10-Q 1 v359315_10q.htm FORM 10-Q
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 September 30, 2013
 
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
 
(I.R.S. Employer Identification No.)
Organization)
 
 
 
 
 
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 November 14, 2013, 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 September 30, 2013 (Unaudited) and December 31, 2012
 
1
 
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)
 
3
 
 
Condensed Consolidated Statement of Stockholders’ Equity and Redeemable Preferred Stock for the Nine Months Ended September 30, 2013 (Unaudited)
 
4
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
 
5
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
7
 
 
 
 
 
 
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
30
 
 
 
 
 
 
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
 
35
 
 
 
 
 
 
ITEM 4.
Controls and Procedures
 
35
 
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
 
 
 
 
ITEM 1.
Legal Proceedings
 
36
 
 
 
 
 
 
ITEM 1A.
Risk Factors
 
37
 
 
 
 
 
 
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
37
 
 
 
 
 
 
ITEM 3.
Defaults Upon Senior Securities
 
37
 
 
 
 
 
 
ITEM 4.
Mine Safety Disclosures
 
37
 
 
 
 
 
 
ITEM 5.
Other Information
 
37
 
 
 
 
 
 
ITEM 6.
Exhibits
 
38
 
 
 
 
 
SIGNATURES
 
39
 
   
 
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
 
 
As of
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
(unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2,116,807
 
$
42,219
 
Accounts receivable, net
 
 
6,986,831
 
 
9,994,407
 
Cost and estimated earnings in excess of billings on uncompleted contracts, net
 
 
5,792,475
 
 
5,480,206
 
Prepaid expenses and other current assets
 
 
455,513
 
 
460,218
 
Deferred income taxes
 
 
-
 
 
1,976,823
 
Current assets of discontinued operations
 
 
29,530
 
 
600,898
 
 
 
 
 
 
 
 
 
Total current assets
 
 
15,381,156
 
 
18,554,771
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
637,357
 
 
773,095
 
Intangible assets, net
 
 
4,055,084
 
 
4,491,443
 
Goodwill
 
 
2,762,083
 
 
2,762,083
 
Other assets
 
 
603,206
 
 
850,309
 
Other assets of discontinued operations
 
 
2,339
 
 
4,250,777
 
 
 
 
 
 
 
 
 
Total assets
 
$
23,441,225
 
$
31,682,478
 
 
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
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
(unaudited)
 
 
 
 
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
 
$
8,073,909
 
$
9,341,047
 
Accrued expenses and other current liabilities
 
 
4,494,591
 
 
4,501,441
 
Billings in excess of costs and estimated earnings on uncompleted contracts
 
 
22,320
 
 
244,226
 
Loan agreement
 
 
5,101,258
 
 
4,910,773
 
Current portion of capitalized lease obligations
 
 
23,337
 
 
45,209
 
Derivative liabilities
 
 
5,822
 
 
81,663
 
Current portion of convertible promissory notes, net
 
 
2,860,894
 
 
-
 
Current liabilities of discontinued operations
 
 
405,206
 
 
1,160,142
 
 
 
 
 
 
 
 
 
Total current liabilities
 
 
20,987,337
 
 
20,284,501
 
 
 
 
 
 
 
 
 
Long-term liabilities:
 
 
 
 
 
 
 
Notes payable
 
 
250,000
 
 
250,000
 
Convertible promissory notes, net, less current portion
 
 
1,866,246
 
 
6,073,087
 
Capitalized lease obligations, less current portion
 
 
15,264
 
 
10,715
 
Deferred income taxes
 
 
-
 
 
1,246,257
 
Deferred rent
 
 
117,585
 
 
126,971
 
 
 
 
 
 
 
 
 
Total long-term liabilities
 
 
2,249,095
 
 
7,707,030
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
23,236,432
 
 
27,991,531
 
 
 
 
 
 
 
 
 
Commitments and contingencies (Note 10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable preferred stock, $0.001 par value, 5,000,000 shares authorized:
 
 
 
 
 
 
 
Series A Convertible Preferred stock, 952,381 shares designated,
 
 
 
 
 
 
 
952,381 shares issued and outstanding at December 31, 2012
 
 
 
 
 
 
 
at stated value; liquidation preference of $3,000,000
 
 
-
 
 
3,000,000
 
 
 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
 
Series A Convertible Preferred stock, $0.001 par value, 5,000,000 shares
 
 
 
 
 
 
 
authorized: 952,381 shares designated, issued and outstanding at
 
 
 
 
 
 
 
September 30, 2013 at stated value; liquidation preference of $3,000,000
 
 
3,000,000
 
 
-
 
Common stock, $0.001 par value, 70,000,000 shares authorized;
 
 
 
 
 
 
 
41,473,570 shares issued and outstanding at September 30, 2013 and
 
 
 
 
 
 
 
December 31, 2012, respectively
 
 
41,474
 
 
41,474
 
Additional paid-in capital
 
 
7,602,949
 
 
7,482,615
 
Accumulated deficit
 
 
(10,439,630)
 
 
(6,833,142)
 
 
 
 
 
 
 
 
 
Total stockholders' equity
 
 
204,793
 
 
690,947
 
 
 
 
 
 
 
 
 
Total liabilities, redeemable preferred stock and stockholders' equity
 
$
23,441,225
 
$
31,682,478
 
 
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 September 30,
 
For the Nine Months Ended September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
15,623,405
 
$
24,394,143
 
$
37,718,888
 
$
48,612,028
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
 
 
12,704,888
 
 
20,667,926
 
 
29,032,552
 
 
38,638,826
 
Gross profit
 
 
2,918,517
 
 
3,726,217
 
 
8,686,336
 
 
9,973,202
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and
    administrative expenses
 
 
3,681,568
 
 
2,880,276
 
 
9,802,871
 
 
8,901,192
 
Depreciation and amortization
 
 
365,575
 
 
245,763
 
 
1,073,468
 
 
715,910
 
Total operating expenses
 
 
4,047,143
 
 
3,126,039
 
 
10,876,339
 
 
9,617,102
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating (loss) income
 
 
(1,128,626)
 
 
600,178
 
 
(2,190,003)
 
 
356,100
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value of derivative
    liabilities
 
 
13,277
 
 
90,347
 
 
76,458
 
 
1,021,224
 
Interest expense
 
 
(308,786)
 
 
(300,522)
 
 
(890,491)
 
 
(942,554)
 
Other income
 
 
3,000
 
 
234,425
 
 
4,100
 
 
234,425
 
Other (expense) income, net
 
 
(292,509)
 
 
24,250
 
 
(809,933)
 
 
313,095
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income from continuing
    operations before income taxes
 
 
(1,421,135)
 
 
624,428
 
 
(2,999,936)
 
 
669,195
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense from
    continuing operations
 
 
684,266
 
 
306,021
 
 
568,729
 
 
332,789
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income from continuing
    operations
 
 
(2,105,401)
 
 
318,407
 
 
(3,568,665)
 
 
336,406
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from discontinued
    operations, net of tax
 
 
-
 
 
(490,069)
 
 
(385,994)
 
 
(1,227,212)
 
Gain on disposal of Biodiesel
    Production Facility, net of tax
 
 
27,296
 
 
-
 
 
348,171
 
 
-
 
Income (loss) from
    discontinued operations,
    net of tax
 
 
27,296
 
 
(490,069)
 
 
(37,823)
 
 
(1,227,212)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(2,078,105)
 
$
(171,662)
 
$
(3,606,488)
 
$
(890,806)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.05)
 
$
0.01
 
$
(0.09)
 
$
0.01
 
Discontinued operations,
    net of tax
 
 
-
 
 
(0.01)
 
 
-
 
 
(0.03)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per common share
 
$
(0.05)
 
$
-
 
$
(0.09)
 
$
(0.02)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of
    common shares outstanding
    - basic and diluted
 
 
40,650,387
 
 
40,650,387
 
 
40,650,387
 
 
39,106,399
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity and Redeemable Preferred Stock
For the Nine Months Ended September 30, 2013
(Unaudited)
 
