At any time after the one-year anniversary after the issuance of a December 30 Note or the March 2012 Note, the Company may, at its discretion, convert any December 30 Note or the March 2012 Note into shares of its common stock in full satisfaction of such December 30 Note or the March 2012 Note if (i) the common stock is trading on a national securities exchange, (ii) the shares underlying the December 30 Note or March 2012 Note have been registered for resale with the SEC and the resale registration statement is effective, (iii) the average weekly trading volume of the common stock over the preceding three-months is equal to at least 1% of the total issued and outstanding shares of common stock, and (iv) the average closing price or last sale price per share of common stock has been at least two times the then-effective conversion price for any 60 consecutive trading days during the preceding six months.  Pursuant to the purchase agreements entered into in connection with the sale of the December 30 Notes and March 2012 Note, the Company agreed to certain covenants, including but not limited to a covenant that the Company will prepare and file with the SEC a registration statement on Form S-3 or such other available form covering the resale of the shares of its common stock issuable upon the conversion of the December 30 Notes and March 2012 Note and shall cause such registration statement to become effective on or before June 30, 2014.  No such registration statement has been filed with or declared effective by the SEC. Additionally, in connection with the sale of the December 30 Notes and March 2012 Note, the Company and the holders of the December 30 Notes and March 2012 Note entered into a registration rights agreement, dated as of December 30, 2011 and amended on March 30, 2012, providing for certain demand and piggyback registration rights with respect to the shares of common stock underlying the December 30 Notes and March 2012 Note.

 

On December 31, 2013, the Company modified all of its Private Placement Notes in aggregate principal amount of $5,047,838, principally in order to (i) extend their maturity dates to April 30, 2015 and (ii) increase the interest rate on their unpaid principal balance to 15% per annum effective upon each of their respective original maturity dates (the “Note Modifications”). The other principle terms of the Private Placement Notes remained the same. The Note Modifications were accounted for as a modification of debt.

 

In consideration for the Note Modifications, the Company issued warrants to purchase an aggregate of 1,932,321 shares of the Company’s common stock at an exercise price of $0.25 per share (subject to adjustment) to the holders of the Private Placement Notes (the “Private Placement Warrants”). The grant date fair value of the Private Placement Warrants issued of $145,175 was capitalized as debt issuance costs and is being amortized over the remaining term of the Private Placement Notes.

 

14
 

  

NOTE 6 – CONVERTIBLE PROMISSORY NOTES, continued

 

Private Placement Notes, continued

 

The Company is in discussions with certain holders of the Private Placement Notes and expects that the holders of the Private Placement Notes would provide their consent to a further extension of the maturity of the Private Placement Notes. However, the Company has not secured any such consents at this time, nor can it provide any assurance that such consents will be obtained on commercially acceptable terms, or at all.

 

Accounting for Convertible Promissory Notes

 

Pursuant to the terms of the Private Placement Notes, the applicable conversion prices are subject to adjustment in the event that the Company subsequently issues common stock or other equity or debt securities convertible into common stock at a price less than such conversion price. More specifically, the weighted average down round ratchet provision compensates the holder for certain dilutive events. The Company bifurcated the conversion option derivative from its debt host in accordance with ASC 815. For the six months ended June 30, 2014 and 2013, the Company recorded an additional derivative liability of $0 and $617, respectively for the accrued interest on the Private Placement Notes, which also was convertible. The Company amortized the respective discounts over the terms of the notes, using the effective interest method. For the six months ended June 30, 2014 and 2013, $147,920 and $215,303, respectively, of the note and accrued interest discount was amortized and charged to interest expense.

 

As of June 30, 2014 and December 31, 2013, after the mark-to-market adjustment, the aggregate fair value of the conversion liability was $0 and $6,067, respectively, representing the fair value of the conversion feature of both the principal and the interest for the Private Placement Notes.

 

Convertible promissory notes consist of:

 

   As of June 30, 2014   As of December 31, 2013 
   Principal   Discount   Balance, Net
of Discount
   Principal   Discount   Balance, Net
of Discount
 
March 15 Notes   2,500,000    -    2,500,000    2,500,000    49,500    2,450,500 
May 13 Notes   500,000    -    500,000    500,000    17,611    482,389 
December 30 Notes   1,858,879    71,968    1,786,911    1,858,879    140,411    1,718,468 
March 2012 Note   188,959    3,017    185,942    188,959    5,938    183,021 
Total convertible promissory notes, net  $5,047,838   $74,985   $4,972,853   $5,047,838   $213,460   $4,834,378 

 

Future minimum principal payments of these convertible promissory notes are as follows:

 

For the Twelve Months Ended June 30,  Amount 
2015   5,047,838 
Total, gross  $5,047,838 
Less: discount   (74,985)
Total, net  $4,972,853 

 

As of June 30, 2014, the Company was in compliance with the terms of the Private Placement Notes.

 

15
 

  

NOTE 7 – COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

The Company is involved in various claims, legal actions and regulatory proceedings arising from time to time in the ordinary course of business. Other than the matters set forth below, in the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our combined financial position, results of operations or cash flows.

