MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2016 AND 2015
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,751,557
|
|
|
$
|
1,083,280
|
|
Accounts receivable
|
|
|
3,553,096
|
|
|
|
1,150,602
|
|
Inventory
|
|
|
609,072
|
|
|
|
2,715,913
|
|
Prepaid expenses and other assets
|
|
|
199,495
|
|
|
|
161,813
|
|
Total current assets
|
|
|
12,113,220
|
|
|
|
5,111,608
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,569,354
|
|
|
|
1,243,450
|
|
Deferred tax asset
|
|
|
500,000
|
|
|
|
-
|
|
License, net
|
|
|
52,945
|
|
|
|
58,825
|
|
Prepaid expenses and other assets
|
|
|
-
|
|
|
|
4,058
|
|
Customer acquisition costs, net
|
|
|
642,203
|
|
|
|
897,428
|
|
Total assets
|
|
$
|
15,877,722
|
|
|
$
|
7,315,369
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
4,363,553
|
|
|
$
|
1,235,162
|
|
Deferred revenue
|
|
|
-
|
|
|
|
2,281,760
|
|
Current portion of notes payable
|
|
|
1,500,000
|
|
|
|
-
|
|
Current portion of convertible notes payable
|
|
|
-
|
|
|
|
2,497,114
|
|
Current portion of equipment notes payable
|
|
|
39,499
|
|
|
|
20,979
|
|
Customer credits
|
|
|
590,206
|
|
|
|
936,500
|
|
Total current liabilities
|
|
|
6,493,258
|
|
|
|
6,971,515
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net of discount and issuance costs
|
|
|
11,678,669
|
|
|
|
-
|
|
Convertible notes payable, net of discount and issuance costs
|
|
|
1,142,154
|
|
|
|
3,175,085
|
|
Warrant liability
|
|
|
1,313,000
|
|
|
|
9,854,400
|
|
Accrued interest
|
|
|
78,750
|
|
|
|
169,202
|
|
Equipment notes payable
|
|
|
143,135
|
|
|
|
90,165
|
|
Total liabilities
|
|
|
20,848,966
|
|
|
|
20,260,367
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value: 2,000,000 shares authorized
|
|
|
-
|
|
|
|
-
|
|
Common stock; $.001 par value; 150,000,000 shares authorized; 73,509,663 shares issued and outstanding as of December 31, 2016 47,194,118 shares issued and outstanding as of December 31, 2015
|
|
|
73,510
|
|
|
|
47,194
|
|
Additional paid-in capital
|
|
|
49,838,469
|
|
|
|
25,008,016
|
|
Accumulated deficit
|
|
|
(54,883,223
|
)
|
|
|
(38,000,208
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' deficit
|
|
|
(4,971,244
|
)
|
|
|
(12,944,998
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' deficit
|
|
$
|
15,877,722
|
|
|
$
|
7,315,369
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Product sales
|
|
$
|
28,920,051
|
|
|
$
|
5,028,184
|
|
Equipment sales
|
|
|
2,699,051
|
|
|
|
6,939,412
|
|
Demonstrations and consulting services
|
|
|
726,438
|
|
|
|
664,323
|
|
|
|
|
|
|
|
|
|
|
Total revenues:
|
|
|
32,345,540
|
|
|
|
12,631,919
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
23,030,404
|
|
|
|
10,764,835
|
|
Selling, general and administrative expenses
|
|
|
7,257,445
|
|
|
|
4,220,606
|
|
Settlement charges
|
|
|
-
|
|
|
|
1,335,394
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
30,287,849
|
|
|
|
16,320,835
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
2,057,691
|
|
|
|
(3,688,916
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,912,855
|
)
|
|
|
(6,213,897
|
)
|
Letter of credit fees
|
|
|
(226,000
|
)
|
|
|
-
|
|
Change in value of warrant liability
|
|
|
(14,681,311
|
)
|
|
|
(3,194,189
|
)
|
Gain on debt restructuring
|
|
|
406,791
|
|
|
|
-
|
|
Debt conversion inducement expense
|
|
|
-
|
|
|
|
(1,123,380
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(19,413,375
|
)
|
|
|
(10,531,466
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before taxes
|
|
|
(17,355,684
|
)
|
|
|
(14,220,382
|
)
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
472,669
|
|
|
|
(41,149
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,883,015
|
)
|
|
$
|
(14,261,531
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted:
|
|
$
|
(0.34
|
)
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
50,646,328
|
|
|
|
44,160,298
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Paid-in Capital
|
|
|
(Deficit)
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2014
|
|
|
40,228,123
|
|
|
$
|
40,228
|
|
|
$
|
19,113,724
|
|
|
$
|
(23,738,677
|
)
|
|
$
|
(4,584,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for interest on notes payable
|
|
|
335,000
|
|
|
|
335
|
|
|
|
161,245
|
|
|
|
-
|
|
|
|
161,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock and warrants issued upon debt conversion
|
|
|
6,630,995
|
|
|
|
6,631
|
|
|
|
4,448,566
|
|
|
|
-
|
|
|
|
4,455,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
789,087
|
|
|
|
-
|
|
|
|
789,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to be issued
|
|
|
-
|
|
|
|
-
|
|
|
|
495,394
|
|
|
|
-
|
|
|
|
495,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,261,531
|
)
|
|
|
(14,261,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2015
|
|
|
47,194,118
|
|
|
$
|
47,194
|
|
|
$
|
25,008,016
|
|
|
$
|
(38,000,208
|
)
|
|
$
|
(12,944,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for interest on notes payable
|
|
|
329,000
|
|
|
|
329
|
|
|
|
262,871
|
|
|
|
-
|
|
|
|
263,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon debt conversion
|
|
|
2,737,858
|
|
|
|
2,738
|
|
|
|
1,366,189
|
|
|
|
-
|
|
|
|
1,368,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon warrant exercise
|
|
|
121,510
|
|
|
|
122
|
|
|
|
65,106
|
|
|
|
-
|
|
|
|
65,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon cashless warrant exercise
|
|
|
11,734,440
|
|
|
|
11,734
|
|
|
|
9,795,110
|
|
|
|
-
|
|
|
|
9,806,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of stock, net of issuance costs
|
|
|
11,314,968
|
|
|
|
11,315
|
|
|
|
12,182,638
|
|
|
|
-
|
|
|
|
12,193,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon cashless option exercise
|
|
|
77,769
|
|
|
|
78
|
|
|
|
(78
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
78,020
|
|
|
|
-
|
|
|
|
78,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,080,597
|
|
|
|
|
|
|
|
1,080,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,883,015
|
)
|
|
|
(16,883,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016
|
|
|
73,509,663
|
|
|
$
|
73,510
|
|
|
$
|
49,838,469
|
|
|
$
|
(54,883,223
|
)
|
|
$
|
(4,971,244
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
For the Year
Ended
December 31,
2016
|
|
|
For the Year
Ended
December 31,
2015
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,883,015
|
)
|
|
$
|
(14,261,531
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
1,158,617
|
|
|
|
789,087
|
|
Amortization of license fees
|
|
|
5,880
|
|
|
|
5,882
|
|
Amortization of discount of notes payable
|
|
|
1,625,808
|
|
|
|
4,030,201
|
|
Amortization of debt issuance costs
|
|
|
619,524
|
|
|
|
670,107
|
|
Amortization of customer acquisition costs
|
|
|
443,450
|
|
|
|
259,093
|
|
Depreciation expense
|
|
|
463,868
|
|
|
|
125,853
|
|
Deferred tax benefit
|
|
|
(500,000
|
)
|
|
|
-
|
|
Loss on the change in value of warrant liability
|
|
|
14,681,311
|
|
|
|
3,194,189
|
|
Noncash financing expenses
|
|
|
1,125,000
|
|
|
|
-
|
|
Gain on debt restructuring
|
|
|
(406,791
|
)
|
|
|
-
|
|
Debt conversion inducement expense
|
|
|
-
|
|
|
|
1,123,380
|
|
Noncash settlement charge expenses
|
|
|
-
|
|
|
|
1,335,394
|
|
PIK interest
|
|
|
584,667
|
|
|
|
1,324,463
|
|
Change in assets and liabilities
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(2,590,719
|
)
|
|
|
(739,652
|
)
|
Decrease in inventory
|
|
|
2,106,841
|
|
|
|
3,068,992
|
|
Increase in prepaid expenses and other assets
|
|
|
(33,624
|
)
|
|
|
(11,513
|
)
|
Increase (decrease) in accounts payable and accrued liabilities
|
|
|
3,106,992
|
|
|
|
(125,371
|
)
|
Decrease in deferred revenue
|
|
|
(2,281,760
|
)
|
|
|
(3,526,541
|
)
|
Net cash provided by (used in) operating activities
|
|
|
3,226,049
|
|
|
|
(2,737,967
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,686,344
|
)
|
|
|
(956,605
|
)
|
Net cash used in investing activities
|
|
|
(1,686,344
|
)
|
|
|
(956,605
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
(98,671
|
)
|
|
|
(22,688
|
)
|
Payment of equity issuance costs
|
|
|
(1,264,009
|
)
|
|
|
-
|
|
Payments of equipment notes payable
|
|
|
(31,938
|
)
|
|
|
(11,574
|
)
|
Payments on convertible promissory note
|
|
|
(5,000,000
|
)
|
|
|
(3,000,000
|
)
|
Payments on secured promissory note
|
|
|
(2,000,000
|
)
|
|
|
-
|
|
Proceeds from the issuance of convertible promissory notes and related warrants
