Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

July 6, 2020

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

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

 incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1810 Jester Drive

Corsicana, Texas

 

75109

(Address of principal Executive offices)

 

(Zip Code)

 

(614) 505-6115

(Registrant’s Telephone Number, Including Area Code)

 

Not applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

  

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

 

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 an 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 

¨

Accelerated filer

¨

Non-accelerated filer

x

Smaller reporting company

x

 

 

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

 

State the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date: Common, $.001 par value per share 77,747,750 outstanding as of July 6, 2020. 

 

 

 

 

 

EXPLANATORY NOTE

 

We are filing this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “Quarterly Report”) pursuant to an order issued by the Securities and Exchange Commission (the “SEC”) on March 25, 2020 (which extended and superseded a prior order issued on March 4, 2020), pursuant to Section 36 of the Securities Exchange Act of 1934, as amended (Release No. 34-88465) (the “Order”), regarding exemptions granted to certain public companies.  The 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.  On May 15, 2020, we filed a current report on Form 8-K with the SEC to avail ourselves of such 45-day grace period to file this Quarterly Report provided by the Order.  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 the Quarterly Report due in part to suggested and mandated social quarantining and work from home orders.  This has, in turn, delayed the Company’s ability to prepare and complete this Quarterly Report.

  

 
2

 

 

MIDWEST ENERGY EMISSIONS CORP.

 

TABLE OF CONTENTS

  

 

 

 

Page

PART I ‑ FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements.

5

 

Item 2.

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

24

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

29

 

Item 4.

Controls and Procedures.

29

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings.

30

 

Item 1A.

Risk Factors

30

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

30

 

Item 3.

Default upon Senior Securities.

30

 

Item 4.

Mine Safety Disclosures.

30

 

Item 5.

Other Information.

30

 

Item 6.

Exhibits.

31

 

 

 

 

SIGNATURES

 

32

 

 
3

 

 

PART I – FINANCIAL INFOMATION

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q 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 under the caption “Risk Factors” in the Company’s 2019 Form 10-K.  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 the Company’s filings and with the Securities and Exchange Commission. 

 

 
4

Table of Contents

 

Item 1. Financial Information.

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY

Index to Condensed Consolidated Financial Information

As of and for the three months ended March 31, 2020

 

 

 

Page

 

 

 

 

 

Condensed Consolidated Unaudited Balance Sheets

 

6

 

 

 

 

 

Condensed Consolidated Unaudited Statements of Operations

 

7

 

 

 

 

 

Condensed Consolidated Unaudited Statements of Stockholders’ Deficit

 

8

 

 

 

 

 

Condensed Consolidated Unaudited Statements of Cash Flows

 

9

 

 

 

 

 

Notes to Condensed Consolidated Unaudited Financial Statements

 

10

 

 

 
5

Table of Contents

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2020 AND DECEMBER 31, 2019

(UNAUDITED)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash

 

$ 461,300

 

 

$ 1,499,287

 

Accounts receivable

 

 

499,560

 

 

 

1,222,874

 

Inventory

 

 

464,812

 

 

 

513,498

 

Prepaid expenses and other assets

 

 

392,795

 

 

 

316,199

 

Total current assets

 

 

1,818,467

 

 

 

3,551,858

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

2,015,754

 

 

 

2,082,343

 

Right of use asset

 

 

1,011,865

 

 

 

1,106,575

 

Intellectual property

 

 

2,482,162

 

 

 

2,532,462

 

Total assets

 

$ 7,328,248

 

 

$ 9,273,238

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (related party of $56,250 and $43,750)

 

$ 655,726

 

 

$ 1,676,757

 

Current portion of equipment notes payable

 

 

43,016

 

 

 

53,304

 

Current portion of operating lease liability

 

 

393,147

 

 

 

383,307

 

Note payable

 

 

183,982

 

 

 

-

 

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

 

 

-

 

 

 

990,000

 

Accrued interest

 

 

128,550

 

 

 

226,065

 

Customer credits

 

 

167,000

 

 

 

167,000

 

Accrued salaries

 

 

381,934

 

 

 

357,095

 

Total current liabilities

 

 

1,953,355

 

 

 

3,853,528

 

 

 

 

 

 

 

 

 

 

Equipment notes payable, less current portion

 

 

21,460

 

 

 

22,386

 

Operating lease liability

 

 

702,347

 

 

 

807,409

 

Convertible notes payable, net of discount and issuance costs

 

 

3,969,642

 

 

 

2,951,137

 

Profit share liability – related party

 

 

2,452,495

 

 

 

2,328,845

 

Secured note payable – related party

 

 

271,686

 

 