 

Energy Solutions Claim

 

During the fourth quarter of 2013, the Company was notified that Energy Solutions Government Group, Inc. (“Energy Solutions”), which was engaged by the Company and Sullivan International Group, Inc. (“Sullivan”) for subcontract services, was seeking a total of $2,567,472 from the Company and Sullivan, of which the Company’s portion was $1,258,061. The Company believed that the services allegedly performed by Energy Solutions were unapproved and not part of the Company’s agreement with Energy Solutions. The Company and Sullivan have negotiated a final settlement with Energy Solutions under which the Company and Sullivan agreed to pay Energy Solutions a total of $1,657,283. The Company’s portion of this settlement was $697,735, of which $191,614 was paid during the second quarter of 2014 and the remaining amount of $506,121 has been expensed by the Company and included within accounts payable on the condensed consolidated balance sheet as of June 30, 2014.

   

Environmental Restoration Claim

 

Environmental Restoration (“ER”), which is a subcontractor of EQM, pursuant to a notice received on November 8, 2013, has alleged damages of $3 million on the basis that it was guaranteed more work under its subcontract agreement for ERRS Region 6 than it actually received. The Company believes that this claim is without merit and that it is more likely than not that the Company will not have to pay any amount in connection with this claim. The Company is in regular communications with ER regarding their claim. This matter is still pending as of June 30, 2014.

 

Investigation Regarding FOB Hope Project

 

In August 2007, the Company initiated an internal investigation regarding potential billing for unallowable costs in connection with its construction of a forward operating base in Iraq beginning in 2006 (the “FOB Hope Project”). The Company completed the FOB Hope Project in March 2008. The Company submitted its findings to the Office of the Department of Defense Inspector General and the Company was admitted into the Department of Defense Voluntary Disclosure Program, which provides participants with certain protections and rights related to possible contract violations. The Company answered all questions of, and submitted all information requested by, the Federal government concerning this matter. On March 26, 2013, the Company received a letter from the Department of the Air Force informing the Company that the Air Force Civil Engineer Center is seeking reimbursement of approximately $3.69 million, based on approximately $440,409 in overbillings that it disclosed as part of the Voluntary Disclosure Program and an additional approximately $3.25 million in unallowable costs as determined by a verification investigation conducted by the Defense Contract Audit Agency (“DCAA”). On June 4, 2014, the Company received a letter from the Air Force reducing the demand amount to $2.63 million, including the $440,409 in agreed upon overbillings. The Company has challenged this amount with a response in July 2014. Beyond what has already been accrued, the Company cannot reasonably estimate the amount that will ultimately be paid under this claim. As a result, an unfavorable outcome may have a material impact on the Company’s operations. The Company is in regular communications with the DCAA regarding their claim. Based upon those discussions, the Company believes that any settlement reached would include payments over a long-term installment plan. This matter is still pending as of June 30, 2014.

 

Pursuant to an agreement with the Air Force, the Company began making payments on the disclosed $440,409 in overbillings, with $294,792 paid through June 30, 2014, an additional $109,685 to be paid over the remainder of 2014 and $35,932 to be paid in 2015. The Company has filed a challenge in July 2014 with the Air Force through their attorney on the remaining claim and is awaiting a response from the Air Force. As of June 30, 2014, the Company has included within accrued expenses and other current liabilities, within the consolidated balance sheet, a total of $145,617 for amounts that are due in regard to the FOB Hope Project, which represents the agreed upon overbillings obligation amount of $440,409 less the payments of $294,792 made through June 30, 2014.

 

16
 

  

NOTE 7 – COMMITMENTS AND CONTINGENCIES, continued

 

Legal Proceedings, continued

 

FOB Hope Project Claim for Equitable Adjustment

 

In 2008, the Company filed a request with the U.S. Air Force for an equitable adjustment in connection with the FOB Hope Project (the “Air Force Claim”).  The Company completed the FOB Hope Project in March 2008.  The Air Force Claim is being reviewed, but the Company has not been provided with a specific time line for final resolution of the Air Force Claim and the Company is not able to determine the amount that might be received in connection with the Air Force Claim. The Company does not believe that the results of this matter will have a material effect on its operations.

 

Memorandum of Understanding with Sullivan International Group, Inc.

 

On January 21, 2014, the Company entered into a memorandum of understanding (the “Sullivan MOU”) with Sullivan International Group, Inc., or Sullivan, regarding a potential merger. The Sullivan MOU, which is non-binding with respect to the terms of the merger, provided that the Company and Sullivan would negotiate and enter into a merger agreement pursuant to which Sullivan would merge with and into a subsidiary of the Company.  The Company and Sullivan have been negotiating the terms of the transaction and related financing, some of the material terms of which have changed from those set out in the Sullivan MOU, but the parties have not reached a definitive agreement as to the final terms of the transaction and there can be no assurance that the parties will enter into a merger agreement or complete the merger.

 

The Sullivan MOU contains a binding exclusivity provision in which Sullivan has agreed that for 180 days it will not enter into another agreement with a third party with respect to the acquisition or sale of Sullivan or a material part of its assets, or engage in any related discussions with a third party.  This exclusivity provision is extended automatically for an additional 180 days if the Company enters into a letter of intent or similar agreement with an underwriter or placement agent with respect to the financing. On March 26, 2013, the Company entered into an engagement letter with Roth Capital Partners, LLC to explore financing opportunities, with Monarch Capital Group, LLC acting as a co-manager. As a result, the exclusivity provision of the Sullivan MOU has been extended according to its terms.

 

Notwithstanding the above, the Sullivan MOU does not preclude the Company from continuing to pursue or close other potential acquisition candidates.