 
 
Redeemable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series A Convertible
 
 
Series A Convertible
 
 
 
 
 
 
 
Additional
 
 
 
 
Total
 
 
 
 
Preferred Stock
 
 
Preferred Stock
 
Common Stock
 
Paid-in
 
Accumulated
 
Stockholders'
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficit
 
(Deficit) Equity
 
Balance at January 1, 2013
 
 
952,381
 
$
3,000,000
 
 
 
-
 
$
-
 
 
41,473,570
 
$
41,474
 
$
7,482,615
 
$
(6,833,142)
 
$
690,947
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
-
 
 
-
 
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
(3,606,488)
 
 
(3,606,488)
 
Series A Convertible Preferred Stock reclassified to stockholder's equity
 
 
(952,381)
 
 
(3,000,000)
 
 
 
952,381
 
 
3,000,000
 
 
-
 
 
-
 
 
-
 
 
-
 
 
3,000,000
 
Warrant issued to advisor for services
 
 
-
 
 
-
 
 
 
-
 
 
-
 
 
-
 
 
-
 
 
3,046
 
 
-
 
 
3,046
 
Amortization of stock options
 
 
-
 
 
-
 
 
 
-
 
 
-
 
 
-
 
 
-
 
 
117,288
 
 
-
 
 
117,288
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2013
 
 
-
 
$
-
 
 
 
952,381
 
$
3,000,000
 
 
41,473,570
 
$
41,474
 
$
7,602,949
 
$
(10,439,630)
 
$
204,793
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
For the Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Cash Flows From Operating Activities
 
 
 
 
 
 
 
Net loss
 
$
(3,606,488)
 
$
(890,806)
 
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
1,074,786
 
 
1,062,007
 
Gain on disposal of Biodiesel Production Facility
 
 
(348,171)
 
 
-
 
(Gain) loss on disposal of other property and equipment
 
 
(4,100)
 
 
4,470
 
Gain on the extinguishment of debt
 
 
-
 
 
(329,365)
 
Amortization of debt discount
 
 
328,508
 
 
292,933
 
Stock based compensation
 
 
120,334
 
 
97,842
 
Provision for doubtful accounts
 
 
39,728
 
 
250,631
 
Changes in fair market value of derivative liabilities
 
 
(76,458)
 
 
(1,021,224)
 
Deferred income taxes
 
 
551,205
 
 
352,553
 
Changes in assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
 
 
3,181,489
 
 
(946,202)
 
Costs and estimated earnings in excess of billings on uncompleted contracts
 
 
(312,269)
 
 
(2,554,818)
 
Inventory
 
 
106,961
 
 
(71,047)
 
Prepaid expenses and other current assets
 
 
(57,487)
 
 
(15,620)
 
Other assets
 
 
(96,540)
 
 
(6,942)
 
Accounts payable, accrued expenses and other current liabilities
 
 
(2,050,128)
 
 
4,657,495
 
Billings in excess of costs and estimated earnings on uncompleted contracts
 
 
(221,906)
 
 
142,295
 
Other long-term liabilities
 
 
(9,386)
 
 
(17,759)
 
Total adjustments
 
 
2,226,566
 
 
1,897,249
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
 
(1,379,922)
 
 
1,006,443
 
 
 
 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
 
 
Purchases of property and equipment
 
 
(96,332)
 
 
(219,115)
 
Proceeds from sale of property and equipment
 
 
4,100
 
 
 
 
Proceeds from sale of Biodiesel Production Facility
 
 
4,945,400
 
 
-
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) investing activities
 
 
4,853,168
 
 
(219,115)
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5

 
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
For the Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Cash Flows From Financing Activities
 
 
 
 
 
 
 
Net borrowings under loan agreement
 
 
190,485
 
 
610,145
 
Repayment of Beacon Merger Notes
 
 
(1,650,000)
 
 
-
 
Payment of capital lease obligations
 
 
(29,773)
 
 
(33,834)
 
Payment of debt financing costs
 
 
(48,945)
 
 
(314,404)
 
Repayment of note payable
 
 
-
 
 
(454,608)
 
 
 
 
 
 
 
 
 
Net cash used in financing activities
 
 
(1,538,233)
 
 
(192,701)
 
 
 
 
 
 
 
 
 
Net increase in cash and cash equivalents
 
 
1,935,013
 
 
594,627
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, beginning of period
 
 
181,794
 
 
1,835,629
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, end of period
 
$
2,116,807
 
$
2,430,256
 
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
 
Interest
 
$
460,620
 
$
266,692
 
 
 
 
 
 
 
 
 
Income taxes
 
$
49,761
 
$
87,172
 
 
 
 
 
 
 
 
 
Non-cash investing and financing activities:
 
 
 
 
 
 
 
The exchange of loan from officer for subordinated convertible promissory note
 
$
-
 
$
150,000
 
 
 
 
 
 
 
 
 
The exchange of accrued interest for subordinated convertible promissory notes
 
$
-
 
$
38,959
 
 
 
 
 
 
 
 
 
Property and equipment acquired through capital lease
 
$
12,450
 
$
-
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
6

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
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.
 
On December 27, 2012, EQ acquired all of the outstanding capital stock of Vertterre Corp. (“Vertterre”), a New Mexico corporation. Vertterre is a mechanical and electrical engineering services firm providing energy efficient solutions for both new and existing government and commercial facilities, based in Albuquerque, NM (See Note 3 – Acquisition of Vertterre).
 
On January 10, 2013, the Company completed the sale of its biodiesel production facility (“Biodiesel Production Facility”) based in Cleburne, TX and related assets, constituting substantially all of the assets of the Company’s former biodiesel production segment (“Biodiesel Production”) (See Note 4 – Sale of Biodiesel Production Facility).
 
 
7

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 1 – BUSINESS, continued
 
Liquidity, Going Concern and Management’s Plans 
 
As of September 30, 2013, the Company’s cash on hand was $2,116,807 (approximately $2,188,000 as of November 7, 2013). The Company incurred a net loss of $3,606,488 for the nine months ended September 30, 2013. At September 30, 2013, the Company’s accumulated deficit was $10,439,630 and it had total stockholder’s equity of $204,793. The Company has historically met its liquidity requirements through the sale of equity and debt securities, operations and its revolving credit facility.
 
During the nine months ended September 30, 2013, cash flows used by operating activities were $1,379,922, consisting primarily of a net loss of $3,606,488 and a decrease in accounts payable and accrued expenses of $2,050,128, offset by a decrease in accounts receivable of $3,181,489.
 
During the nine months ended September 30, 2013, cash flows provided by investing activities were $4,853,168, consisting of $4,945,400 received upon the sale of the Biodiesel Production Facility, $4,100 received from the sale of other property and equipment, offset by $96,332 paid for purchases of property and equipment.
 
During the nine months ended September 30, 2013, cash flows used in financing activities were $1,538,233, consisting primarily of the full repayment of the $1,650,000 in aggregate principal amount of the Beacon Merger Notes, offset by $190,485 of net proceeds of the Company’s revolving credit facility.
 
As of September 30, 2013, the Company had a deficit in working capital of $5,606,181
 
Since the start of 2013, the EPA and other federal agencies have 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 federal government shut down for a period of 17 days (the “Shutdown”). In anticipation of the Shutdown, many of our funded projects were delayed, and some were temporarily shut down. These events have negatively impacted our revenues from the EPA and other federal agencies, which has had a negative impact upon our financial results. The federal government is expected to hold further budget meetings in February 2014.  There can be no assurance as to the outcome of those budget meetings and the impact that those meetings might have on the Company’s operations.
 
The Company currently has Private Placement Notes with aggregate obligations of $5,047,838 outstanding as of September 30, 2013 (as discussed in Note 8) that mature on March 15, May 13 and December 31, 2014. The Company is in discussions with the holders of these Private Placement Notes, and expects that, for certain holders, it will be able to extend the maturities of such obligations beyond their current terms; however, the Company has not secured any commitment for such extensions at this time, nor can it provide any assurance that such extensions will be agreed to on commercially acceptable terms, or at all.
 