 

271,686

 

Unsecured note payable, net of discount and issuance costs – related party

 

 

8,404,785

 

 

 

7,911,898

 

Total liabilities

 

 

17,775,770

 

 

 

18,146,889

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' deficit

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value: 2,000,000 shares authorized

 

 

-

 

 

 

-

 

Common stock; $0.001 par value; 150,000,000 shares authorized; 77,747,750 and 76,747,750 shares issued and outstanding as of March 31, 2020 and December 31, 2019 respectively

 

 

77,748

 

 

 

76,748

 

Additional paid-in capital

 

 

48,907,085

 

 

 

48,708,085

 

Accumulated deficit

 

 

(59,432,355 )

 

 

(57,658,484 )

 

 

 

 

 

 

 

 

 

Total stockholders' deficit

 

 

(10,447,522 )

 

 

(8,873,651 )

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' deficit

 

$ 7,328,248

 

 

$ 9,273,238

 

 

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

 

 
6

Table of Contents

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(UNAUDITED)

 

 

 

For the Three Months Ended March 31, 2020

 

 

For the Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

Revenues

 

$ 1,116,676

 

 

$ 2,787,321

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of sales

 

 

930,534

 

 

 

2,166,340

 

Selling, general and administrative expenses (related party of $62,500 and $75,000)

 

 

1,171,975

 

 

 

1,140,195

 

Interest expense & letter of credit fees (related party of $502,825 and $438,645)

 

 

664,388

 

 

 

502,008

 

Loss on change in fair value of profit share

 

 

123,650

 

 

 

37,557

 

Total costs and expenses

 

 

2,890,547

 

 

 

3,846,100

 

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

 

(1,773,871 )

 

 

(1,058,779 )

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Net loss

 

$ (1,773,871 )

 

$ (1,058,779 )

 

 

 

 

 

 

 

 

 

Net loss per common share-basic and diluted:

 

$ (0.02 )

 

$ (0.01 )

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

 

77,736,639

 

 

 

76,246,113

 

 

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

 

 
7

Table of Contents

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(UNAUDITED)

 

Three Months Ended March 31, 2020

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

(Deficit)

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2020

 

 

76,747,750

 

 

$ 76,748

 

 

$ 48,708,085

 

 

$ (57,658,484 )

 

$ (8,873,651 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for prepaid services

 

 

1,000,000

 

 

 

1,000

 

 

 

199,000

 

 

 

-

 

 

 

200,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,773,871 )

 

 

(1,773,871 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - March 31, 2020

 

 

77,747,750

 

 

$ 77,748

 

 

$ 48,907,085

 

 

$ (59,432,355 )

 

$ (10,447,522 )

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

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 related to debt restructuring

 

 

-

 

 

 

-

 

 

 

3,412,204

 

 

 

-

 

 

 

3,412,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,058,779 )

 

 

(1,058,779 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - March 31, 2019

 

 

76,246,113

 

 

$ 76,246

 

 

$ 46,198,194

 

 

$ (52,619,977 )

 

$ (6,345,537 )

 

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

 

 
8

Table of Contents

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(UNAUDITED)

 

 

 

For the Three Months Ended March 31, 2020

 

 

For the Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$ (1,773,871 )

 

$ (1,058,779 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation – amortization of prepaid services

 

 

114,640

 

 

 

-

 

Amortization of discount of notes payable

 

 

490,988

 

 

 

276,512

 

Amortization of debt issuance costs

 

 

30,406

 

 

 

7,174

 

Amortization of right to use assets

 

 

94,710

 

 

 

94,353

 

Amortization of customer acquisition costs

 

 

-

 

 

 

34,467

 

Amortization of patent rights

 

 

50,300

 

 

 

50,301

 

Depreciation expense

 

 

66,589

 

 

 

82,597

 

Loss on change in fair value of profit share

 

 

123,650

 

 

 

37,557

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in accounts receivable

 

 

723,314

 

 

 

673,961

 

(Increase) Decrease in inventory

 

 

48,686

 

 

 

(16,961 )

Decrease in prepaid expenses and other assets

 

 

8,764

 

 

 

20,129

 

(Decrease) in accounts payable and accrued liabilities

 

 

(1,093,709 )

 

 

(40,690 )

(Decrease) in operating lease liability

 

 

(95,222 )

 

 

(92,376 )

Net cash provided by (used in) operating activities

 

 

(1,210,755 )

 

 

68,245

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payment of debt issuance costs

 

 

-

 

 

 

(26,683 )

Payments of notes payable

 

 

(16,018 )

 

 

(14,892 )

Payments of equipment notes payable

 

 

(11,214 )

 

 