 

17
 

  

NOTE 8 – STOCK BASED COMPENSATION

 

Stock Options

 

The fair value of stock options is amortized on a straight line basis over the requisite service periods of the respective awards. Stock based compensation expense related to stock options was $3,227 and $39,730 for three months ended June 30, 2014 and 2013, $38,260 and $87,096 for the six months ended June 30, 2014 and 2013, respectively, and was reflected in selling, general and administrative expenses on the accompanying consolidated statements of operations. As of June 30, 2014, the unamortized value of options was $8,758. As of June 30, 2014, the unamortized portion will be expensed over a period of 0.2 years.

 

The following table is a summary of activity under the Company’s 2011 Stock Option Plan:

 

   Number of
Options
   Weighted
Average
Exercise
Price
   Weighted
Average
Grant Date
Fair Value
   Weighted
Average
Remaining
Contractual
Life
  Intrinsic
Value
 
Options outstanding at January 1, 2014   4,306,400   $0.31   $0.13   7.5 years  $- 
Granted   -                   
Exercised   -                   
Forfeited   (1,149,000)  $0.30              
Options outstanding at June 30, 2014   3,157,400   $0.31   $0.12   7.1 years  $- 
                        
Exercisable at January 1, 2014   3,129,200   $0.31   $0.13   7.5 years  $- 
Vested   954,350   $0.31              
Forfeited   (1,146,750)  $0.30              
Exercisable at June 30, 2014   2,936,800   $0.31   $0.13   7.0 years  $- 

 

Warrants to Purchase Common Stock

 

The following table is a summary of activity for the warrants issued by the Company:

 

   Number of
Warrants
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Life in Years
Warrants outstanding at January 1, 2014   2,184,138   $0.23   9.6 years
Granted   -    -    
Exercised   -    -    
Forfeited   -    -    
Options outstanding at June 30, 2014   2,184,138   $0.23   9.1 years

 

NOTE 9 – MAJOR CUSTOMERS

 

During the three months ended June 30, 2014, the Company’s two largest customers, representing work performed under government contracts, accounted for approximately 62% and 4% of consolidated revenues, respectively, compared with 54% and 10% of consolidated revenues, respectively, during the three months ended June 30, 2013.

 

During the six months ended June 30, 2014, the Company’s two largest customers, representing work performed under government contracts, accounted for approximately 56% and 3% of consolidated revenues, respectively, compared with 48% and 15% of consolidated revenues, respectively, during the six months ended June 30, 2013.

 

18
 

  

NOTE 10 - RELATED PARTIES

 

Argentum Capital Partners II, L.P., Argentum Capital Partners, L.P., Walter Barandiaran and Daniel Raynor

 

Mr. Barandiaran serves as the Company’s Chairman of the Board. Mr. Barandiaran and Mr. Raynor are co-managing members of Argentum Investments, LLC, which is the managing member of Argentum Partners II, LLC, which is the general partner of ACP II. Additionally, Mr. Barandiaran is the President and Mr. Raynor is the chairman of B.R. Associates, Inc., which is the general partner of Argentum Capital Partners, L.P. (“ACP”).  As of June 30, 2014, ACP II, ACP, Mr. Barandiaran and Mr. Raynor, collectively, owned 21,313,086 shares of the Company’s common stock, 952,381 shares of Series B Stock (convertible into 8,571,429 shares of the Company’s common stock) and Private Placement Warrants to purchase 648,605 shares of the Company’s common stock.

 

The Company and Argentum Equity Management, LLC (“Argentum Management”), an affiliate of ACP II, are parties to a Management Services Agreement (the “Management Services Agreement”), dated July 1, 2012, pursuant to which the Company engaged Argentum Management to provide certain management services to the Company, including serving as a consultant with respect to periodic reviews of its business, operations, and strategic direction; assisting the Board in corporate governance, personnel, compensation, and other matters; providing the Company with assistance in identifying and analyzing potential mergers, acquisitions and financing transactions; and providing the Company with the services of its Chairman of the Board, among other things. In consideration of the performance of these services, the Management Services Agreement provides for the payment of minimum annual fees to Argentum Management as follows: $120,000 for the period January 1, 2013 to December 31, 2013, $150,000 for the period January 1, 2014 to December 31, 2014, and $180,000 for the period January 1, 2015 to December 31, 2015. The annual fee is payable in monthly installments in arrears in cash. The Management Services Agreement will continue in effect until the earlier of (i) the date as of which Argentum Management or one or more of its affiliates no longer collectively control, in the aggregate, at least 20% of the Company’s equity interests (on a fully diluted basis), or (ii) such earlier date as the Company and Argentum Management may mutually agree. On September 27, 2013, Argentum Management agreed to waive $40,000 of its annual fee for the year end December 31, 2013.

 

On March 15, 2011, ACP, ACP II, Mr. Barandiaran, and two trusts controlled by Mr. Raynor purchased March 15 Notes. On May 13, 2011, ACP purchased a May 13 Note.  On December 30, 2011, ACP II, Mr. Barandiaran, and a trust controlled by Mr. Raynor purchased December 30 Notes. The current amount of principal and accrued and unpaid interest outstanding on each of these notes is presented in the table below.

 

On December 31, 2013, in consideration of the Note Modification (as described in Note 6 – Convertible Promissory Notes), ACP II, ACP, Mr. Barandiaran and trusts controlled by Mr. Raynor were issued Private Placement Warrants to purchase 326,889, 187,867, 71,049, and 62,800 shares of the Company’s common stock each at an exercise price of $0.25 per share, respectively.