The Company also has a Loan Agreement with a balance of $5,101,258 outstanding as of September 30, 2013 (as discussed in Note 6), which expires on January 21, 2014. The Company expects to be able to extend the Loan Agreement under similar terms; however, the Company has not secured any commitment to an extension at this time, nor can it provide any assurance that an extension will be agreed to on commercially acceptable terms, or at all.
 
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 (as discussed in Note 10). 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 would have a material adverse effect on the Company’s business. 
 
In order to execute the Company’s long-term growth strategy, which may include selected acquisitions of businesses that may bolster the expansion of the Company’s environmental services business, the Company will need to raise additional funds through public or private equity offerings, debt financings, or other means. 
 
The Company has identified potential sources of additional capital which might include offerings to its existing management or to its existing principal investors, including Argentum Capital Partners II, L.P. (See Note 14 – Related Parties) or from others; however, the Company has not secured any commitment for new financing at this time, nor can it provide any assurance that new financing will be available on commercially acceptable terms, if needed.
 
 
8

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 1 – BUSINESS, continued
 
Liquidity, Going Concern and Management’s Plans, continued
 
These matters raise substantial doubt about the Company’s ability to continue as a going concern. If the Company is unable to extend the maturities of the Private Placement Notes, is unable to extend the maturity of its Loan Agreement or is negatively impacted by the business factors discussed above, the Company may have to curtail its development and operations, delay note or vendor payments, and/or initiate cost reductions, which would have a material adverse effect on the Company’s business, financial condition and results of operations.
 
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The unaudited condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

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 three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.   The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2012 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 1, 2013.
 
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 September 30, 2013 and December 31, 2012 and the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 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.
 
Principles of Consolidation
 
The condensed consolidated financial statements of the Company include EQ and its wholly owned subsidiaries EQ Engineers, LLC, Vertterre and EQ Engineers Slovakia, s.r.o. (“EQES”), as well as subsidiaries acquired in the Beacon Merger, including Beacon Energy Corp., EQM Biofuels Corp., AgriFuel United Biofuels Co., Inc., AgriFuel BBD Holding Co., Inc. and AgriFuel Terra Farms, LLC and two Vertterre joint ventures in which the Company has a controlling interest.  At September 30, 2013, the Company had a controlling interest in two joint ventures: a 51% interest in STC Mosaic and a 51% interest in Vis-Com STC.  Noncontrolling interests were de minimis.  All significant intercompany accounts and transactions have been eliminated in consolidation.   Other entities, including certain joint ventures, in which the Company has the ability to exercise significant influence over operating and financial policies of the investee, but of which the Company does not possess control, are accounted for by the equity method and not consolidated.  Those entities in which the Company does not have the ability to exercise significant influence are generally carried at the lower of cost or fair value.
 
9

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
Use of Estimates, continued
 
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those which result from using such estimates. The use of estimates is an integral part of the process in making a determination of the estimated costs of completion for contracts accounted for under the percentage-of-completion method. Management also utilizes various other estimates, including but not limited to recording revenues under its contracts, assessing the collectability of accounts receivable, determining the estimated lives of long-lived assets, determining the potential impairment of intangibles and goodwill, the fair value of the Company’s common stock, the valuation of securities underlying stock based compensation and derivative financial instruments, income tax expense, the valuation of deferred tax assets, the value of contingent consideration in connection with the Vertterre acquisition, and to assess its litigation, other legal claims and contingencies.  The results of any changes in accounting estimates are reflected in the consolidated financial statements of the period in which the changes become evident.  Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.
 
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 nine months ended September 30, 2013 and 2012 excludes potentially dilutive securities. At September 30, 2013 and 2012, the Company excluded potentially dilutive securities of 29,390,642 and 27,316,936, 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 176,815 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 September 30,
 
 
 
2013
 
2012
 
Private Placement Notes – principal
 
 
12,619,595
 
 
12,619,595
 
Private Placement Notes – accrued interest
 
 
2,811,718
 
 
873,150
 
Beacon Merger Notes – principal
 
 
-
 
 
1,187,136
 
Beacon Merger Notes – accrued interest
 
 
-
 
 
135,626
 
Series A Stock
 
 
8,571,429
 
 
8,571,429
 
Stock options
 
 
4,312,900
 
 
3,905,000
 
Warrant to purchase common stock
 
 
75,000
 
 
25,000
 
Sandoval Shares
 
 
1,000,000
 
 
-
 
Total potentially dilutive securities
 
 
29,390,642
 
 
27,316,936
 
 
 
 
10

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
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 September 30, 2013 and December 31, 2012, one customer, who was a government customer, accounted for 54% and 52%, 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.  
 
 
 
 
 
 
Quoted Prices
 
Quoted Prices
 
 
 
 
 
 
 
 
 
in Active
 
for Similar
 
 
 
 
 
 
 
 
 
Markets for
 
Assets or
 
 
 
 
 
 
 
 
 
Identical
 
Liabilities in
 
Significant
 
 
 
 
 
 
Assets or
 
Active
 
Unobservable
 
 
 
Consolidated
 
Liabilities
 
Markets
 
Inputs
 
 
 
Balance Sheet
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
$
5,822
 
$
-
 
$
-
 
$
5,822
 
December 31, 2012
 
$
81,663
 
$
-
 
$
-
 
$
81,663
 
 
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 Nine Months Ended
 
 
 
September 30, 2013
 
Beginning balance at January 1, 2013
 
$
81,663
 
Aggregate fair value of conversion features upon issuance
 
 
617
 
Change in fair value of conversion features
 
 
(76,458)
 
Ending balance at September 30, 2013
 
$
5,822
 
 
 
11

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
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:
 
 
 
As of September 30, 2013
 
Stock price (derived from the Company’s valuation)
 
$
0.17
 
Volatility
 
 
38.5
%
Risk-free interest rate
 
 
0.10
%
Dividend yield
 
 
0
%
Expected life
 
 
0.4 to 1.2 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 condensed 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 September 30, 2013, the peer group consisted solely of companies operating in the environmental services sector. 
 
As of September 30, 2013, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
 
In accordance with the provisions of ASC 815, “Derivatives and Hedging Activities” (“ASC 815”), the Company presented the conversion feature liabilities at fair value on its condensed consolidated balance sheet, with the corresponding changes in fair value recorded in the Company’s condensed consolidated statement of operations for the applicable reporting periods. The Company computed the fair value of the derivative liability at the reporting dates of September 30, 2013 and December 31, 2012 using the Black-Scholes option pricing model. 
 
The Company determined that the conversion feature included an implied downside protection feature.  As such, upon initially recording the derivative liabilities during 2011, the Company performed a Monte-Carlo simulation and concluded that the value of the downside protection feature is de minimis and the use of the Black-Scholes valuation model was considered to be a reasonable method to value the conversion feature derivative liability. 
 
 
12

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
Fair Value Measurements, continued
 
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 September 30, 2013 and December 31, 2012, 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 periods ended September 30, 2013 and 2012.
 
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 consolidated financial statements.
 