-

 

Proceeds from the issuance of notes payable

 

 

200,000

 

 

 

-

 

Net cash provided by (used in) financing activities

 

 

172,768

 

 

 

(41,575 )

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

(1,037,987 )

 

 

26,670

 

 

 

 

 

 

 

 

 

 

Cash - beginning of period

 

 

1,499,287

 

 

 

584,877

 

 

 

 

 

 

 

 

 

 

Cash - end of period

 

$ 461,300

 

 

$ 611,547

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$ 228,458

 

 

$ 108,928

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:

 

 

 

 

 

 

 

 

Cumulative effect on accumulated deficit of lease accounting change

 

$ -

 

 

$ 77,866

 

Stock issued for prepaid services

 

$ 200,000

 

 

$ -

 

Capital contribution related to debt restructuring

 

$ -

 

 

$ 3,412,204

 

 

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

 

 
9

Table of Contents

 

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 $0.001 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 unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of Rule 8-03 of Regulation S-X promulgated by the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed on May 14, 2020, from which the accompanying condensed consolidated balance sheet dated December 31, 2019 was derived.

 

In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the financial position as of March 31, 2020, and results of operations, changes in stockholders’ deficit and cash flows for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year.

 

Principles of Consolidation

 

The condensed 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.

 

Use of Estimates

 

The preparation of condensed 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 condensed 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, profit share liability, 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.

 

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 property and equipment, right of use asset and intellectual property. No impairment charges were recognized for both of the three months ended March 31, 2020 and 2019.

 

 
10

Table of Contents

 

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 March 31, 2020 and December 31, 2019 and is considered to be Level 1.

 

Financial instruments include cash, accounts receivable, accounts payable, customer credits and short-term debt. The carrying amounts of these financial instruments approximated fair value at March 31, 2020 and December 31, 2019 due to their short-term maturities.

 

The fair value of the promissory notes payable at March 31, 2020 and December 31, 2019 approximated the carrying amount as the notes were issued during the three months ended March 31, 2020 and 2019 at interest rates prevailing in the market and interest rates have not significantly changed as of March 31, 2020. 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.

 

The fair value of the profit share liability at March 31, 2020 and 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

March 31, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

461,300

 

 

 

461,300

 

 

 

-

 

 

 

-

 

Total Assets

 

$ 461,300

 

 

$ 461,300

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Promissory notes

 

 

12,894,571

 

 

 

-

 

 

 

12,894,571

 

 

 

-

 

Profit share liability

 

 

2,452,495

 

 

 

-

 

 

 

-

 

 

 

2,452,495

 

Total Liabilities

 

$ 15,347,066

 

 

$ -

 

 

$ 12,894,571

 

 

$ 2,452,495

 

 

 
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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

 

 

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 March 31, 2020 and 2019, 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.

 

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 three months ended March 31, 2020 and 2019 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.

 

 
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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 three months ended March 31, 2020 and 2019.

 

 

 

Three months ended

March 31, 2020

 

 

Three months ended

March 31, 2019

 

 

 

United States

 

 

International

 

 

Total

 

 

United States

 

 

International

 

 

Total

 

Product revenue

 

$

984,160

 

 

$

85,200

 

 

$

1,069,360

 

 

$

2,715,282

 

 

$

42,600

 

 

$

2,757,882

 

Demonstrations & Consulting revenue

 

 

42,767

 

 

 

-

 

 

 

42,767

 

 

 

24,000

 

 

 

-

 

 

 

24,000

 

Equipment revenue

 

 

4,549

 

 

 

-

 

 

 

4,549

 

 

 

5,439

 

 

 

-

 

 

 

5,439

 

 

 

$

1,031,476

 

 

$

85,200

 

 

$

1,116,676

 

 

$

2,744,721

 

 

$

42,600

 

 

$

2,787,321

 

 

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 March 31, 2020 and 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.

 

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Corporate taxpayers may carryback net operating losses (“NOLs”) originating between 2018 and 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

 

In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to our income tax provision. 

 

 
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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. There were no dilutive potential common shares as of March 31, 2020 and 2019, 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. 

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Stock options

 

 

12,553,326

 

 

 

8,526,510

 

Warrants

 

 

5,690,378

 

 

 

4,105,398

 

Convertible debt

 

 

9,157,100

 

 

 

3,700,000

 

Total common stock equivalents excluded from diluted net loss per share

 

 

27,400,804

 

 

 

16,331,908

 

 

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 March 31, 2020 and 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 three months ended March 31, 2020 and 2019, 100% of the Company’s revenue related to nine and eight customers, respectively. At March 31, 2020 and 2019, 100% of the Company’s accounts receivable related to seven customers, respectively.