 

Jack Greber

 

Mr. Greber is a director and Senior Vice President of EPA Programs and Business Development of the Company and served as the Company’s President from 2000 through November 2011 and Chief Executive Officer from March 2008 to November 2011. As of June 30, 2014, Mr. Greber owned 3,058,314 shares of the Company’s common stock and Private Placement Warrants to purchase 296,044 shares of the Company’s common stock.

 

On March 15, 2011, Mr. Greber purchased a March 15 Note. On December 30, 2011, Mr. Greber purchased a December 30 Note. On March 30, 2012, the Company issued to Mr. Greber a March 2012 Note. The current amount of principal and accrued and unpaid interest outstanding on each of these notes is presented in the table below.

 

On December 31, 2013, in consideration of the Note Modification (as described in Note 6 – Convertible Promissory Notes), Mr. Greber was issued Private Placement Warrants to purchase 296,044 shares of the Company’s common stock at an exercise price of $0.25 per share.

 

Jon Colin, Robert Galvin, and Kurien Jacob

 

Jon Colin serves as the Company’s interim Chief Executive Officer and as a director of the Company. Robert R. Galvin serves as the Company’s Chief Financial Officer and Kurien Jacob serves as a director of the Company. As of June 30, 2014, Messrs. Colin, Galvin and Jacob, collectively, owned 706,424 shares of the Company’s common stock and Private Placement Warrants to purchase 101,733 shares of the Company’s common stock.

 

On March 15, 2011, Messrs. Galvin and Jacob purchased March 15 Notes. On May 13, 2011, Mr. Colin purchased a May 13 Note. The current amount of principal and accrued and unpaid interest outstanding on each of these notes is presented in the table below.

 

On December 31, 2013, in consideration of the Note Modification (as described in Note 6 – Convertible Promissory Notes), Messrs. Colin, Galvin and Jacob were issued Private Placement Warrants to purchase 46,933, 27,400, and 27,400 shares of the Company’s common stock each at an exercise price of $0.25 per share, respectively.

 

19
 

  

NOTE 10 - RELATED PARTIES, continued

 

Related Party Holdings

 

As of June 30, 2014, the following principal and interest amounts were outstanding on notes held by the following related parties:

 

   March 15 Notes   May 13 Notes   December 30 Notes   March 2012 Notes 
   Principal   Interest   Principal   Interest   Principal   Interest   Principal   Interest 
Argentum Capital Partners II, L.P.  $300,000   $104,708   $-   $-   $1,015,556   $257,556   $-   $- 
Argentum Capital Partners, L.P.  $300,000   $104,708   $50,000   $16,222   $-   $-   $-   $- 
Walter Barandiaran  $100,000   $34,903   $-   $-   $101,556   $25,756   $-   $- 
Daniel Raynor  $100,000   $34,903   $-   $-   $50,000   $12,681   $-   $- 
Jack Greber  $375,000   $130,885   $-   $-   $376,944   $95,597   $188,959   $43,146 
Robert Galvin  $50,000   $17,451   $-   $-   $-   $-   $-   $- 
Jon Colin  $-   $-   $100,000   $32,444   $-   $-   $-   $- 
Kurien Jacob  $50,000   $17,451   $-   $-   $-   $-   $-   $- 

 

As of December 31, 2013, the following notes were outstanding and held by the following related parties:

 

   March 15 Notes   May 13 Notes   December 30 Notes   March 2012 Notes 
   Principal   Interest   Principal   Interest   Principal   Interest   Principal   Interest 
Argentum Capital Partners II, L.P.  $300,000   $85,167   $-   $-   $1,015,556   $206,496   $-   $- 
Argentum Capital Partners, L.P.  $300,000   $85,167   $50,000   $13,375   $-   $-   $-   $- 
Walter Barandiaran  $100,000   $28,389   $-   $-   $101,556   $20,650   $-   $- 
Daniel Raynor  $100,000   $28,389   $-   $-   $50,000   $10,167   $-   $- 
Jack Greber  $375,000   $106,458   $-   $-   $376,944   $76,645   $188,959   $33,645 
Robert Galvin  $50,000   $14,194   $-   $-   $-   $-   $-   $- 
Jon Colin  $-   $-   $100,000   $26,750   $-   $-   $-   $- 
Kurien Jacob  $50,000   $14,194   $-   $-   $-   $-   $-   $- 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

Information included or incorporated by reference in this Quarterly Report on Form 10-Q may contain forward-looking statements.  This information may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different than the future results, performance or achievements expressed or implied by any forward-looking statements.  Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

 

Examples of forward-looking statements include, but are not limited to, statements regarding our proposed services, market opportunities and acceptance, expectations for revenues, cash flows and financial performance, and intentions for the future.  Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on April 14, 2014 and in Part II, Item 1A of this report.  In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q will in fact be accurate.  Further, we do not undertake any obligation to publicly update any forward-looking statements.  As a result, you should not place undue reliance on these forward-looking statements.

 

Overview

 

EQM Technologies & Energy, Inc. and its subsidiaries (collectively “we”, “us”, the “Company” or “EQM”) is a leading full service provider of environmental consulting, engineering, program management, clean technology, remediation and construction management and technical services. Our solutions span the entire life cycle of consulting and engineering projects and are designed to help public and private sector organizations manage and control their environmental risks and comply with regulatory requirements.  Our focus areas include air and emissions, water and wastewater, industrial hygiene and safety, and emergency response and hazardous waste site cleanup.

