ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES
Index to Financial Information
Year Ended December 31, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Midwest Energy Emissions Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Midwest Energy Emissions Corporation (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the years in the two-year period ended December 31, 2017 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Midwest Energy Emissions Corporation as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt Regarding Going Concern
As disclosed in Note 3 to the financial statements, the Company has experienced a net loss, and has an accumulated deficit of $46,667,000. The Company has convertible notes maturing during 2018 of $1,550,000 and current principal payments due in 2018 on outstanding promissory notes of $2,550,000. These matters raise substantial doubt regarding the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3 to the financial statements. The financial statements do not include any adjustments related to the outcome of this uncertainty.
Change in Accounting Principle – Early Adoption of Provisions in ASU 2017-11
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for the classification of certain liability-classified financial instruments with down round features in 2017 and 2016 due to the adoption of Accounting Standards Update (“ASU”) 2017-11,
“Earning Per Share (Topic 260) ; Distinguishing Liabilities from Equity (Topic 480) ; Derivatives and Hedging (Topic 815)
.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2011.
/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
April 17, 2018
MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
DECEMBER 31, 2017 AND 2016
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
(Restated)
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,418,427
|
|
|
$
|
7,751,557
|
|
Accounts receivable
|
|
|
2,931,353
|
|
|
|
3,553,096
|
|
Inventory
|
|
|
659,579
|
|
|
|
609,072
|
|
Prepaid expenses and other assets
|
|
|
210,535
|
|
|
|
199,495
|
|
Total current assets
|
|
|
6,219,894
|
|
|
|
12,113,220
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,728,993
|
|
|
|
2,569,354
|
|
Deferred tax asset
|
|
|
-
|
|
|
|
500,000
|
|
Intellectual property, net
|
|
|
2,934,862
|
|
|
|
52,945
|
|
Customer acquisition costs, net
|
|
|
172,333
|
|
|
|
642,203
|
|
Total assets
|
|
$
|
12,056,082
|
|
|
$
|
15,877,722
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,795,703
|
|
|
$
|
4,363,553
|
|
Current portion of notes payable
|
|
|
2,500,000
|
|
|
|
1,500,000
|
|
Current portion of convertible notes payable, net
|
|
|
1,461,417
|
|
|
|
-
|
|
Current portion of equipment notes payable
|
|
|
61,177
|
|
|
|
39,499
|
|
Customer credits
|
|
|
167,000
|
|
|
|
590,206
|
|
Accrued interest
|
|
|
77,500
|
|
|
|
78,750
|
|
Deferred revenue
|
|
|
517,060
|
|
|
|
-
|
|
Total current liabilities
|
|
|
6,579,857
|
|
|
|
6,572,008
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net of discount and issuance costs
|
|
|
9,733,361
|
|
|
|
11,678,669
|
|
Convertible notes payable, net of discount and issuance costs
|
|
|
-
|
|
|
|
1,142,154
|
|
Equipment notes payable
|
|
|
167,650
|
|
|
|
143,135
|
|
Total liabilities
|
|
|
16,480,868
|
|
|
|
19,535,966
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value: 2,000,000 shares authorized
|
|
|
-
|
|
|
|
-
|
|
Common stock; $.001 par value; 150,000,000 shares authorized; 76,246,113 shares issued and outstanding as of December 31, 2017 73,509,663 shares issued and outstanding as of December 31, 2016
|
|
|
76,246
|
|
|
|
73,510
|
|
Additional paid-in capital
|
|
|
42,165,620
|
|
|
|
40,031,625
|
|
Accumulated deficit
|
|
|
(46,666,652
|
)
|
|
|
(43,763,379
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' deficit
|
|
|
(4,424,786
|
)
|
|
|
(3,658,244
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' deficit
|
|
$
|
12,056,082
|
|
|
$
|
15,877,722
|
|
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, 2017 AND 2016
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Product sales
|
|
$
|
26,050,032
|
|
|
$
|
28,920,051
|
|
Equipment sales
|
|
|
794,206
|
|
|
|
2,699,051
|
|
Demonstrations and consulting services
|
|
|
654,842
|
|
|
|
726,438
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
27,499,080
|
|
|
|
32,345,540
