Company Quick10K Filing
Midwest Energy Emissions
Price0.26 EPS-0
Shares77 P/E-15
MCap20 P/FCF-15
Net Debt-1 EBIT-1
TEV19 TEV/EBIT-14
TTM 2019-09-30, in MM, except price, ratios
10-K 2019-12-31 Filed 2020-05-14
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-04-11
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-21
10-K 2017-12-31 Filed 2018-04-17
10-Q 2017-09-30 Filed 2017-11-20
10-Q 2017-06-30 Filed 2017-08-21
10-Q 2017-03-31 Filed 2017-05-15
10-K 2016-12-31 Filed 2017-03-28
10-Q 2016-09-30 Filed 2016-11-15
10-Q 2016-06-30 Filed 2016-08-08
10-Q 2016-03-31 Filed 2016-05-16
10-K 2015-12-31 Filed 2016-03-30
10-Q 2015-09-30 Filed 2015-11-16
10-Q 2015-06-30 Filed 2015-08-14
10-Q 2015-03-31 Filed 2015-05-15
10-K 2014-12-31 Filed 2015-03-20
10-Q 2014-09-30 Filed 2014-11-14
10-Q 2014-06-30 Filed 2014-08-14
10-Q 2014-03-31 Filed 2014-05-15
10-K 2013-12-31 Filed 2014-03-14
10-Q 2013-09-30 Filed 2013-11-12
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-14
10-K 2012-12-31 Filed 2013-03-13
10-Q 2012-09-30 Filed 2012-11-13
10-Q 2012-06-30 Filed 2012-08-10
10-Q 2012-03-31 Filed 2012-05-11
10-K 2011-12-31 Filed 2012-04-12
10-Q 2011-09-30 Filed 2011-11-21
10-Q 2011-06-30 Filed 2011-08-22
10-Q 2011-03-31 Filed 2011-05-23
10-K 2010-12-31 Filed 2011-04-19
10-Q 2010-09-30 Filed 2010-11-22
10-Q 2010-06-30 Filed 2010-08-23
10-Q 2010-03-31 Filed 2010-05-21
10-K 2009-12-31 Filed 2010-04-15
8-K 2020-05-15 Other Events
8-K 2020-04-13 Amendment, Other Events
8-K 2019-11-15 Officers
8-K 2019-10-23 Enter Agreement, Sale of Shares
8-K 2019-07-25 Other Events, Exhibits
8-K 2019-06-27 Enter Agreement, Sale of Shares
8-K 2019-06-18 Enter Agreement, Sale of Shares
8-K 2019-06-04 Sale of Shares, Officers, Other Events
8-K 2019-05-14 Sale of Shares, Officers
8-K 2019-02-25 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-12-17 Accountant, Exhibits
8-K 2018-10-08 Officers
8-K 2018-09-12 Enter Agreement, Off-BS Arrangement
8-K 2018-06-14 Enter Agreement, Off-BS Arrangement, Shareholder Vote, Exhibits

MEEC 10K Annual Report

Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8 - Financial Statements and Supplementary Data
Note 1 - Organization
Note 2 - Summary of Significant Accounting Policies
Note 3 - Going Concern and Financial Condition
Note 4 - Inventory
Note 5 - Property and Equipment, Net
Note 6 - Intellectual Property
Note 7 - Convertible Notes Payable
Note 8 - Related Party
Note 9 - Operating Leases
Note 10 - Commitments and Contingencies
Note 11 - Stock Based Compensation
Note 12 - Warrants
Note 13 - Income Taxes
Note 14 - Restatement of Previously Issued Financial Statements (Unaudited)
Note 15 - Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
Item 16. Form 10 - K Summary.
EX-4.1 meec_ex41.htm
EX-10.16 meec_ex1016.htm
EX-31.1 meec_ex311.htm
EX-31.2 meec_ex312.htm
EX-32.1 meec_ex321.htm
EX-32.2 meec_ex322.htm

Midwest Energy Emissions Earnings 2019-12-31

Balance SheetIncome StatementCash Flow
20100-10-20-302012201420172020
Assets, Equity
151050-5-102012201420172020
Rev, G Profit, Net Income
10.07.44.82.2-0.4-3.02012201420172020
Ops, Inv, Fin

10-K 1 meec_10k.htm FORM 10-K meec_10k.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2019

 

Commission file number: 000-33067

 

MIDWEST ENERGY EMISSIONS CORP.

(Exact name of registrant as specified in its charter)

 

Delaware

 

87-0398271

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)   

 

Identification No.)

 

1810 Jester Drive, Corsicana, Texas 75109

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (614) 505-6115

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

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 every Interactive Data File required to be submitted 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 such files). Yes x No ¨

 

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

 

Large accelerated filer

Non-accelerated

Accelerated filer 

Smaller reporting issuer

 

 

Emerging growth company

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $13,086,000.

 

The number of shares outstanding of the Common Stock ($.001 par value) of the Registrant as of the close of business on May 14, 2020 was 77,747,750.

 

DOCUMENTS INCORPORATED BY REFERENCE  None

 

 

 

 

MIDWEST ENERGY EMISSIONS CORP.

TABLE OF CONTENTS

 

 

Page

 

PART I

 

 

 

 

Item 1.

Business

 

 

4

 

 

 

 

 

Item 1A.

Risk Factors

 

 

10

 

 

 

 

 

Item 1B.

Unresolved Staff Comments

 

 

16

 

 

 

 

 

Item 2.

Properties

 

 

16

 

 

 

 

 

Item 3.

Legal Proceedings

 

 

16

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

 

16

 

 

 

 

 

PART II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

 

17

 

 

 

 

 

Item 6.

Selected Financial Data

 

 

18

 

 

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

18

 

 

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

 

27

 

 

 

 

 

Item 8.

Financial Statements and Supplementary Data

 

 

28

 

 

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

 

29

 

 

 

 

 

Item 9A.

Controls and Procedures

 

 

29

 

 

 

 

 

Item 9B.

Other Information

 

 

30

 

 

 

 

 

PART III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

 

31

 

 

 

 

 

Item 11.

Executive Compensation

 

 

34

 

 

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

 

38

 

 

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

 

39

 

 

 

 

 

Item 14.

Principal Accountant Fees and Services

 

 

39

 

 

 

 

PART IV

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

 

41

 

 

 

 

 

Item 16.

Form 10-K Summary

 

 

41

 

 

 

 

 

Signatures

 

 

42

 

 

 
2

 

  

TABLE OF DEFINED TERMS

 

TERM

 

DEFINITION

 

 

BAC

 

Brominated Powdered Activated Carbon

 

 

EERC

 

Energy and Environmental Research Center

 

 

EGU

 

Electric Generating Unit

 

 

EPA

 

The U.S.  Environmental Protection Agency

 

 

ESP

 

Electrostatic Precipitator

 

 

Hg

 

Mercury

 

 

IGCC

 

Integrated Gasification Combined Cycle

 

 

MATS

 

Mercury and Air Toxics Standards

 

 

ME2C

 

Midwest Energy Emissions Corp.

 

 

MW

 

Megawatt

 

 

OTCQB

 

OTCQB Venture Market

 

 

PAC

 

Powdered Activated Carbon

 

 

SCR

 

Selective Catalytic Reduction

 

 

SEC

 

U.S. Securities and Exchange Commission

 

 
3

Table of Contents

 

PART I

 

Forward-Looking Statements

 

This Annual Report on Form 10-K contains “forward-looking statements,” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and reflect our current expectations regarding our future growth, results of operations, cash flows, performance and business prospects, and opportunities, as well as assumptions made by, and information currently available to, our management. Forward-looking statements are generally identified by using words such as “anticipate,” “believe,” “plan,” “expect,” “intend,” “will,” and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. Forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those discussed herein under the caption “Risk Factors”. In addition, matters that may cause actual results to differ materially from those in the forward-looking statements include, among other factors, the gain or loss of a major customer, change in environmental regulations, disruption in supply of materials, capacity factor fluctuations of power plant operations and power demands, a significant change in general economic conditions in any of the regions where our customer utilities might experience significant changes in electric demand, a significant disruption in the supply of coal to our customer units, the loss of key management personnel, availability of capital and any major litigation regarding the Company.

 

Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances or for any other reason. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in ME2C’s filings and with the Securities and Exchange Commission. See “Risk Factors” in Item 1A.

 

Item 1. Business.

 

As used in this Annual Report on Form 10-K, the terms “we”, “us”, “our”, “the Company”, “ME2C”, and “Midwest Energy Emissions Corp.” refer to Midwest Energy Emissions Corp. and our wholly owned subsidiaries.

 

Background

 

Midwest Energy Emissions Corp., a Delaware corporation, is an environmental services and technology company specializing in mercury emission control technologies, primarily to utility and industrial coal-fired units. We deliver patented and proprietary solutions to the global coal-power industry to remove mercury from power plant emissions, providing performance guarantees, and leading-edge emissions services. We have developed patented technology and proprietary products that have been shown to achieve mercury removal at a significantly lower cost and with less operational impact than currently used methods, while maintaining and/or increasing unit output and preserving the marketability of fly-ash for beneficial use.

 

Our principal place of business is located at 1810 Jester Drive, Corsicana, Texas 75109, which location we have maintained for manufacturing and distribution of our products since 2015. As of December 2019, we relocated our corporate headquarters to such address which corporate headquarters prior thereto were maintained at 670 D Enterprise Drive, Lewis Center, Ohio 43035. Our telephone number is (614) 505-6115. Our corporate website address is http://www.midwestemissions.com. Our common stock is quoted on the OTCQB under the symbol “MEEC”.

 

We originally incorporated under the name Digicorp on July 19, 1983 in the State of Utah. We subsequently domesticated as a Delaware corporation in February 2007; changed our name to China Youth Media, Inc. in October 2008; and changed our name to Midwest Energy Emissions Corp. in October 2011.

 

Our wholly owned subsidiary, MES, Inc., was originally incorporated under the name RLP Energy, Inc. in December 2008 in the State of North Dakota; changed its name to Grunergy Technologies USA Inc. in December 2010; and changed its name to Midwest Energy Emissions Corp. (“Midwest”) in January 2011. Midwest was engaged in the business of developing and commercializing state-of-the-art control technologies relating to the capture and control of mercury emissions from coal-fired boilers in the United States and Canada.

 

 
4

Table of Contents

 

On June 21, 2011, we completed a merger transaction (the “Merger”) whereby Midwest became our wholly owned subsidiary and changed its name to MES, Inc. For accounting purposes, the Merger was treated as a reverse merger and a recapitalization of the Company.

 

As a result of the Merger, our business is now focused on the delivery of mercury capture technologies to power plants in North America, Europe and Asia. Our prior business, which focused on youth marketing and media in China, terminated.

 

Prior to relocating our corporate headquarters to Corsicana, Texas, we maintained our corporate headquarters in Lewis Center, Ohio from March 2015 to December 2019, and in Worthington, Ohio from November 2011 to March 2015.

 

We currently have 11 full-time employees. Our employees are not represented by labor unions. We believe that relations with our employees are good.

 

Regulations and Markets

 

The markets for mercury removal from plant emissions are largely driven by regulations. Changes in regulations have profound effects on these markets and the companies that compete in these markets. This is especially true for smaller companies such as ME2C.

 

On December 21, 2011 the EPA issued its Mercury and Air Toxics Standards (“MATS”) for power plants in the U.S. The MATS rule is intended to reduce air emissions of heavy metals, including mercury (Hg), from all major U.S. power plants burning coal or oil, which are the leading source of non-natural mercury emissions in the U.S. Existing power plants were granted three years (plus a potential one-year extension in cases of hardship, ruled on by State EPA’s where the plant is domiciled) from April 16, 2012, to comply with the new emission limits. The MATS rule applies to Electric Generating Units (“EGUs”) that are larger than 25 megawatts (“MW”) that burn coal or oil for the purpose of generating electricity for sale and distribution through the national electric grid to the public. They include investor-owned units, as well as units owned by the Federal government, municipalities, and cooperatives that provide electricity for commercial, industrial, and residential uses. At the time of MATS being promulgated, there were approximately 1,250 coal-fired EGU’s affected by this new rule. Since this time, many of such EGU’s have been shut down as a result of this regulation and due to competitive disadvantage to newer or gas-fired EGUs and renewable energy sources (e.g. wind, solar). We believe that at the end of 2019, there are approximately 350 coal-fired EGU’s remaining in the power market which make up the large mercury-emissions control market into which we sell.

 

The final MATS rule identifies two subcategories of coal-fired EGUs, four subcategories of oil-fired EGUs and a subcategory for units that combust gasified coal or solid oil (integrated gasification combine cycle [IGCC] units) based on the design, utilization, and/or location of the various types of boilers at different power stations. The rule includes emission standards and/or other requirements for each subcategory. The rule set nationwide emission limits estimated to reduce mercury emissions in coal-fired plants by about 90%.

 

In addition to the U.S. federal MATS rule, more than 20 states currently have regulations which limit mercury emissions which regulations are similar to or more restrictive than the MATS rule.

 

There are several choices of pollution control technologies available to reduce mercury emissions, but they do not all work consistently or cost-effectively for every plant design or for all of the various types of coal. The most common technology employed to reduce mercury emissions is a sorbent injection system which provides for the injection of powdered activated carbon (“PAC”) or brominated PAC (“BAC”) into the flue-gas of an EGU after the boiler itself but in front of the Electro-Static Precipitators (“ESP”). Such injections have proven effective with many coals, especially at reduction levels of 70% or less. At required mercury reduction levels above 80%, these injection systems require substantial injection rates which often have severe operational issues including over-loading the ESP and rendering the fly ash unfit for sale to concrete companies, and at times even causing combustion concerns with the fly ash itself.

 

Mercury is also removed as a co-benefit by special pollution control equipment installed to remove oxides of sulfur (“SOX”) and nitrogen (“NOX”). To achieve very high levels of SOX reduction, large, complex and expensive (capital costs in the hundreds of millions of dollars for a medium-sized EGU) systems called Scrubbers can be installed in the plant exhaust system, typically just before the flue-gas goes up the stack for release. As a co-benefit to their primary mission, Scrubbers have been shown to remove significant quantities of oxidized mercury. Mercury is typically found in two basic forms in coal: elemental and oxidized. The amount of each form varies in any given seam of coal and is affected by the other natural elements (such as chlorine) which might also be present in the coal. We believe about 30-40% of the mercury in the post-combustion flue-gas exists in the oxidized state for power plants burning low-rank coal and about 60-70% for power plants burning high-rank coals. Mercury is found in only trace amounts in coal making it difficult to remove from coal, or from the flue gas when combusted with the coal. It is in the burning of millions of tons of coal that these trace amounts become problematic, and why MATS was promulgated.

 

 
5

Table of Contents

 

The other major pollution control system which contributes significantly to the co-benefits of mercury removal is a Selective Catalytic Reduction (“SCR”) system which can be installed to achieve high levels of removal of NOX. SCRs are also very large and expensive systems (costing hundreds of millions of dollars in capital costs to install on a medium-size EGU) that are typically installed just after the flue-gas exits from the unit boiler. As a co-benefit, SCRs have been shown to oxidize a considerable percentage of the elemental mercury in many types of coal. If the EGU then has a combination of an SCR and a Scrubber, we estimate that the EGU might achieve an overall reduction of 80-85% of the mercury in power plants that burn high-rank coals. The exact level of mercury emission reductions depends on the designs of these systems, the types of coal being burned and the operations of the power plant.

 

We believe that the large majority of the coal-fired EGUs in the U.S. employ some sort of sorbent injection system to achieve the very low mercury emission levels required by the MATS rule. Either the sorbent injection system is the primary removal method or such a system is employed as a supplemental system to SCR/Scrubber combinations to achieve the emission limits.

 

See “North American Markets for Our Technology” below for information on mercury control standards in Canada and “Other Markets for Our Technology” below for information on mercury control in Europe and Asia.

 

ME2C’s Technology

 

Background and Acquisition of Patent Rights

 

We provide customer-focused mercury capture solutions driven by our patented two-part Sorbent Enhancement Additive (SEA®) process using a powerful combination of science and engineering. We design systems and materials tailored and formulated specifically to each customer’s coal-fired units. Our mercury removal technology and systems will achieve mercury removal levels which meet or exceed the MATS requirements and to do so with lower cost and plant systems impacts than typical PAC or BAC sorbent injection systems. Our products have been shown to be successful across a myriad of fuel and system types, tunable to any configuration, and environmentally friendly, allowing for the recycling of fly ash for beneficial use. Our SEA technology was originally developed by the University of North Dakota’s Energy and Environmental Research Center (“EERC”). It was tested and refined on numerous operating coal-fired EGUs, with the founder of MES, Inc. participating with the EERC on these tests since 2008. The Energy and Environmental Research Center Foundation, a non-profit entity (“EERCF”), obtained patents on this technology.

 

On January 15, 2009, we entered into an “Exclusive Patent and Know-How License Agreement Including Transfer of Ownership” (the “License Agreement”) with the EERCF. Under the terms of the License Agreement, we were granted an exclusive license by EERCF with respect to this patented technology to develop, make, have made, use, sell, offer to sell, lease, and import the technology in any coal-fired combustion systems (power plant) worldwide and to develop and perform the technology in any coal-fired power plant in the world. Amendments No. 4 and No. 5 to the License Agreement were made effective as of December 16, 2013 and August 14, 2014, respectively, expanding the number of patents covered, eliminated certain contract provisions and compliance issues and restructured the fee payments and buyout provisions while granting EERCF equity in the Company. The License Agreement applied to various domestic and foreign patents and patent applications which formed the basis of our mercury control technology.

 

Under the terms of the License Agreement, we were required to pay EERCF monthly license maintenance fees and annual running royalties on operational systems of the Company, and we had the right to purchase the patent rights for a payment specified therein.

 

On April 24, 2017, we closed on the acquisition from EERCF of all such patent rights, including all patents and patents pending, domestic and foreign, relating to the foregoing technology. A total of 42 domestic and foreign patents and patent applications were included in the acquisition. In accordance with the terms of the License Agreement, the patent rights were acquired for the purchase price of (i) $2,500,000 in cash, and (ii) 925,000 shares of common stock of which 628,998 shares were issued to EERCF and 296,002 were issued to the inventors who had been designated by EERCF. As a result of the acquisition of the patent rights, no additional monthly license maintenance fees and annual running royalties shall be due and owing to the EERCF following closing which fees and royalties have now been eliminated.