|
|
|
-
|
|
|
|
600,000
|
|
Proceeds from the issuance of common stock
|
|
|
13,457,962
|
|
|
|
-
|
|
Proceeds from the issuance of common stock upon warrant exercise
|
|
|
65,228
|
|
|
|
-
|
|
Net cash provided by (used in) financing activities
|
|
|
5,128,572
|
|
|
|
(2,434,262
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
6,668,277
|
|
|
|
(6,128,834
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of year
|
|
|
1,083,280
|
|
|
|
7,212,114
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of year
|
|
$
|
7,751,557
|
|
|
$
|
1,083,280
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
578,934
|
|
|
$
|
69,489
|
|
Taxes
|
|
$
|
27,331
|
|
|
$
|
41,149
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
|
|
|
|
|
|
|
|
|
Equipment purchases included in note payable
|
|
$
|
103,428
|
|
|
$
|
113,718
|
|
Non cash debt issuance costs
|
|
$
|
-
|
|
|
$
|
76,200
|
|
Non cash discounts on notes payable
|
|
$
|
-
|
|
|
$
|
168,000
|
|
Stock issued for interest on notes payable
|
|
$
|
263,200
|
|
|
$
|
161,580
|
|
Conversion of accounts receivable to customer acquisition costs
|
|
$
|
188,225
|
|
|
$
|
-
|
|
Conversion of debt and accrued interest to equity
|
|
$
|
1,368,927
|
|
|
$
|
3,331,817
|
|
Conversion of accrued interest to debt
|
|
$
|
696,999
|
|
|
$
|
1,324,463
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Midwest Energy Emissions Corp. and Subsidiaries
Notes to Consolidated Financial Statements for the years ended December 31, 2016 and 2015
Note 1 - Organization
Midwest Energy Emissions Corp.
Midwest Energy Emissions Corp. (the “Company") is organized under the laws of the State of Delaware with 150,000,000 authorized shares of common stock, par value $.001 per share and 2,000,000 authorized shares of preferred stock, par value $0.001 per share.
MES, Inc.
MES, Inc. is incorporated in the State of North Dakota. MES, Inc. is a wholly owned subsidiary of Midwest Energy Emissions Corp. and is engaged in the business of developing and commercializing state of the art control technologies relating to the capture and control of mercury emissions from coal fired boilers in the United States and Canada.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with the Generally Accepted Accounting Principles in the United States of America (“GAAP”).
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents. The Company maintains its cash in one account with one financial institution, which at times may exceed federally insured limits.
Accounts Receivable
Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. At December 31, 2016 and 2015, the allowance for doubtful accounts was zero.
Inventory
Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value).
Property and Equipment
Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For consolidated financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years.
Expenditures for repairs and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. Management reviews the carrying value of its property and equipment for impairment on an annual basis.
Recoverability of Long-Lived and Intangible Assets
The Company has adopted ASC 360-10,
Property, Plant and Equipment
(“ASC 360-10”). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of the long-lived and or intangible assets would be adjusted, based on estimates of future discounted cash flows. The Company evaluated the recoverability of the carrying value of the Company’s equipment. No impairment charges were recognized for the years ended December 31, 2016 and 2015, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation awards in accordance with the provisions of ASC 718,
Compensation—Stock Compensation
(“ASC 718”), which requires equity-based compensation, be reflected in the consolidated financial statements over the period of service which is typically the vesting period based on the estimated fair value of the awards.
Derivative Liabilities
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks; however, the Company has certain financial instruments that are embedded derivatives associated with capital raises and common stock purchase warrants. The Company evaluates all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with FASB ASC 815-10. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either income or expense. Upon conversion or exercise, the derivative liability is marked to fair value at the conversion date and then the related fair value is reclassified to equity.
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 and cash equivalents were the only asset measured at fair value on a recurring basis by the Company at December 31, 2016 and December 31, 2015 and is considered to be Level 1. Warrant liability is considered to be Level 3, and is the only liability measured at fair value on a recurring basis as of December 31, 2016 and December 31, 2015.
Financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, deferred revenue, customer credits and short-term debt. The carrying amounts of these financial instruments approximated fair value at December 31, 2016 and 2015 due to their short-term maturities. The fair value of the convertible promissory notes payable at December 31, 2016 and 2015 approximated the carrying amount as the notes were issued during the years ended December 31, 2016 and 2015 at interest rates prevailing in the market and interest rates have not significantly changed as of December 31, 2016. The fair value of the convertible promissory notes payable was determined on a Level 2 measurement.
The Company has entered into certain financial instruments and contracts; such as, equity financing arrangements for the issuance of common stock, which include anti-dilution arrangements and detachable stock warrants that are i) not afforded equity classification, ii) embody risks not clearly and closely related to host contracts, or iii) may be net-cash settled by the counterparty. These instruments are recorded as derivative liabilities, at fair value at the issuance date. Subsequent changes in fair value are recorded through the statement of operations.
The Company’s derivative liabilities are related to detachable common stock purchase warrants (“warrants”) issued in conjunction with debt and warrants issued to the placement agents for financial instrument issuances. We estimate fair values of the warrants that do contain “Down Round Protections” utilizing valuation models and techniques that have been developed and are widely accepted that take into account the additional value inherent in “Down Round Protection.” These widely accepted techniques include “Modified Binomial”, “Monte Carlo Simulation” and the “Lattice Model.” The “core” assumptions and inputs to the “Modified Binomial” model are the same as for “Black-Scholes”, such as trading volatility, remaining term to maturity, market price, strike price, and risk free rates; all Level 2 inputs. Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable. However, a key input to a “Modified Binomial” model (in our case, the “Monte Carlo Simulation”, for which we engaged an independent valuation firm to perform) is the probability of a future capital raise. By definition, this input assumption does not meet the requirements for Level 1 or Level 2 outlined above; therefore, the entire fair value calculation is deemed to be Level 3 under accounting requirements due to this single Level 3 assumption. This input to the Monte Carlo Simulation model was developed with significant input from management based on its knowledge of the business, current financial position and the strategic business plan with its best efforts.
As discussed above, financial liabilities are considered Level 3 when their fair values are determined using pricing models or similar techniques and at least one significant model assumption or input is unobservable. For the Company, the Level 3 financial liability is the derivative liability related to the warrants that include “Down Round Protection” and they were valued using the “Monte Carlo Simulation” technique. This technique, while the majority of inputs are Level 2, necessarily incorporates various assumptions associated with a Capital Raise which are unobservable and, therefore, a Level 3 input.