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
19,016,932
|
|
|
|
23,030,404
|
|
Selling, general and administrative expenses
|
|
|
8,471,096
|
|
|
|
7,257,445
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
27,488,028
|
|
|
|
30,287,849
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
11,052
|
|
|
|
2,057,691
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,154,570
|
)
|
|
|
(3,816,855
|
)
|
Letter of credit fees
|
|
|
(219,333
|
)
|
|
|
(226,000
|
)
|
Loss on debt restructuring
|
|
|
-
|
|
|
|
(14,105,076
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(2,373,903
|
)
|
|
|
(18,147,931
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before taxes
|
|
|
(2,362,851
|
)
|
|
|
(16,090,240
|
)
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
|
(540,422
|
)
|
|
|
472,669
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,903,273
|
)
|
|
$
|
(15,617,571
|
)
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.03
|
)
|
|
$
|
(0.32
|
)
|
Net loss per common share - basic and diluted:
|
|
$
|
(0.03
|
)
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
75,061,800
|
|
|
|
50,646,328
|
|
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, 2017 AND 2016
|
(RESTATED)
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2015
|
|
|
47,194,118
|
|
|
$
|
47,194
|
|
|
$
|
25,008,016
|
|
|
$
|
(28,145,808
|
)
|
|
$
|
(3,090,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
(11,734
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,617,571
|
)
|
|
|
(15,617,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016
|
|
|
73,509,663
|
|
|
$
|
73,510
|
|
|
$
|
40,031,625
|
|
|
$
|
(43,763,379
|
)
|
|
$
|
(3,658,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon debt conversion
|
|
|
51,236
|
|
|
|
51
|
|
|
|
25,567
|
|
|
|
-
|
|
|
|
25,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon cashless warrant exercise
|
|
|
630,214
|
|
|
|
630
|
|
|
|
(630
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for the acquisition of patents rights
|
|
|
925,000
|
|
|
|
925
|
|
|
|
517,075
|
|
|
|
-
|
|
|
|
518,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued to non-employees
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
230,250
|
|
|
|
-
|
|
|
|
231,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued per settlement agreement
|
|
|
130,000
|
|
|
|
130
|
|
|
|
60,970
|
|
|
|
-
|
|
|
|
61,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-issuance of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
17,922
|
|
|
|
-
|
|
|
|
17,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,282,841
|
|
|
|
-
|
|
|
|
1,282,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,903,273
|
)
|
|
|
(2,903,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,246,113
|
|
|
$
|
76,246
|
|
|
$
|
42,165,620
|
|
|
$
|
(46,666,652
|
)
|
|
$
|
(4,424,786
|
)
|
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, 2017 AND 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,
2017
|
|
|
For the Year
Ended
December 31,
2016
|
|
|
|
|
|
|
(Restated)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,903,273
|
)
|
|
$
|
(15,617,571
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
1,532,013
|
|
|
|
1,158,617
|
|
Amortization of license fees
|
|
|
1,950
|
|
|
|
5,880
|
|
Amortization of patent rights
|
|
|
134,133
|
|
|
|
-
|
|
Amortization of discount of notes payable
|
|
|
745,652
|
|
|
|
1,625,808
|
|
Amortization of debt issuance costs
|
|
|
153,303
|
|
|
|
619,524
|
|
Amortization of customer acquisition costs
|
|
|
469,870
|
|
|
|
443,450
|
|
Depreciation expense
|
|
|
748,020
|
|
|
|
463,868
|
|
Deferred tax benefit
|
|
|
500,000
|
|
|
|
(500,000
|
)
|
Noncash financing expenses
|
|
|
-
|
|
|
|
29,000
|
|
Loss on debt restructuring
|
|
|
-
|
|
|
|
14,105,076
|
|
Noncash settlement charge expenses
|
|
|
61,100
|
|
|
|
-
|
|
PIK interest
|
|
|
-
|
|
|
|
584,667
|
|
Change in assets and liabilities
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
621,743
|
|
|
|
(2,590,719
|
)
|
(Increase) decrease in inventory
|
|
|
(50,507
|
)
|
|
|
2,106,841
|
|
(Increase) in prepaid expenses and other assets
|
|
|
(11,040
|
)
|
|
|
(33,624
|
)
|
Increase (decrease) in accounts payable and accrued liabilities
|
|
|
(2,568,482
|
)
|
|
|
3,106,992
|
|
Increase in Deferred Revenue
|
|
|
517,060
|
|
|
|
-
|
|
(Decrease) in customer credits
|
|