 

 
6

Table of Contents

 

SEA® Technology

 

Our SEA® technology provides total mercury control, providing solutions that are based on a thorough scientific understanding of actual and probable interactions involved in mercury capture in coal-fired flue gas. A complete understanding of the complexity of mercury–sorbent–flue gas interactions and chemisorption mechanisms allows for optimal control strategy and product formulation, resulting in effective mercury capture. Combined with a thorough proprietary audit of the plant and its configuration and instrumentation, we believe our complete science and engineering approach for mercury–sorbent–flue gas interactions is well-understood, highly predictive, and critical to delivering total mercury control.

 

The SEA® approach to mercury capture is specifically tailored for each application to match a customer’s fuel type and boiler configuration for optimal results. Our two-pronged solution consists of a front end sorbent injected directly into the boiler in minimal amounts combined with a back end sorbent injection solution to insure maximum mercury capture. We believe our two-part process uses fewer raw materials than other mercury capture systems and causes less disruption to plant operations. We believe our sorbent line, which are designed to meet or exceed the mercury mitigation requirements of our customers, offers superior performance and the lowest possible feed rates when compared to other solutions on the market. Our processes also preserve fly ash which can be sold and recycled for beneficial use.

 

Scrubber Reemissions Additive Technology

 

We have also added a scrubber reemission additive to our product offering for use in wet flue gas desulfurization systems which reduces mercury reemissions from wet flue gas desulfurization systems by preventing scrubber reemission events. Our scrubber reemissions additive technology provides another mercury control solution in addition to our SEA technology for plants that are equipped with wet scrubbers. Depending on the level of mercury oxidation (discussed above), we can use one of our mercury oxidation additives to increase the amount of mercury oxidation in the flue gas and thereby increase the amount of mercury that is removed in the wet scrubber, often resulting in the plant achieving MATS compliance. Should the power plant encounter mercury reemission or desire a lower mercury emissions, we can provide a scrubber reemissions additive that is introduced into the scrubber to prevent mercury remissions resulting in lower mercury emissions from the plant.

 

Customized Emissions Services

 

In order to evaluate each customer’s needs, we finely tune the combustion chemistry using our technologies and specially formulated ME2C products. In order to achieve optimal results, we bring mercury emission analytics to the field for our demonstrations as opposed to collecting samples for laboratory analysis, while our team analyzes the entire plant’s performance once compliance testing has begun. As a result, we are able to offer customers:

 

Assessment of existing systems and suggested improvements;

 

Assessment and guidance of mercury capture and emissions;

 

Optimal design of the injection strategy and appropriate equipment layout and installation;

 

Sorbent optimization using flow modeling for a customized, low-cost plan for each unit;

 

Emission testing for mercury and other trace metals with our mobile laboratory; and

 

Ongoing research toward improved technology for mercury capture and rapid-response scientific support for emission or combustion issues as operations and regulations change.

 

Intellectual Property

 

We have a patent portfolio consisting of 50 patents throughout the U.S., Canada, Europe and China and 18 patents pending. We believe that our patent position is strong in the U.S., Canada, and Europe.

 

 
7

Table of Contents

 

North American Markets for Our Technologies

 

North America is currently the largest market for our technologies.

 

In the U.S. market, our success depends, in part, on the success of demonstrations performed with utility customers and the resulting contract awards to meet the MATS requirements in the long-term period and our operational performance with EGUs under contract.

 

In Canada, there is a Canada-Wide Standard among all the provinces which was initially implemented in 2010, and which provides for increasingly stricter emissions control through 2020, although individual provinces may move faster to more stringent levels. We believe we have the most effective technology for the EGUs in Canada and a strong patent position there.

 

In 2010, we were awarded our first commercial contract to design, build and install our solution on two large (670MW each) coal units in the western part of the U.S. This was a multi-million dollar, three year renewable contract, which was awarded as a result of a competitive demonstration process. We invested more than $1.4 million in the capital equipment for this project. Our systems out-performed the contract guarantees in all operational areas during startup and testing and went into commercial operation at the start of 2012. The system has successfully kept the plant in compliance since 2012.

 

At the present time, there are 15 EGUs in the U.S. which currently use our technologies. In Canada, we have 3 EGUs which currently use our technologies, with 2 more expected in the near term. We expect to continue to conduct numerous demonstrations on prospective customer units throughout 2020 and thereafter.

 

Other Markets for Our Technology

 

In March 2018, we entered into an agreement for a term of ten years with one of the Company’s primary suppliers to commercialize our technology throughout Europe. Under the terms of the agreement, we have granted such supplier an exclusive, non-transferable license to make, use, sell and market the Company’s technology during the term throughout Europe (which includes Germany and Poland which currently have the largest coal fleets in Europe). We believe such arrangement will make our technology more saleable throughout Europe and which will benefit the Company from such supplier’s knowledge and operations in this region. We have agreed to provide certain technical support throughout the term and shall continue to have the right to market and seek customers for our technology throughout Europe provided any opportunities are turned over to the supplier. Although we do not expect to generate significant revenues from such agreement for several years, we believe it positions us to make inroads in the European market sooner than we could achieve otherwise as Europe appears to be moving ahead with mercury emissions controls. The European market is significant although not as large as the market in the U.S. We believe more coal-fired EGUs operate throughout Europe than in the U.S. but are generally smaller EGUs.

 

In May 2017, the European Union and seven of its member states ratified the Minamata Convention on Mercury, which triggered its entry into force with implementation starting in 2021. The Minamata Convention on Mercury is a global treaty to protect human health and the environment from the adverse effects of mercury. This Convention was a result of three years of meeting and negotiating, after which the text of the Convention was approved by delegates representing approximately 140 countries in January 2013 in Geneva and adopted and signed later that year in October 2013 by approximately 125 countries at a diplomatic conference held in Japan. It is expected that over the next few decades, this international agreement will enhance the reduction of mercury pollution from the targeted activities responsible for the major release of mercury to the environment.

 

In addition, in July 2017, the European Union, through the European Commission, adopted certain BREF standards for large coal-fired electric generating units. The BREFs are a series of reference documents covering certain industrial activities and provide descriptions of a range of industrial processes and their respective operating conditions and emission rates. Member states are required to take these documents into account when determining best available techniques. As a result of the EU’s adoption of these BREF conclusions, specific emissions limits are currently being developed.

 

With regard to business opportunities in China and other Asian countries, there currently exists no specific mandate for mercury capture that requires specific control technology, such as we offer. Nevertheless, we are optimistic of the prospects for mercury emissions regulations in China in the coming years, and because we have very broad patent rights in China, this has the potential to become a large business opportunity for us in future years. It is estimated that China represents 47% of the world’s coal power usage compared to the United States which represents 14%*. We are hopeful that as a result of the Minamata Convention, China as well as other countries will follow the U.S. in regulating mercury emissions.

 

*Source: Carbon Brief, “Mapped: The World’s Coal Power Plants”, Simon Evans and Rosamund Pearce. May 6, 2018.

 

 
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Additional Business Opportunities

 

Our acquisition of all the patent rights, including all patents and patents pending, domestic and foreign, which forms the basis of our mercury control technology, which acquisition was completed on April 24, 2017 (see “ME2C’s Technology” above) positions us to license systems using a two-part mercury control process. In this regard, we anticipate being able, and have begun efforts, to license our technologies to utilities and others across North America and elsewhere.

 

In October 2019, we entered into a license and development agreement with an unaffiliated entity located in Alabama pursuant to which the parties will work together to develop a plan to commercialize and market certain technology owned by such unaffiliated entity related to the removal of mercury from air and water emissions generated by coal burning power plants. Although no assurance can be given, we are optimistic that this arrangement will lead to a new revenue stream for us in the future.

 

Raw Materials

 

We buy all the raw materials needed to implement our technologies and provide uniquely formulated products for effective mercury removal. Material components of our proprietary SEA® technology are readily available from numerous sources in the market. Suppliers of our raw materials include large companies that have provided materials for decades and have an international presence. When we use PAC as one component of our sorbent material, we buy it in the market from large activated carbon manufacturers. We believe that we have excellent relationships with our current suppliers. If any of our suppliers should become unavailable to us for any reason, there are a number of other suppliers that we believe can be contracted with expeditiously to supply the raw materials that we need, ensuring a continued supply of our products to our customers.

 

Competition

 

Our major competitors in the U.S. and Canada include companies such as Advanced Emissions Solutions, Inc., Albemarle Corporation, Cabot Corporation, Calgon Carbon Corporation, Carbonxt, Inc., Environmental Energy Services Inc. and Nalco Company. These companies employ large sales staff and are well positioned in the market. However, in head-to–head tests with competitor products our SEA® technology has consistently performed better in mercury removal, at lower projected costs. We believe that our SEA® technology is superior to offerings of our competitors and, with our highly experienced staff, we have shown that we can compete effectively in these markets.

 

Seasonality

 

The power market has changed over recent years with the introduction of more renewable energy, the low price of natural gas and the declining industrial demand for continuous power resulting in a greater proportional residential load demand. With this shift in demand and load, we have experienced some seasonal declines in the winter months due to our current customer concentration in the Southwestern United States, where many of our customers decrease capacity in such winter months.

 

Backlog

 

We do not consider backlog to be a significant indicator of the level of future sales activity. In general, we do not manufacture our products against a backlog of orders. Production and inventory levels are based on the level of incoming orders as well as projections of future demand. Therefore, we believe that backlog information is not material to understanding our overall business and is not a reliable indicator of our ability to achieve any particular level of revenue or financial performance.

 

Available Information

 

We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. The SEC maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SECat www.sec.gov. Our SEC filings are also available on our website at www.midwestemissions.com. Information on or connected to our website is neither part of, nor incorporated by reference into, this Form 10-K or any other report filed with or furnished to the SEC.

 

 
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Item 1A. Risk Factors.

 

In your evaluation of the Company and our business, you should carefully consider the risks and uncertainties described below, together with the information included elsewhere in this report and the other documents we file with the SEC. The following factors describe the risks and uncertainties that we consider significant to the operation of our business, but should not be considered a complete listing of all potential risks and uncertainties that could adversely affect our operating results, financial position or liquidity. Additionally, our business is subject to the same general risks and uncertainties that affect many other companies, such as but not limited to the overall economic conditions, changes in laws or accounting rules, fluctuations in interest and exchange rates or other disruptions of expected economic and business conditions.

 

Risks Related to our Business

 

Our business focus is mercury removal from power plant emissions, which is driven primarily by regulation. Any significant changes in mercury emission regulation could have a major impact on the Company.

 

Our business focus is mercury reduction in flue gas emissions from large coal-fired utility and industrial boilers. This market is primarily based on air pollution control regulations and enforcement of those regulations. Any significant change in these regulations would have a dramatic effect on the Company, especially in North America (and primarily the United States) which is currently the largest market for our technology. Specifically, on December 16, 2011, the EPA published the Mercury and Air Toxics Standards (MATS), which sets forth federal mercury emission levels. Power plants were required to begin complying with MATS on April 16, 2015, unless they were granted a one-year extension to begin to comply.

 

The MATS regulation has been subject to legal challenge, and in June 2015, the U.S. Supreme Court held that the EPA unreasonably failed to consider costs in determining whether it is “appropriate and necessary” to regulate hazardous air pollutants, including mercury, from power plants. The Court remanded the case back to the U.S. Court of Appeals for the District of Columbia Circuit for further proceedings, but left the rule in place. In December 2015, the D.C. Circuit remanded the rule back to the EPA for further consideration while allowing MATS to remain in effect pending the EPA’s finding; the Supreme Court later denied a petition challenging the lower court’s decision to remand without vacating. On April 14, 2016, EPA issued a final supplemental finding reaffirming the MATS rule on the ground that it is supported by the cost analysis the Supreme Court required. That supplemental finding is under review by the D.C. Circuit, and the Company is unable to predict with certainty the outcome of these proceedings. On April 18, 2017, EPA asked the court to place that litigation in abeyance, stating that the Agency is reviewing the supplemental finding to determine whether it should be reconsidered in whole or in part. The court granted EPA’s abeyance request on April 27, 2017, and ordered EPA to file 90-day status reports starting July 26, 2017. In February 2019, the EPA published a proposed revised supplemental cost-benefits finding for MATS in which EPA proposed to conclude that the 2016 supplemental finding was flawed in part due to its reliance on co-benefits to justify MATS. Nevertheless, the EPA proposed to leave the MATS rule in place. At the same time, EPA also requested public comment on whether MATS may or must be rescinded if EPA reversed its earlier conclusion that it is “appropriate and necessary” to regulate power plant emissions of mercury and other hazardous air pollutants under the statutory provision authorizing MATS. Following the close of the public comment period, on April 16, 2020, the EPA issued a final rule which finalized the proposed supplemental cost-benefits finding in substantially the form proposed in 2019. The final rule withdraws EPA’s 2016 “appropriate-and-necessary” determination as erroneous, but leaves the 2011 MATS rule in place pursuant to D.C. Circuit case law holding that a source category may only be removed from the list of categories to be regulated through a rigorous delisting process that cannot currently be satisfied by EPA. EPA’s final action will almost certainly be challenged in the courts, both by those who favor retention of MATS (such as the electric utility industry) and by those who oppose it (such as certain coal interests and deregulatory groups). This litigation could extend uncertainty over the status of MATS for a number of years. Investors should note that any changes to the MATS rule could have a negative impact on our business.

 

 
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The risks associated with technological change may make the Company’s products and services less marketable.

 

The market into which we sell our products and services is characterized by periodic technological change as well as evolving industry standards and regulations. The nature of such market will require that we continually improve and/or modify the performance, features, and reliability of our products and services, particularly in response to possible competitive offerings. Unless we are able to enhance, improve and/or modify existing products in a timely manner or to develop and introduce new products that incorporate new technologies or conform with evolving industry standards and regulations, our products and services may be rendered less marketable.

 

Our industry is highly competitive. If we are unable to compete effectively with competitors having greater resources than we do, our financial results could be adversely affected.

 

Our major competitors in the U.S. and Canada include companies such as Advanced Emissions Solutions, Inc., Albemarle Corporation, Cabot Corporation, Calgon Carbon Corporation, Carbonxt, Inc., Environmental Energy Services Inc. and Nalco Company. These companies employ large sales staff and are well positioned in the market. Our ability to compete successfully depends in part upon our ability to offer superior technology, including a superior team of sales and technical staff. If we are unable to maintain our competitive position, we could lose market share to our competitors which is likely to adversely impact our financial results.

 

We may not be able to successfully protect our intellectual property rights.

 

We own a number of significant patents, and patents pending covering the U.S., Canada, Europe and China for our technology. Certain critical technology related to our systems and products is protected by trade secret laws and confidentiality and licensing agreements. There can be no assurance that outstanding patents will not be challenged or circumvented by competitors, or that such other protection provided by trade secret laws and confidentiality and licensing agreement will prove adequate. We cannot assure you that we will have adequate remedies against contractual counterparties for disclosure of our trade secrets or violation of ME2C’s intellectual property rights. As a result, we may not be able to successfully defend our patents or protect proprietary aspects of our technology.

 

We may not be successful in our current or any future patent litigation.

 

In July 2019, we announced that we had initiated patent litigation against defendants in the U.S. District Court for the District of Delaware for infringement of certain patents which relate to our two-part Sorbent Enhancement Additive (SEA®) process for mercury removal from coal-fired power plants. Such litigation is in its early stages. Investors should note that patent litigation, like most types of commercial litigation, can be expensive, time-consuming and unpredictable. There is no assurance that this litigation, or any future patent litigation which the Company may commence, will be successful. In addition, in an infringement proceeding, a court may decide that one or more of our patents are not valid or enforceable, or a court may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly and could put our patent applications at risk of not issuing. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business.

 

We depend on third-party suppliers for materials needed to implement our technology.

 

We buy all the raw materials needed to implement our technology and provide uniquely formulated products for effective mercury removal from third-party suppliers. Suppliers of our raw materials include large companies that have provided materials for decades and have an international presence. When we use PAC as one component of our sorbent material, we buy it in the market from large activated carbon manufacturers. We believe that we have excellent relationships with our current suppliers. If any of our suppliers should become unavailable to us for any reason, there are a number of other suppliers that we believe can be contracted with expeditiously to supply the raw materials that we need, ensuring a continued supply of our products to our customers. However, the possibility exists that we may not be able to secure such arrangements on terms acceptable to the Company which could negatively impact our business.

 

We are dependent on key customers. A significant adverse change in such relationships could adversely impact our results of operations and financial condition.

 

Our customers are concentrated, so the loss of one or more key customers or a material reduction in business performed for them could cause us to experience a decline in net sales, which could adversely affect our financial results. In addition, there can be no assurance that such customers will not experience financial difficulties or other problems which could delay such customers in paying for product and services on a timely basis or at all. Any problems with such customers can be expected to have an adverse impact on our results of operations and financial condition.

 

 
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We rely on a small number of key employees. The loss of more than one of these employees could disrupt our operations and future growth.

 

We have a limited number of employees and we depend on the continued services and performance of our key personnel. The loss of more than one member of this team could disrupt our operations and negatively impact our projected future growth. In addition, as we continue to grow, we cannot guarantee we will continue to attract and retain the personnel we need to maintain our competitive position.

 

Our lack of diversification increases the risk of an investment in the Company.

 

Our business lacks significant diversification and is dependent on the success of our mercury emission control technologies. As a result, we are impacted more acutely by factors affecting our industry or the regions in which we operate that we would if our business were more diversified, enhancing our risk profile.

 

Low gas prices could negatively impact our results of operations; mild weather could also have corresponding effects on the demand for coal.

 

Our mercury-emissions control technologies are used by coal-fired power plants primarily in the United States. At such times that gas prices remain low for an extended period of time or drop substantially, power suppliers will likely rely more upon gas-fired units rather than coal plants in meeting their power needs. Gas prices can be very volatile and are influenced by numerous factors beyond our control. For example, market prices for natural gas have recently been low which has caused, and will likely continue to cause, a weaker demand for our products until such time that such prices increase. In addition, mild winter months in the U.S. will also result in less of a power demand which will also be expected to negatively impact our operations.

 

Our insurance coverage may not be adequate to protect us from all business risks.