 
13

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 3 – ACQUISITION OF VERTTERRE
 
On December 27, 2012, the Company acquired all of the capital stock of Vertterre. Vertterre is based in Albuquerque, NM, with additional locations in Louisville, TX and Bloomfield, NM, and is a mechanical and electrical engineering services firm providing energy efficient solutions for both new and existing government and commercial facilities. The acquisition was made pursuant to a stock purchase agreement, dated as of December 27, 2012 (the “Vertterre Agreement”), by and between the Company and Vertterre’s sole shareholder and former President, Daniel Sandoval (“Sandoval”). The purchase price under the Vertterre Agreement was approximately $1.2 million, consisting of (i) $833,867 in cash paid by the Company to Mr. Sandoval at closing, offset by a payment of $98,407 due to the Company from Mr. Sandoval in connection with a post-closing working capital adjustment, which payment was received on April 2, 2013; (ii) 1.0 million shares of the Company’s common stock fair valued at $180,000 (the “Sandoval Shares”), and (iii) an unsecured subordinated promissory note of EQM in the principal amount of $250,000, accruing interest at 5% per annum and due and payable on December 27, 2015 (the “Sandoval Note”). Sandoval may receive the following additional consideration under the Vertterre Agreement (the “Earnouts”): (i) 50% of the net gain realized by the Company upon the sale of certain landfill gas assets of Vertterre (“Gas Assets”); and (ii) 50% of the net profits realized by the Company from the operation of the Gas Assets during the first 60 months following the first anniversary of commencement of production.  The Company determined that as of December 31, 2012, and through September 30, 2013, that the fair value of the Earnouts were de minimis.  The Sandoval Shares, amounts due to Sandoval under the Sandoval Note and the Earnouts may be offset by any amounts owed by Sandoval to the Company under Sandoval’s indemnification obligations under the Vertterre Agreement. Further, Sandoval is not permitted to sell or trade the Sandoval Shares for a period of 18 months after their issuance and Sandoval has agreed that he will not compete with or solicit the employees, customers, or suppliers of the Company for a period of 36 months from the date of the transaction.
 
The assets and liabilities of Vertterre have been recorded in the Company’s condensed consolidated balance sheet at their fair values at the date of acquisition. As part of the purchase of Vertterre on December 27, 2012, the Company acquired identifiable intangible assets of $387,000. The acquired intangibles have been assigned definite lives and are subject to amortization, as described in the table below. 
 
The following details amortization periods for the identifiable, amortizable intangibles: 
 
Intangible Asset Category
 
Amortization Period
 
Covenant not to compete
 
1 years
 
Customer list
 
5 years
 
 
The following details the allocation of the purchase price, as adjusted, for the acquisition of Vertterre: 
 
 
 
Fair Value
 
Accounts receivable, net
 
$
408,781
 
Property and equipment, net
 
 
112,775
 
Intangible asset – covenant not to compete
 
 
187,000
 
Intangible asset – customer list
 
 
200,000
 
Accounts payable and accrued expenses
 
 
(285,832)
 
Net fair values assigned to assets acquired and liabilities assumed
 
 
622,724
 
Goodwill
 
 
542,736
 
Total purchase price consideration
 
$
1,165,460
 
 
 
14

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 3 – ACQUISITION OF VERTTERRE, continued
 
The Company’s purchase of Vertterre resulted in the recording of goodwill of $542,736 at September 30, 2013.   In connection with this acquisition and the related management team, the Company acquired access to new customers, greater geographic reach, and additional product and service lines, all of which have the potential to bring additional revenue and profits to the Company in the future.
 
The following presents a summary of the purchase price consideration for the purchase of Vertterre:
 
Cash, including estimate of working capital adjustment amount paid at closing
    of $11,567, net of $98,407 received from Mr. Sandoval pursuant to the
    post-closing working capital adjustment.
$
735,460
Note payable
 
250,000
Value of common stock issued
 
180,000
Total Purchase Price Consideration
$
1,165,460
 
Based upon the uncertainty associated with the potential realization of proceeds or profits in connection with the Gas Assets, no value was attributed to the Earnouts in the determination of the purchase price.
 
The results of operations for Vertterre for the three and nine months ended September 30, 2013, are reflected in the Company’s results in the accompanying condensed consolidated statements of operations.
 
Unaudited Pro Forma Combined Financial Information
 
The following presents the unaudited pro forma combined financial information, as if the acquisition of Vertterre had occurred as of January 1, 2012:
 
 
 
For the Three
 
For the Nine
 
 
 
Months Ended
 
Months Ended
 
 
 
September 30, 2012
 
September 30, 2012
 
Revenues
 
$
24,661,143
 
$
49,263,028
 
Net loss
 
$
(189,537)
 
$
(1,034,431)
 
Pro forma basic and diluted net loss per common share
 
$
-
 
$
(0.03)
 
Pro forma weighted average common shares outstanding - basic and diluted
 
 
40,650,387
 
 
39,106,399
 
 
The pro forma combined results of operations are not necessarily indicative of the results of operations that actually would have occurred had the acquisition of Vertterre been completed as of January 1, 2012, nor are they necessarily indicative of future consolidated results.  Pro forma weighted average shares outstanding – basic and diluted does not consider the effect of the Sandoval Shares as those shares are subject to forfeiture.

NOTE 4 – SALE OF BIODIESEL PRODUCTION FACILITY
 
On December 31, 2012, the Company and EQM Biofuels Corp. (f/k/a Beacon Energy (Texas) Corp.), a wholly-owned subsidiary of the Company (“EQM Biofuels”), entered into a 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 the terms of the Biodiesel Purchase Agreement, on January 10, 2013, EQM Biofuels sold to Biodiesel Buyer its Biodiesel Production Facility and related assets (the “Biodiesel Transaction”).  The assets sold in the Biodiesel Transaction constituted substantially all of the assets of the Company’s former Biodiesel Production segment.
 
 
15

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 4 – SALE OF BIODIESEL PRODUCTION FACILITY, continued
 
Consideration for the Biodiesel Transaction consisted of (i) $5,489,444 in cash, (ii) Biodiesel Buyer’s assumption of certain liabilities related to the purchased assets, and (iii) certain contingent consideration which may be due to the Company related to the federal biodiesel blenders tax credit in the year 2012.  The Company used $1,974,542 of the proceeds from the Biodiesel Transaction to pay off all unpaid principal and accrued but unpaid interest of its subordinated notes that were secured by the assets sold in the Biodiesel Transaction, paid approximately $990,530 to satisfy the outstanding obligations of the Biodiesel Production Facility, and paid approximately $585,401 in fees and closing costs in connection with the transaction.  The Company intends to use the remainder of the proceeds for general corporate purposes.
 
In connection with sale of the Biodiesel Production Facility, the Company is entitled to receive up to approximately $1,200,000 from Biodiesel Buyer as contingent consideration in connection with the reinstatement of the biodiesel blenders credit. The Company will record such contingent consideration when, in the opinion of management, the receipt of such gain is determined to be probable.  Accordingly, such contingent consideration is not reflected within the gain calculation below.
 
Through the Company’s former Biodiesel Production segment, the Company operated its Biodiesel Production Facility, designed and constructed to produce high quality biodiesel from a broad range of inputs and feedstocks, and sold finished biodiesel to regional refiners and blenders.  The Company acquired the former Biodiesel Production segment in February 2011 in connection with the Beacon Merger, at which time the Biodiesel Production Facility was not in operation.  The Company successfully restarted the Biodiesel Production Facility in April 2011. The balance sheet and results of operation of the Biodiesel Production segment have been reclassified as discontinued operations.
 
During the three and nine months ended September 30, 2013, the Company recorded a gain of $27,296 and $348,171, respectively, on the sale of the Biodiesel Production Facility, pursuant to the following:
 
Gross proceeds from sale (consisting of cash received at closing)
 
$
5,489,444
 
Less: Expenses of sale, net
 
 
(544,044)
 
Net consideration from sale
 
 
4,945,400
 
Less: Net book value of assets sold
 
 
(4,417,869)
 
Gain on the sale of the Biodiesel Production Facility
 
 
527,531
 
Less: Income taxes on sale
 
 
(179,360)
 
Gain, net of income taxes
 
$
348,171
 
 
The gain does not reflect the benefit of any contingent consideration, which will be recorded when realized.

NOTE 5 - DISCONTINUED OPERATIONS
 
On December 31, 2012, in connection with the execution of the Biodiesel Purchase Agreement, the assets, liabilities and operating results of the Biodiesel Production Facility were reclassified to discontinued operations. 
 