|
(423,206
|
)
|
|
|
(2,281,760
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(471,664
|
)
|
|
|
3,226,049
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(806,460
|
)
|
|
|
(1,686,344
|
)
|
Purchase of intellectual property
|
|
|
(2,500,000
|
)
|
|
|
-
|
|
Net cash (used in) investing activities
|
|
|
(3,306,460
|
)
|
|
|
(1,686,344
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
-
|
|
|
|
(98,671
|
)
|
Payment of equity issuance costs
|
|
|
-
|
|
|
|
(1,264,009
|
)
|
Payments of equipment notes payable
|
|
|
(55,006
|
)
|
|
|
(31,938
|
)
|
Payments on convertible promissory note
|
|
|
-
|
|
|
|
(5,000,000
|
)
|
Payments on secured promissory note
|
|
|
(1,500,000
|
)
|
|
|
(2,000,000
|
)
|
Proceeds from the issuance of common stock
|
|
|
-
|
|
|
|
13,457,962
|
|
Proceeds from the issuance of common stock upon warrant exercise
|
|
|
-
|
|
|
|
65,228
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,555,006
|
)
|
|
|
5,128,572
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(5,333,130
|
)
|
|
|
6,668,277
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of year
|
|
|
7,751,557
|
|
|
|
1,083,280
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of year
|
|
$
|
2,418,427
|
|
|
$
|
7,751,557
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,254,997
|
|
|
$
|
578,934
|
|
Taxes
|
|
$
|
40,422
|
|
|
$
|
27,331
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
|
|
|
|
|
|
|
|
|
Equipment purchases included in note payable
|
|
$
|
101,199
|
|
|
$
|
103,428
|
|
Stock issued for interest on notes payable
|
|
$
|
-
|
|
|
$
|
263,200
|
|
Conversion of accounts receivable to customer acquisition costs
|
|
$
|
-
|
|
|
$
|
188,225
|
|
Conversion of debt and accrued interest to equity
|
|
$
|
25,618
|
|
|
$
|
1,368,927
|
|
Conversion of accrued interest to debt
|
|
$
|
-
|
|
|
$
|
696,999
|
|
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, 2017 and 2016
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, 2017 and 2016, 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 2 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, 2017 and 2016, 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.
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, 2017 and December 31, 2016 and is considered to be Level 1.
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, 2017 and 2016 due to their short-term maturities. The fair value of the convertible promissory notes payable at December 31, 2017 and 2016 approximated the carrying amount as the notes were issued during the years ended December 31, 2017 and 2016 at interest rates prevailing in the market and interest rates have not significantly changed as of December 31, 2017. The fair value of the convertible promissory notes payable was determined on a Level 2 measurement.
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 $172,333 and $642,203 on December 31, 2017 and December 31, 2016, respectively. Amortization expense for the years ended December 31, 2017 and 2016 was $469,870 and $443,450, respectively.
The Company generated revenues of $27,499,080 and $32,345,540 for the years ended December 31, 2017 and 2016, respectively. The Company generated revenue for the years ended December 31, 2017 and 2016 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.
In accordance with the terms of an agreement with one customer, the Company has agreed to credit $517,060 of payments received in 2017 towards future deliveries. This amount is included as deferred revenue at December 31, 2017 and is expected to be recognized as revenue during the quarter ended March 31, 2018 when product is delivered to the customer
.
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, 2017 or 2016. 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 2014 or state tax examinations for years prior to 2013.
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, 2017 or 2016, 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, 2017 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, 2017 and 2016, 100% of the Company’s revenue related to eight customers, respectively. At both December 31, 2017 and 2016, 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 Adopted Accounting Standards
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 July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach.