The table below provides a summary of the changes in fair value of the warrant liability measured at fair value on a recurring basis:
Balance at January 1, 2015
|
|
$
|
5,597,011
|
|
Issuance of warrants
|
|
|
1,008,000
|
|
Warrants to be issued
|
|
|
55,200
|
|
Change in value of warrant liability
|
|
|
3,194,189
|
|
Balance at December 31, 2015
|
|
$
|
9,854,400
|
|
|
|
|
|
|
Issuance of warrants
|
|
|
1,096,000
|
|
Change in value of warrant liability
|
|
|
14,681,311
|
|
Warrants exercised
|
|
|
(9,806,844
|
)
|
Warrants surrendered
|
|
|
(14,511,867
|
)
|
Balance at December 31, 2016
|
|
$
|
1,313,000
|
|
Foreign Currency Transactions
The Company's functional currency is the United States Dollar (the "U.S. Dollar"). Transactions denominated in currencies other than the U.S. Dollar are re-measured to the U.S. Dollar at the period-end exchange rates. Any associated transactional currency re-measurement gains and losses are recognized in current operations.
Revenue Recognition
The Company records revenue from sales in accordance with ASC 605,
Revenue Recognition
(“ASC 605”). The criteria for recognition are as follows:
|
1.
|
Persuasive evidence of an arrangement exists;
|
|
|
|
|
2.
|
Delivery has occurred or services have been rendered;
|
|
|
|
|
3.
|
The seller’s price to the buyer is fixed or determinable; and
|
|
|
|
|
4.
|
Collectability is reasonably assured.
|
Determination of criteria (3) and (4) will be based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments will be provided for in the same period the related sales are recorded.
The Company recorded customer acquisition costs totaling $1,287,500 during the year ended December 31, 2014. The Company entered into agreements with three new customers during this period. The capitalized balance of customer acquisition costs was $642,203 and $897,428 on December 31, 2016 and December 31, 2015, respectively. Amortization expense for the years ended December 31, 2016 and 2015 was $443,450 and $259,093, respectively.
In accordance with the terms of the its customer agreements, the Company made progress billings to four customers of $0 and $3,412,871 during the years ended December 31, 2016 and 2015, respectively, which relate to the future fabrication, delivery and installation of new equipment. During the years ended December 31, 2016 and 2015, three and nine projects totaling $2,699,051 and $6,939,412, respectively, were completed and recognized as revenue.
The Company generated revenues of $32,345,540 and $12,631,919 for the years ended December 31, 2016 and 2015, respectively. The Company generated revenue for the years ended December 31, 2016 and 2015 by (i) delivering product to its commercial customers, (ii) completing and commissioning equipment projects at commercial customer sites and (ii) 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.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, 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 includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s consolidated financial statements are based on a more-likely-than-not recognition threshold. The Company did not have any unrecognized tax benefits at December 31, 2016 or 2015. When necessary, the Company would accrue penalties and interest related to unrecognized tax benefits as a component of income tax expense.
The Company and its subsidiaries file a consolidated income tax return in the U.S. federal jurisdiction and three state jurisdictions. The Company is no longer subject to U.S. federal examinations for years prior to 2013 or state tax examinations for years prior to 2012.
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 December 31, 2016 or 2015, because the Company incurred net losses and basic and diluted losses per common share are the same.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk consist of cash and equivalents on deposit with financial institutions and accounts receivable. The Company’s cash as of December 31, 2016 is on deposit in a non-interest-bearing transaction account that is subject to FDIC deposit insurance limits. For each of the years ended December 31, 2016 and 2015, 100% of the Company’s revenue related to eight customers, respectively. At both December 31, 2016 and 2015, 100% of the Company’s accounts receivable related to six and five customers, respectively.
Contingencies
Certain conditions may exist which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in which case the guarantees would be disclosed.
Recently Issued Accounting Standards
In May, 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) Summary - The FASB has made available Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606. ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles-Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. 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.
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. We are currently assessing the impact this standard will have on the Company’s consolidated financial statements and required disclosures.
In April, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.
The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption of the amendments is permitted for financial statements that have not been previously issued. The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability). We have adopted this standard in the current presentation of the Company’s consolidated financial statements and required disclosures. By adopting this standard, the Company’s balance sheet presentation has changed as certain assets have been reclassified to a liability. The adoption does not alter the accounting for the amortization of debt issuance costs.
In November 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes. ASU 2015-17 is intended to simplify the presentation of deferred income taxes. Deferred tax liabilities and assets will be classified as noncurrent in a classified statement of financial position, and the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount remains the same. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. During 2016, we have implemented this new standard.
In June, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-11,
Inventory (Subtopic 330): Simplifying the measurement of Inventory.
The amendments in this ASU require inventory be measured at the lower of cost and net realizable value. For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently assessing the impact this standard will have on the Company’s consolidated financial statements and required disclosures.
In February, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-11,
Leases (Topic 842).
Under the new guidance, lessees will be required to recognize a lease liability and right-of-use asset at the commencement date for all leases, with the exception of short term leases.
For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We are currently assessing the impact this standard will have on the Company’s consolidated financial statements and required disclosures.
In March, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-09,
Stock Compensation (Topic 718).
This amendment is intended to improve and simplify the accounting for employee share-based payments including areas such as (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.. For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We are currently assessing the impact this standard will have on the Company’s consolidated financial statements and required disclosures.
Note 3 - Inventory
During the year ended December 31, 2014, the Company began the production of equipment to be sold to its customers. As of December 31, 2016 and 2015, respectively, costs totaling $0 and $2,219,476 respectively, were incurred for component purchases and progress billings from subcontractors on projects that have not yet been commissioned for use by our customers. These costs will be recorded as cost of sales at that time. The Company also held product supply inventory valued at $414,384 and $285,067 and other inventory valued at $194,688 and $211,370 as of December 31, 2016 and December 31, 2015, respectively.
Note 4 - Property and Equipment, Net
Property and equipment at December 31, 2016 and 2015 are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Equipment & Installation
|
|
$
|
1,823,594
|
|
|
$
|
1,159,298
|
|
Trucking equipment
|
|
|
926,614
|
|
|
|
743,605
|
|
Office equipment
|
|
|
27,155
|
|
|
|
27,155
|
|
Computer equipment and software
|
|
|
111,518
|
|
|
|
97,530
|
|
Total equipment
|
|
|
2,888,881
|
|
|
|
2,027,588
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(1,420,755
|
)
|
|
|
(956,887
|
)
|
Construction in process
|
|
|
1,101,228
|
|
|
|
172,749
|
|
Property and equipment, net
|
|
$
|
2,569,354
|
|
|
$
|
1,243,450
|
|
The Company uses the straight-line method of depreciation over 3 to 5 years. During the years ended December 31, 2016 and 2015, depreciation expense charged to operations was $463,868 and $125,853, respectively.
Note 5 - License Agreement
On January 15, 2009, the Company entered into an "Exclusive Patent and Know-How License Agreement Including Transfer of Ownership" with the Energy and Environmental Research Center Foundation, a non-profit entity (“EERCF”). Under the terms of the Agreement, the Company has been granted an exclusive license by EERCF for the technology to develop, make, have made, use, sell, offer to sell, lease, and import the technology in any coal-fired combustion systems (power plant) worldwide and to develop and perform the technology in any coal-fired power plant in the world. Amendments No. 4 and No. 5 to this agreement were made effective as of December 16, 2013 and August 14, 2014, respectively, expanding the number of patents covered, eliminated certain contract provisions and compliance issues and restructured the fee payments and buyout provisions while granting EERCF equity in the Company. This agreement now applies to 25 domestic and foreign patents and patent applications.
The Company paid EERCF $100,000 in 2009 for the license to use the patents and at the option of the Company can pay $2,500,000 and issue 875,000 shares of common stock for the assignment of the patents or pay the greater of the license maintenance fees or royalties on product sales for continued use of the patents. The license maintenance fees are $25,000 due monthly beginning in January 1, 2014 and continuing each month thereafter. The running royalties are $100 per one megawatt of electronic nameplate capacity and $100 per three megawatt per hour for the application to thermal systems to which licensed products or licensed processes are sold by the Company, associate and sublicensees. Running royalties are payable by the Company within 30 days after the end of each calendar year to the licensor and may be credited against license maintenance fees paid. There were no royalties due for 2015. For 2016, running royalties were $1,022,380 and $722,380 due to EERCF as of December 31, 2016.