 

For each of the three months ended March 31, 2020 and 2019, 86% and 96% of the Company’s purchases related to two suppliers, respectively. At March 31, 2020 and 2019, 47% and 75% of the Company’s accounts payable and accrued expenses related to two vendors, respectively. 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.

 

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.

 

 
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Recently Adopted Accounting Standards

 

Effective January 1, 2020, the Company adopted 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. Prior to the issuance of this guidance, the accounting requirements for nonemployee and employee share-based payment transactions were significantly different. ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which only included 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 is substantially aligned. This ASU supersedes Subtopic 505-50, Equity — Equity-Based Payments to Nonemployees. The adoption of ASU 2018-07 did not have a material impact on its condensed consolidated financial statements. 

 

Effective January 1, 2020, the Company adopted 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 adoption of ASU 2018-13 did not have a material impact on its condensed consolidated financial statements.

 

Recently Issued Accounting Standards

 

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 (beginning with the quarter ended March 31, 2021 for the Company). The Company is currently evaluating the potential impact of this guidance on its condensed 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 condensed 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 condensed consolidated financial statements as of March 31, 2020 have been prepared assuming the Company will continue as a going concern. As reflected in the condensed consolidated financial statements, the Company had an accumulated deficit of $59.4 million and a negative working capital of $134,888 at March 31, 2020. Additionally, the Company had a net loss in the amount of $1.8 million and cash used by operating activities of $1.2 million for the three months ended March 31, 2020. 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 condensed consolidated financial statements within the Company’s Quarterly Report on Form 10-Q. 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 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.

 

 
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Table of Contents

 

The accompanying condensed 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.

 

Note 4 - Inventory

 

Inventory was comprised of the following at March 31, 2020 and December 31, 2019:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Raw materials

 

$ 173,692

 

 

$ 223,790

 

Work in process

 

 

59,475

 

 

 

43,814

 

Spare parts

 

 

27,632

 

 

 

27,632

 

Finished goods

 

 

204,013

 

 

 

218,262

 

 

 

$ 464,812

 

 

$ 513,498

 

 

Note 5 - Property and Equipment, Net

 

Property and equipment at March 31, 2020 and December 31, 2019 are as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Equipment & installation

 

$ 1,965,659

 

 

$ 1,965,659

 

Trucking equipment

 

 

922,441

 

 

 

922,441

 

Computer equipment and software

 

 

67,126

 

 

 

67,126

 

Office equipment

 

 

27,155

 

 

 

27,155

 

Total equipment 

 

 

2,982,381

 

 

 

2,982,381

 

 

 

 

 

 

 

 

 

 

Less: accumulated depreciation

 

 

(2,774,334 )

 

 

(2,707,745 )

Construction in process

 

 

1,807,707

 

 

 

1,807,707

 

Property and equipment, net

 

$ 2,015,754

 

 

$ 2,082,343

 

 

The Company uses the straight-line method of depreciation over 2 to 5 years. During the three months ended March 31, 2020 and 2019 depreciation expense was $66,589, and $82,597, respectively.

 

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.

 

 
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Table of Contents

 

License and patent costs capitalized as of March 31, 2020 and December 31,2019 are as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Patents

 

$ 3,068,995

 

 

$ 3,068,995

 

Less: Accumulated amortization

 

 

(586,833 )

 

 

(536,533 )

License, net

 

$ 2,482,162

 

 

$ 2,532,462

 

 

Amortization expense for the three months ended March 31, 2020 and 2019 was $50,300 and $50,301, respectively. Estimated annual amortization for each of the next five years is $201,200.

 

Note 7 - Note Payable

 

On February 25, 2020, and pursuant to a Business Loan Agreement entered into with a banking institution, the Company’s wholly owned subsidiary, MES, Inc. closed on a one-year secured loan in the principal amount of $200,000 bearing interest at 8.75% per annum. Principal and interest is to be paid in equal monthly installments until the loan is paid in full on February 26, 2021. The note is secured by substantially all of the assets of MES, Inc. Interest expense for the three months ended March 31, 2020 was $1,410.

 

Note 8 - Convertible Notes Payable

 

The Company has the following convertible notes payable outstanding as of March 31, 2020 and December 31, 2019:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Secured convertible promissory notes which mature upon the retirement of the New AC Midwest Secured Debt (see Note 9), bear interest at 10% per annum, are convertible into shares of common stock at $0.50 per share,  and are secured by the assets of the Company.

 

$ 990,000

 

 

$ 990,000

 

 

 

 

 

 

 

 

 

 

Unsecured convertible promissory notes which mature beginning on June 15, 2023 through October 31, 2023, bear interest at 12% per annum, and are convertible into shares of common stock at $0.50 per share.