The Company early adopted ASU 2017-11 and changed its method of accounting for certain warrants that were initially recorded as liabilities during the year ended December 31, 2014 on a full retrospective basis. Since the warrants were issued in conjunction with the issuance of certain convertible notes payable. The following table provide a reconciliation of warrant liability, additional paid-in capital and accumulated deficit on the consolidated balance sheets as of December 31, 2016:
|
|
Consolidated Balance Sheet
|
|
|
|
Warrant
Liability
|
|
|
Additional
paid in
capital
|
|
|
Accumulated
deficit
|
|
Balance, December 31, 2016 (Prior to adoption of ASU 2017-11)
|
|
$
|
1,313,000
|
|
|
$
|
49,838,468
|
|
|
$
|
(54,883,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverese beginning balance as of Janaury 1, 2016
|
|
|
(9,854,000
|
)
|
|
|
-
|
|
|
|
9,854,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
|
(1,096,000
|
)
|
|
|
-
|
|
|
|
1,096,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability
|
|
|
(14,021,626
|
)
|
|
|
(659,685
|
)
|
|
|
14,681,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon cashless warrant exercise
|
|
|
9,147,159
|
|
|
|
(9,147,159
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt restructuting
|
|
|
14,511,467
|
|
|
|
-
|
|
|
|
(14,511,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016 (After adoption of ASU 2017-11)
|
|
|
-
|
|
|
$
|
40,031,625
|
|
|
$
|
(43,763,379
|
)
|
The following table provide a reconciliation of interest expense, change in fair value of warrant liability, gain (loss) on debt restructuring and net loss on the consolidated statement of operations for the year ended December 31, 2016:
|
|
Consolidated Statement Of Operations
|
|
|
|
Interest
Expense
|
|
|
Change in
value of
warrant
liability
|
|
|
Gain on debt restructuring
|
|
|
Net loss
|
|
Balance, December 31, 2016 (Prior to adoption of ASU 2017-11)
|
|
$
|
(4,912,855
|
)
|
|
$
|
(14,681,311
|
)
|
|
$
|
406,791
|
|
|
$
|
(16,883,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
|
1,096,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,096,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability
|
|
|
-
|
|
|
|
14,681,311
|
|
|
|
-
|
|
|
|
14,681,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt restructuting
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,511,867
|
)
|
|
|
(14,511,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,816,855
|
)
|
|
|
-
|
|
|
$
|
(14,105,076
|
)
|
|
$
|
(15,617,571
|
)
|
The Company’s consolidated statement of cash flows for the year ended December 31, 2016 was also impacted by the adoption of ASU 2017-11, including increases in the (i) net loss by $1,265,000 and (ii) loss on debt restructuring by $14,512,000; and the reduction of (i) noncash financing expenses by $1,096,000 and (ii) loss on the change in value of warrant liability by $14,681,000.
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 will adopt this standard on January 1, 2018, and have determined that the standard will not have a material impact on the company’s financial statements.
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 - Going Concern
The accompanying consolidated financial statements as of December 31, 2017 have been prepared assuming the Company will continue as a going concern. The Company has experienced a net loss, and has an accumulated deficit of $46,667,000. The Company has convertible notes maturing during 2018 of $1,550,000, and current principal payments due in 2018 on outstanding promissory notes of $2,500,000. These principal payments raise doubt about the Company’s ability to continue as a going concern. Although we anticipate continued significant revenues for products to be used in MATS compliance activities, no assurances can be given that the Company can obtain sufficient working capital through these activities and additional financing activities to meet its debt obligations. Therefore, success in our debt refinancing efforts or negotiations with our note holders is critical. We are currently negotiating with outside sources of additional debt financing in order to fund our obligations however no assurances can be given that the Company can maintain sufficient working capital through these efforts or that the continued implementation of its business plan will generate sufficient revenues in the future to sustain ongoing operations.
The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
Note 4 - Inventory
The Company held product supply inventory valued at $533,432 and $414,384 and other inventory valued at $126,147 and $194,688 as of December 31, 2017 and December 31, 2016, respectively.
Note 5 - Property and Equipment, Net
Property and equipment at December 31, 2017 and 2016 are as follows:
|
|
December 31
|
|
|
December 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Equipment & Installation
|
|
$
|
1,965,659
|
|
|
$
|
1,823,594
|
|
Trucking equipment
|
|
|
1,010,961
|
|
|
|
926,614
|
|
Office equipment
|
|
|
27,155
|
|
|
|
27,155
|
|
Computer equipment and software
|
|
|
117,212
|
|
|
|
111,518
|
|
Total equipment
|
|
|
3,120,987
|
|
|
|
2,888,881
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(2,067,786
|
)
|
|
|
(1,420,755
|
)
|
Construction in process
|
|
|
1,675,792
|
|
|
|
1,101,228
|
|
Property and equipment, net
|
|
$
|
2,728,993
|
|
|
$
|
2,569,354
|
|
The Company uses the straight-line method of depreciation over 2 to 5 years. During the years ended December 31, 2017 and 2016, depreciation expense charged to operations was $748,020 and $463,868, respectively.