Results of discontinued operations are as follows:
 
 
 
For the three months ended September 30,
 
 
 
2013
 
2012
 
Revenues
 
$
-
 
$
1,561,534
 
Loss from operations
 
$
-
 
$
(464,711)
 
Gain on disposal, net of tax
 
$
27,296
 
$
-
 
Gain (loss), net of tax
 
$
27,296
 
$
(490,069)
 
 
 
 
For the nine months ended September 30,
 
 
 
2013
 
2012
 
Revenues
 
$
35,958
 
$
5,186,064
 
Loss from operations
 
$
(386,437)
 
$
(1,228,049)
 
Gain on disposal, net of tax
 
$
348,171
 
$
-
 
Loss, net of tax
 
$
(37,823)
 
$
(1,227,212)
 
 
 
16

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 5 - DISCONTINUED OPERATIONS, continued
 
Assets and liabilities included in discontinued operations are as follows:
 
 
 
As of
 
 
 
September
 
December 31,
 
 
 
30, 2013
 
2012
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
-
 
$
139,575
 
Accounts receivable, net
 
 
-
 
 
213,641
 
Inventory
 
 
-
 
 
106,961
 
Prepaid expenses and other current assets
 
 
29,530
 
 
140,721
 
Property and equipment, net
 
 
-
 
 
4,244,486
 
Other assets
 
 
2,339
 
 
6,291
 
Total assets of discontinued operations held for sale
 
$
31,869
 
$
4,851,675
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Accounts payable
 
$
28,109
 
$
660,390
 
Accrued expenses and other current liabilities
 
 
377,097
 
 
499,752
 
Total liabilities of discontinued operations held for sale
 
$
405,206
 
$
1,160,142
 

NOTE 6 – 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. 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 3.18% as of September 30, 2013). 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 January 21, 2014.   As of September 30, 2013, the available borrowing base under the Loan Agreement totaled approximately $7,900,000, including $1,500,000 attributable to obligations under outstanding letters of credit. As of September 30, 2013, $5,101,258 was outstanding under the Loan Agreement.
 
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 a fixed charge coverage ratio of no less than 1.20 to 1, and (ii) limit certain capital expenditures by the Borrowers to $250,000 per fiscal year. 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 and for the quarterly period ended September 30, 2013, the Borrowers were not in compliance with the fixed charge coverage ratio financial covenant under the Loan Agreement.  On October 30, 2013, the Borrowers received a written waiver from the Bank for their compliance with the fixed charge coverage ratio financial covenant as of September 30, 2013 and for the resulting event of default under the Loan Agreement.   

NOTE 7 – NOTES PAYABLE
 
Sandoval Note
 
On December 27, 2012, in connection with the acquisition of Vertterre (as described in Note 4 – Acquisition of Vertterre), the Company issued the Sandoval Note in the amount of $250,000, bearing an interest rate of 5%, due and payable on December 27, 2015.  As of September 30, 2013 and December 31, 2012, this amount was included with non-current liabilities.  The amount of accrued and unpaid interest under the Sandoval Note as of September 30, 2013 and December 31, 2012 was approximately $9,375 and $140, respectively.
 
 
17

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements 
 
NOTE 8 – CONVERTIBLE PROMISSORY NOTES
 
Beacon Merger Notes
 
On February 7, 2011, in connection with the Beacon Merger, the holders of $1,650,000 aggregate principal amount of secured promissory notes of Beacon, accruing interest at 15% per annum interest rate and due and payable on April 10, 2012 (the "Old Beacon Notes”), were issued, in exchange for the aggregate principal amount outstanding under the Old Beacon Notes, new subordinated convertible promissory notes in the aggregate principal amount of $1,650,000, accruing interest at 10% per annum and due and payable on February 7, 2014 (the “Beacon Merger Notes”). On January 10, 2013, in connection with the completion of the Biodiesel Transaction, the Company used $1,974,042 of the proceeds from such transaction to pay off all unpaid principal and accrued but unpaid interest of the Beacon Merger Notes and the Beacon Merger Notes were cancelled (See Note 4 – Sale of Biodiesel Production Facility).  The aggregate amount of accrued and unpaid interest under the Beacon Merger Notes as of December 31, 2012 was $319,000.
 
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 September 30, 2013 and December 31, 2012 was $1,124,687 and $743,295, respectively.
 
The Private Placement Notes bear interest at a rate of 10% per annum, are due and payable on the third anniversary of their issuance (except for the March 2012 Note, which is due and payable on December 31, 2014), 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 2,811,718 shares, respectively, as of September 30, 2013, and 12,619,595 and 1,858,237 shares, respectively, as of December 31, 2012, 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.
 
 
18

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements 
 
NOTE 8 – CONVERTIBLE PROMISSORY NOTES, continued
 
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 a December 30 Note or the 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. 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.
 
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. During the nine months ended September 30, 2013 and 2012, the Company recorded an additional derivative liability of $617 and $17,693, 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.   During the three months ended September 30, 2013 and 2012, $113,205 and $102,101 of the note and accrued interest discount was amortized and charged to interest expense. During the nine months ended September 30, 2013 and 2012, $328,508 and $292,933 of the note and accrued interest discount was amortized and charged to interest expense.
 
As of September 30, 2013 and December 31, 2012, after the mark-to-market adjustment, the aggregate fair value of the conversion liability was $5,736 and $54,920, 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 September 30, 2013
 
As of December 31, 2012
 
 
 
 
 
 
 
 
 
Balance, Net
 
 
 
 
 
 
 
Balance, Net
 
 
 
Principal
 
Discount
 
of Discount
 
Principal
 
Discount
 
of Discount
 
Beacon Merger Notes
 
$
-
 
$
-
 
$
-
 
$
1,650,000
 
$
-
 
$
1,650,000
 
March 15 Notes
 
 
2,500,000
 
 
109,676
 
 
2,390,324
 
 
2,500,000
 
 
279,682
 
 
2,220,318
 
May 13 Notes
 
 
500,000
 
 
29,430
 
 
470,570
 
 
500,000
 
 
62,825
 
 
437,175
 
December 30 Notes
 
 
1,858,879
 
 
174,187
 
 
1,684,692
 
 
1,858,879
 
 
270,555
 
 
1,588,324
 
March 2012 Note
 
 
188,959
 
 
7,405
 
 
181,554
 
 
188,959
 
 
11,689
 
 
177,270
 
Total convertible
     promissory notes, net
 
$
5,047,838
 
$
320,698
 
$
4,727,140
 
$
6,697,838
 
$
624,751
 
$
6,073,087
 
 
 
19

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 8 – CONVERTIBLE PROMISSORY NOTES, continued
 
Accounting for Convertible Promissory Notes, continued
 
Future minimum principal payments of these convertible promissory notes are as follows:
 
For the Twelve Months Ending September 30,
 
Amount
 
2014
 
$
3,000,000
 
2015
 
 
2,047,838
 
Total, gross
 
$
5,047,838
 
Less: discount
 
 
(320,698)
 
Total, net
 
$
4,727,140
 
 
On January 10, 2013, in connection with the completion of the Biodiesel Transaction, the Company paid off the Beacon Merger Notes in full.

NOTE 9 – OBLIGATIONS UNDER CAPITAL LEASES
 
The following is a schedule of future minimum payments required under capital leases that have initial or remaining noncancelable lease terms in excess of one year:
 
For the Twelve Months Ending September 30,
 
Amount
 
2014
 
$
25,182
 
2015
 
 
15,716
 
Total minimum capital lease payments
 
 
40,898
 
Less portion representing interest
 
 
(2,297)
 
Total
 
$
38,601
 
Less current portion
 
 
(23,337)
 
Long-term portion
 
$
15,264
 

NOTE 10 – 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 matter set forth below, in the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
 
 
20

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 10 – COMMITMENTS AND CONTINGENCIES, continued
 
Investigation Regarding FOB Hope Project
 
In August 2007, the Company initiated an internal investigation regarding potential billing for unallowable costs in connection with the 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 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 was accepted into the Voluntary Disclosure Program and 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 $440,000 in overbillings that the Company 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”).  Pursuant to the March 26, 2013 letter, the Air Force had requested that payment be made promptly and informed the Company that the Defense Finance and Accounting Services payment office may initiate procedures to offset the amount of the requested reimbursement against any payments otherwise due to the Company.  The letter advises the Company that if it believes that the requested reimbursement is invalid or the amount is incorrect, the Company should contact the sender to discuss. 
 