 

Since the 1970s, there has been a significant increase in environmental legislation that has benefitted the environmental services industry substantially.  As compliance with these laws is mandatory and violations can be punitive, environmental services have become more strategic and mission critical activities for companies and public agencies that have been subjected to these complex policies.  We believe that organizations are increasingly evaluating, identifying, quantifying and managing elements of environmental risk on a more proactive basis, to avoid the costs, liabilities, and other adverse effects of being found in noncompliance with regulations, as opposed to purely reacting to critical events, catastrophes, or violations.  This has helped drive demand and growth for environmental services to help prevent, mitigate, and navigate such risks. We intend to grow our environmental services business by capitalizing on these trends. We believe that we will be able to grow organically through leveraging our relationships with our existing public and private sector clients, and potentially through selected acquisitions, we believe that we will be able to bolster the scope and geographic reach of our core environmental services areas.

 

We categorize the industry in which we compete into three primary service areas:

 

Environmental Consulting

These services are designed to help government and industry protect the environment and natural resources and comply with regulations and laws. They include environmental engineering and consulting services to industry and government, air and water quality consulting, industrial hygiene, environmental modeling and risk assessments, regulatory compliance and multimedia permitting.

 

Remediation and Construction

These services are designed to help sustain the safety of natural resources by creating / rehabilitating infrastructure and restoring environments damaged by natural disasters and manmade activities. They include support to U.S. federal government, state and local governments and commercial clients for environmental engineering, remediation and construction, infrastructure development, and alternative energy.

 

Design Engineering

These services are designed to help industries operate through environmentally sustainable, responsible, and efficient means. Serving primarily the private sector, they include engineering evaluation and process optimization services to address environmental matters surrounding plants, processes, and pollution.

 

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On January 21, 2014, we entered into a memorandum of understanding (the “Sullivan MOU”) with Sullivan International Group, Inc. (“Sullivan”) regarding a potential merger. Sullivan, headquartered in San Diego, CA, is a privately-held professional services firm providing applied science, environmental, and technology services to the commercial and government sectors. The Sullivan MOU, which is non-binding with respect to the terms of the merger, provided that the Company and Sullivan would negotiate and enter into a merger agreement pursuant to which Sullivan would merge with and into a subsidiary of the Company. The Company and Sullivan have been negotiating the terms of the transaction and related financing, some of the material terms of which have changed from those set out in the Sullivan MOU, but the parties have not reached a definitive agreement as to the final terms of the transaction and there can be no assurance that the parties will enter into a merger agreement or complete the merger.

 

The Sullivan MOU contains a binding exclusivity provision in which Sullivan has agreed that for 180 days it will not enter into another agreement with a third party with respect to the acquisition or sale of Sullivan or a material part of its assets, or engage in any related discussions with a third party.  This exclusivity provision is extended automatically for an additional 180 days if we enter into a letter of intent or similar agreement with an underwriter or placement agent with respect to the financing. On March 26, 2013, we entered into an engagement letter with Roth Capital Partners, LLC to explore financing opportunities, with Monarch Capital Group, LLC acting as a co-manager. As a result, the exclusivity provision of the Sullivan MOU has been extended according to its terms.

 

Results of Operations

 

Overview of the Effect of the Federal Sequester and Government Shutdown on Our Revenue

 

We rely heavily on long-term relationships and multi-year contracts with numerous federal agencies for a significant portion of our revenues.  We note that for the three months ended June 30, 2014 and 2013, the EPA accounted for approximately 62% and 54% of our total revenues, respectively, and for the six months ended June 30, 2014 and 2013, the EPA accounted for approximately 56% and 48% of our total revenues, respectively. Most of our work for the EPA is performed under long-term contracts (i.e., “master contracts”) providing us with the potential to realize a certain amount of revenue over the “life” or total performance period of these contracts. We are dependent upon the EPA to individually authorize and fund specific projects, or task orders, under these master contracts.

 

In 2013, the EPA and other federal agencies delayed the authorization of new funding and work under existing task orders and the authorization of new task orders due in large part to the actual and threatened unspecified cuts in federal discretionary spending in the federal budget sequestration process under the Budget Control Act of 2011 (the “Sequester”). Further, on October 1, 2013, the U.S. federal government shut down for a period of 17 days (the “Shutdown”). In anticipation of and during the Shutdown, many of our funded projects with the EPA and other federal agencies were delayed, and some were temporarily shut down. These events negatively impacted our revenues from the EPA and other federal agencies during 2013, which had a negative impact upon our financial results.

 

In January 2014, the federal government passed a spending bill for fiscal 2014. During 2013 and since the passage of the 2014 federal budget, our management team has worked with the contracting officers and project officers at the EPA in order to facilitate the EPA’s funding of ongoing work and the start of new projects. Currently, we believe that our EPA/ERRS business is operating at normal levels. However, there may be future adverse effects to our results of operations if the federal government does not continue to approve spending.

 

Three Months Ended June 30, 2014 and 2013

 

Overview of Results

 

We reported a consolidated net loss and net loss attributable to common stockholders of $348,890 and 343,630, respectively for the three months ended June 30, 2014, as compared to a net loss and net loss attributable to common stockholders of $159,308 and $159,308, respectively, for the three months ended June 30, 2013. The increase in net loss and net loss attributable to common stockholders of $189,582 and $184,322, respectively, was due primarily to tighter margins, caused primarily by a greater utilization of subcontractors, on several large construction projects in 2014, resulting in a lower gross profit in 2014 on comparable levels of revenue.

