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Midwest Energy Emissions (MEEC)

Filed: 14 Nov 21, 7:00pm

 

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 September 30, 2021

 

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 ☒    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 ☒    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

Smaller reporting company

 

 

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 ☒

 

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 89,265,951 outstanding as of November 15, 2021.

  

 

 

   

MIDWEST ENERGY EMISSIONS CORP.

 

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I ‑ FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements.

 

4

 

Item 2.

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

 

5

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

11

 

Item 4.

Controls and Procedures.

 

12

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings.

 

13

 

Item 1A.

Risk Factors

 

13

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

13

 

Item 3.

Default upon Senior Securities.

 

13

 

Item 4.

Mine Safety Disclosures.

 

13

 

Item 5.

Other Information.

 

13

 

Item 6.

Exhibits.

 

14

 

 

 

 

 

 

SIGNATURES

 

 

15

  

 

2

 

   

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 2020 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.

  

 

3

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 and nine months ended September 30, 2021

 

 

 

Page

 

 

 

 

 

Condensed Consolidated Unaudited Balance Sheets

 

 

F-1

 

 

 

 

 

 

Condensed Consolidated Unaudited Statements of Operations

 

 

F-2

 

 

 

 

 

 

Condensed Consolidated Unaudited Statements of Stockholders’ Deficit

 

 

F-3

 

 

 

 

 

 

Condensed Consolidated Unaudited Statements of Cash Flows

 

 

F-5

 

 

 

 

 

 

Notes to Condensed Consolidated Unaudited Financial Statements

 

 

F-6

 

 

 

4

Table of Contents

    

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

SEPTEMBER 30, 2021 AND DECEMBER 31, 2020

 

(UNAUDITED)

 

 

 

 

 

 

 

 

September 30,

2021

 

 

December 31,

2020

 

 

 

(Unaudited)

 

 

 

ASSETS

 

Current assets

 

 

 

 

 

 

Cash

 

$866,013

 

 

$591,019

 

Accounts receivable

 

 

3,066,521

 

 

 

1,116,082

 

Inventory

 

 

709,717

 

 

 

560,127

 

Prepaid expenses and other assets

 

 

329,484

 

 

 

107,443

 

Total current assets

 

 

4,971,735

 

 

 

2,374,671

 

 

 

 

 

 

 

 

 

 

Security deposits

 

 

10,175

 

 

 

0

 

Property and equipment, net

 

 

1,830,208

 

 

 

1,887,029

 

Right of use asset

 

 

493,366

 

 

 

795,869

 

Intellectual property, net

 

 

2,165,346

 

 

 

2,318,796

 

Total assets

 

$9,470,830

 

 

$7,376,365

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (related party of $181,250 and $168,750)

 

$2,975,670

 

 

$1,611,956

 

Current portion of equipment notes payable

 

 

8,294

 

 

 

29,255

 

Current portion of operating lease liability

 

 

386,984

 

 

 

407,975

 

Note payable

 

 

44,064

 

 

 

34,661

 

Accrued interest

 

 

1,997

 

 

 

259,230

 

Customer credits

 

 

167,000

 

 

 

167,000

 

Accrued salaries

 

 

692,672

 

 

 

848,706

 

Secured note payable – related party

 

 

271,686

 

 

 

0

 

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

 

 

11,367,533

 

 

 

0

 

Total current liabilities

 

 

15,915,900

 

 

 

3,358,783

 

 

 

 

 

 

 

 

 

 

Equipment notes payable, less current portion

 

 

0

 

 

 

789

 

Operating lease liability

 

 

111,560

 

 

 

394,625

 

Note payable

 

 

255,316

 

 

 

299,300

 

Convertible notes payable, net of discount and issuance costs

 

 

0

 

 

 

4,055,122

 

Profit share liability – related party

 

 

2,692,259

 

 

 

2,305,308

 

Secured note payable – related party

 

 

-

 

 

 

271,686

 

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

 

 

0

 

 

 

9,894,284

 

Total liabilities

 

 

18,975,035

 

 

 

20,579,897

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

 

 

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

 

 

0

 

 

 

0

 

Common stock; $0.001 par value; 150,000,000 shares authorized; 89,265,951 and 78,096,326 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively

 

 

89,266

 

 

 

78,096

 

Additional paid-in capital

 

 

56,244,900

 

 

 

50,202,478

 

Accumulated deficit

 

 

(65,838,371)

 

 

(63,484,106)

 

 

 

 

 

 

 

 

 

Total stockholders’ deficit

 

 

(9,504,205)

 

 

(13,203,532)

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

$9,470,830

 

 

$7,376,365

 

 

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

 

 
F-1

Table of Contents

    

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

 

 

 

For the Three Months Ended

September 30,

2021

 

 

For the Three Months Ended

September 30,

2020

 

 

For the Nine

Months Ended

September 30,

2021

 

 

For the Nine

Months Ended

September 30,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$5,019,717

 

 

$2,812,197

 

 

$10,317,051

 

 

$5,812,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

3,240,507

 

 

 

1,881,742

 

 

 

6,221,073

 

 

 

4,198,125

 

Selling, general and administrative expenses (related party of $75,000, $75,000, $250,373, and $200,000)

 

 

1,340,585

 

 

 

1,271,351

 

 

 

4,054,221

 

 

 

3,576,796

 

Interest expense & letter of credit fees (related party of $503,189, $509,300, $1,504,152, and $1,514,735)

 

 

506,592

 

 

 

672,355

 

 

 

2,302,298

 

 

 

1,987,102

 

Gain on extinguishment of debt

 

 

0

 

 

 

 

 

 

 

(299,300)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss (gain) on change in fair value of profit share

 

 

137,126

 

 

 

111,436

 

 

 

386,951

 

 

 

(140,954)

Gain on sale of equipment

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(5,919)

Total costs and expenses

 

 

5,224,810

 

 

 

3,936,884

 

 

 

12,665,243

 

 

 

9,615,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

 

(205,093)

 

 

(1,124,687)

 

 

(2,348,192)

 

 

(3,802,775)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

(1,555)

 

 

0

 

 

 

(6,073)

 

 

0

 

 

 

 

 

 

 

 

��

 

 

 

 

 

 

 

 

 

Net loss

 

$(206,648)

 

$(1,124,687)

 

$(2,354,265)

 

$(3,802,775)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share-basic and diluted:

 

$(0.00)

 

$(0.01)

 

$(0.03)

 

$(0.05)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

 

89,255,299

 

 

 

77,747,750

 

 

 

84,666,319

 

 

 

77,744,087

 

 

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

 

 
F-2

Table of Contents

    

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

(Deficit)

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2021

 

 

78,096,326

 

 

$78,096

 

 

$50,202,478

 

 

$(63,484,106)

 

$(13,203,532)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for interest payable on convertible notes

 

 

494,400

 

 

 

494

 

 

 

246,706

 

 

 

0

 

 

 

247,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for conversion of convertible notes

 

 

3,700,000

 

 

 

3,700

 

 

 

1,846,300

 

 

 

0

 

 

 

1,850,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for exercise of warrants

 

 

705,166

 

 

 

705

 

 

 

246,103

 

 

 

0

 

 

 

246,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for cashless exercise of warrants

 

 

194,690

 

 

 

195

 

 

 

(195)

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for services

 

 

525,000

 

 

 

525

 

 

 

643,725

 

 

 

0

 

 

 

644,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share based compensation expense

 

 

-

 