Shortly after its receipt of the March 26, 2013 letter, the Company established a dialogue with the Air Force and requested additional information regarding the findings of the DCAA.  In a show of good faith, the Company also agreed to remit approximately $440,000 (the Company’s estimate of its overbillings pursuant to its filing with the Voluntary Disclosure Program) (the “Voluntary Amount”) to the Air Force over a tentatively agreed to installment period.  As of September 30, 2013, the Company is awaiting further information from the Air Force concerning the specific terms and conditions for paying the Voluntary Amount as proposed.  The Company also requested that the Air Force defer further collection efforts in regard to its request for reimbursement in order to allow the Air Force time to analyze and properly respond to the information that the Company has submitted to the Air Force in connection with the DCAA’s claim.  On August 2, 2013 and September 20, 2013, the Company filed responses to the DCAA’s claim with the Air Force including reasoning to refute the claims asserted by the DCAA.  As of September 30, 2013 and December 31, 2012, the Company has included within accrued expenses and other current liabilities, within the condensed consolidated balance sheet, approximately $400,000 for amounts that may be due in regard to its FOB Hope Project.  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, the outcome would likely have a material adverse effect upon the Company’s financial position.   The Company has not accrued any additional amounts in response to the letter received on March 26, 2013. 
 
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.
 
EPA Claim for Equitable Adjustment
 
On January 23, 2012, the Company filed with the EPA to request an equitable adjustment in connection with a 2-year, $11 million contract to excavate and remove lead contaminated soils from residential properties located throughout Madison County, Missouri, which was completed in October 2011 (the “Madison County Contract”).  On January 23, 2012, the Company filed a request with the EPA for an equitable adjustment on the basis that the Company suffered a major financial loss as a result of certain volume under runs in connection with the Madison County Contract (“EPA Claim”). The amount of the EPA Claim was approximately $6,000,000.  In early April 2013, the EPA filed a motion with the United States Civilian Board of Contract Appeals (“USCBCA”) for the dismissal of the Company’s equitable adjustment claim.  On April 30, 2013, the USCBCA denied the EPA’s motion for dismissal.  On May 10, 2013, the Company and the EPA agreed to pursue an alternative dispute resolution process as a means to resolve the principal elements of the Company’s claim. The Company and the EPA participated in a non-binding mediation program in front of a judge in regard to the principal elements of the EPA Claim.  On August 6, 2013, the judge issued a report in which he denied the principal elements of the Company’s claims and found in favor of the EPA.  Based on this report and upon the advice of legal counsel, the Company has decided not to further pursue the EPA Claim.
 
 
21

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 10 – COMMITMENTS AND CONTINGENCIES, continued
 
Tacoma Project Claim for Equitable Adjustment
 
Q2 Remediation Services, JV (“Q2”), a joint venture between EQ and Quaternary Resource Investigations, LLC (“QRI”), was awarded a contract from the U.S. Army Corp of Engineers on August 30, 2010 to remediate lead and arsenic contaminated soil from residential properties in the Tacoma, Washington area. Work began on this project in September 2010, and the field work was substantially completed by August 2011. As a result of delays in both the award of the contract and Q2’s receipt of notice from the customer to proceed with work under the contract, and further delays in the release by the customer of properties to Q2 for remediation and restoration, Q2 incurred costs that exceeded the value of the contract. On March 27, 2012, Q2 filed a request with the U.S. Army Corp of Engineers for an equitable adjustment to recover unbilled costs in connection with its work under the contract (the “ACE Claim”). During August of 2012, the Company was informed that the ACE Claim was initially denied by the U.S. Army Corp of Engineers.  As of December 31, 2012, the Company’s receivable from such joint venture was fully reserved for.  During February 2013, Q2 settled its ACE Claim with the U.S. Army Corp of Engineers and on April 17, 2013 the Company received $110,000, representing its portion of the settlement amount.  The settlement amount was recorded as revenue during the three months ended March 31, 2013.
 
Operating Leases
 
The Company leases its facilities and certain equipment with terms that range from month-to-month to 10 years. Rent expense was $442,663 and $351,850 for the three months ended September 30, 2013 and 2012 and $1,224,638 and $1,078,774 for the nine months ended September 30, 2013 and 2012, respectively.  Rent expense is recorded on a straight-line basis for lease agreements containing escalation clauses.
 
Joint Ventures
 
During the three months ended September 30, 2013 and 2012 and the nine months ended September 30, 2013 and 2012, the Company recorded (revenue reserves) revenues of $(316,649), $0, $63,832, and $0, respectively, of earnings distributed from joint ventures in which the Company’s ownership interest was 49% or less (the “Noncontrolling Joint Ventures”).  During the three and nine months ended September 30, 2013, the Company recorded a reserve of $316,649 to reduce the project–to-date profitability on the Noncontrolling Joint Ventures.  As of September 30, 2013 and December 31, 2012, the Noncontrolling Joint Ventures were reflected in the condensed consolidated financial statements as a liability of $269,713 and $0, respectively, which represents the distributions in excess of earnings due to the Noncontrolling Joint Ventures.  As of September 30, 2013 and December 31, 2012, the Company also had a receivable from the Noncontrolling Joint Ventures of $1,149,703 and $0, respectively, which receivable includes the work that the Company performed for the Noncontrolling Joint Ventures. 
 
In connection with the acquisition of Vertterre, the Company acquired a 51% controlling interest in two joint ventures (the “Vertterre Controlling Joint Ventures”).  Of the two Vertterre Controlling Joint Ventures, the work for one has been completed, and for the second, the project activity at September 30, 2013 was immaterial (See Note 16 – Subsequent Events).
 
During the three and nine months ended September 30, 2013, no earnings were distributed from the Vertterre Controlling Joint Ventures and as of September 30, 2013, the net assets reflected within the condensed consolidated financial statements were immaterial.
 
For joint ventures where the Company does not have a controlling interest, the Company accounted for their activities under the equity method of accounting.  Any intercompany profits, if material, have been eliminated.  For joint ventures where the Company does have a controlling interest, the Company consolidated their activities and recorded any noncontrolling interest as required.  Noncontrolling interest at September 30, 2013 and December 31, 2012 was determined to be de minimis.
 
 
22

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 11 – 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 $30,192 and $29,688 for the three months ended September 30, 2013 and 2012, respectively, and was reflected in selling, general and administrative expenses on the accompanying condensed consolidated statements of operations.  Stock based compensation expense related to stock options was $117,288 and $97,842 for the nine months ended September 30, 2013 and 2012, respectively, and was reflected in selling, general and administrative expenses on the accompanying condensed consolidated statements of operations.  As of September 30, 2013, the unamortized value of options was $79,901.  As of September 30, 2013, the unamortized portion will be expensed over a period of 0.6 years.
 
On April 15, 2013, the Company granted options for the purchase of 125,000 shares of its common stock at an exercise price of $0.30 per share under the 2011 Stock Option Plan to three directors of the Company.  The options have 10 year term and vest 25% on the grant date, and an additional 25% on each of the first, second and third anniversaries of the grant date. The options had a grant date fair value of $4,798 utilizing the Black-Scholes option pricing model.
 
On June 1, 2013, the Company granted an option for the purchase of 200,000 shares of its common stock at an exercise price of $0.40 per share under the 2011 Stock Option Plan to an officer of the Company.  The option has a 10 year term and was fully vested on the date of grant.  The option had a grant date fair value of $4,556 utilizing the Black-Scholes option pricing model.
 