 

We may be subject, in the ordinary course of business, to claims resulting from products liability, employment-related actions, class action lawsuits, accidents, acts of God and other actions against us. Additionally, our insurance coverage may be insufficient to cover all existing and future claims against us. We may be compelled to expend significant time and resources defending any such claims, and a loss that is uninsured or which exceeds policy limits may require us to pay substantial amounts, which could adversely affect our financial condition and operating results.

 

Litigation resulting from disputes with customers may result in substantial costs, liabilities and loss of revenues.

 

From time to time, we may be faced with disputes with our customers over the provisions of supply contracts relating to, among other things, pricing, quality, quantity and the existence of specified conditions beyond our or our customers’ control that impact performance obligations under the particular contract. In the event such disputes occur, we may not be able to resolve those disputes in a satisfactory manner which could have a material adverse effect on our business, financial condition and results of operations.

 

Revenues are generated under contracts that must be renegotiated periodically.

 

Substantially all of our revenues are generated under contracts which expire periodically or which must be frequently renegotiated, extended or replaced. Whether these contracts are renegotiated, extended or replaced is often subject to factors that may be beyond our control, including an extremely competitive marketplace for the services we offer. We cannot assure you that the costs and pricing of our services can remain competitive in the marketplace or that we will be successful in renegotiating our contracts.

 

Business interruptions, including any interruptions resulting from COVID-19, could significantly disrupt our operations and could have a material adverse impact on us.

 

The ongoing coronavirus outbreak which began in China at the beginning of 2020 has impacted various businesses throughout the world, including travel restrictions and the extended shutdown of certain businesses in impacted geographic regions. If the coronavirus outbreak situation should worsen, we may experience disruptions to our business including, but not limited to, the availability of raw materials, equipment, to our workforce, or to our business relationships with other third parties. Also, it may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission (the “SEC”). In this regard, on April 14, 2020, we filed a current report on Form 8-K with the SEC in part to avail ourselves of a 45-day grace period to file this Annual Report on Form 10-K provided by an SEC order issued on March 25, 2020 (which extended and superseded a prior order issued on March 4, 2020), which order allows a registrant up to an additional 45 days after the original due date of certain reports required to be filed with the SEC if a registrant’s ability to file such report timely is affected due to COVID-19. In such Form 8-K, we acknowledged experiencing disruptions including, but not limited to, the limited availability of key Company personnel and professional advisors who are needed to prepare this Annual Report due in part to suggested and mandated social quarantining and work from home orders. This has, in turn, delayed our ability to complete our audit and prepare this Annual Report. Investors should be aware that such disruptions may impact our ability to file future SEC reports by their original due dates.

 

 
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The extent to which the coronavirus impacts our operations in other areas or those of our third-party partners will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. Any such disruptions or losses we incur could have a material adverse effect on our financial results and our ability to conduct business as expected.

 

Delays in enactment of foreign regulations could restrict our ability to reach our strategic growth targets in Europe and Asia.

 

Our strategic growth initiatives are reliant upon more restrictive environmental regulations being enacted for the purpose of mercury control from power plant emissions in Europe and in China and other Asian countries. In May 2017, the European Union and seven of its member states ratified the Minamata Convention on Mercury, which triggered its entry into force with implementation starting in 2021. The Minamata Convention on Mercury is a global treaty to protect human health and the environment from the adverse effects of mercury. With regard to business opportunities in China and other Asian countries, there currently exists no specific mandate for mercury capture that requires specific control technology, such as we offer. China is the largest producer and consumer of coal in the world. Nevertheless, we are hopeful that as a result of the Minimata Convention, China as well as other countries will follow the U.S. in regulating mercury emissions. If stricter regulations are delayed or are not enacted, our sales growth targets in Europe and Asia could be adversely affected.

 

Maintaining and improving our financial controls may divert management’s attention and increase costs.

 

We are subject to the requirements of the Securities Exchange Act of 1934, including the requirements of the Sarbanes-Oxley Act of 2002. The requirements of these rules and regulations have increased in recent years, causing an increase in legal and financial compliance costs, and make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. Such rules and regulations require, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. This can be difficult to do. In this regard, our management concluded our internal control over financial reporting was not effective as of December 31, 2019. While certain remedial actions have been completed, we continue to actively plan for and implement additional control procedures to improve our overall control environment and expect these efforts to continue throughout 2020 and beyond. As a result of this and similar activities, management’s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our board of directors recently concluded that we needed to restate previously issued financial statements as a result of a change in accounting for a certain debt restructuring.

 

On April 13, 2020, our board of directors of the Company (which currently acts as our audit committee) concluded, after consultation with management and the Company’s recently retained financial consulting firm, that our previously issued unaudited financial statements for the periods ended March 31, 2019, June 30, 2019 and September 30, 2019, included in the Company’s Quarterly Reports of Form 10-Q for the periods ended March 31, 2019, June 30, 2019 and September 30, 2019, respectively, should no longer be relied upon as a result of the change in accounting for a certain debt restructuring. We concluded that a gain on debt restructuring recognized during the first quarter of 2019 should have been accounted for as a capital transaction. Specifically, on February 25, 2019, we entered into an Unsecured Note Financing Agreement with AC Midwest Energy LLC (“AC Midwest”), pursuant to which AC Midwest exchanged a previously issued subordinated unsecured note in the principal amount of $13,000,000, together with all accrued and unpaid interest thereon, for a new unsecured note in the principal amount of $13,154,931. We recorded a gain of $3,412,402 on this exchange which we recently concluded should have been recorded as an equity transaction capital contribution. The adjustments resulting therefrom, which are non-cash in nature, increase additional paid-in capital and increase our previously reported net loss, but has no impact on previously reported cash, working capital, total assets, total liabilities and revenues. Nevertheless, such restatement could cause investors in our securities to lose confidence in our financial statements and management which could result in a decrease in our stock price and negative sentiment in the investment community.

 

 
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Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

 

Liquidity, i.e., ready access to funds, is essential to our business. Our access to external sources of financing could be impaired by factors that are specific to us or others that may be outside of our control. As a result, such liquidity risk could impair our ability to funds operations and jeopardize our financial condition.

 

Possible inability of the Company to continue as a going concern.

 

The accompanying consolidated financial statements as of December 31, 2019 have been prepared assuming the Company will continue as a going concern. As reflected in the consolidated financial statements, we had an accumulated deficit of $57.7 million, $1.5 million in cash and negative working capital of $302,000 at December 31, 2019. Additionally, we had a net loss in the amount of $6.1 million and cash used by operating activities of $1.6 million for the year ended December 31, 2019. These factors raise substantial doubt about our ability to continue as a going concern for the next twelve months from the filing of this Annual Report on Form 10-K. Although we anticipate continued significant revenues for products to be used in MATS compliance activities, no assurances can be given that we can obtain sufficient working capital through these activities and additional financing may be needed to meet its obligations. In February 2020, we closed on a one-year secured loan with a bank in the principal amount of $200,000 and in April 2020, we received loan proceeds in the amount of $299,300 pursuant to the Paycheck Protection Program under the CARES Act which was enacted on March 27, 2020 as a result of the COVID-19 pandemic. Nevertheless, we may need to raise additional equity or debt financing. While we believe in our ability to raise additional funds, no assurances can be given that we can maintain sufficient working capital through these efforts, or that the continued implementation of our business plan will generate sufficient revenues in the future to sustain ongoing operations.

 

The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

Risks Related to our Common Stock

 

Current stockholders may suffer dilution.

 

In recent prior years, we have raised funds through the sale of convertible notes and restricted stock to qualified investors, and have under certain circumstances issued warrants to investors and options to employees and others. As of December 31, 2019, we have 76,747,750 shares of common stock outstanding of a total of 150,000,000 shares authorized by the Company. Approximately 104,313,000 shares of common stock are outstanding on a fully diluted basis as of December 31, 2019, taking into account shares issuable upon conversion of outstanding notes, and exercise of outstanding warrants and options. Any such conversion and/or exercise of such securities will have a dilutive effect on existing stockholders. In addition, if we were to raise additional funds through further issuances of equity or convertible debt securities in the future, our stockholders would suffer additional dilution.

 

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

 

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. In addition, until such time that the AC Midwest Energy, LLC promissory notes are paid in full, we are not permitted to issue any dividends. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

 
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If our internal control over financial reporting is found not to be effective or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls, investors could lose confidence in our financial reports, and our stock price may be adversely affected.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include an internal control report with our Annual Report on Form 10-K. That report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. We evaluate our existing internal control over financial reporting based on the framework issued in 2013 by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. During the course of our ongoing evaluation of the internal controls, we may identify areas requiring improvement, and may have to design enhanced processes and controls to address issues identified through this review. Remedying any deficiencies, significant deficiencies or material weaknesses that we identify may require us to incur significant costs and expend significant time and management resources. Based on such evaluation, our management concluded our internal control over financial reporting was not effective as of December 31, 2019. The ineffectiveness of our internal control over financial reporting was due to the following material weaknesses which are indicative of many small companies: (i) lack of a sufficient complement of personnel commensurate with the Company’s reporting requirements; and (ii) insufficient written documentation or training of our internal control policies and procedures which provide staff with guidance or framework for accounting and disclosing financial transactions. While certain remedial actions have been completed, we continue to actively plan for and implement additional control procedures to improve our overall control environment and expect these efforts to continue throughout 2020 and beyond.

 

Nevertheless, we cannot assure you that any of the measures we implement to remedy any such deficiencies will effectively mitigate or remedy such deficiencies. Due to the nature of the remediation process, the need to have sufficient resources (cash or otherwise) to devote to such efforts, and the need to allow adequate time after implementation to evaluate and test the effectiveness of the controls, no assurance can be given as to the timing of achievement of remediation. Investors could lose confidence in our financial reports, and our stock price may be adversely affected, if our internal controls over financial reporting continue to be found not to be effective by management or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls in the future, investors could lose confidence in our financial reports and our stock price may be adversely affected.

 

The trading price of our common stock may be volatile.

 

The trading price of our shares has, from time to time, fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be affected by a number of factors including the risk factors set forth in this report as well as our operating results, financial condition, announcements of innovations or new products by us or our competitors, general conditions in the market place, and other events or factors. Although we believe a number of registered broker dealers currently make a market in our common stock, we cannot assure you that any of these firms will continue to serve as market makers or have the financial capability to stabilize or support our common stock. A reduction in the number of market makers or the financial capability of any of these market makers could also result in a decrease in the trading volume of and price of our shares. In recent years, broad stock market indices in general have experienced substantial price fluctuations. Such broad market fluctuations may adversely affect the future trading price of our common stock.

 

The trading market for securities quoted on the OTCQB is less liquid.

 

Our common stock currently trades on the OTCQB. The trading market for securities of companies quoted on the OTCQB or other quotation systems is substantially less liquid than the average trading market for companies listed on a national securities exchange. The quotation of our shares on the OTCQB or other quotation system may result in a less liquid market available for existing and potential shareholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.

 

Potential future sales pursuant to Rule 144.

 

Many of the shares of our common stock presently held by management and others are “restricted securities” as that term is defined in Rule 144, promulgated under the Securities Act of 1933, as amended. Under Rule 144, a person (or persons whose shares are aggregated) who has satisfied a certain holding period, may, under certain circumstances sell such shares or a portion of such shares. Such holding periods have already been satisfied in many instances. Therefore, actual sales or the prospect of sales of such shares under Rule 144 in the future may depress the prices of the Company’s securities.

 

 
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Our common stock may be characterized as a “penny stock” under applicable SEC regulations.

 

Our common stock may be characterized as “penny stock” under SEC regulations. As such, broker-dealers dealing in our common stock may be subject to the disclosure rules for transactions involving penny stocks, which generally require that, prior to a purchase, the broker-dealer has approved the proposed purchaser’s account for transactions in penny stocks and has received from the purchaser an agreement to the transaction setting forth the identity and quantity of the common stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker-dealer must obtain from the person information concerning the person’s financial situation, investment experience and investment objectives, and reasonably determine that transactions in penny stocks are suitable for the person. These additional burdens imposed upon broker-dealers may discourage them from effecting transactions in our common stock, which could make it difficult for an investor to sell his, her or its shares at any given time.

 

Except as required by the Federal Securities Law, the Company does not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or for any other reason.

 

Item 1B. Unresolved Staff Comments.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 2. Properties.

 

We lease a warehouse in Corsicana, Texas consisting of 20,000 square feet which we use for manufacturing and distribution of our products. As of December 2020, we relocated our corporate headquarters to such location which corporate headquarters prior thereto were maintained in Lewis Center, Ohio. Such lease in Corsicana, Texas expires March 31, 2024. We also lease approximately 500 square feet of office space in Grand Forks, North Dakota which is primarily used for research and development activities. Such lease currently expires August 31, 2020, which shall automatically extend an additional year and on a year to year basis thereafter unless either landlord or tenant otherwise terminates.             

 

Item 3. Legal Proceedings.

 

On July 17, 2019, we initiated patent litigation against certain defendants in the U.S. District Court for the District of Delaware for infringement of United States Patent Nos. 10,343,114 (the “‘114 Patent”) and 8,168,147 (the “‘147 Patent”) owned by the Company. These patents relate to our two-part Sorbent Enhancement Additive (SEA®) process for mercury removal from coal-fired power plants. Named as defendants in the lawsuit are (i) Vistra Energy Corp., AEP Generation Resources Inc., NRG Energy, Inc., Talen Energy Corporation, and certain of their respective affiliated entities, all of which are owners and/or operators of coal-fired power plants in the United States, and (ii) Arthur J. Gallagher & Co., DTE REF Holdings, LLC, CERT Coal Holdings LLC, Chem-Mod LLC, and certain of their respective affiliated entities, and additional named and unnamed defendants, all of which operate or are involved in operations of coal facilities in the United States. In the lawsuit, the Company alleges that each of the defendants has willfully infringed the Company’s ‘114 Patent and ‘147 Patent and seeks a permanent injunction from further acts of infringement and monetary damages. Such litigation is currently pending and in its early stages.

 

On April 21, 2020, NRG Energy, Inc., Talen Energy Corporation and Vistra Energy Corp., three of the defendants in the above action, filed two petitions for Inter Partes Review (IPR) with the United States Patent and Trademark Office (USPTO), seeking to invalidate certain claims to the ‘114 Patent. The Company believes that such claims of invalidity are without merit.

 

Other than the foregoing, there are no material pending legal proceedings to which we are a party or to which any of our property is subject, nor are there any such proceedings known to be contemplated by governmental authorities. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

 
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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market

 

Our shares of common stock are quoted on the OTCQB operated by OTC Markets Group Inc. under the symbol “MEEC”. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

Recent Sales of Unregistered Securities

 

None.

 

Share Repurchase Program

 

We purchased no equity securities during year ended December 31, 2019 and have no program in place at the present time to buy any equity securities in the future.

 

Holders

 

As of December 31, 2019, there were 420 stockholders of record of our common stock. This does not reflect persons or entities that hold their stock in nominee or “street name”. The approximate number of beneficial stockholders is estimated to be 1,125.

 

Dividends

               

We have not declared any cash dividends to date and have no current plan to do so in the foreseeable future. In addition, until such time that the AC Midwest Energy, LLC promissory notes are paid in full, we are not permitted to issue any dividends.

 

Transfer Agent

 

The Transfer Agent and Registrar for the Company’s common stock is Transfer Online, Inc., 512 SE Salmon Street, Portland, Oregon 97214.

 

Equity Compensation Plan Information

 

The following table shows information, as of December 31, 2019, with respect to each equity compensation plan under which the Company’s common stock is authorized for issuance:

 

 

 

Number of securities to

be issued upon exercise of outstanding options,

warrants and rights

 

 

Weighted-average

exercise price of

outstanding options,

warrants and rights

 

 

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

 

Plan Category

 

(a)

 

 

(b)

 

 

(c)

 

 

 

 

 

 

 

 

 

 

 

Equity compensation

plans approved by

security holders, terminated

 

 

5,325,000

 

 

$ 0.76

 

 

 

0

 

Equity compensation

plans approved by

security holders

 

 

7,228,326

 

 

$ 0.39

 

 

 

771,674

 

Total

 

 

12,553,326

 

 

$ 0.55

 

 

 

771,674

 

 

 
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Item 6. Selected Financial Data.

 

Not applicable as a smaller reporting company.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion should be read in conjunction with consolidated financial statements and the related notes that appear elsewhere within this report. Certain statements we make under this Item 7 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Forward-Looking Statements” in “Part I” preceding “Item 1 - Business.” You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors” in Item 1A above, as well as our consolidated financial statements, related notes and other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission.

 

Background

 

Midwest Energy Emissions Corp. (the “Company”, “we”, “us” and “our”) is an environmental services and technology company specializing in mercury emission control technologies, primarily to utility and industrial coal-fired units. We deliver patented and proprietary solutions to the global coal-power industry to remove mercury from power plant emissions, providing performance guarantees, and leading-edge emissions services. We have developed patented technology and proprietary products that have been shown to achieve mercury removal at a significantly lower cost and with less operational impact than currently used methods, while maintaining and/or increasing unit output and preserving the marketability of fly-ash for beneficial use.

 

North America is currently the largest market for our technology. The U.S. EPA MATS (Mercury and Air Toxics Standards) rule requires that all coal and oil-fired power plants in the U.S., larger than 25MWs, must limit mercury in its emissions to below certain specified levels, according to the type of coal burned. Power plants were required to begin complying with MATS on April 16, 2015, unless they were granted a one-year extension to begin to comply. MATS, along with many state and provincial regulations, form the basis for mercury emission capture at coal fired plants across North America. Under the MATS regulation, Electric Generating Units (“EGUs”) are required to remove about 90% of the mercury from their emissions. We believe that we continue to meet the requirements of the industry as a whole and our technologies have been shown to achieve mercury removal levels compliant with all state, provincial and federal regulations at a lower cost and with less plant impact than our competition.

 

As is typical in this market, we are paid by the EGU based on how much of our material is injected to achieve the needed level of mercury removal. Our current clients pay us as material is delivered to their facility. Clients will use our material whenever their EGUs operate, although EGUs are not always in operation. EGUs typically may not be in operation due to maintenance reasons or when the price of power in the market is less than their cost to produce power. Thus, our revenues from EGU clients will not typically be a consistent stream but will fluctuate, especially seasonally as the market demand for power fluctuates.