 

Revenues and Gross Profit

 

We had overall revenues of $14,125,089 for the three months ended June 30, 2014, as compared to revenues of $14,166,862 for the three months ended June 30, 2013, for an overall decrease of $41,773 or 0.3%.  Although revenues were basically flat, the revenue mix shifted in 2014 to a greater percentage of EPA remediation work. Our gross profit for the three months ended June 30, 2014 was $2,821,805 or 20.0% of revenues as compared to $3,314,054 or 23.4% of revenues for the three months ended June 30, 2013. The lower gross margin for the three months ended June 30, 2014 was primarily due to (i) a long-term EPA construction project where we utilize sub-contractors to a greater extent, resulting in lower margins; (ii) a harsher than average winter, which delayed construction work for certain of our projects to late in the second quarter of 2014; and (iii) work done on our Vertterre landfill gas project, which included a high volume of equipment sales made at cost.

 

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Operating Expenses

 

Operating expenses are primarily driven by compensation expenses and professional fees.   Our consolidated operating expenses for the three months ended June 30, 2014 and 2013 were $3,004,564 and $3,290,460, respectively.  The decrease in operating expenses of $285,896 was principally attributable to reductions in professional fees and salaries. During the three months ended June 30, 2013, we incurred legal and professional fees due to the EPA claim for equitable adjustment as well as additional operating costs incurred by Vertterre for administrative and engineering personnel, the costs of which were not incurred during the three months ended June 30, 2014.

 

Six Months Ended June 30, 2014 and 2013

 

Overview of Results

 

We reported a consolidated net loss and net loss attributable to common stockholders of $1,648,593 and $1,638,785, respectively for the six months ended June 30, 2014, as compared to a loss and net loss attributable to common stockholders of $1,528,383 and $1,528,383, respectively, for the six months ended June 30, 2013. The increase in net loss and net loss attributable to common stockholders of $120,210 and $110,402, respectively, was primarily due to much lower gross profit margins on slightly higher sales. The lower gross margins overall were primarily due to the relatively low gross margins on the engineering revenues attributable to the landfill gas plant venture, and lower margins on certain long term construction projects during the six months ended June 30, 2014.

 

Revenues and Gross Profit

 

We had overall revenues of $23,145,653 for the six months ended June 30, 2014, as compared to revenues of $22,095,483 for the six months ended June 30, 2013, for an overall increase of $1,050,170 or 4.8%. The increase in revenues for the six months ended June 30, 2014 was primarily attributable to the operations of Vertterre, which had an increase in revenue of $2,278,933, primarily due to the engineering and planning work in connection with our landfill gas plant venture. This was partially offset by less commercial and remediation and construction work for the six months ended June 30, 2014. Our gross profit for the six months ended June 30, 2014 was $4,932,575 or 21.3% of revenues as compared to $5,767,819 or 26.1% of revenues for the six months ended June 30, 2013. The lower gross margin for the six months ended June 30, 2014 was primarily due to (i) a long-term EPA construction project where we utilize sub-contractors to a greater extent, resulting in lower margins; (ii) a harsher than average winter, which delayed construction work for certain of our projects to late in the second quarter of 2014; and (iii) work done on our Vertterre landfill gas project, which included a high volume of equipment sales made at cost.

 

Operating Expenses

 

Operating expenses are primarily driven by compensation expenses and professional fees.   Our consolidated operating expenses for the six months ended June 30, 2014 and 2013 were $6,132,223 and $6,829,196, respectively.  The decrease in operating expenses of $696,973 was principally the result of reductions in overhead salaries in 2014. During the six months ended June 30, 2013, we incurred legal and professional fees due to the EPA claim for equitable adjustment as well as additional operating costs incurred by Vertterre for administrative and engineering personnel, the costs of which were not incurred during the six months ended June 30, 2014.

 

23
 

 

Liquidity and Capital Resources

 

As of June 30, 2014 our cash on hand was $741,198. As of June 30, 2014 our accumulated deficit was $10,491,057.  

 

Sources of liquidity – We have historically met our liquidity requirements principally through the sale of equity and debt securities and our bank line of credit.  Our borrowings as of June 30, 2014 are as follows:

 

    Principal
Outstanding
    Interest Rate   Maturity Date
Senior Debt:                
Loan Agreement   $ 4,933,669     LIBOR plus 3.0%   April 15, 2015
Convertible Notes:                
Private Placement Notes                
March 15 Notes     2,500,000     15% per annum   Principal and accrued interest due April 30, 2015
May 13 Notes     500,000     15% per annum   Principal and accrued interest due April 30, 2015
December 30 Notes     1,858,879     10% per annum*   Principal and accrued interest due April 30, 2015
March 2012 Note     188,959     10% per annum*   Principal and accrued interest due April 30, 2015
                 
Total     9,981,507          
Discounts     (74,985)          
Total, net of discounts   $ 9,906,522          

 

* The interest rate will increase to 15% per annum effective December 30, 2014.

 

The terms of these debt securities are described in detail in Notes 7 and 8 to our Condensed Consolidated Financial Statements.