 

 

0

 

 

 

5,878

 

 

 

0

 

 

 

5,878

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

0

 

 

 

0

 

 

 

(417,934)

 

 

(417,934)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - March 31, 2021

 

 

83,715,582

 

 

 

83,715

 

 

 

53,190,995

 

 

 

(63,902,040)

 

 

(10,627,330)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for interest payable on convertible notes

 

 

229,500

 

 

 

230

 

 

 

367,909

 

 

 

0

 

 

 

368,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for conversion of convertible notes

 

 

5,160,000

 

 

 

5,160

 

 

 

2,574,840

 

 

 

0

 

 

 

2,580,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for exercise of stock options

 

 

125,000

 

 

 

125

 

 

 

101,125

 

 

 

0

 

 

 

101,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for cashless exercise of stock options

 

 

15,869

 

 

 

16

 

 

 

(16)

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share based compensation expense

 

 

-

 

 

 

0

 

 

 

67

 

 

 

0

 

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

0

 

 

 

0

 

 

 

(1,729,683)

 

 

(1,729,683)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2021

 

 

89,245,951

 

 

$89,246

 

 

$56,234,920

 

 

$(65,631,723)

 

$(9,307,557)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock for conversion of convertible notes

 

 

20,000

 

 

 

20

 

 

 

9,980

 

 

 

-

 

 

 

10,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 -

 

 

 

 0

 

 

 

-

 

 

 

(206,648)

 

 

(206,648)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – September 30, 2021

 

 

89,265,951

 

 

$89,266

 

 

$56,244,900

 

 

$(65,838,371)

 

$(9,504,205)

 

 
F-3

Table of Contents

    

Nine Months Ended September 30, 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

 

 

 

0

 

 

 

200,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

0

 

 

 

0

 

 

 

(1,773,871)

 

 

(1,773,871)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - March 31, 2020

 

 

77,747,750

 

 

$77,748

 

 

$48,907,085

 

 

$(59,432,355)

 

$(10,447,522)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock options

 

 

-

 

 

 

0

 

 

 

19,921

 

 

 

0

 

 

 

19,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

0

 

 

 

0

 

 

 

(904,217)

 

 

(904,217)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2020

 

 

77,747,750

 

 

 

77,748

 

 

 

48,927,006

 

 

 

(60,336,572)

 

 

(11,331,818)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock options

 

 

-

 

 

 

0

 

 

 

252,973

 

 

 

0

 

 

 

252,973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

0

 

 

 

0

 

 

 

(1,124,687)

 

 

(1,124,687)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – September 30, 2020

 

 

77,747,750

 

 

$77,748

 

 

$49,179,979

 

 

$(61,461,259)

 

$(12,203,532)

 

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

  

 
F-4

Table of Contents

    

MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

 

 

 

 

 

 

 

For the Nine

Months Ended

September 30,

2021

 

 

For the Nine

Months Ended

September 30,

2020

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$(2,354,265)

 

$(3,802,775)

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

 

 

 

 

 

 

 

 

Stock-based compensation – amortization of prepaid services

 

 

447,107

 

 

 

619,176

 

Stock-based compensation

 

 

5,945

 

 

 

0

 

Amortization of discount of notes payable

 

 

1,777,243

 

 

 

1,477,771

 

Amortization of debt issuance costs

 

 

90,883

 

 

 

91,551

 

Amortization of right to use assets

 

 

302,503

 

 

 

212,372

 

Amortization of patent rights

 

 

153,450

 

 

 

162,516

 

Depreciation expense

 

 

56,824

 

 

 

160,537

 

Gain on sale of equipment

 

 

0

 

 

 

(5,919)

Gain on forgiveness of debt

 

 

(299,300)

 

 

0

 

(Gain) Loss on change in fair value of profit share

 

 

386,951

 

 

 

(140,954)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

 

(1,950,439)

 

 

(252,078)

(Increase) Decrease in inventory

 

 

(149,591)

 

 

39,938

 

Decrease in security deposits

 

 

2,080

 

 

 

0

 

Increase in prepaid expenses and other assets

 

 

(37,154)

 

 

(15,331)

Increase in accounts payable and accrued liabilities

 

 

1,565,786

 

 

 

204,882

 

Decrease in operating lease liability

 

 

(304,056)

 

 

(289,263)

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(306,033)

 

 

(1,537,577)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Cash received from sale of equipment

 

 

0

 

 

 

9,500

 

Net cash provided by investing activities

 

 

0

 

 

 

9,500

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments of notes payable

 

 

(34,661)

 

 

(114,415)

Payments of equipment notes payable

 

 

(21,750)

 

 

(37,164)

Proceeds from exercise of warrants

 

 

246,808

 

 

 

0

 

Proceeds from exercise of stock options

 

 

101,250

 

 

 

0

 

Payment of convertible notes

 

 

(10,000)

 

 

 

 

Proceeds from the issuance of notes payable

 

 

299,380

 

 

 

499,300

 

Net cash provided by financing activities

 

 

581,027

 

 

 

347,721

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

274,994

 

 

 

(1,180,356)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents - beginning of period

 

 

591,019

 

 

 

1,499,287

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents - end of period

 

$866,013

 

 

$318,931

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$41,082

 

 

$488,265

 

Taxes

 

$4,518

 

 

$0

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS

 

 

 

 

 

 

 

 

Stock issued for prepaid services

 

$644,250

 

 

$200,000

 

Stock issued for conversion of convertible notes

 

$4,440,000

 

 

$0

 

Stock issued for interest payable

 

$615,339

 

 

$0

 

 

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

 

 
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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, 2020 filed on April 5, 2021, from which the accompanying condensed consolidated balance sheet dated December 31, 2020 was derived.

 

In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the financial position as of September 30, 2021, 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.

 

 
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Table of Contents

   

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 and nine months ended September 30, 2021 and 2020.

 

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 September 30, 2021 and December 31, 2020 and is considered to be Level 1.

  

 
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Table of Contents

 

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 September 30, 2021 and December 31, 2020 due to their short-term maturities.

 

The fair value of the promissory notes payable at September 30, 2021 and December 31, 2020 approximated the carrying amount as the notes were recently issued at interest rates prevailing in the market and interest rates have not significantly changed as of September 30, 2021 and December 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 September 30, 2021 and December 31, 2020 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

 

 

 

 

 

 

September 30, 2021

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

866,013

 

 

 

866,013

 

 

 

0

 

 

 

0

 

Total Assets

 

$866,013

 

 

$866,013

 

 

$0

 

 

$0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Promissory notes

 

 

11,946,893

 

 

 

0

 

 

 

11,946,893

 

 

 

0

 

Profit share liability – related party

 

 

2,692,258

 

 

 

0

 

 

 

0

 

 

 

2,692,258

 

Total Liabilities

 

$14,639,151

 

 

$0

 

 

$11,946,893

 

 

$2,692,258

 

 

 

 

 

 

 

Fair Value Measurement as of

December 31, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

591,019

 

 

 

591,019

 

 

 

0

 

 

 

0

 

Total Assets

 

$591,019

 

 

$591,019

 

 

$0

 

 

$0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Promissory notes

 

 

14,585,097

 

 

 

0

 

 

 

14,585,097

 

 

 

0

 

Profit share liability

 

 

2,305,308

 

 

 

0

 

 

 

0

 

 

 

2,305,308

 

Total Liabilities

 

$16,890,405

 

 

$0

 

 

$14,585,097

 

 

$2,305,308

 

  

 
F-8

Table of Contents

    

Foreign Currency Translation

 

The Company’s functional currency is the United States Dollar (the “U.S. Dollar”). The Company engages in foreign currency denominated transactions with customers that operate in functional currencies other than the U.S. Dollar. Assets and liabilities denominated in foreign currencies are translated into U.S. Dollar amounts at the period-end exchange rates. Sales and purchases and income and expense transactions that are denominated in foreign currencies are translated into U.S. Dollar amounts at the prevailing rates of exchange on the transaction date. Adjustments arising from foreign currency transactions are reflected in the statement of operations. For the three and nine months ended September 30, 2021 and 2020, there were no material foreign exchange gains or losses recognized by the Company in its statements of operations.