 

The MATS regulation has been subject to legal challenge, and in June 2015, the U.S. Supreme Court held that the EPA unreasonably failed to consider costs in determining whether it is “appropriate and necessary” to regulate hazardous air pollutants, including mercury, from power plants. The Court remanded the case back to the U.S. Court of Appeals for the District of Columbia Circuit for further proceedings, but left the rule in place. In December 2015, the D.C. Circuit remanded the rule back to the EPA for further consideration while allowing MATS to remain in effect pending the EPA’s finding; the Supreme Court later denied a petition challenging the lower court’s decision to remand without vacating. On April 14, 2016, EPA issued a final supplemental finding reaffirming the MATS rule on the ground that it is supported by the cost analysis the Supreme Court required. That supplemental finding is under review by the D.C. Circuit, and the Company is unable to predict with certainty the outcome of these proceedings. On April 18, 2017, EPA asked the court to place that litigation in abeyance, stating that the Agency is reviewing the supplemental finding to determine whether it should be reconsidered in whole or in part. The court granted EPA’s abeyance request on April 27, 2017, and ordered EPA to file 90-day status reports starting July 26, 2017. In February 2019, the EPA published a proposed revised supplemental cost-benefits finding for MATS in which EPA proposed to conclude that the 2016 supplemental finding was flawed in part due to its reliance on co-benefits to justify MATS. Nevertheless, the EPA proposed to leave the MATS rule in place. At the same time, EPA also requested public comment on whether MATS may or must be rescinded if EPA reversed its earlier conclusion that it is “appropriate and necessary” to regulate power plant emissions of mercury and other hazardous air pollutants under the statutory provision authorizing MATS. Following the close of the public comment period, on April 16, 2020, the EPA issued a final rule which finalized the proposed supplemental cost-benefits finding in substantially the form proposed in 2019. The final rule withdraws EPA’s 2016 “appropriate-and-necessary” determination as erroneous, but leaves the 2011 MATS rule in place pursuant to D.C. Circuit case law holding that a source category may only be removed from the list of categories to be regulated through a rigorous delisting process that cannot currently be satisfied by EPA. EPA’s final action will almost certainly be challenged in the courts, both by those who favor retention of MATS (such as the electric utility industry) and by those who oppose it (such as certain coal interests and deregulatory groups). This litigation could extend uncertainty over the status of MATS for a number of years. Investors should note that any changes to the MATS rule could have a negative impact on our business.

 

 
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Executive Overview

 

We remain focused on positioning the Company for short and long-term growth. During 2018, we focused on execution at our customer sites and on continual operation improvement. We continue to make refinements to all of our key products, as we continue to focus on the customer and its operations. As part of our overall strategy, we have a number of initiatives which we believe will be able to drive our short and long-term growth.

 

Our acquisition of all the patent rights, including all patents and patents pending, domestic and foreign, which forms the basis of our mercury control technology, which acquisition was completed in April 2017 provides a strong foundation for us to seek new customers for product using a two-part mercury control process or to offer licenses on a case by case basis.

 

In the United States, we continue to seek new utility customers for our technology in order for them to meet the MATS requirements as well as maintaining our contractual arrangements with our current customers. In this regard, in October 2018, we secured a supply contract extension with our largest customer and also expanded into this customer’s fleet by securing two additional coal-fired boilers to which we supply our technology and products. In March 2019, we secured two additional coal-fired boilers within this customer’s fleet. In addition, in March 2019, we secured a contract renewal with another long-term customer and entered into an agreement with a new utility customer to supply our technology and products. In May 2019, we announced that we had signed a multi-year contract renewal with a long-term customer located in the U.S. Southwest, and in July 2019 we announced a two-year contract extension with another long-term customer.

 

In Europe, we are working to penetrate this market through our licensing agreement entered into in March 2018 with one of our primary suppliers. We believe such arrangement will make our technology more marketable throughout Europe and which will benefit the Company from such supplier’s knowledge and operations in the region.

 

On February 25, 2019, we were able to complete the restructuring of our unsecured and secured debt obligations held by AC Midwest Energy LLC extending the maturity dates of these debts until 2022 and eliminating quarterly principal payment requirements. This restructuring reflects the commitment of our financial partner in our efforts to attract new business, manage our present customers and monetize our patent portfolio.

 

From June through October 2019, we raised $2,600,000 in a private placement offering of 12.0% unsecured convertible promissory notes and warrants sold and issued to certain accredited investors.

 

In July 2019, we announced that we had initiated patent litigation against defendants in the U.S. District Court for the District of Delaware for infringement of certain patents which relate to our two-part Sorbent Enhancement Additive (SEA®) process for mercury removal from coal-fired power plants.

 

In October 2019, we entered into a license and development agreement with an unaffiliated entity located in Alabama pursuant to which the parties will work together to develop a plan to commercialize and market certain technology owned by such unaffiliated entity related to the removal of mercury from air and water emissions generated by coal burning power plants.

 

Although we face a host of challenges and risks, we are optimistic about our future and expect our business to grow substantially.

 

It should be noted that our operations may be affected by the recent and ongoing outbreak of the coronavirus disease (COVID-19) which was declared a pandemic by the World Health Organization in March 2020. The ultimate disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on our financial position, operations and cash flow. Such disruptions may include, but are not limited to, the availability of raw materials and equipment, and disruptions to our workforce or to our business relationships with other third parties.

 

 
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Restatement of Previously Issued Financial Statements (Unaudited)

 

On April 13, 2020, our board of directors of the Company (which currently acts as our audit committee) concluded, after consultation with management and the Company’s recently retained financial consulting firm, that our previously issued unaudited financial statements for the periods ended March 31, 2019, June 30, 2019 and September 30, 2019, included in the Company’s Quarterly Reports of Form 10-Q for the periods ended March 31, 2019, June 30, 2019 and September 30, 2019, respectively, should no longer be relied upon as a result of the change in accounting for a certain debt restructuring.

 

Specifically, on February 25, 2019, the Company entered into an Unsecured Note Financing Agreement with AC Midwest Energy LLC (“AC Midwest”), pursuant to which AC Midwest exchanged a previously issued subordinated unsecured note in the principal amount of $13,000,000, together with all accrued and unpaid interest thereon, for a new unsecured note in the principal amount of $13,154,931 (the “New AC Midwest Unsecured Note”). We recorded a gain of $3,412,402 on this exchange which is primarily related to the difference in fair value of the notes on the date of the exchange, which we recently concluded should have been recorded as an equity transaction capital contribution.

 

Since the New AC Midwest Unsecured Note was held by a related party, the gain should have been recorded as a capital transaction under ASC 470-50-40. The profit-sharing portion also should have been bifurcated from the loan and shown separately on the Consolidated Balance Sheets of the financial statements. Such changes, including necessary adjustments for the periods ended March 31, 2019, June 30, 2019 and September 30, 2019, have been reflected in the audited consolidated financial statements and notes included in this Annual Report on Form 10-K. The adjustments, which are non-cash in nature, increase additional paid-in capital and increase our previously reported net loss, but has no impact on previously reported cash, working capital, total assets, total liabilities and revenues. For further information including the impact of these adjustments, please see Notes 8 and 14 to the audited consolidated financial statements included in this Annual Report on Form 10-K.

 

Results of Operations

 

Sales - We generated revenues of approximately $11,417,000 and $12,296,000 for the years ended December 31, 2019 and 2018, respectively. Such revenues were primarily derived from sorbent product sales which were approximately $11,324,000 and $12,115,000 for the years ended December 31, 2019 and 2018, respectively. The decrease from the prior year is primarily due to decreased generation in the coal fired power sector principally due to renewables and low natural gas prices. Equipment sales and other revenues for the years ended December 31, 2019 and 2018 were approximately $93,000 and $49,000 respectively.

 

Costs and Expenses

 

Total costs and expenses were approximately $13,929,000 and $17,090,000 during the years ended December 31, 2019 and 2018, respectively. The decrease in costs and expenses from the prior year to date is primarily attributable to the decrease in cost of sales. This was offset by an increase in selling, general and administrative expenses and interest expense.

 

Costs of sales were approximately $8,335,000 and $9,148,000 for the year ended December 31, 2019 and 2018, respectively. The year to date decreases in cost is primarily attributable to decreased sales.

 

Selling, general and administrative expenses were approximately $6,429,000 and $5,895,000 for the years ended December 31, 2019 and 2018, respectively. The increase is primarily attributed to an increase in stock-based compensation of $1,810,000 in 2019 compared to $491,000 in 2018. This increase was offset by decreases in salaries and other compensation which totaled $1,910,000 in 2019 compared to $2,400,000 in 2018.

 

Loss on change in fair value of profit share liability (relating to the restructured unsecured debt obligation held by AC Midwest Energy LLC) were approximately $374,000 and $0 for the years ended December 31, 2019 and 2018, respectively. The increase is primarily attributed to an increase in the fair value of the profit share liability.

 

 
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Interest expense related to the financing of capital was approximately $2,391,000 and $2,004,000 for the years ended December 31, 2019 and 2018, respectively. The increase in the year ended 2019 is due to the incentives provided with the notes issued in 2019, offset by the reduced interest on the notes payable. The breakdown of interest expense for the years ended December 2019 and 2018 is as follows:

  

 

 

Year Ended

December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

Interest expense on notes payable

 

$ 537

 

 

$ 1,224

 

Amortization of discount of notes payable

 

 

1,752

 

 

 

678

 

Amortization of debt issuance costs

 

 

102

 

 

 

102

 

 

 

 

 

 

 

 

 

 

 

 

$ 2,391

 

 

$ 2,004

 

 

Net Income (Loss)

 

For the years ended December 31, 2019 and 2018 we had a net loss of approximately $6,097,000 and $4,817,000, respectively. The change in net loss for the year ended December 31, 2019 is primarily due to the decrease in revenue and an increase in Selling, general and administrative expenses. This was offset by a decrease in cost of sale.

 

Liquidity and Capital Resources

 

We had approximately $1,499,000 in cash on its balance sheet at December 31, 2019. Total current assets were $3,552,000 and total current liabilities were $3,854,000 at December 31, 2019, resulting in a working capital deficit of approximately $302,000. Our accumulated deficit was $57.7 million at December 31, 2019. Additionally, we had a net loss in the amount of approximately $6,097,000 and cash used by operating activities of approximately $1,577,000 for the year ended December 31, 2019.

 

During 2018, we restructured convertible notes totaling $560,000 into new loans that mature in 2023. In February 2019, we completed the restructuring of our unsecured and secured debt obligations held by a principal shareholder, extending the maturity dates of these debts and the remaining convertible notes until 2022 and eliminating quarterly principal payment requirements. From June through October 2019, we sold $2,600,000 new convertible notes which mature in 2024 to investors. Nevertheless, the accompanying consolidated financial statements as of December 31, 2019 have been prepared assuming we will continue as a going concern. As reflected in the consolidated financial statements, we had an accumulated deficit of $57.7 million and a negative working capital of $302,000 at December 31, 2019. Additionally, we had a net loss in the amount of $6.1 million and cash used by operating activities of $1.6 million for the year ended December 31, 2019. These factors raise substantial doubt about our ability to continue as a going concern for the next twelve months from the issuance of this Annual Report on Form 10-K. Although we anticipate continued significant revenues for products to be used in MATS compliance activities, no assurances can be given that we can obtain sufficient working capital through these activities and additional financing may be needed to meet its obligations. In February 2020, we closed on a one-year secured loan with a bank in the principal amount of $200,000, and in April 2020, we received loan proceeds in the amount of $299,300 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act which was enacted on March 27, 2020 as a result of the COVID-19 pandemic. The principal and accrued interest under the PPP Loan is forgivable after eight weeks if we use the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise complies with the PPP requirements. In order to obtain forgiveness of the PPP Loan, we must submit a request and provide satisfactory documentation regarding our compliance with applicable requirements. Notwithstanding the foregoing loans, we may need to raise additional equity or debt financing. While we believe in our ability to raise additional funds, no assurances can be given that we can maintain sufficient working capital through these efforts, or that the continued implementation of our business plan will generate sufficient revenues in the future to sustain ongoing operations.

 

Total assets were approximately $9,273,000 at December 31, 2019 versus approximately $8,039,000 at December 31, 2018. The change in total assets is primarily attributable to the increase in right of use assets.

 

Total liabilities were approximately $18,147,000 at December 31, 2019 versus approximately $16,660,000 at December 31, 2018. The increase in liabilities is primarily due to an increase in convertible notes payable and operating lease liabilities offset by a decrease in unsecured notes payable, net of discount and issuance costs.

 

 
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Operating activities used approximately $1,577,000 and $1,065,000 of cash during the years ended December 31, 2019 and 2018, respectively. The increase in cash used in operating activities is primarily due to a decrease in accounts payable, accrued liabilities and operating lease liability partially offset by a decrease in accounts receivable.

 

Investing activities provided $30,000 during the year ended December 31, 2019 and used approximately $132,000 during the years ended December 31, 2018. The increase in cash provided by investing activities is due the increase in cash received from the sale of equipment and the decrease in cash used to purchase equipment.

 

Financing activities provided approximately $2,461,000 during the year ended December 31, 2019 and used approximately $636,000 during the year ended December 31, 2018, respectively. In 2019, the Company raised $2,600,000 in unsecured convertible debt and repaid $139,000 on notes payable compared to $300,000 in unsecured convertible debt and repaid $936,000 on notes payable during 2018.

 

Off-Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial conditions and results of operation are based upon the accompanying consolidated financial statements which have been prepared in accordance with the generally accepted accounting principles in the U.S. The preparation of the consolidated financial statements requires that we make estimates and assumptions that affect the amounts reported in assets, liabilities, revenues and expenses. Management evaluates on an on-going basis our estimates with respect to the valuation allowances for accounts receivable, income taxes, accrued expenses and equity instrument valuation, for example. We base these estimates on various assumptions and experience that we believe to be reasonable. The following critical accounting policies are those that are important to the presentation of our financial condition and results of operations. These policies require management’s most difficult, complex, or subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

 

The following critical accounting policies affect our more significant estimates used in the preparation of our consolidated financial statements. In particular, our most critical accounting policies relate to the recognition of revenue, and the valuation of our stock-based compensation.

 

Inventory

 

Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. Inventories are periodically evaluated to identify obsolete or otherwise impaired products and are written off when management determines usage is not probable. The Company estimates the balance of excess and obsolete inventory by analyzing inventory by age using last used and original purchase date and existing sales pipeline for which the inventory could be used. In the past the Company has experienced a minimal valuation allowance on its inventory.

 

Property and Equipment

 

Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For consolidated financial statement purposes, equipment is recorded at cost and depreciated using the straight-line method over their estimated useful lives of 2 to 5 years. Leasehold improvements are recorded at cost and depreciated using the straight-line method over the life of the lease.

 

Expenditures for repairs and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. Management reviews the carrying value of its property and equipment for impairment on an annual basis.

 

 
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Intellectual Property

 

Intellectual is recorded at cost and amortized over its estimated useful life of 15 years. Management reviews intellectual property for impairment when events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. In the event that impairment indicators exist, a further analysis is performed and if the sum of the expected undiscounted future cash flows resulting from the use of the asset or asset group is less than the carrying amount of the asset or asset group, an impairment loss equal to the excess of the asset or asset group’s carrying value over its fair value is recorded. Management considers historical experience and all available information at the time the estimates of future cash flows are made, however, the actual cash values that could be realized may differ from those that are estimated.

 

Recoverability of Long-Lived and Intangible Assets

 

Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of the long-lived and or intangible assets would be adjusted, based on estimates of future discounted cash flows. The Company evaluated the recoverability of the carrying value of the Company’s equipment. No impairment charges were recognized for the years ended December 31, 2019 and 2018, respectively.

 

Leases

 

In February 2016, the FASB issued new guidance which requires lessees to recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The accounting standard, effective January 1, 2019, requires virtually all leases to be recognized on the Balance Sheet. Effective January 1, 2019, we adopted the standard using the modified retrospective method, under which we elected the package of practical expedients and transition provisions allowing us to bring our existing operating leases onto the Consolidated Balance Sheet without adjusting comparative periods, but recognizing a cumulative-effect adjustment to the opening balance of accumulated deficit on January 1, 2019. Under the guidance, we have also elected not to separate lease and non-lease components in recognition of the lease-related assets and liabilities, as well as the related lease expense.

 

We have operating leases for office space in two multitenant facilities, which are not recorded as assets and liabilities as those leases do not have terms greater than 12 months. We have an operating leases for a multi-purpose facility and bulk trailers used in operations which is recorded as an asset and liability as the lease has a terms greater than 12 months. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

 

Upon adoption of the new lease accounting standard on January 1, 2019, we recorded $1,339,569 of right of use assets and $1,417,435 of lease-related liabilities, with the difference charged to accumulated deficit at that date.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation awards in accordance with the provisions of ASC 718, Compensation-Stock Compensation , which requires equity-based compensation, be reflected in the consolidated financial statements over the period of service which is typically the vesting period based on the estimated fair value of the awards.

 

Fair Value of Financial Instruments

 

The fair value hierarchy has three levels based on the inputs used to determine fair value, which are as follows:

 

 

Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.

 

Level 2 — Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

 

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

 

 
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The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

 

Revenue Recognition

 

The Company records revenue in accordance with ASC 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

Revenue is recognized when the Company satisfies its performance obligation under the contract by transferring the promised product to its customer that obtains control of the product. A performance obligation is a promise in a contract to transfer a distinct product to a customer. Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.

 

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales and other taxes are excluded from revenues. Invoiced shipping and handling costs are included in revenue. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

Disaggregation of Revenue

 

The Company generated revenue for the years ended December 31, 2019 and 2018 by (i) delivering product to its commercial customers, (ii) completing and commissioning equipment projects at commercial customer sites and (iii) performing demonstrations of its technology at customers with the intent of entering into long term supply agreements based on the performance of the Company’s products during the demonstrations.

 

Revenue for product sales is recognized at the point of time in which the customer obtains control of the product, at the time title passes to the customer upon shipment or delivery of the product based on the applicable shipping terms.

 

Revenue for equipment sales is recognized upon commissioning and customer acceptance of the installed equipment per the terms of the purchase contract.