 

Cash Flow – For the Six Months Ended June 30, 2014

 

Cash Flows – Operating Activities

 

During the six months ended June 30, 2014, cash flows used in operating activities were $1,569,128, consisting primarily of a net loss of $1,648,593.

 

Cash Flows – Investing Activities

 

During the six months ended June 30, 2014, cash flows provided by investing activities were $1,212,461, consisting primarily of $1,245,542 that we received in January 2014 as contingent consideration in connection with sale of our biodiesel production facility and related assets in January 2013 related to the reinstatement of the federal biodiesel blender’s tax credit with respect to the year 2012.

 

Cash Flows – Financing Activities

 

During the six months ended June 30, 2014, cash flows used in financing activities were $1,276,496, consisting primarily of $1,225,861 of net repayments of our revolving credit facility and $40,631 paid for debt financing costs.

 

Future Liquidity and Cash Flows

 

As of June 30, 2014, our cash on hand was $741,198. We incurred a net loss attributable to common stockholders of $343,630 and $1,638,785 for the three and six months ended June 30, 2014. At June 30, 2014, our accumulated deficit was $10,491,057 and we had total equity of $587,081. As of June 30, 2014, we had a deficit in working capital of $7,444,238. We have historically met our liquidity requirements through the sale of equity and debt securities, operations and its revolving credit facility.

 

We currently have Private Placement Notes (as defined in Note 6 to our condensed consolidated financial statements) and related accrued interest with aggregate obligations of principal and interest of $5,047,838 and $1,555,052, respectively, outstanding as of June 30, 2014. The Private Placement Notes were modified on December 31, 2013 to extend their maturities to April 30, 2015. Pursuant to the terms of the Private Placement Notes, holders may convert the principal and accrued interest into common stock at any time at a conversion price of $0.40 per share. We are in discussions with certain holders of the Private Placement Notes and expect that the holders of the Private Placement Notes would provide their consent to a further extension of the maturity of the Private Placement Notes. However, we have not secured any such consents at this time, nor can we provide any assurance that such consents will be obtained on commercially acceptable terms, or at all.

 

24
 

  

We have a Loan Agreement with a balance of $4,933,669 outstanding as of June 30, 2014 (as discussed in Note 5 to our condensed consolidated financial statements), which expires on April 15, 2015. On April 8, 2014, in connection with an amendment to the Loan Agreement effective April 1, 2014, among other modifications, the bank (i) increased by $1,000,000 the amount of revolving loan availability through May 31, 2014 for the fiscal quarters ending June 30, 2014, and (ii) set the fixed asset coverage ratio at 1.2 to 1. We are in discussions with our lender regarding a further extension of the Loan Agreement and we expect to be able to extend the Loan Agreement; however, we have not secured any such commitment at this time, nor can we provide any assurance that such commitment will be obtained on commercially acceptable terms, or at all.

   

We believe that our cash on hand, cash flows expected to be generated from operations, and borrowings available under our credit facility (after its terms are extended), will be sufficient to fund our operations. If the terms of the Loan Agreement and the Private Placement Notes are not extended, we will need to seek alternative sources of funding. If we are not successful in either case, this may have an impact on our financial position.

 

On March 26, 2013, we received a letter from the Air Force seeking reimbursement of approximately $3.69 million related to the FOB Hope Project and a subsequent letter on June 4, 2014 reducing the amount claimed to $2.63 million, including $440,409 in overbillings voluntarily disclosed and agreed upon by the Company (as discussed in Note 7 to our condensed consolidated financial statements). We believe that we will be successful in defending our position with the Air Force. However, if we are not successful in defending our position, the outcome may have a material adverse effect on our financial position.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements as of June 30, 2014.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4.Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, our principal executive officer and principal financial officer evaluated the

effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on their evaluation of our disclosure controls and procedures, our principal executive officer and principal financial officer, with the participation of the Company’s management, concluded that our disclosure controls and procedures were not effective as of June 30, 2014, to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.

 

Description of Material Weakness

 

Management has concluded that the Company’s disclosure controls and procedures and internal control over financial reporting were not effective as of June 30, 2014, due to the need for more enhanced and formalized documentation regarding the financial statement closing and review process to ensure that the application of the Company’s accounting policies and the presentation of disclosures in the notes to the financial statements is adequate.

 

Remediation of Material Weakness

 

Management has developed a plan and related timeline for the Company to design a set of control procedures and the related required documentation thereof in order to address this material weakness. Management has targeted to have the necessary controls in place by the end of 2014. Specifically, management intends to engage a consultant who will assist the Company in the identification of required key controls, the necessary steps required for procedures to ensure the appropriate communication and review of inputs necessary for the financial statement closing process, as well as for the appropriate presentation of disclosures within the financial statements.

 

25
 

 

Changes in Internal Control over Financial Reporting

 

During the fiscal quarter ended June 30, 2014, there were no changes in our internal controls over financial reporting, or in other factors that could significantly affect these controls, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

26
 

 

PART II.  OTHER INFORMATION

 

Item 1.   Legal Proceedings.

 

We are involved in various claims, legal actions and regulatory proceedings arising from time to time in the ordinary course of business. Other than the matters set forth below, in the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our combined financial position, results of operations or cash flows.