 

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.

   

Disaggregation of Revenue

 

The Company generated revenue for the three and nine months ended September 30, 2021 and 2020 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 and (iv) licensing its technology to customers.

 

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.

  

 
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Table of Contents

 

The following table presents sales by operating segment disaggregated based on the type of product and geographic region for the three months ended September 30, 2021 and 2020.

 

 

 

Three months ended

September 30, 2021

 

 

Three months ended

September 30, 2020

 

 

 

United

States

 

 

International

 

 

Total

 

 

United

States

 

 

International

 

 

Total

 

Product revenue

 

$4,687,595

 

 

$0

 

 

$4,687,595

 

 

$2,780,638

 

 

$0

 

 

$2,780,638

 

License revenue

 

 

195,547

 

 

 

0

 

 

 

195,547

 

 

 

0

 

 

 

0

 

 

 

0

 

Demonstrations & Consulting revenue

 

 

78,870

 

 

 

0

 

 

 

78,870

 

 

 

27,000

 

 

 

0

 

 

 

27,000

 

Equipment revenue

 

 

57,705

 

 

 

0

 

 

 

57,705

 

 

 

1,950

 

 

 

2,609

 

 

 

4,559

 

 

 

$5,019,717

 

 

$0

 

 

$5,019,717

 

 

$2,809,588

 

 

$2,609

 

 

$2,812,197

 

 

The following table presents sales by operating segment disaggregated based on the type of product and geographic region for the nine months ended September 30, 2021 and 2020.

 

 

 

Nine months ended

September 30, 2021

 

 

Nine months ended

September 30, 2020

 

 

 

United

States

 

 

International

 

 

Total

 

 

United

States

 

 

International

 

 

Total

 

Product revenue

 

$8,779,645

 

 

$0

 

 

$8,779,645

 

 

$5,573,643

 

 

$113,600

 

 

$5,687,243

 

License revenue

 

 

1,286,641

 

 

 

0

 

 

 

1,286,641

 

 

 

0

 

 

 

0

 

 

 

0

 

Demonstrations & Consulting revenue

 

 

140,180

 

 

 

0

 

 

 

140,180

 

 

 

109,372

 

 

 

0

 

 

 

109,372

 

Equipment revenue

 

 

110,585

 

 

 

0

 

 

 

110,585

 

 

 

9,394

 

 

 

6,366

 

 

 

15,760

 

 

 

$10,317,051

 

 

$0

 

 

$10,317,051

 

 

$5,692,409

 

 

$119,966

 

 

$5,812,375

 

   

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 September 30, 2021 and December 31, 2020. 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.

  

 
F-10

Table of Contents

 

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.

 

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 September 30, 2021 and 2020, 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.

 

 

 

September 30,

 

 

September 30,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Stock Options

 

 

16,068,326

 

 

 

14,044,826

 

Warrants

 

 

4,285,000

 

 

 

5,690,378

 

Convertible debt

 

 

-

 

 

 

9,157,100

 

Total common stock equivalents excluded from diluted net loss per share

 

 

20,353,326

 

 

 

28,892,304

 

 

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 September 30, 2021 and December 31, 2020 is maintained at high-quality financial institutions and has not incurred any losses to date.

   

Customer and Supplier Concentration

 

For each of the nine months ended September 30, 2021 and 2020,100% of the Company’s revenue related to sixteen and ten customers respectively. At September 30, 2021 and 2020, 100% of the Company’s accounts receivable related to eleven and eight customers, respectively.

 

For each of the nine months ended September 30, 2021 and 2020, 86% and 85% of the Company’s purchases related to two suppliers, respectively. At September 30, 2021 and 2020, 66% and 67% 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.

 

 
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Table of Contents

 

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

 

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

 

Recently Adopted Accounting Standards

 

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 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 consolidated financial statements.

 

In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods (beginning with the quarter ended March 31, 2021 for the Company). The adoption of ASU 2019-12 did not have a material impact on its consolidated financial statements.

 

Recently Issued Accounting Standards

 

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

 

 
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Table of Contents

   

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 September 30, 2021 have been prepared assuming the Company will continue as a going concern. As reflected in the condensed consolidated financial statements, the Company had $866,000 in cash, working capital deficit of $10.9 million and an accumulated deficit of $65.8 million at September 30, 2021. The Company also had a net loss in the amount of $2.4 million and cash used in operating activities of $306,000 for the nine months ended September 30, 2021. All existing secured and unsecured debt held by its principal lender in the principal amount of $13.4 million matures on August 25, 2022 which is within one year from the issuance of these condensed consolidated financial statements within the Company’s Quarterly Report on Form 10-Q.

 

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. The Company has taken steps to alleviate the doubt raised by the application of ASC 205-40. During the first nine months of 2021, the Company eliminated $4,440,000 of convertible notes through conversions to shares of common stock and repaid $10,000 of convertible notes, leaving no convertible notes outstanding as of September 30, 2021. In addition, in June 2021, the Company announced that it had entered into a Debt Repayment and Exchange Agreement with its principal lender which, subject to various closing conditions, including but not limited to the completion of an offering of equity securities resulting in net proceeds of at least $12.0 million by December 31, 2021, will repay all existing secured and unsecured debt obligations held by such lender. Although we anticipate continued significant revenues in our business operations and that we will be able to raise the funds necessary to complete the transaction contemplated by the Debt Repayment and Exchange Agreement, no assurances can be given that we can obtain sufficient working capital through our business operations or that we will be able to raise the funds necessary to close under the Debt Repayment Agreement by December 31, 2021 or at all, in order to sustain ongoing operations.

 

The accompanying condensed consolidated financial statements do not include 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 September 30, 2021 and December 31, 2020:

 

 

 

September 30,

2021

 

 

December 31,

2020

 

Raw Materials

 

$310,415

 

 

$169,803

 

Spare Parts

 

 

69,756

 

 

 

23,432

 

Finished goods

 

 

329,546

 

 

 

366,892

 

 

 

$709,717

 

 

$560,127

 

 

Note 5 - Property and Equipment, Net

 

Property and equipment at September 30, 2021 and December 31, 2020 are as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Equipment & installation

 

$1,965,659

 

 

$1,965,659

 

Trucking equipment

 

 

834,375

 

 

 

834,375

 

Computer equipment and software

 

 

14,768

 

 

 

67,126

 

Office equipment

 

 

5,528

 

 

 

27,155

 

Total equipment

 

 

2,820,330

 

 

 

2,894,315

 

 

 

 

 

 

 

 

 

 

Less: accumulated depreciation

 

 

(2,797,829)

 

 

(2,814,993)

Construction in process

 

 

1,807,707

 

 

 

1,807,707

 

Property and equipment, net

 

$1,830,208

 

 

$1,887,029

 

 

The Company uses the straight-line method of depreciation over 2 to 5 years. During the three months ended September 30, 2021 and 2020 depreciation expense was $12,445, and $37,933, respectively. During the nine months ended September 30, 2021 and 2020 depreciation expense was $56,824, and $160,537, respectively.