 

 

860,000

 

 

 

860,000

 

 

 

 

 

 

 

 

 

 

Unsecured convertible promissory notes which mature beginning on June 18, 2024 through October 23, 2024, bear interest at 12% per annum, and are convertible into shares of common stock at $0.50 per share.

 

 

2,600,000

 

 

 

2,600,000

 

 

 

 

 

 

 

 

 

 

Total convertible notes payable before discount

 

 

4,450,000

 

 

 

4,450,000

 

 

 

 

 

 

 

 

 

 

Less discounts and debt issuance costs

 

 

(480,358 )

 

 

(508,863 )

 

 

 

 

 

 

 

 

 

Total convertible notes payable

 

 

3,969,642

 

 

 

3,941,137

 

 

 

 

 

 

 

 

 

 

Less current portion

 

 

-

 

 

 

(990,000 )

 

 

 

 

 

 

 

 

 

Convertible notes payable, net of current portion

 

$ 3,969,642

 

 

$ 2,951,137

 

 

 
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As of March 31, 2020, remaining scheduled principal payments due on convertible notes payable are as follows: 

 

Twelve months ended March 31,

 

 

 

2021

 

$ -

 

2022

 

 

-

 

2023

 

 

990,000

 

2024

 

 

860,000

 

2025

 

 

2,600,000

 

 

 

$ 4,450,000

 

 

As of March 31, 2020, the remaining future amortization of discounts are as follows:

 

Twelve months ended March 31,

 

Discounts

 

2021

 

$ 114,334

 

2022

 

 

114,334

 

2023

 

 

114,334

 

2024

 

 

101,604

 

2025

 

 

35,752

 

 

 

$ 480,358

 

 

Note 9 - 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. AC Midwest beneficially owns 5% or more of the common stock of the Company. 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. Interest expense for the three months ended March 31, 2020 and 2019 was $9,937 and $40,753, 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 both March 31, 2020 and December 31, 2019, total principal of $271,686 was outstanding on this note.

 

 
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Unsecured Note Payable

 

The Company has the following unsecured note payable - related party outstanding as of March 31, 2020 and December 31, 2019:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Unsecured note payable

 

$ 13,154,931

 

 

$ 13,154,931

 

 

 

 

 

 

 

 

 

 

Less discounts and debt issuance costs

 

 

(4,750,146 )

 

 

(5,243,033 )

 

 

 

 

 

 

 

 

 

Total unsecured note payable

 

 

8,404,785

 

 

 

7,911,898

 

 

 

 

 

 

 

 

 

 

Less current portion

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Unsecured note payable, net of current portion

 

$ 8,404,785

 

 

$ 7,911,898

 

 

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 three months ended March 31, 2020 and 2019 was $462,483 and 273,526, respectively. As of March 31, 2020, the unamortized balance of the discount was $4,750,146.

 

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 (see Note 11), Net Revenue Share and Adjusted Free Cash Flow (as such terms are defined in the Unsecured Note Financing Agreement).

 

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.

 

 
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The Company is utilizing the methodology behind the ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity to determine how to account for the profit-sharing portion of the note payable. Although the transaction is not indexed to MEEC’s common stock the profit sharing has the characteristics of a freestanding financial instrument because the profit sharing is not callable by the lender, it will be paid out past the maturity of the Unsecured 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 three months ended March 31, 2020 and 2019.

 

Profit Share as of January 1, 2020

 

$ 2,328,845

 

Addition

 

 

-

 

Loss on change in fair value of profit share

 

 

123,650

 

Profit Share as of March 31, 2020

 

$ 2,452,495

 

 

Profit Share as of January 1, 2019

 

$ -

 

Addition

 

 

1,954,383

 

Loss on change in fair value of profit share

 

 

37,557

 

Profit Share as of March 31, 2019

 

$ 1,991,940

 

 

Related Party Transactions

 

Kaye Cooper Kay & Rosenberg, LLP provides certain legal services to the Company and was paid $62,500 in 2020 for legal services rendered and disbursement incurred. David M. Kaye, a Director and Secretary of the Company, is a partner of the law firm.  At March 31, 2020 and December 31, 2019, $56,250 and $43,750, respectively, was owed to the firm for services rendered.

 

Note 10 - 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.