The Company is required to pay EERCF 35% of all sublicense income received by the Company, excluding royalties on sales by sublicensees. Sublicense income is payable by the Company within 30 day after the end of each calendar year to the licensor. This requirement ends at the time the Company pays for the assignment of the patents. There was no sublicense income in 2016 or 2015.
License costs capitalized as of December 31, 2016 and 2015 are as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
License
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
Less: accumulated amortization
|
|
|
47,055
|
|
|
|
41,175
|
|
License, net
|
|
$
|
52,945
|
|
|
$
|
58,825
|
|
The Company is currently amortizing its license to use EERCF’s patents over their estimated useful life of 17 years when acquired. During the period ended December 31, 2016 and 2015, amortization expense charged to operations was $5,880 and $5,882, respectively. Estimated amortization for each of the next five years is approximately $5,900.
Note 6 – Notes Payable
The Company has the following notes payable outstanding as of December 31:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Unsecured convertible promissory notes which had an original term of three years, bear interest at 12% per annum, and are convertible into units, where each unit consists of: (i) one share of common stock of the Company, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock of the Company at an exercise price of $1.00 per share. The conversion ratio shall be equal to $0.75 per unit.
|
|
$
|
-
|
|
|
$
|
357,483
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible promissory notes which have a term of three years, bear interest at 12% per annum, and are convertible into units, where each unit consists of: (i) 1 share of common stock of the Company, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock of the Company at an exercise price of $0.75 per share. The initial conversion ratio shall be equal to $0.50 per unit.
|
|
|
-
|
|
|
|
735,293
|
|
|
|
|
|
|
|
|
|
|
Secured convertible promissory notes which mature on July 31, 2018, bear interest at 10% 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.
|
|
|
1,575,000
|
|
|
|
1,645,000
|
|
|
|
|
|
|
|
|
|
|
Secured convertible note which matures on July 31, 2018, bear interest at 12% per annum, and is convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share.
|
|
|
-
|
|
|
|
9,062,019
|
|
|
|
|
|
|
|
|
|
|
Secured promissory note which matures on June 15, 2018 and bears interest at 12% per annum.
|
|
|
2,646,686
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory note which matures on December 15, 2020, and bears interest at LIBOR + 500 per annum.
|
|
|
13,000,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable before discount
|
|
|
17,221,686
|
|
|
|
11,799,795
|
|
|
|
|
|
|
|
|
|
|
Less discounts
|
|
|
(2,587,519
|
)
|
|
|
(4,413,119
|
)
|
|
|
|
|
|
|
|
|
|
Less debt issuance costs
|
|
|
(313,344
|
)
|
|
|
(1,714,477
|
)
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
14,320,823
|
|
|
|
5,672,199
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
1,500,000
|
|
|
|
2,497,114
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net of current portion
|
|
$
|
12,820,823
|
|
|
$
|
3,175,085
|
|
As of December 31, 2016, scheduled principal payments due on convertible notes payable are as follows:
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2017
|
|
$
|
1,500,000
|
|
2018
|
|
|
4,075,000
|
|
2019
|
|
|
3,000,000
|
|
2020
|
|
|
8,646,686
|
|
|
|
$
|
17,221,686
|
|
From April 26, 2012 to January 24, 2013, the Company sold convertible notes to unaffiliated accredited investors totaling $2,675,244. The notes have a term of three years, bear interest at 12% per annum, and are convertible into units, where each unit consists of: (i) one share of common stock of the Issuer, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock of the Issuer at an exercise price of $1.25 per share. The initial conversion ratio shall be equal to $1.00 per unit. The notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. These securities were sold in reliance upon the exemption provided by Section 4(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Interest expense for the year ended December 31, 2016 and 2015, was $56,634 and $208,676, respectively.
During the year ended December 31, 2015, the Company and holders of these notes have entered into amendments which (i) extend the maturity dates by 12 months from their original maturity dates; (ii) reduce the conversion price from $1.00 to $0.50 per unit for a period of 45 days and $0.75 thereafter; and (iii) reduce the exercise of the warrant included in the unit from $1.25 to $1.00 per share. As of December 31, 2015, the holders of these notes totaling $3,112,883 converted their notes into equity of the Company. The Company has converted this balance and along with accrued interest of $124,352 into 6,474,717 shares of common stock and 1,618,680 warrants to purchase common stock. As of December 31, 2015, total principal of $357,483 was outstanding on these notes to the remaining note holders that did not convert. The Company recognized a non-cash inducement expense of $1,123,380 associated with these conversions as they took place during the initial 45 day period after the amendment, prior to the conversion rate resetting to $0.75.
During 2016 the Company issued 2,286,209 shares of common stock and 571,557 warrants to purchase shares of common stock upon the conversion of a note principal and accrued interest totaling $1,143,101, that bear interest at 12% per annum, and was convertible into units, where each unit consists of: (i) one share of common stock, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock at an exercise price of $0.75 per share with a conversion ratio equal to $0.50 per unit.
From April 5 through May 10, 2013, the Company sold convertible notes to unaffiliated accredited investors totaling $405,000. The notes have a term of three years, bear interest at 12% per annum, and are convertible into units, where each unit consists of: (i) 1 share of common stock of the Issuer, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock of the Issuer at an exercise price of $0.75 per share. The initial conversion ratio shall be equal to $0.50 per unit. The notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. These securities were sold in reliance upon the exemption provided by Section 4(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Interest expense for the years ended December 31, 2016 and 2015, was $56,487 and $60,707, respectively. As of December 31, 2016 and 2015, total principal of $0 and $520,625, respectively, was outstanding on these notes.
During 2016 the Company issued 1,216,701 shares of common stock and 304,177 warrants to purchase shares of common stock upon the conversion of a note principal and accrued interest totaling $608,349 that bear interest at 12% per annum, and was convertible into units, where each unit consists of: (i) one share of common stock, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock at an exercise price of $0.75 per share with a conversion ratio equal to $0.50 per unit.
On June 27 and June 30, 2013, the Company converted advances payable from related parties into convertible notes totaling $1,036,195. The notes have a term of three years, bear interest at 12% per annum, and are convertible into units, where each unit consists of: (i) 1 share of common stock of the Issuer, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock of the Issuer at an exercise price of $0.75 per share. The initial conversion ratio shall be equal to $0.50 per unit. The notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. These securities were issued in reliance upon the exemption provided by Section 4(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. . Interest expense for the years ended December 31, 2016 and 2015, was $22,738 and $25,031, respectively. As of December 31, 2016 and 2015, total principal of $0 and $214,668, respectively was outstanding on these notes.
During 2016 the Company issued 500,574 shares of common stock and 125,144 warrants to purchase shares of common stock upon the conversion of a note principal and accrued interest totaling $250,287 that bear interest at 12% per annum, and was convertible into units, where each unit consists of: (i) one share of common stock, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock at an exercise price of $0.75 per share with a conversion ratio equal to $0.50 per unit.
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 have a term of three years, 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. For each dollar invested, the investor received two warrants to purchase one shares of common stock of the Issuer at an exercise price of $0.75 per share. The notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. These securities were sold in reliance upon the exemption provided by Section 4(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Interest expense for the years ended December 31, 2016 and 2015, was $238,315 and $163,054, respectively. A discount on the notes payable of $841,342 was recorded based on the value of the warrants issued using a Black-Scholes options pricing model. Amortized interest expense for the years ended December 31, 2016 and 2015 on this discount was $152,959 and $152,541, respectively. As of December 31, 2016 and 2015, total principal of $1,575,000 and $1,645,000, respectively, was outstanding on these notes.