  

 
F-13

Table of Contents

    

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. Under the terms of the Agreement, the Company has been granted an exclusive license by the Energy and Environmental Research Center Foundation 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 the Energy and Environmental Research Center Foundation 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 the Energy and Environmental Research Center Foundation and 296,002 were issued to the inventors who had been designated by the Energy and Environmental Research Center Foundation. The shares issued were valued at $518,000 ($0.56 per share), representing the value as of the closing date.

 

License and patent costs capitalized as of September 30, 2021 and December 31, 2020 are as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Patents

 

$3,068,995

 

 

$3,068,995

 

Less: Accumulated amortization

 

 

(903,649)

 

 

(750,199)

License, net

 

$2,165,346

 

 

$2,318,796

 

 

Amortization expense for the three months ended September 30, 2021 and 2020 was $51,150 and $51,150, respectively. Amortization expense for the nine months ended September 30, 2021 and 2020 was $153,450 and $162,516, respectively. Estimated annual amortization for each of the next five years is $204,600.

 

Note 7 - Notes 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. In February 2021, the loan was repaid in full.

 

 
F-14

Table of Contents

 

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. In January 2021, the PPP Loan was forgiven, and the Company recorded a gain on extinguishment of debt of $299,300.

 

In February 2021, the Company received second draw loan proceeds in the amount of $299,380 from First International Bank & Trust pursuant to the Paycheck Protection Program (the “Second PPP Loan”) under the CARES Act. The Second PPP Loan is in the form of a Note dated February 2, 2021, matures on April 14, 2026 and bears interest at a rate of 1.0% per annum, with one interest payment on February 2, 2022, 47 monthly consecutive principal and interest payments of $6,366.89 each, beginning March 2, 2022, and one final principal and interest payment of $6,366.92 on February 2, 2026. The principal and accrued interest under the Second PPP Loan is forgivable after eight or twenty-four weeks if the Company uses the Second PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise complies with the PPP requirements. In October 2021, the Second PPP Loan was forgiven.

   

Note 8 - Convertible Notes Payable

 

The Company has the following convertible notes payable outstanding as of September 30, 2021 and December 31, 2020:

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

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.

 

$

0

 

 

$

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.

 

 

0

 

 

 

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.

 

 

0

 

 

 

2,600,000

 

 

 

 

 

 

 

 

 

 

Total convertible notes payable before discount

 

 

0

 

 

 

4,450,000

 

 

 

 

 

 

 

 

 

 

Less discounts and debt issuance costs

 

 

0

 

 

 

(394,878

)

 

 

 

 

 

 

 

 

 

Total convertible notes payable

 

 

0

 

 

 

4,055,122

 

 

 

 

 

 

 

 

 

 

Less current portion

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

Convertible notes payable, net of current portion

 

$

0

 

 

$

4,055,122

 

  

 
F-15

Table of Contents

 

From July 30, 2013 through December 24, 2013, the Company sold convertible notes and warrants to unaffiliated accredited investors totaling $1,902,500. The notes bear interest at 10% per annum, are secured by the Company’s assets, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share. The notes had an initial term of three years, but the maturity of the notes was extended during 2014 to match the retirement of the New AC Midwest Secured Debt. From February 8, 2021 to February 15, 2021, the Company issued 1,880,000 shares of common stock to certain holders of such convertible promissory notes issued in 2013 for the conversion of the outstanding principal of such notes in the aggregate amount of $940,000, based upon a conversion rate of $0.50 per share. On April 9, 2021, the Company issued 60,000 shares of common stock to another certain holder of such notes issued in 2013 for the conversion of outstanding principal in the amount of $30,000, based upon a conversion rate of $0.50 per share. On August 18, 2021, the Company issued 20,000 shares of common stock to another certain holder of such notes issued in 2013 for the conversion of outstanding principal in the amount of $10,000, based upon a conversion rate of $0.50 per share. On August 24, 2021, the Company prepaid the outstanding principal balance of another of such notes issued in 2013 in the principal amount of $10,000. As of September 30, 2021 and December 31, 2020, total principal of $0 and $990,000, respectively, was outstanding on these notes.

 

On June 15, 2018, the Company issued 2018 Unsecured Convertible Notes (the “2018 Unsecured Notes”) totaling $560,000 and warrants to certain holders of the 2013 Notes in exchange for their secured 2013 Notes. The 2018 Unsecured Notes have a term of five years, bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share. For each dollar exchanged, the investor received a warrant to purchase one share of common stock of the Company at an exercise price of $0.70 per share. The 2018 Unsecured Notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. From August 31, 2018 through October 30, 2018, the Company issued additional 2018 Unsecured Notes totaling $300,000 and warrants to unaffiliated investors. Pursuant to the terms of the 2018 Unsecured Notes, if at any time after six months from the issuance of the 2018 Notes, the closing price of the Company’s common stock exceeds $1.00 per share for 10 consecutive trading days, the Company shall have the right to force convert all of the outstanding principal of such Notes. Pursuant to notice dated February 17, 2021, the Company notified all such holders that as a result closing price of the Company’s common stock having exceeded $1.00 per share for 10 consecutive trading days, the Company was electing to force convert all such outstanding principal. Between February 26, 2021 and March 8, 2021, the Company issued 690,000 shares of common stock to certain holders of the 2018 Unsecured Notes for conversion of the outstanding principal of such Notes in the aggregate amount of $345,000, and on March 17, 2021, the Company issued 1,030,000 shares of common stock to the remaining holders of the 2018 Unsecured Notes for the conversion of the remaining outstanding principal in the aggregate amount of $515,000, all based upon a conversion rate of $0.50 per share. As of September 30, 2021 and December 31, 2020, total principal of $0 and $860,000, respectively, was outstanding on the 2018 Unsecured Notes.

 

From June 18, 2019 through October 23, 2019, the Company sold 2019 Unsecured Convertible Notes (the “2019 Unsecured Notes”) totaling $2,600,000 and warrants to unaffiliated accredited investors. The 2019 Unsecured Notes bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share. The 2019 Unsecured Notes have a term of five years. On February 26, 2021, the Company issued 100,000 shares of common stock to a certain holder of the 2019 Unsecured Notes for the conversion of outstanding principal in the amount of $50,000, based upon a conversion rate of $0.50 per share. Pursuant to a letter dated June 14, 2021, the Company offered each of the holders of the 2019 Unsecured Notes the opportunity to voluntarily convert the outstanding principal into shares of common stock at conversion ratio of $0.50 per share and, if converted prior to June 30, 2021, still be paid interest through September 30, 2021. With such offer, all accrued and unpaid interest, and additional interest through September 30, 2021, would be paid in shares of common stock at a rate of $1.00 per share, in lieu of payment in cash. As a result thereof, and between June 17, 2021 and June 23, 2021, (i) the outstanding principal totaling $2,550,000 was voluntarily converted by the holders thereof into an aggregate of 5,100,000 shares of common stock of the Company at a conversion price of $0.50 per share, and (ii) all accrued and unpaid interest thereon, together with additional interest through September 30, 2021, which together totaled $229,500, was converted into an aggregate of 229,500 shares of common stock of the Company. The Company recognized a conversion inducement cost of $98,515 related to the conversion. As of September 30, 2021 and December 31, 2020, total principal of $0 and $2,600,000, respectively, was outstanding on the 2019 Unsecured Notes. There is no further liability related to the profit share due to the voluntary conversion of all of the 2019 Unsecured Notes.