 

Energy Solutions Claim

 

During the fourth quarter of 2013, the Company was notified that Energy Solutions Government Group, Inc. (“Energy Solutions”), which was engaged by the Company and Sullivan for subcontract services, was seeking a total of $2,567,472 from the Company and Sullivan, of which the Company’s portion was $1,258,061. The Company believed that the services allegedly performed by Energy Solutions were unapproved and not part of the Company’s agreement with Energy Solutions. The Company and Sullivan have negotiated a final settlement with Energy Solutions under which the Company and Sullivan will pay Energy Solutions $1,657,283. The Company’s portion of this settlement was $697,735, of which $191,614 was paid during the second quarter of 2014 and the remaining amount of $506,121 has been expensed by the Company and included within accounts payable on the condensed consolidated balance sheet as of June 30, 2014.

 

Environmental Restoration Claim

 

Environmental Restoration (“ER”), which is a subcontractor of EQM, pursuant to a notice received on November 8, 2013, has alleged damages of $3 million on the basis that it was guaranteed more work under its subcontract agreement for ERRS Region 6 than it actually received. The Company believes that this claim is without merit and that it is more likely than not that the Company will not have to pay any amount in connection with this claim. The Company is in regular communications with ER regarding their claim. This matter is still pending as of June 30, 2014.

 

Investigation Regarding FOB Hope Project

 

In August 2007, the Company initiated an internal investigation regarding potential billing for unallowable costs in connection with its construction of a forward operating base in Iraq beginning in 2006 (the “FOB Hope Project”). The Company completed the FOB Hope Project in March 2008. The Company submitted its findings to the Office of the Department of Defense Inspector General and the Company was admitted into the Department of Defense Voluntary Disclosure Program, which provides participants with certain protections and rights related to possible contract violations. The Company answered all questions of, and submitted all information requested by, the Federal government concerning this matter. On March 26, 2013, the Company received a letter from the Department of the Air Force informing the Company that the Air Force Civil Engineer Center is seeking reimbursement of approximately $3.69 million, based on approximately $440,409 in overbillings that it disclosed as part of the Voluntary Disclosure Program and an additional approximately $3.25 million in unallowable costs as determined by a verification investigation conducted by the Defense Contract Audit Agency (“DCAA”). On June 4, 2014, the Company received a letter from the Air Force reducing the demand amount to $2.63 million, including the $440,409 in agreed upon overbillings. The Company has challenged this amount with a response in July 2014. Beyond what has already been accrued, the Company cannot reasonably estimate the amount that will ultimately be paid under this claim. As a result, an unfavorable outcome may have a material impact on the Company’s operations. The Company is in regular communications with the DCAA regarding their claim. Based upon those discussions, the Company believes that any settlement reached would include payments over a long-term installment plan. This matter is still pending as of June 30, 2014.

 

Pursuant to an agreement with the Air Force, the Company began making payments on the disclosed $440,409 in overbillings, with $294,792 paid through June 30, 2014, an additional $109,685 to be paid over the remainder of 2014 and $35,932 to be paid in 2015. The Company has filed a challenge in July 2014 with the Air Force through their attorney on the remaining claim and is awaiting a response from the Air Force. As of June 30, 2014, the Company has included within accrued expenses and other current liabilities, within the consolidated balance sheet, a total of $145,617 for amounts that are due in regard to the FOB Hope Project, which represents the agreed upon overbillings obligation amount of $440,409 less the payments of $294,792 made through June 30, 2014.

 

FOB Hope Project Claim for Equitable Adjustment

 

In 2008, the Company filed a request with the U.S. Air Force for an equitable adjustment in connection with the FOB Hope Project (the “Air Force Claim”).  The Company completed the FOB Hope Project in March 2008.  The Air Force Claim is being reviewed, but the Company has not been provided with a specific time line for final resolution of the Air Force Claim and the Company is not able to determine the amount that might be received in connection with the Air Force Claim. The Company do not believe that the results of this matter will have a material effect on its operations.

 

27
 

  

Item 1A.  Risk Factors.

 

None.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.   Defaults Upon Senior Securities.

 

None.

 

Item 4.   Mine Safety Disclosures.

 

Not applicable.

 

Item 5.   Other Information.

 

None.

 

Item 6.   Exhibits.

 

Exhibit No.   Description
31.1   Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2   Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1   Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2   Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS   XBRL Instance Document.**
101.SCH   XBRL Taxonomy Schema.**
101.CAL   XBRL Taxonomy Extension Calculation Linkbase.**
101.DEF   XBRL Taxonomy Extension Definition Linkbase.**
101.LAB   XBRL Taxonomy Extension Label Linkbase.**
101.PRE   XBRL Taxonomy Extension Presentation Linkbase.**

* Filed herewith.

** These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  EQM Technologies & Energy, Inc.
     
Date: August 12, 2014 By: /s/  Jon Colin
    Name: Jon Colin
  Title: Interim Chief Executive Officer
    (Principal Executive Officer)
   
Date: August 12, 2014 By: /s/  Robert R. Galvin
    Name: Robert R. Galvin
  Title:

Chief Financial Officer, Secretary and Treasurer

(Principal Financial Officer)

 

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Exhibit Index

 

Exhibit No.   Description
31.1   Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2   Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1   Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2   Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS   XBRL Instance Document.**
101.SCH   XBRL Taxonomy Schema.**
101.CAL   XBRL Taxonomy Extension Calculation Linkbase.**
101.DEF   XBRL Taxonomy Extension Definition Linkbase.**
101.LAB   XBRL Taxonomy Extension Label Linkbase.**
101.PRE   XBRL Taxonomy Extension Presentation Linkbase.**

 

* Filed herewith.

** These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

30