 

Revenue for demonstrations and consulting services is recognized when performance obligations contained in the contract have been completed, typically the completion of necessary field work and the delivery of any required analysis per the terms of the agreement.

 

Deferred Revenue

 

Revenue is recognized in the period that delivery is made and performance obligations are met. In accordance with the terms of an agreement with one customer, the Company allocated a fixed amount of payments made against the total deliveries of product made during the contract period. Due to this agreement $517,060 was deferred as of December 31, 2017 and was recognized in 2018 when product was delivered to the customer.

 

 
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Income Taxes

 

The Company follows the asset and liability method of accounting for income taxes under FASB ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

FASB ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of December 31, 2019. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.

 

The Company may be subject to potential examination by federal, state, and city taxing authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with federal, state, and city tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.

 

The Company is no longer subject to tax examinations by tax authorities for years prior to 2017.

 

Recently Adopted Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” Under ASU 2016-02, lessees will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 became effective for us on January 1, 2019 and initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. As of January 1, 2019, the Company adopted ASU 2016-02 and has recorded a right-of-use asset and lease liability on the balance sheet for its operating leases. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). The Company accounted for lease and non-lease components separately because such amounts are readily determinable under our lease contracts and because we expect this election will result in a lower impact on our balance sheet.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings.

 

 
25

Table of Contents

 

The guidance in ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The Company early adopted ASU 2017-11 and changed its method of accounting for certain warrants that were initially recorded as liabilities during the year ended December 31, 2014 on a full retrospective basis. The adoption of ASU 2017-11 did not have a material impact on its consolidated financial statements.

 

Recently Issued Accounting Standards

 

In June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718)”. ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share based payments. Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different. ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity — Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company is currently evaluating ASU 2018-07 and its impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 modify the disclosure requirements associated with fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating ASU 2018-13 and its impact on its consolidated financial statements.

 

In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements.

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.

 

Non-GAAP Financial Measures

 

Adjusted EBITDA

 

To supplement our consolidated financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we consider and are including herein Adjusted EBITDA, a Non-GAAP financial measure. We view Adjusted EBITDA as an operating performance measure and, as such, we believe that the GAAP financial measure most directly comparable to it is net income (loss). We define Adjusted EBITDA as net income adjusted for interest and financing fees, income taxes, depreciation, amortization, stock based compensation, and other non-cash income and expenses. We believe that Adjusted EBITDA provides us an important measure of operating performance because it allows management, investors, debtholders and others to evaluate and compare ongoing operating results from period to period by removing the impact of our asset base, any asset disposals or impairments, stock based compensation and other non-cash income and expense items associated with our reliance on issuing equity-linked debt securities to fund our working capital.

 

 
26

Table of Contents

 

Our use of Adjusted EBITDA has limitations as an analytical tool, and this measure should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition. Additionally, our measure of Adjusted EBITDA may differ from other companies’ measure of Adjusted EBITDA. When evaluating our performance, Adjusted EBITDA should be considered with other financial performance measures, including various cash flow metrics, net income and other GAAP results. In the future, we may disclose different non-GAAP financial measures in order to help our investors and others more meaningfully evaluate and compare our future results of operations to our previously reported results of operations.

 

The following table shows our reconciliation of Net Income to Adjusted EBITDA for the years ended December 31, 2019 and 2018, respectively:

 

 

 

Year Ended

 

 

 

12/31/2019

 

 

12/31/2018

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

Net loss

 

$ (6,097 )

 

$ (4,817 )

 

 

 

 

 

 

 

 

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

929

 

 

 

796

 

Interest and letter of credit fees

 

 

2,391

 

 

 

2,004

 

Income taxes

 

 

14

 

 

 

22

 

Stock based compensation

 

 

1,810

 

 

 

491

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$ (953 )

 

$ (1,504 )

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 
27

Table of Contents

 

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES

Index to Financial Information

Years Ended December 31, 2019 and 2018

 

Page

 

Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

F-1

 

Consolidated Balance Sheets

F-2

Consolidated Statements of Operations

F-3

 

Consolidated Statements of Stockholders’ Deficit

F-4

 

Consolidated Statements of Cash Flows

F-5

 

Notes to Consolidated Financial Statements

F-6

 

 
28

Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and Board of Directors of

Midwest Energy Emissions Corp.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Midwest Energy Emissions Corp. (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph – Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 3, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Adoption of New Accounting Standards

 

As discussed in Note 2 to the financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842), as amended, effective January 1, 2019, using the modified retrospective approach.

 

Restatement of Previously Issued Unaudited Financial Statements

 

As discussed in Note 14 to the financial statements, the Company concluded that a gain on debt restructuring recognized during the first quarter of 2019 should have been accounted for as a capital transaction. The effect of restatement, which resulted in a reduction in net gain and no effect on ending equity, on the specific items presented in the Company’s historical unaudited interim condensed consolidated financial statements previously included in the Company’s Quarterly Reports on Form 10-Q have been restated within these financial statements for the periods ended March 31, 2019, June 30, 2019 and September 30, 2019; as further described in Note 14.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Marcum LLP

 

Marcum LLP

 

We have served as the Company’s auditor since 2018.

Houston, Texas
May 14, 2020

 

 
F-1

Table of Contents

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2019 AND 2018

   

 

 

December 31,

2019

 

 

December 31,

2018

 

ASSETS

Current assets

 

 

 

 

 

 

Cash

 

$ 1,499,287

 

 

$ 584,877

 

Accounts receivable

 

 

1,222,874

 

 

 

1,642,126

 

Inventory

 

 

513,498

 

 

 

509,416

 

Prepaid expenses and other assets

 

 

316,199

 

 

 

136,628

 

Customer acquisition costs, net

 

 

-

 

 

 

34,467

 

Total current assets

 

 

3,551,858

 

 

 

2,907,514

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

2,082,343

 

 

 

2,397,691

 

Right of use asset

 

 

1,106,575

 

 

 

-

 

Intellectual property

 

 

2,532,462

 

 

 

2,733,662

 

Total assets

 

$ 9,273,238

 

 

$ 8,038,867

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$ 1,676,757

 

 

$ 1,858,326

 

Current portion of equipment notes payable

 

 

53,304

 

 

 

63,424

 

Current portion of operating lease liability

 

 

383,307

 

 

 

-

 

Current portion of convertible notes payable, net of discount and issuance costs

 

 

990,000

 

 

 

-

 

Accrued interest

 

 

226,065

 

 

 

96,902

 

Customer credits

 

 

167,000

 

 

 

167,000

 

Deferred compensation

 

 

357,095

 

 

 

555,877

 

Total current liabilities

 

 

3,853,528

 

 

 

2,741,529

 

 

 

 

 

 

 

 

 

 

Equipment notes payable, less current portion

 

 

22,386

 

 

 

104,226

 

Operating lease liability

 

 

807,409

 

 

 

-

 

Convertible notes payable, net of discount and issuance costs

 

 

2,951,137

 

 

 

1,760,570

 

Profit share liability

 

 

2,328,845

 

 

 

-

 

Secured note payable

 

 

271,686

 

 

 

271,686

 

Unsecured note payable, net of discount and issuance costs

 

 

7,911,898

 

 

 

11,781,952

 

Total liabilities

 

 

18,146,889

 

 

 

16,659,963

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value: 2,000,000 shares authorized, no shares issued

 

 

-

 

 

 

-

 

Common stock; $0.001 par value; 150,000,000 shares authorized; 76,747,750 and 76,246,113 shares issued and outstanding as of December 31, 2019 and 2018, respectively

 

 

76,748

 

 

 

76,246

 

Additional paid-in capital

 

 

48,708,085

 

 

 

42,785,990

 

Accumulated deficit

 

 

(57,658,484 )

 

 

(51,483,332 )

 

 

 

 

 

 

 

 

 

Total stockholders’ deficit

 

 

(8,873,651 )

 

 

(8,621,096 )

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

$ 9,273,238

 

 

$ 8,038,867

 

 

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

 

 
F-2

Table of Contents

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

  

 

 

For the Year

Ended

December 31,

2019

 

 

For the Year

Ended

December 31,

2018

 

 

 

 

 

 

 

 

Revenues

 

$ 11,417,027

 

 

$ 12,295,862

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of sales

 

 

8,335,436

 

 

 

9,147,745

 

Selling, general and administrative expenses

 

 

6,428,580

 

 

 

5,894,511

 

Interest expense & letter of credit fees

 

 

2,391,395

 

 

 

2,004,097

 

Loss on debt restructuring

 

 

-

 

 

 

44,036

 

Loss on change in fair value of profit share liability

 

 

374,462

 

 

 

-

 

Gain on sale of equipment

 

 

(29,560 )

 

 

-

 

Total costs and expenses

 

 

17,500,313

 

 

 

17,090,389

 

 

 

 

 

 

 

 

 

 

Net loss before provision for income taxes

 

 

(6,083,286 )

 

 

(4,794,527 )

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

(14,000 )

 

 

(22,153 )

 

 

 

 

 

 

 

 

 

Net loss

 

$ (6,097,286 )

 

$ (4,816,680 )

 

 

 

 

 

 

 

 

 

Net loss per common share-basic and diluted:

 

$ (0.08 )

 

$ (0.06 )

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

76,534,957

 

 

 

76,137,894

 

 

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

 

 
F-3

Table of Contents

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

  

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

(Deficit)

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2017

 

 

76,246,113

 

 

$ 76,246

 

 

$ 42,165,620

 

 

$ (46,666,652 )

 

$ (4,424,786 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock issued to non-employees in prior year

 

 

-

 

 

 

-

 

 

 

138,750

 

 

 

-

 

 

 

138,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of warrants

 

 

-

 

 

 

-

 

 

 

129,850

 

 

 

-

 

 

 

129,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock options

 

 

-

 

 

 

-

 

 

 

351,770

 

 

 

-

 

 

 

351,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,816,680 )

 

 

(4,816,680 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2018

 

 

76,246,113

 

 

$ 76,246

 

 

$ 42,785,990

 

 

$ (51,483,332 )

 

$ (8,621,096 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in accounting principle related to accounting for leases

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(77,866 )

 

 

(77,866 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of warrants, recorded as discount on convertible notes payable

 

 

-

 

 

 

-

 

 

 

485,640

 

 

 

-

 

 

 

485,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock options

 

 

-

 

 

 

-

 

 

 

898,207

 

 

 

-

 

 

 

898,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension of certain stock option expiration

 

 

-

 

 

 

-

 

 

 

745,989

 

 

 

-

 

 

 

745,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued per resignation agreements

 

 

464,517

 

 

 

465

 

 

 

118,075

 

 

 

-

 

 

 

118,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued upon cashless warrant exercise

 

 

37,120

 

 

 

37

 

 

 

(37 )

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock warrants issued for prepaid services

 

 

-

 

 

 

-

 

 

 

243,294

 

 

 

-

 

 

 

243,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options issued for prepaid services

 

 

-

 

 

 

-

 

 

 

18,723

 

 

 

-

 

 

 

18,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital contribution related to debt restructuring Note 8

 

 

-

 

 

 

-

 

 

 

3,412,204

 

 

 

-

 

 

 

3,412,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,097,286 )

 

 

(6,097,286 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2019

 

 

76,747,750

 

 

$ 76,748

 

 

$ 48,708,085

 

 

$ (57,658,484 )

 

$ (8,873,651 )

   

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

 

 
F-4

Table of Contents

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

  

 

 

For the Year

Ended

December 31,

2019

 

 

For the Year

Ended

December 31,

2018

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$ (6,097,286 )

 

$ (4,816,680 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

1,810,267

 

 

 

490,520

 

Amortization of discount of notes payable

 

 

1,752,639

 

 

 

678,061

 

Amortization of debt issuance costs

 

 

101,852

 

 

 

102,183

 

Amortizaton of right to use assets

 

 

378,261

 

 

 

-

 

Amortization of customer acquisition costs

 

 

34,467

 

 

 

137,866

 

Amortization of patent rights

 

 

201,200

 

 

 

201,200

 

Depreciation expense

 

 

314,908

 

 

 

456,914

 

Loss on debt exchange

 

 

-

 

 

 

44,036

 

Loss on change in fair value of profit share

 

 

374,462

 

 

 

-

 

(Gain) Loss on sale of equipment

 

 

(29,560 )

 

 

6,303

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Decrease in accounts receivable

 

 

419,252

 

 

 

1,289,227

 

(Increase) Decrease in inventory

 

 

(4,082 )

 

 

150,163

 

Decrease in prepaid expenses and other assets

 

 

34,915

 

 

 

73,907

 

(Decrease) Increase in accounts payable and accrued liabilities

 

 

(426,638 )

 

 

62,623

 

Increase in deferred compensation

 

 

(198,782 )

 

 

555,877

 

Increase in accrued interest

 

 

129,163

 

 

 

19,402

 

(Decrease) in operating lease liability

 

 

(371,986 )

 

 

-

 

(Decrease) in deferred revenue and customer credits

 

 

-

 

 

 

(517,060 )

Net cash used in operating activities

 

 

(1,576,948 )

 

 

(1,065,458 )

 

 

 

 

 

 

 

 

 

Cash flows used in investing activities

 

 

 

 

 

 

 

 

Cash received from sale of equipment

 

 

30,000

 

 

 

-

 

Purchase of property and equipment

 

 

-

 

 

 

(131,915 )

Net cash used in investing activities

 

 

30,000

 

 

 

(131,915 )

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments on secured promissory note

 

 

(46,682 )

 

 

(875,000 )

Payments of equipment notes payable

 

 

(91,960 )

 

 

(61,177 )

Proceeds from the issuance of convertible promissory notes and related warrants

 

 

2,600,000

 

 

 

300,000

 

Net cash provided by (used in) financing activities

 

 

2,461,358

 

 

 

(636,177 )

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

914,410

 

 

 

(1,833,550 )

 

 

 

 

 

 

 

 

 

Cash and cash equivalents - beginning of year

 

 

584,877

 

 

 

2,418,427

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents - end of year

 

$ 1,499,287

 

 

$ 584,877

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$ -

 

 

$ 1,175,450

 

Taxes

 

$ 14,000

 

 

$ 22,153

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS

 

 

 

 

 

 

 

 

Cumulative effect on accumulated deficit of lease accounting change

 

$ 77,866

 

 

$ -

 

Discount on convertible promissory notes payable

 

$ 485,640

 

 

$ -

 

Net adjustment for extension of lease

 

$ 145,267

 

 

$ -

 

Stock warrants issued for prepaid services

 

$ 243,294

 

 

$ -

 

Stock options issued for prepaid services

 

$ 18,723

 

 

$ -

 

Conversion of secured notes payable into unsecured notes payable

 

$ -

 

 

$ 560,000

 

Capital contribution

 

$ (3,412,204 )

 

$ -

 

Warrants issued upon debt exchange

 

$ -

 

 

$ 89,500

 

 

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

 

 
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Table of Contents

  

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

 

Note 1 - Organization

 

Midwest Energy Emissions Corp.

 

Midwest Energy Emissions Corp. (the “Company”) is organized under the laws of the State of Delaware with 150,000,000 authorized shares of common stock, par value $.001 per share and 2,000,000 authorized shares of preferred stock, par value $0.001 per share.

 

MES, Inc.

 

MES, Inc. is incorporated in the State of North Dakota. MES, Inc. is a wholly owned subsidiary of Midwest Energy Emissions Corp. and is engaged in the business of developing and commercializing state of the art control technologies relating to the capture and control of mercury emissions from coal fired boilers in the United States and Canada.

 

Note 2 - Summary of Significant Accounting Policies

 

Basis of Presentation


The accompanying consolidated financial statements have been prepared in accordance with the Generally Accepted Accounting Principles in the United States of America (“GAAP”).

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Midwest Energy Emissions Corp. and its wholly-owned subsidiary, MES, Inc. Intercompany balances and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain prior year amounts in the consolidated financial statements and the notes thereto have been reclassified where necessary to conform to the current year presentation. These reclassifications did not affect the prior period total assets, total liabilities, stockholders’ deficit, net loss or net cash used in operating activities.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, valuation of equity issuances and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company uses estimates in accounting for, among other items, revenue recognition, allowance for doubtful accounts, stock-based compensation, income tax provisions, excess and obsolete inventory reserve and impairment of intellectual property. Actual results could differ from those estimates.

 

Cash

 

Cash and cash equivalents include all highly liquid monetary instruments with original maturities of three months or less when purchased. These investments are carried at cost, which approximates fair value. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash deposits. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, the Company’s cash and cash equivalent balances may be uninsured or in amounts that exceed the FDIC insurance limits. The Company has not experienced any loses on such accounts. At December 31, 2019 and 2018, the Company had no cash equivalents.

 

As of December 31, 2019, approximately $1,249,000 of cash exceeded the FDIC insurance limits.

 

 
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Table of Contents

 

Accounts Receivable

 

Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. At December 31, 2019 and 2018, the allowance for doubtful accounts was zero.

 

Inventory

 

Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. Inventories are periodically evaluated to identify obsolete or otherwise impaired products and are written off when management determines usage is not probable. The Company estimates the balance of excess and obsolete inventory by analyzing inventory by age using last used and original purchase date and existing sales pipeline for which the inventory could be used. As of December 31, 2019 and 2018, the Company has no valuation allowance.

 

Property and Equipment

 

Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For consolidated financial statement purposes, equipment is recorded at cost and depreciated using the straight-line method over their estimated useful lives of 2 to 5 years. Leasehold improvements are recorded at cost and depreciated using the straight-line method over the life of the lease.

 

Expenditures for repairs and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. Management reviews the carrying value of its property and equipment for impairment on an annual basis.

 

Intellectual Property

 

Intellectual is recorded at cost and amortized over its estimated useful life of 15 years. Management reviews intellectual property for impairment when events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. In the event that impairment indicators exist, a further analysis is performed and if the sum of the expected undiscounted future cash flows resulting from the use of the asset or asset group is less than the carrying amount of the asset or asset group, an impairment loss equal to the excess of the asset or asset group’s carrying value over its fair value is recorded. Management considers historical experience and all available information at the time the estimates of future cash flows are made, however, the actual cash values that could be realized may differ from those that are estimated.

 

Recoverability of Long-Lived and Intangible Assets

 

Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of the long-lived and or intangible assets would be adjusted, based on estimates of future discounted cash flows. The Company evaluated the recoverability of the carrying value of the Company’s equipment. No impairment charges were recognized for the years ended December 31, 2019 and 2018, respectively.