 

 
F-16

Table of Contents

 

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 “AC Midwest Secured Note”) in the original principal amount of $9,646,686, which was to mature on December 15, 2018. AC Midwest is wholly-owned by a stockholder of the Company. The 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 September 30, 2021 and 2020 was $10,415 and $10,215, respectively. Interest expense for the nine months ended September 30, 2021 and 2020 was $30,904 and $30,653 respectively. On February 25, 2019, per Amendment No. 3 to the Amended and Restated 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 September 30, 2021 and December 31, 2020, total principal of $271,686 was outstanding on this note.

 

Unsecured Note Payable

 

The Company has the following unsecured note payable - related party outstanding as of September 30, 2021 and December 31, 2020:

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Unsecured note payable

 

$13,154,931

 

 

$13,154,931

 

 

 

 

 

 

 

 

 

 

Less discounts and debt issuance costs

 

 

(1,787,398)

 

 

(3,260,647)

 

 

 

 

 

 

 

 

 

Total unsecured note payable

 

 

11,367,533

 

 

 

9,894,284

 

 

 

 

 

 

 

 

 

 

Less current portion

 

 

(11,367,533)

 

 

0

 

 

 

 

 

 

 

 

 

 

Unsecured note payable, net of current portion

 

$0

 

 

$9,894,284

 

 

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 nine months ended September 30, 2021 and 2020 was $1,382,366 and $1,484,082, respectively. As of September 30, 2021, the unamortized balance of the discount was $1,677,469 and unamortized balance of the debt issuance costs was $109,929 at September 30, 2021.

 

 
F-17

Table of Contents

 

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.

 

AC Midwest shall be entitled to a profit participation preference equal to 1.0 times the original principal amount (the “Profit Share”). If the original principal amount had been paid in full on or prior to August 25, 2020, AC Midwest would have been entitled to a profit participation preference equal to 0.5 times the original principal amount.

 

The Profit Share is “non-recourse” and shall only be derived from and computed on the basis of, and paid from, Net Litigation Proceeds from claims relating to the Company’s intellectual property, Net Revenue Share and Adjusted Free Cash Flow (as such terms are defined in the Unsecured Note Financing Agreement).

 

The Profit Share

 

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

 

The Company is utilizing the methodology behind the ASC 815, 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. The discounted cash flow model assumptions used at September 30, 2021 to calculate the Profit Share liability included: estimated term of sixteen years with between $100,000 to $350,000 paid quarterly starting in February 2024, and an annual market interest rate of 21%. The profit share liability will be marked to market every quarter utilizing management’s estimates.

   

The following are the changes in the profit share liabilities during the nine months ended September 30, 2021 and 2020.

 

Profit Share as of January 1, 2021

 

$2,305,308

 

Addition

 

 

0

 

Loss on change in fair value of profit share

 

 

386,951

 

Profit Share as of September 30, 2021

 

$2,692,259

 

 

Profit Share as of January 1, 2020

 

$

2,328,845

 

Addition

 

 

0

 

Gain on change in fair value of profit share

 

 

(140,954

)

Profit Share as of September 30, 2020

 

$

2,187,891

 

 

 
F-18

Table of Contents

 

Debt Repayment and Exchange Agreement

 

On June 1, 2021, the Company, along with MES, entered into a Debt Repayment and Exchange Agreement with AC Midwest, which will repay all existing secured and unsecured debt obligations presently held by AC Midwest (the “Debt Repayment Agreement”).

 

Pursuant to the Debt Repayment Agreement, the Company shall at closing repay the principal balance outstanding on the AC Midwest Secured Note in cash, together with any other amounts due and owing under such note, and repay the outstanding debt under the New AC Midwest Unsecured Note by paying and issuing a combination of cash and shares of common stock which AC Midwest has agreed to accept in full and complete repayment of the obligations thereunder.

 

At closing, and with regard to the New AC Midwest Unsecured Note, the Company shall pay AC Midwest $6,577,465.30 in cash representing 50.0% of the aggregate outstanding principal balance of such note, and issue shares of common stock to AC Midwest in exchange for the remaining 50.0% of the aggregate outstanding principal balance at an exchange price equal to 100% of the offering price of common stock in the Qualifying Offering (as defined below). With regard to the Profit Share, at closing the Company shall pay AC Midwest $2,305,308.00 in cash representing the Profit Share Valuation, and issue shares of common stock for $4,026,567.76 representing the Adjusted Profit Share Valuation (as such terms are defined in the Debt Repayment Agreement) at the same exchange price indicated above. The Company has agreed to provide certain registration rights with respect to the shares issued thereunder.

 

The closing is subject to various conditions including but not limited to the completion of an offering of equity securities resulting in net proceeds of at least $12.0 million by December 31, 2021 (the “Qualifying Offering”). In the event that the closing does not occur by December 31, 2021, either party may terminate the Debt Repayment Agreement and the existing notes with AC Midwest will continue in their current forms.

 

Related Party Transactions

 

Kaye Cooper Kay & Rosenberg, LLP provides certain legal services to the Company and was paid $212,873 and $137,500 for the nine months ended September 30, 2021 and 2020, respectively, 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 September 30, 2021 and December 31, 2020, $181,250 and $168,750, 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. The lease was not renewed and the Company vacated the space.

 

 
F-19

Table of Contents

 

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

 

For the twelve months ended September 30,

 

 

 

2022

 

$402,520

 

2023

 

 

92,040

 

2024

 

 

22,500

 

Total

 

 

517,060

 

Less discount

 

 

(18,516)

Total lease liabilities

 

 

498,544

 

Less current portion

 

 

(386,984)

Operating lease obligation, net of current portion

 

$111,560

 

 

The weighted average remaining lease term for operating leases is 1.25 years and the weighted average discount rate used in calculating the operating lease asset and liability is 5.0%. For the nine months ended September 30, 2021, payments on lease obligations were $329,130 and amortization on the right of use assets was $302,503.

   

For the three and nine months ended September 30, 2021, 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

September 30,

2021

 

 

Nine Months

Ended

September 30,

2021

 

 

 

 

 

 

 

 

Operating lease cost

 

$102,622

 

 

$304,056

 

Short-term lease cost (1)

 

 

1,770

 

 

 

5,310

 

Total lease cost

 

$104,392

 

 

$309,366

 

_____________

(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 2021 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.

 

 
F-20

Table of Contents

 

During 2020, each of the four major utility defendants in the above action filed petitions for Inter Partes Review with the United States Patent and Trademark Office, seeking to invalidate certain claims to the patents which are subject to the litigation.

 

Between July 2020 and January 2021, we entered into agreements with each of the four major utility defendants in such action which included certain monetary arrangements and pursuant to which we have dismissed all claims brought against each of them and their affiliates, and such parties have withdrawn from petitions for Inter Partes Review with the United States Patent and Trademark Office. Such agreements entered into with such parties provide each of them and their affiliates with a non-exclusive license to certain Company patents (related to the Company’s two-part Sorbent Enhancement Additive (SEA®) process) for use in connection with such parties’ coal-fired power plants.