Note 6 - Intellectual Property
On January 15, 2009, the Company entered into an “Exclusive Patent and Know-How License Agreement Including Transfer of Ownership” with the Energy and Environmental Research Center Foundation, a non-profit entity (“EERCF”). Under the terms of the Agreement, the Company has been granted an exclusive license by EERCF for the technology to develop, make, have made, use, sell, offer to sell, lease, and import the technology in any coal-fired combustion systems (power plant) worldwide and to develop and perform the technology in any coal-fired power plant in the world. 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. Running royalties were $0 and $722,380 due to EERCF as of December 31, 2017 and December 31, 2016, respectively.
On April 24, 2017, the Company closed on the acquisition from EERCF of all patent rights, including all patents and patents pending, domestic and foreign, relating to the foregoing technology. A total of 42 domestic and foreign patents and patent applications were included in the acquisition. In accordance with the terms of the License Agreement, the patent rights were acquired for the purchase price of (i) $2,500,000 in cash, and (ii) 925,000 shares of common stock of which 628,998 shares were issued to EERCF and 296,002 were issued to the inventors who had been designated by EERCF. Therefore, the Company has not accrued royalty expense as of December 31, 2017. As a result of the acquisition of the patent rights, no additional monthly license maintenance fees and annual running royalties shall be due and owing to the EERCF following closing which fees and royalties have now been eliminated.
The Company was 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. On April 24, 2017, this requirement ended upon the Company’s payment for the assignment and acquisition of the patent rights. There was no sublicense income in 2017 or 2016.
License and patent costs capitalized as of December 31, 2017 and December 31, 2016 are as follows:
|
|
December 31
|
|
|
December 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
3,068,995
|
|
|
$
|
-
|
|
License
|
|
|
-
|
|
|
|
100,000
|
|
Less: Accumulated Amortization
|
|
|
(134,133
|
)
|
|
|
(47,055
|
)
|
License, Net
|
|
$
|
2,934,862
|
|
|
$
|
52,945
|
|
The Company is currently amortizing its patents over their estimated useful life of 15 years. Amortization expense for the twelve months ended December 31, 2017 and 2016 was $136,083 and $5,880, respectively. Estimated annual amortization for each of the next five years is approximately $201,200.
Note 7 – Notes Payable
The Company has the following notes payable outstanding as of December 31:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
$
|
1,550,000
|
|
|
$
|
1,575,000
|
|
|
|
|
|
|
|
|
|
|
Secured promissory note which matures on June 15, 2018 and bears interest at 12% per annum.
|
|
|
1,146,686
|
|
|
|
2,646,686
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory note which matures on December 15, 2020, and bears interest at LIBOR + 500 per annum.
|
|
|
13,000,000
|
|
|
|
13,000,000
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable before discount
|
|
|
15,696,686
|
|
|
|
17,221,686
|
|
|
|
|
|
|
|
|
|
|
Less discounts
|
|
|
(1,841,867
|
)
|
|
|
(2,587,519
|
)
|
Less debt issuance costs
|
|
|
(160,041
|
)
|
|
|
(313,344
|
)
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
13,694,778
|
|
|
|
14,320,823
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
4,050,000
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net of current portion
|
|
$
|
9,644,778
|
|
|
$
|
12,820,823
|
|
As of December 31, 2017, scheduled principal payments due on convertible notes payable are as follows:
Twelve months ended December 31,
|
|
|
|
2018
|
|
$
|
4,050,000
|
|
2019
|
|
|
3,000,000
|
|
2020
|
|
|
8,646,686
|
|
|
|
$
|
15,696,686
|
|
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 have been extended until July 31, 2018. 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, 2017 and 2016, was $155,618 and $238,315, 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, 2017 and 2016 on this discount was $152,558 and $152,959, respectively. As of December 31, 2017 and 2016, total principal of $1,550,000 and $1,575,000, respectively, was outstanding on these notes.