On August 14, 2014, the Company and its wholly-owned subsidiary MES, Inc. (“MES, and together with the Company, collectively the “Companies”) entered into a financing agreement (the “Financing Agreement”) with a newly created independent entity, AC Midwest Energy LLC (the “Lender”). Pursuant to the Financing Agreement, the Company borrowed $10,000,000 from the Lender, evidenced by a convertible note (the “Note”) maturing July 31, 2018, secured by all the assets of the Companies. All the indebtedness under the Note was convertible into common stock of the Company at $1.00 per share, subject to the following adjustments: (i) an adjustment of the price per share down to $0.75 per share if the Company fails to generate EBITDA (earnings before taxes, interest, depreciation and amortization) of at least $2,500,000 for calendar year 2015; and (ii) weighted average anti-dilution adjustments to the extent that following the issuance of the Note, the Company issues securities or rights to acquire securities at an effective purchase price below the conversion price for the Note, subject to carveouts for certain exempt issuances by the Company. Per an amendment to the Financing Agreement discussed below, the conversion price was adjusted to $0.50 per share and the adjustment to the price per share for failing to generate a certain level of EBITDA was eliminated.
The Note bears interest at 12% per annum, to be paid at the rate of: (i) 12% payment in kind or “PIK” for year one; (ii) 2% cash and 10% PIK for year two; and (iii) 12% all cash for years three and four. The PIK interest is paid by increasing the principal balance of the Note by the PIK amount. The Note is secured by the Company’s assets. The Note cannot be prepaid without the Lender’s consent before its second anniversary, and thereafter at 105% of the outstanding indebtedness evidenced by the Note, subject to the right of the Lender to convert the outstanding indebtedness to the Company’s common stock prior to prepayment. Principal amortization of the Note is to begin with the first quarter following the second year of the Note at the rate of 7.5% of the original principal amount per quarter and to continue each quarter thereafter, with all unpaid interest to be due at maturity. In the event of default, the interest rate on the Note will be increased by an additional 3% per annum. The Financing Agreement contains numerous affirmative obligations and negative covenants. Interest expense for the years ended December 31, 2016 and 2015 was $1,045,457 and $1,052,376, respectively. As of December 31, 2016 and 2015, total principal of $0 and $9,062,019, respectively, was outstanding on this note.
In connection with the issuance of the Note to Lender, the Company issued Lender a five year warrant (the “Warrant”) to purchase 12,500,000 shares of the Company’s common stock at $1.00 per share, subject to adjustments (See Note 14). The Company also paid Lender a fee of $100,000 for issuing the loan, reimbursed it $125,000 for its legal fees and costs associated with the transactions and compensated the Placement Agent for the transaction (Drexel Hamilton, LLC, “Drexel”) for the transaction with a cash fee of $350,000 and: (i) a 5-year warrant to purchase up to 800,000 shares of common stock at $1.00 per share; and (ii) a 5-year warrant to purchase up to 1,000,000 shares of common stock at $0.50 per share, both subject to adjustments similar to the Warrant issued to the Lender (See Note 12). The Company incurred legal fees and expenses of $169,000 associated with the transaction. The total transaction costs incurred in connection with the issuance of the Note were $1,999,169, including the warrants to Drexel which were valued at $1,251,200 in accordance with FASB ASC 815-10 as liabilities using a Monte Carlo Simulation Model (see Note 10). In connection with the issuance of the Amendment No. 2, the Company issued a five year warrant to the Lender to purchase up to 5,000,000 shares of common stock with an exercise price of $0.35 per share, subject to adjustments (See Note 12).
In connection with the Financing Agreement, the Lender also entered into an Investor/Registration Rights Agreement, dated as of August 14, 2014, pursuant to which the Lender received demand registration rights requiring the Company, at the direction of the Lender, to register the shares of common stock underlying the Note, the Warrant, and any 2013 Secured Notes purchased by the Lender (such underlying stock being collectively, the “Registrable Securities”) as well as certain veto rights. If: (i) the Company is delayed in getting the applicable registration statement(s) filed or declared effective, (ii) the sales of all of the Registrable Securities required to be registered (subject to certain permitted cutback requirements) cannot be made pursuant to the applicable registration statement(s), or (iii) the applicable registration statement(s) is not effective for any reason other than permitted exceptions, then the Investor/Registration Rights Agreement provides penalties, cumulatively capped at 2.5% of the original principal amount of the Note. The Investor/Registration Rights Agreement also provides that once the Note has been fully paid or converted, and for so long as the Lender continues to hold at least 10% of the issued and outstanding stock of the Company, the Lender’s approval is required before certain major actions may be taken by the Company.
On August 14, 2014, the Companies, the Lender, and each of the holders (“Holders”) of the 2013 Secured Notes entered into an Intercreditor Agreement. The Intercreditor Agreement provides that the Lender acts as the senior secured lender to the Company in all respects, save for where it chooses to liquidate the Collateral securing the Note, in which event the first net proceeds from liquidation of the Collateral, after all associated costs and expenses, are to be applied to retire the 2013 Secured Notes. Simultaneous with entering into the Intercreditor Agreement, the Note Agent entered into an allonge (“Allonge”) amending each of the 2013 Secured Notes in the following manner: (i) extension of the maturity date of all of the 2013 Secured Notes to July 31, 2018; (ii) elimination of the Company’s right to mandatorily convert the 2013 Secured Notes until any time after December 20, 2016, except in the event of a listing of the Company’s common stock on a national securities exchange, where the conversion of the 2013 Secured Notes is a condition preceding such listing and the Company has maintained a volume weighted average price per share of at least $1.25 for the 20 consecutive trading days prior to the conversion and subject to average volume of at least 50,000 shares per day; (iii) issuance of a “springing warrant” in the event of Lender’s exercise of its purchase option to purchase the 2013 Secured Notes, to be issued as of the date of such purchase, in an amount equal to the number of shares that could have been purchased were the 2013 Secured Notes to have been exercised on such date at .50 cents per share and to run until the later of the original maturity date of the applicable note in question or two years following the date of the issuance of the warrant.
On March 16, 2015, the Company entered into a Waiver and Amendment to Financing Agreement, and Reaffirmation of Guaranty with AC Midwest Energy, LLC (“Amendment”). This Amendment decreased the conversion price of the convertible note and exercise price of the outstanding warrants to $0.50, respectively. The Company repaid $3,000,000 of outstanding principal on the convertible note as of the close of the Amendment. The Company agreed to new financial covenants as part of the Amendment, which included a waiver for the compliance of certain covenants in the periods prior to the date of the Amendment. In connection with change in the conversion terms and repayment of principal, the Company incurred a loss of $2,246,105 which was primarily related to accelerated amortization of the discount on convertible notes payable and is included in interest expense.
On November 16, 2015, the Companies entered into Waiver and Amendment No. 2 to Financing Agreement, and Reaffirmation of Guaranty (the “Amendment No. 2”) with the Lender. Pursuant to Amendment No. 2, the Company issued a new Senior Secured Convertible Note of $600,000 (“First New Note”) purchased by the Lender. In addition, Amendment No. 2 allows for two additional Senior Secured Convertible Notes totaling up to $1,400,000 (which together with the First New Note are referred to herein as the “New Notes”) to be purchased by Lender during 2016 subject to certain conditions being met by both parties. All the indebtedness under the New Notes shall be convertible into common stock of the Company at $0.50 per share, subject to weighted average anti-dilution adjustments to the extent that following the issuance of the New Notes, the Company issues securities or rights to acquire securities at an effective purchase price below the conversion price for the New Notes. As of January 31, 2016, the Company’s right to sell one additional New Note for $400,000 expired. In connection to Amendment No. 2, the Company owed Drexel approximately 200,000 warrants and $21,000 as compensation for services rendered. This liability was settled with an amendment to the engagement letter with Drexel on February 19, 2016 and (see Note 16). These warrants were valued in accordance with FASB ASC 815-10 as liabilities using a Monte Carlo Simulation Model. The fair value of the warrant liability on the issuance date for the warrants to be issued was $55,200. These costs were recorded as debt issuance costs.
On January 28, 2016, the Companies entered into Amendment No. 3 to Financing Agreement and Reaffirmation of Guaranty (the "Third Amended Financing Agreement") with Lender, pursuant to which Lender agreed to cause its bank to arrange for the issuance to a certain customer of the Company a standby letter of credit in the amount of $2,000,000 (the "Letter of Credit") to permit the Company to enter into a contract for mercury capture program with such customer. The Letter of Credit is to guarantee the Company's performance under its contract with such customer. Under the Third Amended Financing Agreement, and in consideration for the issuance of the Letter of Credit for the benefit of the Company, the Company shall pay AC Midwest a fee equal to 12.0% per annum of the amount available to be drawn under the Letter of Credit payable on the last day of each calendar month. No amounts were received on this letter of credit as of December 31, 2016. Fee expense for the years ended December 31, 2016 and 2015 was $226,000 and $0, respectively.