 

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

 

For the twelve months ended March 31,

 

 

 

2021

 

$ 438,840

 

2022

 

 

438,840

 

2023

 

 

252,567

 

2024

 

 

45,000

 

Total

 

 

1,175,247

 

Less discount

 

 

(79,753 )

Total lease liabilities

 

 

1,095,494

 

Less current portion

 

 

(364,213 )

Operating lease obligation, net of current portion

 

$ 731,281

 

 

The weighted average remaining lease term for operating leases is 2.94 years and the weighted average discount rate used in calculating the operating lease asset and liability is 5.0%. For the three months ended March 31, 2020, payments on lease obligations were $109,710 and amortization on the right of use assets was $94,710.

 

For the three months ended March 31, 2020, 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:

 

 

 

Three Months

Ended

March 31,

2020

 

 

 

 

 

Operating lease cost

 

$ 95,222

 

Short-term lease cost (1)

 

 

1,770

 

Total lease cost

 

$ 96,992

 

 

(1)

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

 

Note 11 - Commitments and Contingencies

 

Fixed Price Contract

 

The Company’s multi-year contracts with its commercial customers contain fixed prices for product. These contracts expire between 2020 and 2025 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.

 

 
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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.  On May 27, 2020, such defendants filed two additional petitions for IPR with the USPTO, seeking to invalidate certain claims to the ‘147 Patent.  The Company believes that all of the foregoing 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.

 

Note 12 - Stock Based Compensation

 

Stock Based Compensation

 

Stock based compensation consists of the amortization of common stock, stock options and warrants issued for prepaid services.  For the three months ended March 31, 2020 and 2019, stock based compensation amounted to $114,640 and $0, respectively.  Such expense is classified in selling, general and administrative expenses.

 

Common Stock

 

As of January 1, 2020, and pursuant to an advisory agreement dated as of November 20, 2019 and effective as of January 1, 2020 for a term of one year with a nonaffiliated third party, the Company issued 1,000,000 shares of common stock of the Company to such third party as and for the entire compensation to be paid for all services to be rendered during the term. These shares of common stock were valued at $200,000 in accordance with FASB ASC Topic 718. The fair value of the shares is being amortized to selling, general and administrative expenses within the Company’s condensed consolidated statements of operations over one year.

 

Stock Options

 

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 condensed consolidated financial statements over the vesting period based on the estimated fair value of the awards.

 

A summary of stock option activity for the three months ended March 31, 2020 is presented below: 

 

 

 

Number of

Shares

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Life (years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2020

 

 

12,553,326

 

 

$ 0.55

 

 

 

4.02

 

 

$ 927

 

Grants

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

Expirations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

March 31, 2020

 

 

12,553,326

 

 

$ 0.55

 

 

 

3.77

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

12,553,326

 

 

$ 0.55

 

 

 

3.77

 

 

$ -

 

 

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.16 as of March 31, 2020, which would have been received by the option holders had all option holders exercised their options as of that date.

 

 
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Note 13 - 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2020

 

 

5,690,378

 

 

$ 0.63

 

 

 

3.72

 

 

$ -

 

Grants

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

Expirations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

March 31, 2020

 

 

5,690,378

 

 

$ 0.63

 

 

 

3.47

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants exercisable at:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

5,690,378

 

 

$ 0.63

 

 

 

3.47

 

 

$ -

 

 

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.16 as of March 31, 2020, which would have been received by the option holders had all option holders exercised their options as of that date.

 

The following table summarizes information about common stock warrants outstanding at March 31, 2020:

 

Outstanding and Exercisable

Exercise Price

 

 

Number

Outstanding

 

 

Weighted

 Average

 Remaining

Contractual

 Life (years)

 

 

Weighted

Average

Exercise

Price

 

$

0.70

 

 

 

4,460,000

 

 

 

4.20

 

 

$ 0.70

 

 

0.45

 

 

 

150,000

 

 

 

0.67

 

 

 

0.45

 

 

0.35

 

 

 

1,080,378

*

 

 

0.88

 

 

 

0.35

 

$

0.35-$0.70

 

 

 

5,690,378

 

 

 

3.47

 

 

$ 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.

 

Note 14 - Subsequent Events

 

On April 14, 2020, the Company received loan proceeds in the amount of $299,300 from First International Bank & Trust pursuant to the Paycheck Protection Program (the “PPP Loan”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The loan, which is in the form of a Note dated April 14, 2020, matures on April 14, 2022 and bears interest at a rate of 1.0% per annum, with one interest payment on April 14, 2021 and one principal and interest payment on maturity. The principal and accrued interest under the PPP Loan is forgivable after eight or twenty-four weeks if the Company uses 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, the Company must submit a request and provide satisfactory documentation regarding its compliance with applicable requirements.