 

The above described proceedings are continuing with respect to the other parties involved. On May 20, 2021, a U.S. District Court Magistrate Judge issued a report and recommendation that the above action should be permitted to proceed against 16 refined coal defendants named in the action directly involved in the refined coal program and operations, and be dismissed against 12 other defendants, primarily affiliated entities of the refined coal operators. Such report was issued in connection with certain motions to dismiss filed by the refined coal defendants. In September 2021, such report and recommendation was approved by the District Judge for the United States District Court for the District of Delaware.

 

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 September 30, 2021 and 2020, stock based compensation expense amounted to $197,143 and $369,427, respectively. For the nine months ended September 30, 2021 and 2020, stock based compensation expense amounted to $453,051 and $619,176, 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.

 

On March 23, 2021, and pursuant to a consulting agreement dated November 1, 2020, as amended on March 19, 2021, with a nonaffiliated third party, the Company issued 500,000 shares of common stock to such party as part of its compensation thereunder. These shares of common stock were valued at $615,000 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 ten months.

 

 
F-21

Table of Contents

 

On March 30, 2021, and pursuant to a business development agreement dated March 30, 2021 with a nonaffiliated third party, the Company issued 25,000 shares of common stock to such party for its compensation thereunder. These shares of common stock were valued at $29,250 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 three months.

 

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 nine months ended September 30, 2021 is presented below:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining Contractual

Life (years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2021

 

 

16,218,326

 

 

$0.50

 

 

 

3.57

 

 

$3,588,631

 

Grants

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercises

 

 

(150,000)

 

 

0.75

 

 

 

-

 

 

 

-

 

Expirations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

September 30, 2021

 

 

16,068,326

 

 

$0.49

 

 

 

2.87

 

 

$3,701,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

16,068,326

 

 

$0.49

 

 

 

2.87

 

 

$3,701,564

 

 

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.65 as of September 30, 2021, which would have been received by the option holders had all option holders exercised their options as of that date.

 

On May 1, 2021, the Company issued 15,869 shares of common stock to a certain option holder upon the cashless exercise of an option to purchase 25,000 shares of common stock at an exercise price off $0.42 based upon a market price of $1.15 per share as determined under the terms of the option. On June 30, 2021, the Company issued 125,000 shares of common stock to a certain option holder upon a cash exercise of an option to purchase 125,000 shares of common stock at an exercise price of $0.81 or $101,250 in the aggregate.

   

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, a risk-free interest rate and the life of the warrant for the exercise period.

 

 
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Table of Contents

 

From January 23, 2021 to February 16, 2021, the Company issued 705,166 shares of common stock to certain warrant holders upon the cash exercise of warrants to purchase an aggregate of 705,166 shares of common stock at an exercise price of $0.35 per share or $246,808 in the aggregate.

 

On February 17, 2021, the Company issued 97,675 shares of common stock to a certain warrant holder upon the cashless exercise of a warrant to purchase 150,000 shares of common stock at an exercise price of $0.45 per share based upon a market value of $1.29 per share as determined under the terms of the warrant.

 

On March 8, 2021, the Company issued an aggregate of 97,015 shares of common stock to certain warrant holders upon the cashless exercise of warrants to purchase an aggregate of 175,000 shares of common stock at an exercise price of $0.70 per share based upon market values from $1.44 to $1.63 per share as determined under the terms of the warrants.

 

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, 2021

 

 

5,595,378

 

 

$0.63

 

 

 

2.85

 

 

$314,260

 

Grants

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercises

 

 

(1,030,166)

 

$0.42

 

 

 

-

 

 

 

-

 

Expirations

 

 

(280,212)

 

$0.35

 

 

 

-

 

 

 

-

 

September 30, 2021

 

 

4,285,000

 

 

$0.70

 

 

 

2.72

 

 

$0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants exercisable at:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

4,285,000

 

 

$0.70

 

 

 

2.72

 

 

$0

 

 

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.65 as of September 30, 2021, 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 September 30, 2021:

 

Outstanding and Exercisable

Exercise Price

 

 

Number Outstanding

 

 

Weighted Average

Remaining

Contractual

Life (years)

 

 

Weighted Average

Exercise Price

 

$

0.70

 

 

 

4,285,000

 

 

 

2.72

 

 

$0.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.70

 

 

 

4,285,000

 

 

 

2.72

 

 

$0.70

 

 

Note 14 - Subsequent Events

 

See Note 7 for information on the Second PPP Loan received by the Company in February 2021. In October 2021, the Second PPP Loan was forgiven.

  

 
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Table of Contents

   

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, 2020, 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 technologies company developing and delivering patented and proprietary solutions to the global power industry. Our leading-edge services have been shown to achieve mercury emissions removal at a significantly lower cost and with less operational impact to coal-fired power plants than currently used methods, while maintaining and/or increasing power plant output and preserving the marketability of byproducts 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 since being enacted. 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, but left the rule in place. On remand, following the Supreme Court’s instructions to consider costs, the EPA in April 2016 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 remains under review by the D.C. Circuit. In April 2017, the EPA asked the court to place that litigation in abeyance, stating that the Agency then under the Trump Administration was reviewing the supplemental finding to determine whether it should be reconsidered in whole or in part. The court granted the EPA’s abeyance request which has remained in place. In April 2020, the EPA concluded that the 2016 supplemental finding was flawed in part due to its reliance on co-benefits to justify MATS and withdrew EPA’s 2016 “appropriate-and-necessary” determination as erroneous, but left 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 the EPA. Upon taking office, the Biden Administration in January 2021 directed the EPA to review the previous Administration’s actions on various environmental matters including the withdrawal of the “appropriate and necessary” determination, for conformity with Biden Administration environmental policy. Nevertheless, legal challenges may continue with respect to the MATS regulation which 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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Table of Contents

 

Executive Overview

 

We remain focused on positioning the Company for short and long-term growth, including focusing 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.

 

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, during the first quarter of 2021, we announced that we had secured supply contract extensions with two long-term customers. In July 2021, we announced that we had secured new multi-year supply business with a coal-fired power plant located in the Midwest, which power plant is part of the fleet of a large utility and a long-standing customer based in the Southwest region of the United States.

   

In Europe, we had been working to penetrate this market through our licensing agreement entered into in March 2018 with one of our primary suppliers. Such arrangement has been terminated effective as of December 6, 2020. We intend to continue to pursue the European market when certain new regulations are expected to take effect in 2021 and 2022 although no assurance can be made that any such efforts will be successful.

 

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 reflected the commitment of our financial partner in our efforts to attract new business, manage our present customers and monetize our patent portfolio. In June 2021, we announced that we had entered into a Debt Repayment and Exchange Agreement with AC Midwest which will repay all existing secured and unsecured debt obligations held by AC Midwest. Pursuant to such agreement, we will repay the existing $0.3 million secured note outstanding in cash as well as the existing $13.2 million principal amount outstanding under the unsecured note held by AC Midwest through a combination of cash and stock. AC Midwest is also entitled to a certain non-recourse profit share under the unsecured note which will be satisfied through a combination of cash and stock. The closing is subject to various conditions including but not limited to the completion of an offering of equity securities resulting in net proceeds of at least $12.0 million by December 31, 2021.

 

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 February 2021, $50,000 of such principal was voluntarily converted into shares of common stock, and in June 2021, the remaining principal balance of $2,550,000 was voluntarily converted by the holders thereof into shares of common stock of the Company.