On July 1, 2013, the Company granted options for the purchase of an aggregate of 75,000 shares of its common stock at an exercise price of $0.25 per share under the 2011 Stock Option Plan, of which an option for the purchase of 25,000 shares was granted to Jon Colin, its interim Chief Executive Officer and a director, and options for the purchase of 25,000 shares were granted to each of the Company’s two independent directors.  The options have a 10 year term and vest 25% on the grant date, and an additional 25% on each of the first, second and third anniversaries of the grant date.   The options had an aggregate grant date fair value of $3,621 utilizing the Black-Scholes option pricing model.
 
The Company estimated the fair value of employee stock options using the Black-Scholes option pricing model.  The fair values of employee stock options granted were estimated using the following weighted-average assumptions:
 
 
 
April 15, 2013
 
 
June 1, 2013
 
 
July 1, 2013
 
 
 
Option Grants
 
 
Option Grant
 
 
Option Grant
 
Stock Price
 
$
0.17
 
 
$
0.17
 
 
$
0.17
 
Dividend Yield
 
 
0
%
 
 
0
%
 
 
0
%
Expected Volatility
 
 
40.9
%
 
 
40.9
%
 
 
40.9
%
Risk-free interest rate
 
 
0.85
%
 
 
1.05
%
 
 
1.39
%
Expected Life
 
 
5.75 years
 
 
 
5.0 years
 
 
 
5.75 years
 
 
 
23

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES 
Notes to Condensed Consolidated Financial Statements
   
NOTE 11 – STOCK BASED COMPENSATION, continued
 
Stock Options, continued
 
The following table is a summary of activity under the Company’s 2011 Stock Option Plan:
 
 
 
 
 
 
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
 
Weighted
 
Weighted
 
Average
 
 
 
 
 
 
 
 
 
Average
 
Average
 
Remaining
 
 
 
 
 
 
Number of
 
Exercise
 
Grant Date
 
Contractual
 
Intrinsic
 
 
 
Options
 
Price
 
Fair Value
 
Life
 
Value
 
Options outstanding at January 1, 2013
 
 
4,061,900
 
$
0.31
 
$
0.14
 
 
8.3 years
 
$
-
 
Granted
 
 
400,000
 
$
0.34
 
 
-
 
 
-
 
 
-
 
Exercised
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
Forfeited
 
 
(149,000)
 
$
0.32
 
 
-
 
 
-
 
 
-
 
Options outstanding at September 30, 2013
 
 
4,312,900
 
$
0.31
 
$
0.13
 
 
7.8 years
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercisable at January 1, 2013
 
 
1,979,975
 
$
0.31
 
$
0.14
 
 
8.3 years
 
$
-
 
Vested
 
 
1,178,475
 
$
0.32
 
 
-
 
 
-
 
 
-
 
Forfeited
 
 
(76,000)
 
$
0.31
 
 
-
 
 
-
 
 
-
 
Exercisable at September 30, 2013
 
 
3,082,450
 
$
0.31
 
$
0.13
 
 
7.7 years
 
$
-
 
 
Warrant to Purchase Common Stock
 
On April 15, 2013, the Company granted a warrant for the purchase of 50,000 shares of its common stock at an exercise price of $0.30 per share to a consultant who provides financial services to the Company.  The warrant has a 10 year term and was fully vested on the date of grant. The warrant had a grant date fair value of $3,046 utilizing the Black-Scholes option pricing model, pursuant to the inputs and assumptions as provided below.  The grant date fair value was fully recognized during the three months ended June 30, 2013.
 
 
 
April 15, 2013
 
 
 
Warrant
 
Dividend Yield
 
 
0
%
Expected Volatility
 
 
40.9
%
Risk-free interest rate
 
 
0.85
%
Expected Life
 
 
10.0 years
 

NOTE 12 – CONVERTIBLE PREFERRED STOCK
 
On June 28, 2013, a Special Committee of the Board of Directors of the Company (the “Special Committee”) determined that it was in the best interest of the Company and its stockholders to amend the Company’s Certificate of Designations of Series A Convertible Preferred Stock (the “Series A Certificate of Designations”) to: (i) reduce the number of authorized and unissued shares of the Company’s common stock that must be reserved for the purpose of effecting a conversion of the outstanding shares of Series A Stock to 100% of the number of shares of common stock necessary to effect such conversion; (ii) eliminate the redemption right of holders of Series A Stock, which otherwise would take effect on February 7, 2014; (iii) provide for a dividend of 5.0% per annum on the amount of the Stated Value (as defined in the Series A Certificate of Designations) of the Series A Stock (currently $3.15 per share), which dividend would only begin to accrue upon the date that the as amended Series A Certificate of Designations was filed with the Delaware Secretary of State, and would be payable only upon the earlier of (x) a Liquidity Event (as defined in the Series A Certificate of Designations) or (y) the conversion of the shares of Series A Stock into common stock; and (iv) revise the definition of Liquidity Event such that it shall mean only the occurrence, whether voluntary or involuntary, of any liquidation, dissolution or winding up of the affairs of the Company.
 
 
24

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 12 – CONVERTIBLE PREFERRED STOCK, continued
 
On June 28, 2013, in connection with the proposed amendment to the Series A Certificate of Designations, the Company entered into a letter agreement (the “Letter Agreement”) with Argentum Capital Partners II, L.P. (“ACP II”), the holder of all issued and outstanding shares of Series A Stock. Pursuant to the Letter Agreement, the Company agreed to submit the proposed amendment to the Series A Certificate of Designations for the approval of the Company’s stockholders at a meeting of stockholders or by written consent on or prior to December 31, 2013, and the Company agreed to use its best efforts to obtain at the earliest practicable date all approvals necessary to make the amendment effective. Additionally, pursuant to the Letter Agreement, ACP II (i) waived the requirement under the Series A Certificate of Designations that the Company reserve for the purpose of effecting a conversion of the outstanding shares of Series A Stock any number of authorized and unissued shares of common stock in excess of 100% of the number of shares of common stock necessary to effect such conversion; (ii) waived its right under the Series A Certificate of Designations to require the Company to redeem all or a portion of its shares of Series A Stock; and (iii) waived its right to deem any of the events listed under subsection (ii) of the definition of “Liquidity Event” in the Series A Certificate of Designations (the “Excluded Events”) to constitute a Liquidity Event, and (iv) waived its right to receive any benefits under the Series A Certificate of Designations as a result of the occurrence, whether voluntary or involuntary, of any Excluded Event. 
 
On November 12, 2013, in lieu of amending the Series A Certificate of Designation as discussed above, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with ACP II pursuant to which ACP II purchased 952,381 shares of Series B Stock (as defined below) from the Company in exchange for all  952,381 shares of its Series A Stock.  The 952,381 shares of Series B Stock purchased by ACP II and the 952,381 shares of Series A Stock exchanged by ACP II therefore represent all of the authorized shares of Series A Stock and Series B Stock, respectively.  The Company’s entry into the Purchase Agreement was approved by the Special Committee as well as the Company’s full Board of Directors.
 
In connection with the Company’s entry into the Purchase Agreement, on November 12, 2013, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designations of Series B Convertible Preferred Stock (the “Series B Certificate of Designations”) creating a new series of preferred stock of the Company, par value $0.001 per share, designated as “Series B Convertible Preferred Stock” (“Series B Stock”).  The principal terms of the Series B Stock are described below.
 
Holders of Series B Stock may at any time convert their shares of Series B Stock into such number of shares of common stock equal to the quotient of (x) the aggregate stated value (initially $3.15) of the shares of Series B Stock being converted, divided by (y) the conversion price (initially $0.35) then in effect  as of the date of the delivery by such holder of its notice of election to convert, without any further payment thereafter.  The conversion price is subject to weighted average anti-dilution adjustment in certain circumstances, including but not limited to stock splits, combinations of common stock, and the issuance of shares of common stock or equivalents at a per share price, or effective per share price, less than the conversion price, subject to certain limited exceptions.
 