On November 1, 2016, the Companies entered into an Amended and Restated Financing Agreement (the “Restated Financing Agreement”) with AC Midwest, pursuant to which AC Midwest, which holds various warrants to acquire shares of the Company’s common stock (the “AC Midwest Warrants”), will exercise on a cashless basis a portion of the AC Midwest Warrants for 10,000,000 shares of the Company’s common stock and exchange the AC Midwest Notes, together with all accrued and unpaid interest thereon, and the remaining unexercised portion of the AC Midwest Warrants, for (i) a new senior secured note in the principal amount of $9,646,686 (the “New AC Midwest Secured Note”), and (ii) a subordinated unsecured note in the principal amount of $13,000,000 (the “AC Midwest Subordinated Note”). The completion of the transactions contemplated by the Restated Financing Agreement are subject to various conditions including but not limited to the closing by the Company of an equity offering raising at least $10.0 million of gross proceeds prior to December 31, 2016.
On November 29, 2016, the Companies closed on the transactions contemplated by the Restated Financing Agreement. The Company recorded a gain of $406,791 on these transactions which is primarily related to the elimination of the warrant liability associated with the unexercised AC Midwest Warrants and is offset by the accelerated amortization of the discount and debt issuance costs associated with the AC Midwest Notes.
New AC Midwest Secured Note
The New AC Midwest Secured Note, which will mature on December 15, 2018 and be guaranteed by MES, is non-convertible and will bear interest at a rate of 12.0% per annum, payable quarterly in arrears on or before the last day of each fiscal quarter beginning December 31, 2016. Commencing on June 15, 2017 and continuing on each September 15, December 15, March 15 and June 15 thereafter, the Company shall pay principal on the New AC Midwest Secured Note in equal installments of (i) $500,000 per quarter for the 2017 calendar year, (ii) $625,000 per quarter for the 2018 calendar year, and (iii) thereafter $750,000 per quarter, with a final payment of all outstanding principal together with such other amounts as shall then be due and owing from the Company to AC Midwest under the New AC Midwest Secured Note on the maturity date. The New AC Midwest Secured Note will be secured, like the AC Midwest Notes which will be exchanged and cancelled, by all of the assets of the Companies. Interest expense for the years ended December 31, 2016 and 2015 was $35,114 and $0, respectively. As of December 31, 2016 and 2015, total principal of $2,646,686 and $0, respectively, was outstanding on this note.
AC Midwest Subordinated Note
The AC Midwest Subordinated Note, which will mature on December 15, 2020 and be guaranteed by MES, is non-convertible and will bear interest equal to the three-month LIBOR rate plus 5.0% per annum, payable quarterly on or before the last day of each fiscal quarter beginning December 31, 2016. The interest rate shall be subject to adjustment each quarter based on the then current LIBOR rate. Commencing on June 15, 2017 and continuing on each September 15, December 15, March 15 and June 15 thereafter, the Company shall pay principal on the AC Midwest Subordinated Note in equal installments of (i) $500,000 per quarter for the 2017 calendar year, (ii) $625,000 per quarter for the 2018 calendar year, and (iii) thereafter $750,000 per quarter, with a final payment of all outstanding principal together with such other amounts as shall then be due and owing from the Company to AC Midwest on the maturity date. Notwithstanding the foregoing, until the New AC Midwest Secured Note and LC Note are paid in full, AC Midwest will not be entitled to receive any payment on account of the AC Midwest Subordinated Note (other than regularly scheduled interest payments). Interest expense for the years ended December 31, 2016 and 2015 was $71,058 and $0, respectively. As of December 31, 2016 and 2015, total principal of $13,000,000 and $0, respectively, was outstanding on this note. 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 $2,400,000 should be recorded. This discount is based on an applicable market rate for unsecured debt for the Company of 15% and will be amortized as interested expense over the life of the loan. Amortized discount recorded as interest expense for the years ended December 31, 2016 and 2015 was $53,622 and $0, respectively.
Note 7 – Equipment Notes Payable
|
|
2016
|
|
|
2015
|
|
On September 30, 2015, the Company entered into a retail installment purchase contract in the amount of $57,007, secured by a 2016 Dodge Ram 5500 purchased on that date. This installment loan bears interest at a fixed rate of 4.22% and the Company shall make 60 monthly payments of $1,056 beginning October 30, 2015.
|
|
$
|
43,860
|
|
|
$
|
54,433
|
|
|
|
|
|
|
|
|
|
|
On December 15, 2015, the Company entered into a retail installment purchase contract in the amount of $56,711, secured by a 2016 Dodge Ram 5500 purchased on that date. This installment loan bears interest at a fixed rate of 4.22% and the Company shall make 60 monthly payments of $1,050 beginning January 15, 2016.
|
|
|
46,304
|
|
|
|
56,711
|
|
|
|
|
|
|
|
|
|
|
On March 8, 2016, the Company entered into a retail installment purchase contract in the amount of $46,492, secured by a 2016 Dodge Ram 2500 purchased on that date. This installment loan bears interest at a fixed rate of 5.62% and the Company shall make 72 monthly payments of $764 beginning April 8, 2016.
|
|
|
41,483
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On May 26, 2016, the Company entered into a retail installment purchase contract in the amount of $56,936, secured by a 2016 Dodge Ram 5500 purchased on that date. This installment loan bears interest at a fixed rate of 4.89% and the Company shall make 60 monthly payments of $1,072 beginning June 26, 2016.
|
|
|
50,987
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total equipment notes payable
|
|
|
182,634
|
|
|
|
111,144
|
|
|
|
|
|
|
|
|
|
|
Less Current Portion
|
|
|
39,499
|
|
|
|
20,979
|
|
|
|
|
|
|
|
|
|
|
Equipment notes payable, net of current portion
|
|
$
|
143,135
|
|
|
$
|
90,165
|
|
As of December 31, 2016, scheduled principal payments due on convertible notes payable are as follows:
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
40,000
|
|
|
|
|
|
2018
|
|
|
41,000
|
|
|
|
|
|
2019
|
|
|
43,000
|
|
|
|
|
|
2020
|
|
|
42,000
|
|
|
|
|
|
2021
|
|
|
14,000
|
|
|
|
|
|
2022
|
|
|
2,000
|
|
|
|
|
|
|
|
$
|
182,000
|
|
|
|
|
|
Note 8 – Warrant Liability
On August 14, 2014, Company issued the Lender a warrant to purchase 12,500,000 shares of the Company’s common stock at $1.00 per share, subject to the adjustments (see Note 14 for changes to the terms of these warrants). These warrants were valued in accordance with FASB ASC 815-10 as liabilities using a Monte Carlo Simulation Model. The fair value of the warrant liability on the issuance date for all warrants issued was $9,801,200. As of December 31, 2015, pursuant to a new valuation performed in accordance with FASB ASC 815-10, the total value of these warrants was adjusted to $6,754,000 and a loss for the change in value of the liability of $1,944,779 was recognized. As of November 28, 2016, pursuant to a new valuation performed in accordance with FASB ASC 815-10, the total value of these warrants was adjusted to $15,420,000 and a loss for the change in value of the liability of $8,666,000 was recognized. On November 29, 2016 the liability was relieved upon the exercise and surrender of all shares associated with this warrant (See Note 6). The significant assumptions considered by the model were the remaining term of the warrants, operational forecasts provided by the Company, a risk free treasury rate for 1.38% and 1.76% and an expected volatility rate of 102.4% and 85.8% at November 28, 2016 and December 31, 2015, respectively.