 

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. Between July 2020 and January 2021, we entered into agreements with each of the four major utility defendants in the patent litigation commenced in 2019 which agreements included certain monetary arrangements and pursuant to which we have dismissed all claims brought against each of them and their affiliates, and such parties have withdrawn from petitions for Inter Partes Review with the U.S. Patent and Trademark Office. Such agreements entered into with such parties provide each of them and their affiliates with a non-exclusive license to certain Company patents (related to our two-part Sorbent Enhancement Additive (SEA®) process) for use in connection with such parties’ coal-fired power plants. One of the agreements has facilitated an ongoing business relationship with that party. The above described proceedings are continuing with respect to the other parties involved. In May 2021, a U.S. District Court Magistrate Judge issued a report and recommendation that such litigation should be permitted to proceed against 16 refined coal defendants named in the action directly involved in the refined coal program and operations, and be dismissed against 12 other defendants, primarily affiliated entities of the refined coal operators. In September 2021, such report and recommendation was approved by the District Judge for the United States District Court for the District of Delaware which will allow us to proceed against certain refined coal entities named in the lawsuit.

 

 
6

Table of Contents

 

In October 2019, we entered into a license and development agreement with a nonrelated third party entity located in Alabama pursuant to which the parties have agreed to work together to develop a plan to commercialize and market certain technology owned by such entity related to the removal of mercury from air and water emissions generated by coal burning power plants. In addition, during the first quarter of 2021, we announced new technologies under development intended to improve the processing of rare earth elements (REEs) in North America. Our new technologies are under development in conjunction with our collaboration with such Alabama third party entity and its affiliates. Such technologies focus on improving the cost of extracting rare earth minerals along with improving the environmental footprint of extracting those REEs from their solvent state. In October 2021, we announced that we had completed phase 1 testing of our REE technology with Pennsylvania State University’s College of Earth and Mineral Sciences confirming 80-90% efficiency rate in extracting select REEs. While there is no established timeline for the introduction of these technologies after further testing is performed, we hope that if such further testing is successful, these technologies can be commercialized in 2022 and thereafter.

 

During the first quarter of 2021, we announced that we are in the process of developing a proprietary methane gas emissions control technology which we believe can be adopted within the oil and gas industry. While we have not established a timeline for the introduction of our methane gas emissions control technology, we hope to be able to commercialize our efforts in 2022 and thereafter.

 

In addition to the $2.6 million in convertible notes which were converted into shares of common stock in the first and second quarters as described above, during the first quarter of 2021, we eliminated $1,830,000 of other convertible notes originally issued in 2013 and 2018 through conversions to shares of common stock. During the third quarter of 2021, we issued 20,000 shares of common stock to a certain holder of notes issued in 2013 for the conversion of outstanding principal in the amount of $10,000 and prepaid the outstanding principal balance of another of such notes issued in 2013 in the principal amount of $10,000. As a result, there are no convertible notes outstanding as of September 31, 2021 compared to $4,450,000 in convertible notes outstanding as of December 31, 2020.

 

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

 

Effects of the COVID-19 Pandemic

 

It should be noted that the coronavirus (COVID-19) pandemic has impacted various businesses throughout the world since early 2020, including travel restrictions and the extended shutdown of certain businesses in impacted geographic regions. During this time, we have continued to conduct our operations while responding to the pandemic with actions to mitigate adverse consequences to our employees, business, supply chain and customers. Nevertheless, the duration and scope of the COVID-19 pandemic continues to be uncertain. If the coronavirus situation does not improve during the rest of 2021 or should worsen, we may experience disruptions to our business including, but not limited to, the availability of raw materials, equipment, to our workforce, or to our business relationships with other third parties.

   

Results of Operations

 

Revenues

 

We generated revenues of approximately $5,020,000 and $2,812,000 for the three months ended September 30, 2021 and 2020, respectively and approximately $10,317,000 and $5,812,000 for the nine months ended September 30, 2021 and 2020, respectively. Such revenues were primarily derived from sorbent product sales which were approximately $4,688,000 and $2,781,000 for the three months ended September 30, 2021 and 2020, respectively, and approximately $8,780,000 and $5,687,000 for the nine months ended September 30, 2021 and 2020, respectively. The increase in revenues from the prior year periods was primarily driven by increased sorbent product sales due to the increased supply demands in the coal-fired market as well as expansion of our customer base.

    

Licensing revenues for the three months ended September 30, 2021 and 2020 were approximately $196,000 and $0, respectively, and approximately $1,287,000 and $0 for the nine months ended September 30, 2021 and 2020, respectively. Such increases were primarily due to the licensing revenues generated from the agreements entered into with certain of the defendants in the patent litigation commenced in 2019.

 

Equipment sales and other revenues for the three months ended September 30, 2021 and 2020 were approximately $58,000 and $5,000, respectively, and approximately $111,000 and $16,000 for the nine months ended September 30, 2021 and 2020, respectively. This increase was primarily due to increased equipment rental revenues in 2021 compared to last year.

 

 
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Table of Contents

  

Costs and Expenses

 

Total costs and expenses were approximately $5,225,000 and $3,937,000 during the three months ended September 30, 2021 and 2020, respectively, and approximately $12,665,000 and $9,615,000 during the nine months ended September 30, 2021 and 2020, respectively. The increase in costs and expenses from the prior year is mainly attributable to the increase in cost of sales principally due to the increase in sales.

    

Cost of sales were approximately $3,241,000 and $1,882,000 for the three months ended September 30, 2021 and 2020, respectively, and approximately $6,221,000 and $4,198,000 for the nine months ended September 30, 2021 and 2020, respectively. This year-to-date increase in cost of sales is primarily attributable to increased sales.

 

Selling, general and administrative expenses were approximately $1,341,000 and $1,271,000 for the three months ended September 30, 2021 and 2020, respectively, and approximately $4,054,000 and $3,577,000 for the nine months ended September 30, 2021 and 2020, respectively. The increase in selling, general and administrative expenses is primarily attributed to an increase in legal fees compared to the comparable period of 2020.

 

Interest expense related to the financing of capital was approximately $507,000 and $672,000 for the three months ended September 30, 2021 and 2020, respectively, and approximately $2,302,000 and $1,987,000 for the nine months ended September 30, 2021 and 2020, respectively. The decrease for the three months is the result the decrease in notes payable outstanding as a result of conversion of certain notes to stock. The increase for the nine months is due to the stock conversion incentives provided to certain notes and accelerated interest expense upon conversion of notes, partially offset by the reduced interest on the notes payable. The breakdown of interest expense for the three and nine months ended September 30, 2021 and 2020 is as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on notes payable

 

$13

 

 

$144

 

 

$265

 

 

$417

 

Accelerated interest expense upon conversion of notes

 

 

-

 

 

 

-

 

 

 

343

 

 

 

-

 

Additional interest upon conversion of notes

 

 

-

 

 

 

-

 

 

 

221

 

 

 

-

 

Amortization of discount of notes payable

 

 

463

 

 

 

497

 

 

 

1,382

 

 

 

1,478

 

Amortization of debt issuance costs

 

 

31

 

 

 

31

 

 

 

91

 

 

 

92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$507

 

 

$672

 

 

$2,302

 

 

$1,987

 

 

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 $137,000 and $387,000 for the three and nine months ended September 30, 2021, respectively. The change is primarily attributed to an increase in the fair value of the profit share liability. There were no significant changes to the underlying model during the three and nine months ended September 30, 2021.