 

On June 15, 2020, the Company granted a nonqualified stock option to the Company’s controller to acquire 250,000 shares of the Company’s common stock under the Company’s 2017 Equity Plan.  The option granted is exercisable at $0.19 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan.  Fifty percent (50.0%) of the option is exercisable immediately and the balance shall vest and become exercisable on April 1, 2021.

 

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

 

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere within this report. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Forward-Looking Statements” in “Part I” preceding “Item 1 – Financial Information.” You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, as well as our unaudited condensed 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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Results of Operations

 

Revenues

 

We generated revenues of approximately $1,117,000 and $2,787,000 for the three months ended March 31, 2020 and 2019, respectively. Such revenues were primarily derived from sorbent product sales which were approximately $1,069,000 and $2,758,000 for the three months ended March 31, 2020 and 2019, respectively.  The decrease from the prior year period 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 three months ended March 31, 2020 and 2019 were approximately $47,000 and $29,000, respectively.  This increase was primarily due to increased demonstration revenues in the first quarter of 2020 compared to the same period last year. 

 

Costs and Expenses

 

Total costs and expenses were approximately $2,891,000 and $3,846,000 during the three months ended March 31, 2020 and 2019, respectively. The decrease in costs and expenses from the prior year is primarily attributable to the decrease in cost of sales principally due to the decrease in sales.   This was partially offset by increases in selling, general and administrative expenses and interest expense, and an increase in loss on change in fair value of profit share.

 

Cost of sales were approximately $931,000 and $2,166,000 for the three months ended March 31, 2020 and 2019, respectively.  This year to date decrease in cost of sales is primarily attributable to decreased sales.

 

Selling, general and administrative expenses were approximately $1,172,000 and $1,140,000 for the three months ended March 31, 2020 and 2019, respectively. The increase in selling, general and administrative expenses is primarily attributed to an increase of stock-based compensation and accounting related fees compared to the comparable period of 2019. This was offset by a decrease in salaries, legal, and investor relation related fees.

 

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 $124,000 and $38,000 for the three months ended March 31, 2020 and 2019, respectively. The increase is primarily attributed to an increase in the fair value of the profit share liability.

 

Interest expense related to the financing of capital was approximately $664,000 and $502,000 for the three months ended March 31, 2020 and 2019, respectively. The increase in the three months ended 2020 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 three months ended March 2020 and 2019 is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

Interest expense on notes payable

 

$ 143

 

 

$ 218

 

Amortization of discount of notes payable

 

 

491

 

 

 

277

 

Amortization of debt issuance costs

 

 

30

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

$ 664

 

 

$ 502

 

 

 
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Net Income (Loss)

 

For the three months March 31, 2020 and 2019, we had a net loss of approximately $1,774,000 and $1,059,000.  The change in net loss for the three months ended March 31, 2020 compared to the prior year period is primarily due to the decrease in sales partially offset by the decrease in total costs and expenses principally due to the decrease in cost of sales.  

 

Liquidity and Capital Resources

 

We had approximately $461,000 in cash on our balance sheet at March 31, 2020 compared to approximately $1,499,000 at December 31, 2019.  Total current assets were approximately $1,818,000 and total current liabilities were approximately $1,953,000 at March 31, 2020, resulting in a working capital deficit of approximately $135,000.  This compares to total current assets of approximately $3,552,000 and total current liabilities of approximately $3,854,000 at December 31, 2019, resulting in a working capital deficit of approximately $302,000.  Our accumulated deficit was approximately $59.4 million at March 31, 2020 compared to $57.7 million at December 31, 2019. Additionally, we had a net loss in the amount of approximately $1,774,000 and cash used in operating activities of approximately $1,211,000 for the three months ended March 31, 2020. 

 

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 condensed consolidated financial statements as of March 31, 2020 have been prepared assuming we will continue as a going concern. As reflected in the condensed consolidated financial statements included with this report, we had an accumulated deficit of approximately $59.4 million and a negative working capital of approximately $135,000 at March 31, 2020. Additionally, we had a net loss in the amount of approximately $1.8 million and cash used in operating activities of $1.2 million for the three months ended March 31, 2020. These factors raise substantial doubt about our ability to continue as a going concern for the next twelve months from the issuance of this Quarterly Report on Form 10-Q.  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 if we use the PPP Loan proceeds for eligible purposes during an 8 or 24 week period from the date of the loan, including payroll, benefits, rent and utilities, and we otherwise comply 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 $7,328,000 at March 31, 2020 versus approximately $9,273,000 at December 31, 2019. The change in total assets is primarily attributable to decreases in cash and accounts receivable.

 

Total liabilities were approximately $17,776,000 at March 31, 2020 versus approximately $18,147,000 at December 31, 2019.  The decrease in liabilities is primarily due to a decrease in accounts payable and accrued expenses partially offset by increases in secured note payable, profit share liability and unsecured convertible notes payable, net of discount and issuance costs.