On August 14, 2014, the Company also issued to Drexel: (i) a 5-year warrant to purchase up to 800,000 shares of common stock at $1.00 per share; and (ii) a 5-year warrant to purchase up to 1,000,000 shares of common stock at $0.50 per share, both subject to adjustments similar to the Warrant issued to the Lender (see Note 14 for changes to the terms of these warrants). These warrants were valued in accordance with FASB ASC 815-10 as liabilities using a Monte Carlo Simulation Model. The fair value of the warrant liability on the issuance date for the warrants issued to Drexel were valued at $1,251,200 and were recorded as transaction costs associated with Financing Agreement. As of December 31, 2015, pursuant to a new valuation performed in accordance with FASB ASC 815-10, the total value of these warrants was adjusted to $1,118,000 and a loss for the change in value of the liability of $330,210 was recognized. During 2016, 1,060,929 of these warrants were exercised and $1,474,336 was recorded as paid in capital for the shares issued. As of December 31, 2016, pursuant to a new valuation performed in accordance with FASB ASC 815-10, the total value of the remaining 936,164 warrants was adjusted to $1,067,000 and a loss for the change in value of the liability of $ 1,423,336 was recognized. The significant assumptions considered by the model were the remaining term of the warrants, operational forecasts provided by the Company, a risk free treasury rate for 1.47% and 1.76% and an expected volatility rate of 112.2% and 85.8% at December 31, 2016 and 2015, respectively.
On November 16, 2015, Company issued the Lender a contingent warrant to purchase up to 5,000,000 shares of the Company’s common stock at $0.35 per share, subject to adjustments, which warrant shall be immediately exercisable for 3,600,000 shares with the balance of 1,400,000 shares exercisable proportionately to such additional Senior Convertible Notes up to $1,400,000 purchased by the Lender (see Note 14 for the terms of these warrants). These warrants were valued in accordance with FASB ASC 815-10 as liabilities using a Monte Carlo Simulation Model. The fair value of the warrant liability on the issuance date for all warrants issued was $1,008,000. $840,000 of this amount was considered a waiver fee and was recorded as a settlement charge. $168,000 was recorded as a discount on notes payable. As of December 31, 2015, per a new valuation performed in accordance with FASB ASC 815-10, the total value of these warrants was adjusted to $1,872,000 and a loss for the change in value of the liability of $864,000 was recognized. As of November 28, 2016, pursuant to a new valuation performed in accordance with FASB ASC 815-10, the total value of these warrants was adjusted to $4,680,000 and a loss for the change in value of the liability of $2,808,000 was recognized. On November 29, 2016 the liability was relieved upon the exercise and surrender of all shares associated with this warrant (See Note 6).
On January 28, 2016, in consideration for the issuance of the Letter of Credit, the Company has agreed to issue to Lender (i) a five year warrant to purchase 2,000,000 shares of common stock at an exercise price of $0.35 per share of common stock (the “Third Warrant”), and (ii) a Senior Secured Letter of Credit Note (the “LC Note”) to evidence any indebtedness owed by the Company arising from any draws made under the Letter of Credit. The Third Warrant shall be subject to certain anti-dilution adjustments including percentage based anti-dilution protection requiring that the aggregate number of shares of common stock purchasable upon its initial exercise not be less than an amount equal to 7.2% of the Company’s then outstanding shares of capital stock on a fully diluted basis. These warrants were valued in accordance with FASB ASC 815-10 as liabilities using a Monte Carlo Simulation Model. The fair value of the warrant liability on the issuance date for all warrants issued was $1,040,000. As of November 28, 2016, pursuant to a new valuation performed in accordance with FASB ASC 815-10, the total value of these warrants was adjusted to $2,620,000 and a loss for the change in value of the liability of $1,580,000 was recognized. On November 29, 2016 the liability was relieved upon the exercise and surrender of all shares associated with this warrant (See Note 6).
On February 19, 2016, in connection to Amendment No. 2 and Amendment No. 3, the Company issued Drexel: a 5-year warrant to purchase up to 300,000 shares of common stock at $0.35 per share as compensation for services rendered. 200,000 of these warrants were valued in accordance with FASB ASC 815-10 as liabilities using a Monte Carlo Simulation Model as of November 16, 2015. The fair value of the warrant liability on the issuance date for the warrants to be issued was $55,200 which was recorded as debt issuance costs. As of December 31, 2015, per a new valuation performed in accordance with FASB ASC 815-10, the total value of these warrants was adjusted to $110,400 and a loss for the change in value of the liability of $55,200 was recognized. 100,000 of these warrants were valued in accordance with FASB ASC 815-10 as liabilities using a Monte Carlo Simulation Model as of January 28, 2016. The fair value of the warrant liability on the issuance date for the warrants to be issued was $56,000 which was recorded as warrant issuance costs. During 2016, 95,000 of these warrants were exercised and $124,375 was recorded as paid in capital for the shares issued. As of December 31, 2016, pursuant to a new valuation performed in accordance with FASB ASC 815-10, the total value of the remaining 205,000 warrants was adjusted to $246,000 and a loss for the change in value of the liability of $203,975 was recognized.
Note 9 – Commitments and Contingencies
As discussed in Note 6, the Company has entered in an “Exclusive Patent and Know-How License Agreement Including Transfer of Ownership” that requires minimum license maintenance costs. The Company is planning on using the intellectual property granted by the patents for the foreseeable future. The license agreement is considered expired on October 14, 2025, the date the patent expires. Future minimum maintenance fee payments are as follows:
For the year ended December 31
|
|
|
|
2017
|
|
$
|
300,000
|
|
2018
|
|
|
300,000
|
|
2019
|
|
|
300,000
|
|
2020
|
|
|
300,000
|
|
2021
|
|
|
300,000
|
|
Thereafter
|
|
|
1,150,000
|
|
|
|
$
|
2,650,000
|
|
The Company has the option to pay $2,500,000 and issue 925,000 shares of common stock for the assignment of the patents, and upon doing so, the requirement to make minimum license maintenance costs ends. The Company expects to purchase the patent rights in early 2017, which will eliminate ongoing license maintenance and royalty fee payments once closed.
Property Leases
On June 1, 2011, the Company entered into a 36 month lease for warehouse space in Centralia, Washington, commencing August 1, 2011. The Company continues to lease this space on a month to month basis under the same terms of the original lease. Rent is $1,900 monthly throughout the term of the lease.
On January 27, 2015, the Company entered into a 13-month lease for office space in Lewis Center, Ohio, commencing February 1, 2015. The lease provides for the option to extend the lease for up to five additional years. Rent was abated for the first month of the lease. To date, the lease has been extended twice through February 2018. Monthly rent is $1,386 through February 2018.
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 and is waived from July 1, 2016 through September 30, 2016.
On September 1, 2015, the Company entered into a three year lease for office space in Grand Forks, North Dakota. Rent is $3,500 monthly for the first year and decreases to $2,500 throughout the remainder of the term of the lease.
Future minimum lease payments under these non-cancelable leases are approximately as follows:
For the year ended December 31,
|
|
|
|
2017
|
|
$
|
78,000
|
|
2018
|
|
|
65,000
|
|
2019
|
|
|
45,000
|
|
2020
|
|
|
22,500
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
210,500
|
|
Rent expense was approximately $130,000 and $135,000 for the years ended December 31, 2016 and 2015, respectively.
Fixed Price Contract
The Company’s multi-year contracts with its commercial customers contain fixed prices for product. These contracts expire through 2019 and expose the Company to the potential risks associated with rising material costs during that same period.
Legal proceedings
The Company is involved in various claims and legal proceedings arising from the normal course of business. While the ultimate liability, if any, from these proceedings is presently indeterminable, in the opinion of management, these matters should not have a material adverse effect on the Company’s consolidated financial statements.
Note 10 – Equity
The Company was established with two classes of stock, common stock – 150,000,000 shares authorized at a par value of $0.001 and preferred stock – 2,000,000 shares authorized at a par value of $0.001.
Common Stock
On January 1, 2015, the Company issued 170,500 shares of common stock to the holders of notes which mature in 2018, bearing interest at 10% 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, as payment for accrued interest due as of December 31, 2014.
On January 30, 2015, the Company issued 20,161 shares of common stock upon the conversion of a note with principal totaling $10,000 and accrued interest of $81, that bears interest at 10% per annum, and was convertible into one share of common stock, par value $0.001 per share, with a conversion ratio equal to $0.50 per share.