 

Loss (gain) on change in fair value of profit share liability (relating to the restructured unsecured debt obligation held by AC Midwest Energy LLC) were approximately $111,000 and $(141,000) for the three and nine months ended September 30, 2020, respectively. The change is primarily attributed to an increase (decrease) in the fair value of the profit share liability. There were no significant changes to the underlying model during the three and nine months ended September 30, 2020.

 

Gain on forgiveness of debt of $299,300 relates to the loan proceeds we received in April 2020 pursuant to the Paycheck Protection Program (“PPP”) under the CARES Act. Such loan was forgiven in January 2021 pursuant to the applicable PPP requirements.

  

 
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Table of Contents

    

Net Income (Loss)

 

For the three months ended September 30, 2021 and 2020, we had a net loss of approximately $207,000 and $1,125,000, respectively. Such change was primarily due to increased sales and improved margin on such sales.

 

For the nine months ended September 30, 2021 and 2020, we had a net loss of approximately $2,354,000 and $3,803,000, respectively. Such change was primarily due to increased sales and improved margin on such sales as well as the gain on extinguishment of debt partially offset by the change in the fair value of the profit share liability and the change in interest expense due principally to the stock conversion incentive provided to certain note holders and related accelerated interest.

 

Liquidity and Capital Resources

 

We had approximately $866,000 in cash on our balance sheet at September 30, 2021 compared to approximately $591,000 at December 31, 2020. Total current assets were approximately $4,972,000 and total current liabilities were approximately $15,916,000 at September 30, 2021, resulting in working capital deficit of approximately $10,944,000. This compares to total current assets of approximately $2,375,000 and total current liabilities of approximately $3,359,000 at December 31, 2020, resulting in a working capital deficit of approximately $984,000. Our accumulated deficit was approximately $65.8 million at September 30, 2021 compared to $63.5 million at December 31, 2020. Additionally, we had a net loss in the amount of approximately $2,354,000 and cash used in operating activities of approximately $306,000 for the nine months ended September 30, 2021.

 

The accompanying condensed consolidated financial statements as of September 30, 2021 have been prepared assuming we will continue as a going concern. As reflected above and in the condensed consolidated financial statements, we had $866,000 in cash, working capital deficit of $10.9 million and an accumulated deficit of $65.8 million at September 30, 2021. We also had a net loss in the amount of $2.4 million and cash used in operating activities of $306,000 for the nine months ended September 30, 2021. All existing secured and unsecured debt held by our principal lender in the principal amount of $13.4 million matures on August 25, 2022 which is within one year from the issuance of these condensed consolidated financial statements. These factors raise substantial doubt about our ability to continue as a going concern for the next twelve months from the issuance of these condensed consolidated financial statements.

 

We have taken steps to alleviate such doubt. During the first nine months of 2021, we eliminated $4,440,000 of convertible notes through conversions to shares of common stock and repaid $10,000 of convertible notes, leaving no convertible notes outstanding as of September 30, 2021. In addition, in June 2021, we announced that we had entered into a Debt Repayment and Exchange Agreement with our principal lender which, subject to various closing conditions, including but not limited to the completion of an offering of equity securities resulting in net proceeds of at least $12.0 million by December 31, 2021, will repay all existing secured and unsecured debt obligations held by such lender. Although we anticipate continued significant revenues in our business operations and that we will be able to raise the funds necessary to complete the transaction contemplated by the Debt Repayment and Exchange Agreement, no assurances can be given that we can obtain sufficient working capital through our business operations or that we will be able to raise the funds necessary to close under the Debt Repayment Agreement by December 31, 2021 or at all, in order to sustain ongoing operations.

 

The accompanying condensed consolidated financial statements do not include 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 us to continue as a going concern.

 

 
9

Table of Contents

  

Total Assets

 

Total assets were approximately $9,471,000 at September 30, 2021 versus approximately $7,376,000 at December 31, 2020. The change in total assets is primarily attributable to an increase in accounts receivable.

 

Total Liabilities

 

Total liabilities were approximately $18,975,000 at September 30, 2021 versus approximately $20,580,000 at December 31, 2020. The decrease in liabilities is primarily due to a decrease in debt.

 

Operating Activities

 

Net cash used in operating activities consists of net loss, adjusted by certain non-cash items, and changes in operating assets and liabilities.

 

Net cash used operating activities was approximately $306,000 for the nine months ended September 30, 2021 compared to net cash used in operating activities of approximately $1,538,000 for the nine months ended September 30, 2020. The decrease in cash used in operating activities of approximately $1,232,000 was primarily due to an approximate $1,449,000 decrease in net loss, $299,000 change in amortization of discount of notes payable, $528,000 change in fair value of profit share and $1,361,000 change in accounts payable and accrued liabilities, partially offset by a $1,698,000 change in accounts receivable.

 

Investing Activities

 

Net cash provided by investing activities was $0 for the nine months ended September 30, 2021 compared to net cash provided by investing activities of $9,500 for the nine months ended September 30, 2020. The activity for 2020 related to cash received from the sale of equipment.

 

Financing Activities

 

Net cash provided by financing activities was approximately $581,000 for the nine months ended September 30, 2021 compared to net cash provided by financing activities of approximately $348,000 for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, the Company received $299,000 from the issuance of notes payable, $247,000 from the exercise of warrants and $101,000 from the exercise of stock options.

 

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, 2020. 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.

 

 
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Table of Contents

 

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 loss to adjusted EBITDA for the three and nine months ended September 30, 2021 and 2020, respectively:

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

September 30,

2021

 

 

September 30,

2020

 

 

September 30,

2021

 

 

September 30,

2020

 

 

 

(In thousands)

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(207)

 

$(1,125)

 

$(2,354)

 

$(3,803)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

63

 

 

 

108

 

 

 

210

 

 

 

535

 

Interest and letter of credit fees

 

 

507

 

 

 

672

 

 

 

2,302

 

 

 

1,987

 

Gain on extinguishment of debt

 

 

-

 

 

 

-

 

 

 

(299)

 

 

-

 

Income taxes

 

 

2

 

 

 

-

 

 

 

6

 

 

 

-

 

Stock based compensation

 

 

197

 

 

 

369

 

 

 

453

 

 

 

619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$562

 

 

$24

 

 

$318

 

 

$(662)

 

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.

 

 
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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, 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. As of October 21, 2020, our Controller was appointed and promoted to Chief Accounting Officer and Principal Accounting Officer of the Company, and as of June 1, 2021, was appointed and promoted to Chief Financial Officer and Principal Financial Officer. 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 2021 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.

 

See Note 11 “Commitments and Contingencies” to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this report for a summary of our legal proceedings, which is incorporated by reference herein.

 

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.

 

On August 18, 2021, the Company issued 20,000 shares of common stock to a certain holder of a convertible promissory note issued in 2013 for the conversion of outstanding principal of such note in the amount of $10,000, based upon a conversion rate of $0.50 per share.

 

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 (the “1933 Act”), and where applicable, under Section 3(a)(9) of the 1933 Act.

 

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, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act

31.2*

 

Certification by 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, 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

32.2*

 

Certification by 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.INS*

 

Inline XBRL Instance Document

101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104*

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

_______

* 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: November 15, 2021

By:

/s/ Richard MacPherson

 

 

Richard MacPherson

 

 

 

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

Dated: November 15, 2021

By:

/s/ Jami L. Satterthwaite

 

 

 

Jami L. Satterthwaite

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

  

 
15