 

Net cash used in operating activities was approximately $1,211,000 for the three months ended March 31, 2020 compared to net cash provided from operating activities of approximately $68,000 for the three months ended March 31, 2019.  This change is primarily attributable to a decrease in accounts payable and accrued liabilities, offset by a decrease in accounts receivable and decrease in inventory.

 

There was no cash from or used by investing activities for the three months ended March 31, 2020 and 2019. 

 

 
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Net cash provided by financing activities was approximately $173,000 for the three months ended March 31, 2020 compared to net cash used in financing activities of approximately $42,000 for the three months ended March 31, 2019.   During the three months ended March 31, 2020, the Company received $200,000 from the issuance of notes payable. 

 

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

 

For detailed information regarding our critical accounting policies and estimates, see our financial statements and notes thereto included in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2019.  There have been no material changes to our critical accounting policies and estimates from those disclosed in our most recent Annual Report on Form 10-K.

 

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.

 

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 three months ended March 31, 2020 and 2019, respectively:

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

Net loss

 

$ (1,774 )

 

$ (1,059 )

 

 

 

 

 

 

 

 

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

212

 

 

 

262

 

Interest and letter of credit fees

 

 

664

 

 

 

502

 

Income taxes

 

 

-

 

 

 

-

 

Stock based compensation

 

 

115

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$ (783 )

 

$ (295 )

 

 
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Item 3. 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.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer (who is the same person), we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.  Based on that evaluation, our principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were not effective as a result of material weaknesses in our internal control over financial reporting. The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses in our internal control over financial reporting, which are common to 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.

 

Despite the existence of the material weaknesses above, we believe that the consolidated financial statements contained in this Form 10-Q fairly present our financial position, results of operations and cash flows as of and for the periods presented in all material respects.

 

Changes in Internal Control over Financial Reporting

 

Except as discussed below, there have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting except the updated business processes and internal controls made in support of the adoption of the new lease accounting standard. 

 

Certain actions have been taken to address certain aspects of the material weaknesses disclosed above.  As of January 1, 2020, we replaced our previous accounting software with a more efficient software package to manage our business activities and accounting needs.  Although we no longer have a full-time CFO, during the fourth quarter of 2019 we hired a new full-time Controller at our Corsicana, Texas location, closed our Lewis Center, Ohio office and moved our corporate headquarters to our Corsicana, Texas address which has allowed us to consolidate our manufacturing and distribution activities, bookkeeping and accounting at one location. Also, in the fourth quarter of 2019, we hired a financial consulting firm to assist us in bookkeeping and preparing financial statements for our SEC filings, assist us in evaluating our internal controls over financial reporting and assist us in other related matters.  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.  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.

 

 
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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Reference is hereby made to the Annual Report on Form 10-K for the year ended December 31, 2019 for information on patent litigation initiated by us on July 17, 2019 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.  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. On May 27, 2020, such defendants filed two additional petitions for IPR with the USPTO, seeking to invalidate certain claims to the ‘147 Patent.  The Company believes that all of the foregoing 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.

 

Item 1A. Risk Factors.

 

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. Unregistered Sales of Equity Securities and Use of Proceeds.

 

As of January 1, 2020, and pursuant to an advisory agreement dated as of November 20, 2019 and effective as of January 1, 2020 for a term of one year with a nonaffiliated third party, we issued 1,000,000 shares of common stock to such third party as and for the entire compensation to be paid for all services to be rendered during the term.  The foregoing securities were issued in reliance upon the exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

 

Item 3. Default Upon Senior Securities.

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

 
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Item 6. Exhibits.

 

Exhibit Number

 

Description

 

 

31.1*

 

Certification by Principal Executive Officer and Principal Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act

32.1*

 

Certification by Principal Executive Officer and Principal Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code

101*

 

The following financial information from our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Unaudited Balance Sheets, (ii) the Condensed Consolidated Unaudited Statements of Operations, (iii) the Condensed Consolidated Unaudited Statements of Stockholders’ Deficit, (iv) the Condensed Consolidated Unaudited Statements of Cash Flows, and (v) Notes to Condensed Consolidated Unaudited Financial Statements

_______

*   Filed herewith.

 

 
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SIGNATURES

 

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

 

  MIDWEST ENERGY EMISSIONS CORP.
       
Dated: July 6, 2020  By: /s/ Richard MacPherson

 

 

Richard MacPherson  
    President and Chief Executive Officer  
   

(Principal Executive Officer and

Principal Financial and Accounting Officer)

 

 

 
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