 

 
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Table of Contents

 

Leases

 

In February 2016, the FASB issued new guidance which requires lessees to recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The accounting standard, effective January 1, 2019, requires virtually all leases to be recognized on the Balance Sheet. Effective January 1, 2019, we adopted the standard using the modified retrospective method, under which we elected the package of practical expedients and transition provisions allowing us to bring our existing operating leases onto the Consolidated Balance Sheet without adjusting comparative periods, but recognizing a cumulative-effect adjustment to the opening balance of accumulated deficit on January 1, 2019. Under the guidance, we have also elected not to separate lease and non-lease components in recognition of the lease-related assets and liabilities, as well as the related lease expense.

 

We have operating leases for office space in two multitenant facilities, which are not recorded as assets and liabilities as those leases do not have terms greater than 12 months. We have an operating leases for a multi-purpose facility and bulk trailers used in operations which is recorded as an asset and liability as the lease has a terms greater than 12 months. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

 

Upon adoption of the standard on January 1, 2019, we recorded $1,339,569 of right of use assets and $1,417,435 of lease-related liabilities, with the difference charged to accumulated deficit at that date.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation awards in accordance with the provisions of Accounting Standards Codification (“ASC”) 718, Compensation-Stock Compensation, which requires equity-based compensation, be reflected in the consolidated financial statements over the period of service which is typically the vesting period based on the estimated fair value of the awards.

 

Fair Value of Financial Instruments

 

The fair value hierarchy has three levels based on the inputs used to determine fair value, which are as follows:

 

 

Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.

 

Level 2 — Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

 

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

 

The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

 

Cash was the only asset measured at fair value on a recurring basis by the Company at December 31, 2019 and December 31, 2018 and is considered to be Level 1.

 

Financial instruments include cash, accounts receivable, accounts payable, deferred revenue, customer credits and short-term debt. The carrying amounts of these financial instruments approximated fair value at December 31, 2019 and December 31, 2018 due to their short-term maturities.

 

The fair value of the promissory notes payable at December 31, 2019 and December 31, 2018 approximated the carrying amount as the notes were issued during the years ended December 31, 2019 and 2018 at interest rates prevailing in the market and interest rates have not significantly changed as of December 31, 2019. The fair value of the promissory notes payable was determined on a Level 2 measurement. Discounts on issued debt, as well as debt issuance costs, are amortized over the term of the individual promissory notes.

 

 
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Table of Contents

 

The fair value of the profit share liability at December 31, 2019 was calculated using a discounted cash flow model based on estimated future cash payments. The fair value of the profit share liability was determined on a Level 3 measurement. These values are determined using pricing models for which the assumptions utilized management’s estimates.

 

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.

 

 

 

 

 

 

Fair Value Measurement as of

December 31, 2019

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

1,499,287

 

 

 

1,499,287

 

 

 

-

 

 

 

-

 

Total Assets

 

$ 1,499,287

 

 

$ 1,499,287

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Promissory notes

 

 

12,200,411

 

 

 

-

 

 

 

12,200,411

 

 

 

-

 

Profit share liability

 

 

2,328,845

 

 

 

-

 

 

 

-

 

 

 

2,328,845

 

Total Liabilities

 

$ 14,529,256

 

 

$ -

 

 

$ 12,200,411

 

 

$ 2,328,845

 

 

 

 

 

 

 

Fair Value Measurement as of

December 31, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

584,877

 

 

 

584,877

 

 

 

-

 

 

 

-

 

Total Assets

 

$ 584,877

 

 

$ 584,877

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Promissory notes

 

 

13,814,208

 

 

 

-

 

 

 

13,814,208

 

 

 

 

 

Total Liabilities

 

$ 13,814,208

 

 

$ -

 

 

$ 13,814,208

 

 

$ -

 

 

Foreign Currency Transactions

 

The Company’s functional currency is the United States Dollar (the “U.S. Dollar”). Transactions denominated in currencies other than the U.S. Dollar are re-measured to the U.S. Dollar at the period-end exchange rates. Any associated transactional currency re-measurement gains and losses are recognized in current operations. At both December 31, 2019 and December 31, 2018, there were no material gains or losses recognized.

 

Revenue Recognition

 

The Company records revenue in accordance with ASC 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

Revenue is recognized when the Company satisfies its performance obligation under the contract by transferring the promised product to its customer that obtains control of the product. A performance obligation is a promise in a contract to transfer a distinct product to a customer. Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.

 

 
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Table of Contents

 

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales and other taxes are excluded from revenues. Invoiced shipping and handling costs are included in revenue. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

Disaggregation of Revenue

 

The Company generated revenue for the years ended December 31, 2019 and 2018 by (i) delivering product to its commercial customers, (ii) completing and commissioning equipment projects at commercial customer sites and (iii) performing demonstrations of its technology at customers with the intent of entering into long term supply agreements based on the performance of the Company’s products during the demonstrations.

 

Revenue for product sales is recognized at the point of time in which the customer obtains control of the product, at the time title passes to the customer upon shipment or delivery of the product based on the applicable shipping terms.

 

Revenue for equipment sales is recognized upon commissioning and customer acceptance of the installed equipment per the terms of the purchase contract.

 

Revenue for demonstrations and consulting services is recognized when performance obligations contained in the contract have been completed, typically the completion of necessary field work and the delivery of any required analysis per the terms of the agreement.

 

The following table presents sales by operating segment disaggregated based on the type of product and geographic region for the years ended December 31, 2019, and 2018.

 

 

 

Year ended December 31, 2019

 

 

Year ended December 31, 2018

 

 

 

United States

 

 

International

 

 

Total

 

 

United States

 

 

International

 

 

Total

 

Product revenue

 

$ 10,746,714

 

 

$ 297,840

 

 

$ 11,044,554

 

 

$ 11,965,185

 

 

$ 149,968

 

 

$ 12,115,153

 

Demonstrations & Consulting revenue

 

 

183,448

 

 

 

95,543

 

 

 

278,991

 

 

 

131,681

 

 

 

-

 

 

 

131,681

 

Equipment revenue

 

 

93,481

 

 

 

-

 

 

 

93,481

 

 

 

49,028

 

 

 

-

 

 

 

49,028

 

 

 

$ 11,023,643

 

 

$ 393,383

 

 

$ 11,417,026

 

 

$ 12,145,894

 

 

$ 149,968

 

 

$ 12,295,862

 

 

Customer Acquisition Costs

 

Customer acquisition costs are amortized on a straight-line bases over the life of the initial customer contract. The capitalized balance of customer acquisition costs was $0 and $34,467 on December 31, 2019 and December 31, 2018, respectively. Amortization expense for the years ended December 31, 2019 and 2018 was $0 and $137,866, respectively and included in cost of sales.

 

Deferred Revenue

 

Revenue is recognized in the period that delivery is made and performance obligations are met. In accordance with the terms of an agreement with one customer, the Company allocated a fixed amount of payments made against the total deliveries of product made during the contract period. As of December 31, 2019 and 2018 the Company had no deferred revenue.

 

Income Taxes

 

The Company follows the asset and liability method of accounting for income taxes under FASB ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

 
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Table of Contents

 

FASB ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of December 31, 2019. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.

 

The Company may be subject to potential examination by federal, state, and city taxing authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with federal, state, and city tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.

 

The Company is no longer subject to tax examinations by tax authorities for years prior to 2017.

 

Basic and Diluted Loss Per Common Share

 

Basic net loss per common share is computed using the weighted average number of common shares outstanding. Diluted loss per share reflects the potential dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. For the years ended December 31, 2019 and 2018 basic and diluted earnings per share approximated each other. There were no dilutive potential common shares as of December 31, 2019 and 2018, because the Company incurred net losses and basic and diluted losses per common share are the same. The following common stock equivalents were excluded from the computation of diluted net loss per share of common stock because they were anti-dilutive. The exercise of these common stock equivalents would dilute earnings per share if the Company becomes profitable in the future. 

 

 

 

December 31

 

 

December 31

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

Stock Options

 

 

12,553,326

 

 

 

9,161,510

 

Warrants

 

 

5,690,378

 

 

 

4,105,398

 

Convertible debt

 

 

9,351,400

 

 

 

3,700,000

 

Total common stock equivalents excluded from diluted net loss per share

 

 

27,595,104

 

 

 

16,966,908

 

 

Concentration of Credit Risk

 

Financial instruments that subject the Company to credit risk consist of cash and equivalents on deposit with financial institutions and accounts receivable. The Company’s cash as of December 31, 2019 is maintained at high-quality financial institutions and has not incurred any losses to date.

 

Customer and Supplier Concentration

 

For each of the years ended December 31, 2019 and 2018, 100% of the Company’s revenue related to eleven and eight customers respectively. At December 31, 2019 and 2018, 100% of the Company’s accounts receivable related to eight and seven customers respectively.

 

For each of the years ended December 31, 2019 and 2018, 91% and 52% of the Company’s purchases related to two suppliers, respectively. At December 31, 2019 and 2018, 74% and 72% of the Company’s accounts payable and accrued expenses related to two vendors. The Company believes there are numerous other suppliers that could be substituted should the supplier become unavailable or non-competitive.

 

Contingencies

 

Certain conditions may exist which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

 
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Table of Contents

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in which case the guarantees would be disclosed.

 

Recently Adopted Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under ASU 2016-02, lessees will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 became effective for us on January 1, 2019 and initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. As of January 1, 2019, the Company adopted ASU 2016-02 and has recorded a right-of-use asset and lease liability on the balance sheet for its operating leases. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). The Company accounted for lease and non-lease components separately because such amounts are readily determinable under our lease contracts and because we expect this election will result in a lower impact on our balance sheet.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings.

 

The guidance in ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The Company early adopted ASU 2017-11 and changed its method of accounting for certain warrants that were initially recorded as liabilities during the year ended December 31, 2014 on a full retrospective basis. The adoption of ASU 2017-11 did not have a material impact on its consolidated financial statements.

 

 
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Table of Contents

 

Recently Issued Accounting Standards

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718). ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share based payments. Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different. ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity — Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company is currently evaluating ASU 2018-07 and its impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 modify the disclosure requirements associated with fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating ASU 2018-13 and its impact on its consolidated financial statements.

 

 In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements.

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.

 

Note 3 – Going Concern and Financial Condition

 

Under ASC 205-40, Presentation of Financial Statements—Going Concern, the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40.

 

The accompanying consolidated financial statements as of December 31, 2019 have been prepared assuming the Company will continue as a going concern. As reflected in the consolidated financial statements, the Company had an accumulated deficit of $57.7 million and a negative working capital of $302,000 at December 31, 2019. Additionally, the Company had a net loss in the amount of $6.1 million and cash used by operating activities of $1.6 million for the year ended December 31, 2019. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the issuance of these consolidated financial statements within the Company’s Annual Report on Form 10-K. Although we anticipate continued significant revenues for products in be used in MATS compliance activities, no assurances can be given that the Company can obtain sufficient working capital through these activities and additional financing may be needed to meet its obligations. In February 2020, the Company closed on a one-year secured loan with a bank in the principal amount of $200,000, and in April 2020, the Company received loan proceeds in the amount of $299,300 pursuant to the Paycheck Protection Program under the Cares Act which was enacted on March 27, 2020 as a result of the COVID-19 pandemic. Nevertheless, the Company may need to raise additional equity or debt financing. While the Company believes in its ability to raise additional funds, no assurances can be given that the Company can maintain sufficient working capital through these efforts, or that the continued implementation of its business plan will generate sufficient revenues in the future to sustain ongoing operations.

 

The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

 
F-13

Table of Contents

  

Note 4 - Inventory

 

Inventory was comprised of the following at December 31, 2019 and 2018:

 

 

 

December 31,

2019

 

 

December 31,

2018

 

Raw Materials

 

$ 223,790

 

 

$ 87,730

 

Work in Process

 

 

43,814

 

 

 

130,062

 

Spare Parts

 

 

27,632

 

 

 

26,967

 

Finished goods

 

 

218,262

 

 

 

264,657

 

 

 

$ 513,498

 

 

$ 509,416

 

 

Note 5 - Property and Equipment, Net

 

Property and equipment at December 31, 2019 and 2018 are as follows:

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

Equipment & Installation

 

$ 1,965,659

 

 

$ 1,965,659

 

Trucking equipment

 

 

922,441

 

 

 

983,948

 

Computer equipment and software

 

 

67,126

 

 

 

117,212

 

Office equipment

 

 

27,155

 

 

 

27,155

 

Total equipment 

 

 

2,982,381

 

 

 

3,093,974

 

 

 

 

 

 

 

 

 

 

Less: accumulated depreciation

 

 

(2,707,745 )

 

 

(2,503,990 )

Construction in process

 

 

1,807,707

 

 

 

1,807,707

 

Property and equipment, net

 

$ 2,082,343

 

 

$ 2,397,691

 

 

The Company uses the straight-line method of depreciation over 2 to 5 years. During the years ended December 31, 2019 and 2018 depreciation expense was $314,908, and $456,914.

 

Note 6 – Intellectual Property

 

On January 15, 2009, the Company entered into an “Exclusive Patent and Know-How License Agreement Including Transfer of Ownership” with the Energy and Environmental Research Center Foundation, a non-profit entity (“EERCF”). Under the terms of the Agreement, the Company has been granted an exclusive license by EERCF for the technology to develop, make, have made, use, sell, offer to sell, lease, and import the technology in any coal-fired combustion systems (power plant) worldwide and to develop and perform the technology in any coal-fired power plant in the world.

 

On April 24, 2017, the Company closed on the acquisition of all patent rights from EERCF including all patents and patents pending, domestic and foreign, relating to the foregoing technology. A total of 42 domestic and foreign patents and patent applications were included in the acquisition. In accordance with the terms of the License Agreement, the patent rights were acquired for the purchase price of (i) $2,500,000 in cash, and (ii) 925,000 shares of common stock of which 628,998 shares were issued to EERCF and 296,002 were issued to the inventors who had been designated by EERCF. The shares issued were valued at $518,000 ($0.56 per share), representing the value as of the closing date.

 

License and patent costs capitalized as of December 31, 2019 and 2018 are as follows:

 

 

December 31

 

December 31

 

2019

 

2018

 

Patents

 

$

3,068,995

 

$

3,068,995

 

Less: Accumulated amortization

 

(536,533

)

 

(335,333

)

License, net

 

$

2,532,462

 

$

2,733,662

 

Amortization expense for the years ended December 31, 2019 and 2018 was $201,200 and $201,200, respectively. Estimated annual amortization for each of the next five years is $201,200.

 

 
F-14

Table of Contents

 

Note 7 –Convertible Notes Payable

 

The Company has the following convertible notes payable outstanding as of December 31, 2019 and 2018:

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

Secured convertible promissory notes which mature upon the retirement of the New AC Midwest Secured Debt, bear interest at 10% per annum, and are convertible into one share of common stock, par value $0.001 per share.

 

$ 990,000

 

 

$ 990,000

 

 

 

 

 

 

 

 

 

 

Unsecured convertible promissory notes which mature beginning on June 15, 2023, bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share.

 

 

860,000

 

 

 

860,000

 

 

 

 

 

 

 

 

 

 

Unsecured convertible promissory notes which mature beginning on June 18, 2024, bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share.

 

 

2,600,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Total convertible notes payable before discount

 

 

4,450,000

 

 

 

1,850,000

 

 

 

 

 

 

 

 

 

 

Less discounts and debt issuance costs

 

 

(508,863 )

 

 

(89,430 )

 

 

 

 

 

 

 

 

 

Total convertible notes payable

 

 

3,941,137

 

 

 

1,760,570

 

 

 

 

 

 

 

 

 

 

Less current portion

 

 

(990,000 )

 

 

-

 

 

 

 

 

 

 

 

 

 

Convertible notes payable, net of current portion

 

$ 2,951,137

 

 

$ 1,760,570

 

 

As of December 31, 2019, remaining scheduled principal payments due on convertible notes payable are as follows: 

 

Twelve months ended December 31,

 

 

 

2020

 

$ 990,000

 

2021

 

 

-

 

2022

 

 

-

 

2023

 

 

860,000

 

2024

 

 

2,600,000

 

thereafter

 

 

-

 

 

 

$ 4,450,000

 

 

As of December 31, 2019, the remaining future amortization of discounts are as follows:

 

Twelve months ended December 31,

 

Discounts

 

2020

 

$ 114,647

 

2021

 

 

114,334

 

2022

 

 

114,334

 

2023

 

 

105,477

 

2024

 

 

60,071

 

thereafter

 

 

-

 

 

 

$ 508,863

 

 

 
F-15

Table of Contents

 

From July 30, 2013 through December 24, 2013, the Company sold convertible notes and warrants to unaffiliated accredited investors totaling $1,902,500. The notes bear interest at 10% per annum, are secured by the Company’s assets, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share. The notes had an initial term of three years, but the maturity of the notes was extended during 2014 to match the retirement of the New AC Midwest Secured Debt. These securities were sold in reliance upon the exemption provided by Section 4(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Interest expense for the years ended December 31, 2019 and 2018, was $99,000 and $124,967, respectively. A discount on the notes payable of $841,342 was recorded based on the value of the warrants issued using a Black-Scholes options pricing model and was amortized over the initial five year life of the notes. Amortized interest expense for the years ended December 31, 2019 and 2018 on this discount was $0 and $74,447, respectively. As of December 31, 2019 and 2018, total principal of $990,000 and $990,000, respectively, was outstanding on these notes.

 

On June 15, 2018, the Company issued 2018 Unsecured Notes totaling $560,000 and warrants to certain holders of the 2013 Notes in exchange for their secured 2013 Notes (see description above of the private placement offering commenced during the second quarter of 2018). The 2018 Unsecured Notes have a term of five years, bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share. For each dollar exchanged, the investor received a warrant to purchase one share of common stock of the Company at an exercise price of $0.70 per share. The 2018 Unsecured Notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. Loss on this debt exchange was $44,036. A discount on the notes payable of $89,500 was recorded based on the value of the fair value of the note and warrants exchanged. The included warrants were valued using a Black-Scholes options pricing model. From August 31, 2018 through October 30, 2018, the Company issued additional 2018 Notes totaling $300,000 and warrants to unaffiliated accredited investors. A discount on the notes payable of $40,350 was recorded based on the fair value of the warrants issued with this note using a Black-Scholes options pricing model. Amortized interest expense for the years ended December 31, 2019 and 2018 on these discounts was $24,323 and $8,700, respectively. Interest expense for the years ended December 31, 2019 and 2018, was $202,200 and $46,587, respectively. As of December 31, 2019 and 2018, total principal of $860,000 and $860,000 was outstanding on the 2018 Unsecured Notes. The significant assumptions utilized for these Black-Scholes calculations consist of an expected life of equal to the expiration term of the option, historical volatility of 100% respectively, and a risk free interest rate of 3%.