On February 20, 2015, the Company issued 32,604 shares of common stock and 8,151 warrants to purchase shares of common stock upon the conversion of a note principal and accrued interest totaling $32,603, that bear interest at 12% per annum, and was convertible into units, where each unit consists of: (i) one share of common stock, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock at an exercise price of $1.25 per share with a conversion ratio equal to $1.00 per unit.
From April 28, 2015 through September 30, 2015, the Company issued 6,474,703 shares of common stock and 1,618,680 warrants to purchase shares of common stock upon the conversion of a note principal and accrued interest totaling $3,237,370, that bear interest at 12% per annum, and was convertible into units, where each unit consists of: (i) one share of common stock, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock at an exercise price of $1.00 per share with a conversion ratio equal to $0.50 per unit. The Company recognized a non-cash inducement expense of $1,123,380 associated with these conversions as they took place during the initial 45 day period after the amendment, prior to the conversion rate resetting to $0.75.
On May 8, 2015, the Company issued 103,527 shares of common stock upon the conversion of a note with principal totaling $50,000 and accrued interest of $1,764, that bears interest at 10% per annum, and was convertible into one share of common stock, par value $0.001 per share, with a conversion ratio equal to $0.50 per share.
On July 1, 2015, the Company issued 164,500 shares of common stock to the holders of notes which mature in 2018, bear interest at 10% 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, as payment for accrued interest due as of June 30, 2015.
On January 1, 2016, the Company issued 164,500 shares of common stock to the holders of notes with a term of three years, bear interest at 10% 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, as payment for accrued interest due as of December 31, 2015.
On July 1, 2016, the Company issued 164,500 shares of common stock to the holders of notes with a term of three years, bear interest at 10% 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, as payment for accrued interest due as of June 30, 2015.
On August 3, 2016, the Company issued 15,181 shares of common stock upon the cashless exercise of warrants to purchase 22,458 shares of common stock for $0.35 per share based on a market value of $1.08 per share as determined under the terms of the warrant.
On August 10, 2016, the Company issued 30,361 shares of common stock upon the cashless exercise of warrants to purchase 44,917 shares of common stock for $0.35 per share based on a market value of $1.08 per share as determined under the terms of the warrant.
From August 22, 2016 through August 30, 2016 the Company issued 307,572 shares of common stock and 76,893 warrants to purchase shares of common stock upon the conversion of a note principal and accrued interest totaling $153,786, that bear interest at 12% per annum, and was convertible into units, where each unit consists of: (i) one share of common stock, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock at an exercise price of $0.75 per share with a conversion ratio equal to $0.50 per unit.
On August 23, 2016, the Company issued 40,577 shares of common stock upon the conversion of a note with principal and accrued interest totaling $20,289, that bears interest at 10% per annum, and was convertible into one share of common stock, par value $0.001 per share, with a conversion ratio equal to $0.50 per share.
On September 15, 2016, the Company issued 636,064 shares of common stock upon the cashless exercise of warrants to purchase 791,744 shares of common stock for $0.35 per share based on a market value of $1.78 per share as determined under the terms of the warrant.
On September 15, 2016, the Company issued 416,836 shares of common stock upon the cashless exercise of warrants to purchase 570,750 shares of common stock for $0.48 per share based on a market value of $1.78 per share as determined under the terms of the warrant.
On September 15, 2016, the Company issued 160,674 shares of common stock upon the cashless exercise of warrants to purchase 200,000 shares of common stock for $0.35 per share based on a market value of $1.78 per share as determined under the terms of the warrant.
On September 22, 2016, the Company issued 130,207 shares of common stock upon the cashless exercise of warrants to purchase 165,810 shares of common stock for $0.35 per share based on a market value of $1.78 per share as determined under the terms of the warrant.
On September 27, 2016, the Company issued 10,305 shares of common stock upon the exercise of warrants to purchase shares of common stock for $1.00.
On September 29, 2016, the Company issued 21,402 shares of common stock upon the exercise of warrants to purchase shares of common stock for $0.75.
On October 21, 2016, the Company issued 11,445 shares of common stock upon the exercise of warrants to purchase shares of common stock for $1.00.
On October 24, 2016 the Company issued 2,286,209 shares of common stock and 571,557 warrants to purchase shares of common stock upon the conversion of a note principal and accrued interest totaling $1,143,101, that bear interest at 12% per annum, and was convertible into units, where each unit consists of: (i) one share of common stock, par value $0.001 per share, and (ii) a warrant to purchase 0.25 shares of common stock at an exercise price of $0.75 per share with a conversion ratio equal to $0.50 per unit.
On November 2, 2016, the Company issued 38,651 shares of common stock upon the cashless exercise of options to purchase 50,000 shares of common stock for $0.37 per share based on a market value of $1.63 per share as determined under the terms of the option.
On November 3, 2016, the Company issued 54,783 shares of common stock upon the cashless exercise of warrants to purchase 70,000 shares of common stock for $0.35 per share based on a market value of $1.61 per share as determined under the terms of the warrant.
On November 7, 2016, the Company issued 103,500 shares of common stock upon the conversion of a note with principal and accrued interest totaling $51,750, that bears interest at 10% per annum, and was convertible into one share of common stock, par value $0.001 per share, with a conversion ratio equal to $0.50 per share.
On November 14, 2016, the Company issued 39,118 shares of common stock upon the cashless exercise of options to purchase 50,000 shares of common stock for $0.37 per share based on a market value of $1.70 per share as determined under the terms of the option.
On November 14, 2016, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with certain institutional and accredited investors (the “Investors”) pursuant to which the Company has agreed to sell an aggregate of 11,214,968 shares of its common stock at a price of $1.20 per share (the “Private Placement”) to the Investors for gross proceeds to the Company of $13,457,961.60. The closing of the Private Placement was subject to certain customary closing conditions and closed on November 17, 2016. On December 23, 2016, the Company filed a “resale” registration statement with the Securities and Exchange Commission (the “SEC”) covering all shares of common stock sold in the Private Placement, which was declared effective by the SEC on January 10, 2017. Oppenheimer & Co. Inc. (“Oppenheimer”) acted as the lead placement agent in the Private Placement and Feltl and Company has acted as co-placement agent in the Private Placement in consideration for which they received an aggregate cash fee of 8.0% of the gross proceeds. On November 29, 2016, Oppenheimer also received 100,000 shares of the Company’s common stock as part of its fee. The shares are being issued pursuant to the exemption from the registration requirements of the Securities Act 1933, as amended (the “1933 Act”), provided under Section 4(a)(2) thereof and pursuant to Rule 506 of Regulation D only to “accredited investors” (as defined under Rule 501(a) of the 1933 Act) based in part on the representations and warranties of the Investors.
On December 2, 2016, the Company issued 19,531 shares of common stock upon the cashless exercise of warrants to purchase 25,000 shares of common stock for $0.35 per share based on a market value of $1.60 per share as determined under the terms of the warrant.
On December 5, 2016, the Company issued 27,600 shares of common stock upon the cashless exercise of warrants to purchase 36,000 shares of common stock for $0.35 per share based on a market value of $1.50 per share as determined under the terms of the warrant.
On December 6, 2016, the Company issued 4,714 shares of common stock upon the cashless exercise of warrants to purchase 7,000 shares of common stock for $0.48 per share based on a market value of $1.47 per share as determined under the terms of the warrant.
On December 6, 2016, the Company issued 77,707 shares of common stock upon the cashless exercise of warrants to purchase 100,000 shares of common stock for $0.35 per share based on a market value of $1.57 per share as determined under the terms of the warrant.
On December 6, 2016, the Company issued 107,762 shares of common stock upon the cashless exercise of warrants to purchase 140,000 shares of common stock for $0.35 per share based on a market value of $1.52 per share as determined under the terms of the warrant.
On December 6, 2016, the Company issued 29,726 shares of common stock upon the exercise of warrants to purchase shares of common stock for $0.35.
On December 12, 2016, the Company issued 48,632 shares of common stock upon the exercise of warrants to purchase shares of common stock for $0.35.
On December 19, 2016, the Company issued 53,020 shares of common stock upon the cashless exercise of warrants to purchase 68,084 shares of common stock for $0.35 per share based on a market value of $1.582 per share as determined under the terms of the warrant.