Holders of Series B Stock are entitled to receive cumulative dividends at the rate of 5.0% per annum, compounded annually, of the stated value (“Preferred Dividends”). Preferred Dividends are payable (i) whether or not declared by the Board of Directors upon (a) the completion of any public offering by the Company of its common stock, (b) any conversion by the holders of the Series B Stock, in whole or in part, with respect to the shares so converted, or (c) the liquidation, dissolution or winding up of the Company, and (ii) otherwise when and if declared by the Board of Directors.  Preferred Dividends are payable in cash or, at the election of any holder of Series B Stock, in such number of additional shares of Series B Stock equal to the amount of the Preferred Dividends divided by the stated value.
 
In the event of the occurrence, whether voluntary or involuntary, of any liquidation, dissolution or winding up of the affairs of the Company (a “Liquidity Event”), the holders of Series B Stock will be entitled to receive, out of assets of the Company available for distribution to its stockholders, the stated value per share of Series B Stock plus all accrued but unpaid Preferred Dividends before any payment may be made or any assets distributed to the holders of junior classes of the Company’s equity securities.
 
 
25

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
NOTE 12 – CONVERTIBLE PREFERRED STOCK, continued
 
Holders of Series B Stock are entitled to vote their shares on an as-converted to common stock basis together with the holders of common stock at any regular, annual or special meeting of stockholders.   Additionally, the Company is not permitted to take certain corporate actions without the approval of holders of at least a majority of the shares of Series B Stock voting as a separate class, including but not limited to the following: (i) in any manner alter or change the designations, powers, preferences or rights, or the qualifications, limitations or restrictions of the Series B Stock; (ii) in any manner authorize, create or issue any class or series of capital stock, or reclassify any other class of the Company’s equity securities into shares of any class or series of capital stock (x) ranking, in any respect including, without limitation, as to payment of dividends, or distribution of assets, senior to or pari passu with the Series B Stock or (y) which in any manner adversely affects the holders of Series B Stock; (iii) increase or decrease the authorized number of shares of common stock or any class of preferred stock; (iv) issue any additional shares of Series B Stock; (v) effect or permit, or offer or agree to effect or permit, any transaction that would be deemed a Liquidity Event, a reorganization of the Company’s assets or a reclassification or recapitalization of the Company’s capital stock; (vi) acquire or dispose of any of the Company’s assets that have, individually or in the aggregate, a value in excess of $500,000; (vii) hire or terminate the Company’s Chief Executive Officer, Chief Financial Officer, Chief Operating Officer or President; (viii) change the number of directors constituting the whole Board; and (ix) incur any indebtedness, including, without limitation, any lease financing, accounts receivable-based financing arrangements and debt with equity features, in excess of an aggregate of $500,000.

NOTE 13– MAJOR CUSTOMERS
 
During the three months ended September 30, 2013, the Company’s two largest customers, representing work performed under government contracts, accounted for approximately 58%, and 15% of consolidated revenues, respectively, compared with 77% and 7% of consolidated revenues, respectively, during the three months ended September 30, 2012.
 
During the nine months ended September 30, 2013, the Company’s two largest customers, representing work performed under government contracts accounted for approximately 52% and 15% of consolidated revenues, respectively, compared with 62% and 16% of consolidated revenues, respectively, during the nine months ended September 30, 2012.

NOTE 14 - 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 September 30, 2013, ACP II, ACP, Mr. Barandiaran and Mr. Raynor, collectively, owned 21,313,086 shares of the Company’s common stock and 952,381 shares of Series A Stock (convertible into 8,571,429 shares of the Company’s common stock). On November 12, 2013, the Company entered into the Purchase Agreement with ACP II, pursuant to which ACP II purchased 952,381 shares of Series B Stock from the Company in exchange for all 952,381 shares of its Series A Stock. See Note 12 – Convertible Preferred 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 ending December 31, 2013. 
 
On January 10, 2013, in connection with the completion of the sale of the Biodiesel Production Facility, the Company paid ACP, ACP II and Mr. Barandiaran cash as payment in full of their Beacon Merger Notes, including the outstanding unpaid principal and accrued but unpaid interest thereon, respectively, and their Beacon Merger Notes were cancelled (See Note 4 – Sale of Biodiesel Production Facility). The amount paid to ACP, ACP II and Mr. Barandiaran for their Beacon Merger Notes is presented in the table below.
 
 
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EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements 
 
NOTE 14 - RELATED PARTIES, continued
 
Argentum Capital Partners II, L.P., Argentum Capital Partners, L.P., Walter Barandiaran and Daniel Raynor, continued
 
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.
 
Carlos Agüero and Metalico, Inc.
 
Mr. Agüero served as a director of the Company from February 7, 2011 until his resignation on June 7, 2012.  Mr. Agüero serves as the Chairman, President and Chief Executive Officer of Metalico, Inc. (“Metalico”).  Additionally, Mr. Agüero served as the Chairman of the Board of Beacon from September 2006 to February 2011, and as the President of Beacon from February 2009 to February 2011.  As of September 30, 2013, Mr. Agüero and Metalico, collectively, owned 2,888,829 shares of the Company’s common stock.
 
On January 10, 2013, in connection with the completion of the Biodiesel Transaction, the Company paid Mr. Agüero cash as payment in full of his Beacon Merger Note, including the outstanding unpaid principal and accrued but unpaid interest thereon, and his Beacon Merger Note was cancelled (See Note 4 – Sale of Biodiesel Production Facility). The amount paid to Mr. Agüero for his Beacon Merger Note is presented in the table below.
 
On May 13, 2011, Mr. Agüero purchased a May 13 Note. The current amount of principal and accrued and unpaid interest outstanding on this note is presented in the table below.
 
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 September 30, 2013, Mr. Greber owned 3,058,314 shares of the Company’s common stock.
 
On January 10, 2013, in connection with the completion of the Biodiesel Transaction, the Company paid Mr. Greber cash as payment in full of his Beacon Merger Note, including the outstanding unpaid principal and accrued but unpaid interest thereon, and his Beacon Merger Note was cancelled (See Note 4 – Sale of Biodiesel Production Facility). The amount paid to Mr. Greber for his Beacon Merger Note is presented in the table below.
 
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.
 
Jon Colin, James Wendle, Robert Galvin, and Kurien Jacob
 
Jon Colin serves as the Company’s interim Chief Executive Officer and as a director of the Company. James E. Wendle serves as the Company’s President and Chief Operating Officer, Robert R. Galvin serves as the Company’s Chief Financial Officer, and Kurien Jacob serves as a director of the Company.
 
On January 10, 2013, in connection with the completion of the Biodiesel Transaction, the Company paid Mr. Jacob cash as payment in full of his Beacon Merger Note, including the outstanding unpaid principal and accrued but unpaid interest thereon, and his Beacon Merger Note was cancelled (See Note 4 – Sale of Biodiesel Production Facility). The amount paid to Mr. Jacob for his Beacon Merger Note is presented in the table below.
 
On March 15, 2011, Messrs. Wendle, Galvin, and Jacob purchased March 15 Notes.  On May 13, 2011, Messrs. Colin and Wendle  purchased May 13 Notes.  On December 30, 2011, Mr. Wendle purchased a December 30 Note. The current amount of principal and accrued and unpaid interest outstanding on each of these notes is presented in the table below.
 
 
27

 
EQM TECHNOLOGIES & ENERGY, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements 
 
NOTE 14 - RELATED PARTIES, continued
 
Beacon Merger Notes Cancellation – Related Parties
 
On January 10, 2013, in connection with the completed of the Biodiesel Transaction, the Company paid the following in cash to the following related parties in exchange for all outstanding principal and accrued and unpaid interest on their Beacon Merger Notes.
 
 
 
Cash Paid
 
Principal
 
Interest
 
Argentum Capital Partners II, L.P.
 
$
358,917
 
$
300,000
 
$
58,917
 
Argentum Capital Partners, L.P.
 
$
119,639
 
$
100,000
 
$