 

From June 18, 2019 through October 23, 2019, the Company sold convertible notes and warrants to unaffiliated accredited investors totaling $2,600,000. The notes bear interest at 12% per annum, are secured by the Company’s assets, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share. The notes have a term of five years. Interest expense for the year ended December 31, 2019 was $124,600. A discount on the notes payable of $488,245 was recorded based on the relative fair value of the warrants issued using a Black-Scholes options pricing model and was amortized over the initial five year life of the notes. Amortized interest expense for the year ended December 31, 2019 on this discount was $37,737. As of December 31, 2019, total principal of $2,600,000 was outstanding on these notes.

 

Note 8 - Related Party

 

Secured Note Payable

 

On November 29, 2016, pursuant to a new restated financing agreement entered with AC Midwest Energy, LLC (“AC Midwest”) on November 1, 2016, the Company closed on a new secured note with AC Midwest (the “New AC Midwest Secured Note”) in the original principal amount of $9,646,686, which was to mature on December 15, 2018.The New AC Midwest Secured Note is guaranteed by MES, is non-convertible and bears interest at a rate of 15.0% per annum, payable quarterly in arrears on or before the last day of each fiscal quarter. The New AC Midwest Secured Note is secured by all of the assets of the Companies. Interest expense for the years ended December 31, 2019 and 2018 was $40,753 and $66,694, respectively. On February 25, 2019, per Amendment No. 3 to the Amended and Restate Financing Agreement, AC Midwest agreed to waive compliance with a certain financial covenant of the Restated Financing Agreement and strike this covenant in its entirety as of the effective date of the amendment. Also, pursuant to Amendment No. 3, the parties agreed that the maturity date for the remaining principal balance due under the AC Midwest Secured Note would be extended from December 15, 2018 to August 25, 2022. The amendment was accounted for as an extinguishment in accordance with ASC 470-50 with no gain or loss recorded. As of December 31, 2019 and December 31, 2018, total principal of $271,686 and $271,686 was outstanding on this note.

 

 
F-16

Table of Contents

 

Unsecured Note Payable

 

The Company has the following unsecured note payable - related party outstanding as of December 31, 2019 and 2018:

 

Unsecured Note Payable

 

$ 13,154,931

 

 

$ 13,000,000

 

 

 

 

 

 

 

 

 

 

Less discounts and debt issuance costs

 

 

(5,243,033 )

 

 

(1,218,048 )

 

 

 

 

 

 

 

 

 

Total convertible notes payable

 

 

7,911,898

 

 

 

11,781,952

 

 

 

 

 

 

 

 

 

 

Less current portion

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Convertible notes payable, net of current portion

 

$ 7,911,898

 

 

$ 11,781,952

 

 

On November 29, 2016, pursuant to a new restated financing agreement entered with AC Midwest on November 1, 2016, the Company closed on an unsecured note with AC Midwest (the “AC Midwest Subordinated Note”) in the principal amount of $13,000,000, which was to mature on December 15, 2020. On February 25, 2019, the Company, entered into an Unsecured Note Financing Agreement (the “Unsecured Note Financing Agreement”) with AC Midwest, pursuant to which AC Midwest issued an unsecured note in the principal amount of $13,154,931 (the “New AC Midwest Unsecured Note”), which represented the outstanding principal and accrued and unpaid interest at closing.

 

In accordance with ASC 470-60-15-5, since the present value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted for the amendment to note as a debt extinguishment. Accordingly, the Company wrote off the remaining debt discount on the original Debentures of $1,070,819. Since the amendment was with a related party defined in ASC 470-50-40-2 the Company recorded a Capital contribution of $3,412,204 on this exchange which is primarily related to the difference in fair value of the note on the date of the exchange. The Company determined that the rate of interest on the AC Midwest Subordinated Note was a below market rate of interest and determined that a discount of $6,916,687 should be recorded. This discount is based on an applicable market rate for unsecured debt for the Company of 21% and will be amortized as interested expense over the life of the loan. Amortized discount recorded as interest expense for the year ended December 31, 2019 was $1,763,024. As of December 31, 2019, the unamortized balance of the discount was $5,243,033.

 

The New AC Midwest Unsecured Note, which has been issued in exchange for the AC Midwest Subordinated Note which has now been cancelled, will mature on August 25, 2022 (the “Maturity Date”). It bears a zero cash interest rate.

 

If the original principal amount is paid in full on or before August 25, 2020 (18 months from issuance), AC Midwest shall be entitled to a profit participation preference equal to 0.5 times the original principal amount, and if the original principal amount is paid in full after August 25, 2020, AC Midwest shall be entitled to a profit participation preference equal to 1.0 times the original principal amount (the “Profit Share”). The Profit Share is “non-recourse” and shall only be derived from and computed on the basis of, and paid from, Net Litigation Proceeds from claims relating to the Company’s intellectual property, Net Revenue Share and Adjusted Free Cash Flow (as such terms are defined in the Unsecured Note Financing Agreement).

 

 
F-17

Table of Contents

 

The Profit Share

 

In connection with the New AC Midwest Unsecured Note the Company shall pay the principal outstanding, as well as the Profit Share, in an amount equal to 60.0% of Net Litigation Proceeds until such time as any litigation funder has been paid in full and, thereafter, in an amount equal to 75.0% of such Net Litigation Proceeds until the Unsecured Note and Profit Share have been paid in full. In addition, and within 30 days following the end of each fiscal quarter, the Company shall pay the principal outstanding and Profit Share in an aggregate amount equal to the Net Revenue Share (which means 60.0% of Net Licensing Revenue (as defined) from licensing the Company’s intellectual property) plus Adjusted Free Cash Flow until the Unsecured Note and Profit Share have been paid in full, provided, however, that such payments shall exclude the first $3,500,000 of Net Licensing Revenue and Adjusted Free Cash Flow achieved commencing with the fiscal quarter ending March 31, 2019. Any remaining principal balance due on the Unsecured Note shall be due and payable in full on the Maturity Date. The Profit Share, however, if not paid in full on or before the Maturity Date, shall remain subject to Unsecured Note Financing Agreement until full and final payment.

 

The company is utilizing the methodology behind the ASC 815 and ASC 480 to determine how to account for the profit-sharing portion of the note payable. Although the transaction is not indexed to MEEC’s stock the profit sharing seems like a freestanding financial instrument because the profit sharing is not callable by the lender, it will be paid out past the maturity of the note payable and, the fair value will fluctuate over time based on payment predictions. The Profit Share was determined to have a fair value of $1,954,383 upon grant. This was calculated with discounted cash flow model, with the following key valuation assumptions: estimated term of seventeen years with $250,000 paid quarterly after the first three years, and an annual market interest rate of 21%. The profit share liability will be marked to market every quarter utilizing managements estimates.

 

The following are the changes in the profit share liabilities during the year ended December 31, 2019.

 

Profit Share as of January 1, 2019

 

$

-

 

Addition

 

1,954,383

 

Loss on change in fair value of profit share

 

 

374,462

 

 Profit Share as of December 31, 2019

 

$ 2,328,845

 

 

Related Party Transactions

 

Kaye Cooper Kay & Rosenberg, LLP provides certain legal services to the Company and was paid $329,729 in 2019 for legal services rendered and disbursement incurred. David M. Kaye, a Director and Secretary of the Company, is a partner of the law firm.

 

Note 9 - Operating Leases

 

In 2016, the Company entered into a six-year agreement to lease trailers used in the delivery of its products. Monthly payments currently total $32,820.

 

On January 27, 2015, the Company entered into a lease for office space in Lewis Center, Ohio, commencing February 1, 2015 which lease as amended expired in February 2020. The lease provides for the option to extend the lease for up to five additional years. Monthly rent is $1,575 through February 2020. The Company did not renew this lease.

 

On July 1, 2015, the Company entered into a five-year lease for warehouse space in Corsicana, Texas. Rent is $3,750 monthly throughout the term of the lease. The Company is also responsible for the pro rata share of the projected monthly expenses for the property taxes. The current pro rata share is $882. The lease was extended on June 1, 2019 for five years. The company recorded a right of use asset and an operating lease liability of $145,267. This amount represents the difference between the value from the remaining lease and the extended lease.

 

On September 1, 2019, the Company entered into a one-year lease for office space in Grand Forks, North Dakota. Monthly rent is $590 a month through August 2020.

 

Future remaining minimum lease payments under these non-cancelable leases are as follows:

 

For the twelve months ended December 31

 

 

 

2020

 

$ 438,840

 

2021

 

 

438,840

 

2022

 

 

351,027

 

2023

 

 

45,000

 

2014

 

 

11,250

 

Total

 

 

1,284,957

 

Less discount

 

 

(94,241 )

Total lease liabilities

 

 

1,190,716

 

Less current portion

 

 

(383,307 )

Operating lease obligation, net of current portion

 

$ 807,409

 

 

 
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Table of Contents

 

The weighted average remaining lease term for operating leases is 2.0 years and the weighted average discount rate used in calculating the operating lease asset and liability is 5.0%. For the year ended December 31, 2019, payments on lease obligations were $457,740 and amortization on the right of use assets was $378,261.

 

For the year ended December 31, 2019, the Company’s lease cost consists of the following components, each of which is included in costs and expenses within the Company’s consolidated statements of operations:

 

 

 

Year

Ended

December 31,

2019

 

 

 

 

 

Operating lease cost

 

$ 1,284,957

 

Short-term lease cost (1)

 

 

3,150

 

Total lease cost

 

$ 1,288,107

 

 

(1)

Short-term lease costs includes any lease with a term of less than 12 months

 

Note 10 – Commitments and Contingencies

 

Fixed Price Contract

 

The Company’s multi-year contracts with its commercial customers contain fixed prices for product. These contracts expire through 2019 and expose the Company to the potential risks associated with rising material costs during that same period. Revenue reported during interim periods were recorded based on the facts and circumstances at the time and any differences noted when the final revenue is determined is considered to be a change in estimate for the period.

 

Legal proceedings

 

On July 17, 2019, the Company initiated patent litigation against certain defendants in the U.S. District Court for the District of Delaware for infringement of United States Patent Nos. 10,343,114 (the “‘114 Patent”) and 8,168,147 (the “‘147 Patent”) owned by the Company. These patents relate to the Company’s two-part Sorbent Enhancement Additive (SEA®) process for mercury removal from coal-fired power plants. Named as defendants in the lawsuit are (i) Vistra Energy Corp., AEP Generation Resources Inc., NRG Energy, Inc., Talen Energy Corporation, and certain of their respective affiliated entities, all of which are owners and/or operators of coal-fired power plants in the United States, and (ii) Arthur J. Gallagher & Co., DTE REF Holdings, LLC, CERT Coal Holdings LLC, Chem-Mod LLC, and certain of their respective affiliated entities, and additional named and unnamed defendants, all of which operate or are involved in operations of coal facilities in the United States. In the lawsuit, the Company alleges that each of the defendants has willfully infringed the Company’s ‘114 Patent and ‘147 Patent and seeks a permanent injunction from further acts of infringement and monetary damages. Such litigation is currently pending and in its early stages.

 

On April 21, 2020, NRG Energy, Inc., Talen Energy Corporation and Vistra Energy Corp., three of the defendants in the above action, filed two petitions for Inter Partes Review (IPR) with the United States Patent and Trademark Office (USPTO), seeking to invalidate certain claims to the ‘114 Patent. The Company believes that such claims of invalidity are without merit.

 

Except for the foregoing disclosures, the Company is not presently aware of any other material pending legal proceedings to which the Company is a party or of which any of its property is the subject.

 

Litigation, including patent litigation, is inherently subject to uncertainties. As such, there can be no assurance that the Company will be successful in litigating and/or settling any of these claims.

 

 
F-19

Table of Contents

 

Note 11 - Stock Based Compensation

 

The Company accounts for stock-based compensation awards in accordance with the provisions of ASC 718, which addresses the accounting for employee stock options which requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the consolidated financial statements over the vesting period based on the estimated fair value of the awards.

 

A summary of stock option activity for the years ended December 31, 2019 and 2018 is presented below: 

 

 

 

Number of

Shares

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Life (years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

8,463,184

 

 

 

1.26

 

 

 

3.00

 

 

 

 

Grants

 

 

1,423,326

 

 

 

0.26

 

 

 

4.40

 

 

 

 

Expirations

 

 

(725,000 )

 

 

0.69

 

 

 

-

 

 

 

 

December 31, 2018

 

 

9,161,510

 

 

 

1.15

 

 

 

2.00

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants

 

 

4,700,000

 

 

 

0.27

 

 

 

5.00

 

 

 

 

 

Expirations

 

 

(1,308,184 )

 

 

0.27

 

 

 

-

 

 

 

 

 

December 31, 2019

 

 

12,553,326

 

 

 

0.55

 

 

 

4.02

 

 

 

927

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

9,161,510

 

 

 

1.15

 

 

 

2.00

 

 

 

-

 

December 31, 2019

 

 

12,563,326

 

 

 

0.55

 

 

 

4.02

 

 

 

927

 

 

The Company utilized the Black-Scholes options pricing model to value its options granted. The assumptions used for options granted during the years ended December 31, 2019 and 2018 are as follows:

 

 

 

December 31,
2019

 

 

December 31,
2018

 

Exercise price

 

$0.25-$0.27

 

 

$0.17-$0.33

 

Expected dividends

 

0%

 

0%

Expected volatility

 

100% - 109%

 

 

100%

Risk free interest rate

 

1.73% - 3%

 

 

3%

Expected life

 

5 years

 

 

5 years

 

 

During 2018, the Company issued nonqualified stock options to acquire 1,423,236 shares under the Company’s 2017 Equity Plan. The options granted are exercisable at prices ranging from $0.17 to $0.33 per share, representing the fair market value of the common stock as of the date of the grant as determined under the 2017 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five year thereafter. Based on a Black-Scholes valuation model, these options were valued at $272,620 in accordance with FASB ASC Topic 718.

 

On February 5, 2018, the Company released the restriction on stock options to acquire 750,000 shares of the Company’s common stock issued to Rick MacPherson on August 31, 2016 making them now fully vested and exercisable. Based on a Black-Scholes valuation model, these options were valued at $76,543 in accordance with FASB ASC Topic 718.

 

On May 14, 2019, Frederick Van Zijl resigned as a director of the Company. In connection with such resignation, the Company has agreed to issue, and Mr. Van Zijl has agreed to accept, an aggregate of 235,184 shares of common stock of the Company in full and complete payment for service on the Board since his appointment in October 2018. Compensation of $63,500 based on the market price of the shares on the date of issuance was included in selling, general and administrative expenses within the Company’s consolidated statements of operations.

 

 
F-20

Table of Contents

 

On June 4, 2019, Allan T. Grantham resigned as a director of the Company. In connection with such resignation, the Company has agreed to issue, and Mr. Grantham has agreed to accept, an aggregate of 229,333 shares of common stock of the Company in full and complete payment for service on the Board for 2018 and 2019. Compensation of $55,040 based on the market price of the shares on the date of issuance was included in selling, general and administrative expenses within the Company’s consolidated statements of operations.

 

On June 28, 2019, the Company granted nonqualified stock options to acquire an aggregate of 4,600,000 shares of the Company’s common stock under the Company’s 2017 Equity Plan to certain executive officers, employees and others. The options granted are exercisable at $0.27 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $898,207 in accordance with FASB ASC Topic 718 which was included in selling, general and administrative expenses within the Company’s consolidated statements of operations.

 

Also on June 28, 2019, the Company extended the expiration dates of previously granted nonqualified stock options to acquire an aggregate of 4,675,000 shares of the Company’s common stock under the Company’s 2014 Equity Plan to certain executive officers, employees and others. The extended options are exercisable from $0.42 to $1.36 per share, representing the original fair market value of the common stock on the date of grant as determined under the 2014 Equity Plan. The options are fully vested and exercisable and will now expire five years from the date of the extension. Based on a Black-Scholes valuation model, these options were valued at $745,989 in accordance with FASB ASC Topic 718 which was included in selling, general and administrative expenses within the Company’s consolidated statements of operations.

 

On December 20, 2019, the Company granted nonqualified stock options to acquire an aggregate of 100,000 shares of the Company’s common stock under the Company’s 2017 Equity Plan. The options were granted as compensation for a one year consulting agreement. The options granted are exercisable at $0.25 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $18,723 in accordance with FASB ASC Topic 718. The fair value of the option will be amortized to selling, general and administrative expenses within the Company’s consolidated statements of operations over one year.

 

Note 12 - Warrants

 

Sold and issued warrants are subject to the provisions of FASB ASC 815-10, the Company utilized a Black-Scholes options pricing model to value the warrants sold and issued. This model requires the input of highly subjective assumptions such as the expected stock price volatility and the expected period until the warrants are exercised. When calculating the value of warrants issued, the Company uses a volatility factor of 100%, a risk free interest rate and the life of the warrant for the exercise period.

 

The following is a summary of the Company’s warrant activity:

 

 

 

Number of

Shares

 

 

Weighted Average

Exercise

Price

 

 

Weighted Average Remaining Contractual Life (years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

7,237,763

 

 

0.51

 

 

 

1.35

 

 

 

 

Grants

 

 

860,000

 

 

 

0.70

 

 

 

5.00

 

 

 

 

Expirations

 

 

(3,992,365 )

 

 

0.46

 

 

 

-

 

 

 

 

December 31, 2018

 

 

4,105,398

 

 

 

0.59

 

 

 

1.79

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants

 

 

3,600,000

 

 

 

0.70

 

 

 

5.00

 

 

 

 

 

Expirations

 

 

(2,015,020 )

 

 

0.69

 

 

 

-

 

 

 

 

 

December 31, 2019

 

 

5,690,378

 

 

 

0.63

 

 

 

3.72

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants exercisable at:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

4,105,398

 

 

 

0.59

 

 

 

1.79

 

 

 

-

 

December 31, 2019

 

 

5,690,378

 

 

 

0.63

 

 

 

3.72

 

 

 

-

 

 

 
F-21

Table of Contents

 

The following table summarizes information about common stock warrants outstanding at December 31, 2019:

 

Outstanding

 

Exercisable

 

Exercise Price

 

Number

Outstanding

 

Weighted

 Average

 Remaining

Contractual

 Life (years)

 

Weighted

Average

Exercise

Price

 

Number

Exercisable

 

Weighted

Average

Exercise

Price

 

$

0.70

 

4,460,000

 

4.45

$

0.70

 

4,460,000

$

0.70

 

0.45

 

150,000

 

0.92

 

0.45

 

150,000

 

0.45

 

0.35

 

1,080,378

*

 

1.13

 

0.35

 

1,080,378

 

0.35

 

$

0.35 - $0.70

 

5,690,378

 

3.72

$

0.63 

 

5,690,378

$

0.63

 

* 205,000 warrants exercisable at $0.35 contain dilution protections that increase the number of shares purchasable at exercise upon the issuance of securities at a price below the current exercise price.

 

The Company utilized the Black-Scholes options pricing model. The assumptions used for warrants granted during the years ended December 31, 2019 and 2018 are as follows:

 

 

December 31,
2019

 

December 31,
2018

Exercise price

 

$0.70

 

$0.70

Expected dividends

 

0%

 

0%

Expected volatility

 

100% - 112%

 

100%

Risk free interest rate

 

1.58% - 3%

 

3%

Expected life

 

5 years

 

5 years

 

On June 15, 2018, the Company issued unsecured convertible notes and warrants to unaffiliated accredited investors totaling $560,000 in exchange for outstanding secured convertible notes payable. The notes are convertible into one share of common stock, with the initial conversion ratio equal to $0.50 per share. The investors received a total of 560,000 warrants to purchase one shares of common stock with an exercise price of $0.70 per share. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act, as well as under Section 3(a)(9) under the Securities Act. Using a Black-Scholes Valuation model these warrants had a value of $89,450 which was recorded as a discount on the notes payable and will be amortized over the life of the associated notes payable.

 

On August 31, 2018, the Company issued unsecured convertible notes and warrants to unaffiliated accredited investors totaling $200,000. The notes are convertible into one share of common stock, with the initial conversion ratio equal to $0.50 per share. The investors received a total of 200,000 warrants to purchase one shares of common stock with an exercise price of $0.70 per share. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Using a Black-Scholes Valuation model these warrants had a value of $28,900 which was recorded as a discount on the notes payable and will be amortized over the life of the associated notes payable.

 

On October 31, 2018, the Company issued unsecured convertible notes and warrants to unaffiliated accredited investors totaling $100,000. The notes are convertible into one share of common stock, with the initial conversion ratio equal to $0.50 per share. The investors received a total of 100,000 warrants to purchase one shares of common stock with an exercise price of $0.70 per share. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Using a Black-Scholes Valuation model these warrants had a value of $11,450 which was recorded as a discount on the notes payable and will be amortized over the life of the associated notes payable.

 

On August 12, 2019, the Company issued 37,210 shares of common stock upon the cashless exercise of warrants to purchase 167,039 shares of common stock for $0.35 per share based on a market value of $0.45 per share as determined under the terms of the warrant.

 

 
F-22

Table of Contents

  

From June through October 2019, the Company issued unsecured convertible notes and five-year warrants to unaffiliated accredited investors totaling $2,600,000. The notes are convertible into shares of common stock, with the initial conversion ratio equal to $0.50 per share. The investors received warrants to purchase a total of 2,600,000 shares of common stock with an exercise price of $0.70 per share. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Using a Black-Scholes Valuation model these warrants had a value of $525,142 which was recorded as a discount on the notes payable and will be amortized over the life of the associated notes payable.

 

On October 23, 2019, and pursuant to an advisory agreement executed on that date for a term of one year with an unaffiliated third party, the Company granted such unaffiliated third party a vested three-year warrant to purchase 1,000,000 shares of common stock with an exercise price of $0.70 per share, exercisable on a cash basis only. Such warrants were issued as and for the entire compensation to paid to the advisor for all services to be rendered during the term. Based on a Black-Scholes valuation model, these options were valued at $243,294 in accordance with FASB ASC Topic 718. The fair value of the option will be amortized to selling, general and administrative expenses within the Company’s consolidated statements of operations over one year.

 

Note 13 - Income Taxes

 

Below is breakdown of the income tax provisions for the years ended December 31:

 

 

 

2019

 

 

2018

 

Federal

 

 

 

 

 

 

Current

 

$ -

 

 

$ -

 

Deferred

 

 

(1,278,000 )

 

 

(536,000

State and local

 

 

 

 

 

 

 

 

Current

 

 

14,000

 

 

 

22,000

 

Deferred

 

 

(196,000 )

 

 

(116,000

Change in valuation allowance

 

 

1,474,000

 

 

 

652,000

 

Income tax provision (benefit)

 

$ 14,000

 

 

$ 22,000

 

 

The expected tax expense (benefit) based on the statutory rate is reconciled with actual tax expense benefit as follows:

 

 

 

For the Year

Ended

December 31,

2019

 

 

For the Year

Ended

December 31,

2018

 

U.S. federal statutory rate

 

 

21.0 %

 

 

21.0 %

State taxes

 

 

4.3 %

 

 

(0.5 )%

Other permanent and prior period adjustments

 

 

(1.4 )%

 

 

(7.4 )%

Valuation allowance

 

 

(24.2 )%

 

 

(13.6 )%

Income tax provision

 

 

(0.3 )%

 

 

(0.5 )%

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31:

 

 

 

2019

 

 

2018

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryforwards

 

$ 5,456,000

 

 

$ 4,328,000

 

Stock based compensation

 

 

1,285,000

 

 

 

888,000

 

Other

 

 

81,000

 

 

 

115,000

 

Total deferred tax assets

 

 

6,822,000

 

 

 

5,331,000

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Property and equipment

 

 

(57,000 )

 

 

(51,000 )

Other

 

 

(44,000 )

 

 

(33,000 )

Total deferred tax liabilities

 

 

(101,000 )

 

 

(84,000 )

 

 

 

 

 

 

 

 

 

Valuation Allowance

 

 

(6,721,000 )

 

 

(5,247,000 )

 

 

 

 

 

 

 

 

 

Net deferred tax asset

 

$ -

 

 

$ -

 

 

 
F-23

Table of Contents

 

The Company has U.S. federal net operating loss carryovers (“NOLs”) of approximately $22,640,000 and $20,608,000 at December 31, 2019 and 2018, respectively, available to offset 80% of taxable net income in a given year. The Company has state net operating loss carryovers (“NOLs”) of approximately $3,531,815 and $2,873,351 at December 31, 2019 and 2018, respectively. If not used, these NOLs may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under the regulations. The Company plans on undertaking a detailed analysis of any historical and/or current Section 382 ownership changes that may limit the utilization of the net operating loss carryovers.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future generation for taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all the information available, Management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance. For the years ended December 31, 2019 and 2018, the change in the valuation allowance was $1,474,000 and $652,000, respectively.

 

The Company evaluated the provisions of ASC 740-10 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the Company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740-10.

 

If applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other expenses – Interest” in the statement of operations. Penalties would be recognized as a component of “General and administrative.”

 

No interest or penalties on unpaid tax were recorded during the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next year. 

 

Note 14 - Restatement of previously issued financial statements (unaudited)

 

On April 13, 2020, the Company concluded that a gain on debt restructuring recognized during the first quarter of 2019 (relating to the New AC Midwest Unsecured Note) should have been accounted for as a capital transaction. Since the New AC Midwest Unsecured Note was held by a related party, the gain should have been recorded as a capital transaction under ASC 470-50-40. The profit-sharing portion also should have been bifurcated from the loan and shown separately on the Consolidated Balance Sheets of the financial statements. See Note 8.

 

The following tables summarize the effects of the restatements on the specific items presented in the Company’s historical unaudited interim consolidated financial statements previously included in the Company’s Quarterly Reports on Form 10-Q as of and for the three month period ended March 31, 2019:

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

MARCH 31, 2019

 

 

 

As previously
reported

 

 

Adjustment

 

 

As restated

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

Profit Share liability

 

$ -

 

 

$ 1,991,940

 

 

$ 1,991,940

 

Unsecured note payable, net of discount and issuance costs

 

 

8,403,968

 

 

 

(1,981,568 )

 

 

6,422,400

 

Total liabilities

 

 

14,801,425

 

 

 

10,372

 

 

 

14,811,797

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

42,785,990

 

 

 

3,412,204

 

 

 

46,198,194

 

Accumulated deficit

 

 

(49,197,401 )

 

 

(3,422,576 )

 

 

(52,619,977 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ deficit

 

 

(6,335,165 )

 

 

(10,372 )

 

 

(6,345,537 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

$ 8,466,260

 

 

$ -

 

 

$ 8,466,260

 

 

 
F-24

Table of Contents

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

 

FOR THE THREE MONTHS ENDED MARCH 31, 2019

 

 

 

As previously
reported

 

 

Adjustment

 

 

As restated

 

 

 

 

 

 

 

 

 

 

 

Interest expense & letter of credit fees

 

$ 529,193

 

 

$ (27,185 )

 

$ 502,008

 

Loss on change in fair value of profit share

 

 

-

 

 

 

37,557

 

 

 

37,557

 

Gain on debt restructuring

 

 

(3,412,204 )

 

 

3,412,204

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

423,524

 

 

 

3,422,576

 

 

 

3,846,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$ 2,363,797

 

 

$ (3,422,576 )

 

$ (1,058,779 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted:

 

$ 0.03

 

 

$ (0.04 )

 

$ (0.01 )

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

FOR THE THREE MONTHS ENDED MARCH 31, 2019

 

 

 

As previously
reported

 

 

Adjustment

 

 

As restated

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$ 2,363,797

 

 

$

(3,422,576 )

 

$ (1,058,779 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of discount of notes payable

 

 

303,697

 

 

 

(27,185 )

 

 

276,512

 

Loss on change in fair value of profit share

 

 

-

 

 

 

37,557

 

 

 

37,557

 

Gain on debt restructuring

 

 

(3,412,204 )

 

 

3,412,204

 

 

 

-

 

Net cash provided by (used in) operating activities

 

$ 68,245

 

 

$

-

 

 

$ 68,245

 

 

 
F-25

Table of Contents

 

The following tables summarize the effects of the restatements on the specific items presented in the Company’s historical unaudited interim consolidated financial statements previously included in the Company’s Quarterly Reports on Form 10-Q as of and for the three and six month periods ended June 30, 2019:

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2019

 

 

 

As previously
reported

 

 

Adjustment

 

 

As restated

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

Profit Share liability

 

$ -

 

 

$ 2,097,655

 

 

$ 2,097,655

 

Secured note payable

 

 

271,686

 

 

 

-

 

 

 

271,686

 

Unsecured note payable, net of discount and issuance costs

 

 

9,095,119

 

 

 

(2,179,831 )

 

 

6,915,288

 

Total liabilities

 

 

16,654,136

 

 

 

(82,176 )

 

 

16,571,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

44,745,926

 

 

 

3,412,204

 

 

 

48,158,130

 

Accumulated deficit

 

 

(52,036,522 )

 

 

(3,330,028 )

 

 

(55,366,550 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ deficit

 

 

(7,213,886 )

 

 

82,176

 

 

 

(7,131,710 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

$ 9,440,250

 

 

$ -

 

 

$ 9,440,250

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

FOR THE THREE MONTHS

ENDED JUNE 30, 2019

 

 

FOR THE SIX MONTHS

ENDED JUNE 30, 2019

 

 

 

As previously
reported

 

 

Adjustment

 

 

As restated

 

 

As previously
reported

 

 

Adjustment

 

 

As restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense & letter of credit fees

 

$ 763,873

 

 

$ (198,263 )

 

$ 565,610

 

 

$ 1,293,067

 

 

$ (225,448 )

 

$ 1,067,619

 

Loss on change in fair value of profit share

 

 

-

 

 

 

105,715

 

 

 

105,715

 

 

 

-

 

 

 

143,272

 

 

 

143,272

 

(Gain)/Loss on debt restructuring

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,412,204 )

 

 

3,412,204

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

 

5,348,871

 

 

 

(92,548 )

 

 

5,256,323

 

 

 

5,772,394

 

 

 

3,330,028

 

 

 

9,102,422

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$ (2,839,121 )

 

$ 92,548

 

 

$ (2,746,573 )

 

$ (475,324 )

 

$ (3,330,028 )

 

$ (3,805,352 )

Net loss per common share - basic and diluted:

 

$ (0.04 )

 

$ (0.00 )

 

$ (0.04 )

 

$ (0.01 )

 

$ (0.04 )

 

$ (0.05 )

 

 
F-26

Table of Contents

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

FOR THE SIX MONTHS ENDED JUNE 30, 2019

 

 

 

As previously
reported

 

 

Adjustment

 

 

As restated

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Net loss

 

$ (475,324 )

 

$ (3,330,028 )

 

$ (3,805,352 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of discount of notes payable

 

 

938,532

 

 

 

(225,448 )

 

 

713,084

 

Loss on change in fair value of profit share

 

 

-

 

 

 

143,272

 

 

 

143,272

 

Gain on debt restructuring

 

 

(3,412,204 )

 

 

3,412,204

 

 

 

-

 

Net cash used in operating activities

 

$ (506,674 )

 

$ -

 

 

$ (506,674 )

 

The following tables summarize the effects of the restatements on the specific items presented in the Company’s historical unaudited interim consolidated financial statements previously included in the Company’s Quarterly Reports on Form 10-Q as of and for the three and nine month periods ended September 30, 2019:

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

SEPTEMBER 30, 2019

 

 

 

As previously
reported

 

 

Adjustment

 

 

As restated

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Profit Share liability

 

$ -

 

 

$ 2,210,230

 

 

$ 2,210,230

 

Unsecured note payable, net of discount and issuance costs

 

 

9,752,882

 

 

 

(2,339,289 )

 

 

7,413,593

 

Total liabilities

 

 

17,177,693

 

 

 

(129,059 )

 

 

17,048,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

 

 

 

 

 

 

 Additional paid-in capital

 

 

44,882,209

 

 

 

3,412,204

 

 

 

48,294,413

 

 Accumulated deficit

 

 

(52,887,063 )

 

 

(3,283,145 )

 

 

(56,170,208 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ deficit

 

 

(7,928,107 )

 

 

129,059

 

 

 

(7,799,048 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

$ 9,249,586

 

 

$ -

 

 

$ 9,249,586

 

 

 
F-27

Table of Contents

 

CONSOLIDATED STATEMENT OF OPERATIONS

 

 

 

FOR THE THREE MONTHS

ENDED SEPTEMBER 30, 2019

 

 

FOR THE NINE MONTHS

ENDED SEPTEMBER 30, 2019

 

 

 

As previously
reported

 

 

Adjustment

 

 

As restated

 

 

As previously
reported

 

 

Adjustment

 

 

As restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense & letter of credit fees

 

$ 782,695

 

 

$ (159,458 )

 

$ 623,237

 

 

$ 2,075,761

 

 

$ (529,918 )

 

$ 1,690,855

 

Loss on change in fair value of profit share

 

 

-

 

 

 

112,575

 

 

 

112,575

 

 

 

-

 

 

 

255,847

 

 

 

255,847

 

(Gain)/Loss on debt restructuring

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,412,204.00 )

 

 

3,412,204.00

 

 

 

-

 

Total costs and expenses

 

 

4,446,648

 

 

 

(46,883 )

 

 

4,399,765

 

 

 

10,219,042

 

 

 

3,138,133

 

 

 

13,502,187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$ (850,541 )

 

$ 46,883

 

 

$ (803,658 )

 

$ (1,325,865 )

 

$ (3,138,133 )

 

$ (4,609,010 )

Net loss per common share-basic and diluted:

 

$ (0.01 )

 

$ -

 

 

$ (0.01 )

 

$ (0.02 )

 

$ (0.04 )

 

$ (0.06 )

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

FOR THE NINE MONTHS

ENDED SEPTEMBER 30, 2019

 

 

 

As previously
reported

 

 

Adjustment

 

 

As restated

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Net loss

 

$ (1,325,865 )

 

$ (3,283,145 )

 

$ (4,609,010 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of discount of notes payable

 

 

1,585,686

 

 

 

(384,906 )

 

 

1,200,780

 

Loss on change in fair value of profit share

 

 

 

 

 

 

255,847

 

 

 

255,847

 

Gain on debt restructuring

 

 

(3,412,204 )

 

 

3,412,204

 

 

 

-

 

Net cash used in operating activities

 

$ (1,304,626 )

 

$ -

 

 

$ (1,304,626 )

 

 
F-28

Table of Contents

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE MONTHS ENDED MARCH 31, 2019, THE SIX MONTHS ENDED JUNE 30, 2019 AND

THE NINE MONTHS ENDED SEPTEMBER 30, 2019

(Restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated  

 

 

 

 

 

Shares

 

 

Par Value

 

 

Paid-in Capital

 

 

(Deficit)

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2019

 

 

76,246,113

 

 

$ 76,246

 

 

$ 42,785,990

 

 

$ (51,483,332 )

 

$ (8,621,096 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in accounting principle related to accounting for leases

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(77,866 )

 

 

(77,866 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital contribution

 

 

-

 

 

 

-

 

 

 

3,412,204

 

 

 

-

 

 

 

3,412,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,058,779 )

 

 

(1,058,779 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - March 31, 2019

 

 

76,246,113

 

 

$ 76,246

 

 

$ 46,198,194

 

 

$ (52,619,977 )

 

$ (6,345,537 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued per resignation agreements

 

 

464,517

 

 

 

464

 

 

 

118,076

 

 

 

-

 

 

 

118,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock options

 

 

-

 

 

 

-

 

 

 

898,207

 

 

 

-

 

 

 

898,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension of certain stock option expiration

 

 

-

 

 

 

-

 

 

 

745,989

 

 

 

-

 

 

 

745,989