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 held 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 exchanged 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 were 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 loss of $14,105,076 on these transactions which was primarily related to the elimination of the warrant liability associated with the unexercised AC Midwest Warrants and was 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 is guaranteed by MES, is non-convertible and bears 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 pays principal on the New AC Midwest Secured Note in equal installments of (i) $500,000 per quarter for the 2017 the 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 is secured by all of the assets of the Companies. Interest expense for the years ended December 31, 2017 and 2016 was $267,847 and $35,411, respectively. As of December 31, 2017 and 2016, total principal of $1,146,686 and $2,646,686, respectively, was outstanding on this note. As of April 17, 2018, the Company was not in compliance with certain financial covenants of the Restated Financing Agreement with AC Midwest Energy. Per the terms of the Restated Financing Agreement, AC Midwest has the right to accelerate any outstanding balance of the New Midwest Secured Note.
AC Midwest Subordinated Note
The AC Midwest Subordinated Note, which will mature on December 15, 2020 and is guaranteed by MES, is non-convertible and bears 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 pays 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, 2017 and 2016 was $818,357 and $71,058, respectively. As of December 31, 2017 and 2016, total principal of $13,000,000 and $13,000,000 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, 2017 and 2016 was $593,094 and $53,622 respectively.
On January 28, 2016, the Companies entered into Amendment No. 3 to Financing Agreement and Reaffirmation of Guaranty (the “Third Amended Financing Agreement”) with AC Midwest Energy LLC (the “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, 2017. Fee expense for the years ended December 31, 2017 and 2016 was $219,333 and $226,000, respectively.
Note 8 – Equipment Notes Payable
|
|
2017
|
|
|
2016
|
|
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.
|
|
$
|
32,833
|
|
|
$
|
43,860
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
35,449
|
|
|
|
46,304
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
34,468
|
|
|
|
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.
|
|
|
40,385
|
|
|
|
50,987
|
|
|
|
|
|
|
|
|
|
|
On January 23, 2017, the Company entered into a retail installment purchase contract in the amount of $58,924, secured by a 2017 Dodge Ram 5500 purchased on that date. This installment loan bears interest at a fixed rate of 4.74% and the Company shall make 60 monthly payments of $1,105 beginning February 23, 2017.
|
|
|
49,138
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On February 29, 2017, the Company entered into a retail installment purchase contract in the amount of $42,275, secured by a 2017 Dodge Ram 2500 purchased on that date. This installment loan bears interest at a fixed rate of 4.74% and the Company shall make 60 monthly payments of $793 beginning March 29, 2017.
|
|
|
36,553
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total equipment notes payable
|
|
|
228,826
|
|
|
|
182,634
|
|
|
|
|
|
|
|
|
|
|
Less Current Portion
|
|
|
61,177
|
|
|
|
39,499
|
|
|
|
|
|
|
|
|
|
|
Equipment notes payable, net of current portion
|
|
$
|
167,649
|
|
|
$
|
143,135
|
|
As of December 31, 2017, scheduled principal payments due on convertible notes payable are as follows:
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
$
|
61,177
|
|
2019
|
|
|
63,423
|
|
2020
|
|
|
63,280
|
|
2021
|
|
|
36,147
|
|
2022
|
|
|
4,799
|
|
|
|
$
|
228,826
|
|
Note 9 – Commitments and Contingencies
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 lease ended June 30, 2017.
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 2019. Monthly rent is $1,463 through February 2019.
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. 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.
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
|
|
|
|
2018
|
|
$
|
82,397
|
|
2019
|
|
|
47,925
|
|
2020
|
|
|
22,500
|
|
|
|
$
|
152,822
|
|
Rent expense was approximately $130,000 and $130,000 for the years ended December 31, 2017 and 2016, 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. 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
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, 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.
On January 13, 2017, the Company issued 36,842 shares of common stock upon the cashless exercise of warrants to purchase 50,000 shares of common stock for $0.35 per share based on a market value of $1.33 per share as determined under the terms of the warrant.
On January 18, 2017, the Company issued 36,112 shares of common stock upon the cashless exercise of warrants to purchase 50,000 shares of common stock for $0.35 per share based on a market value of $1.26 per share as determined under the terms of the warrant.
On February 6, 2017, the Company issued 21,191 shares of common stock upon the cashless exercise of warrants to purchase 29,179 shares of common stock for $0.35 per share based on a market value of $1.2785 per share as determined under the terms of the warrant.
On February 7, 2017, the Company issued 35,169 shares of common stock upon the cashless exercise of warrants to purchase 50,000 shares of common stock for $0.35 per share based on a market value of $1.18 per share as determined under the terms of the warrant.
On March 30, 2017, the Company issued 16,915 shares of common stock upon the cashless exercise of warrants to purchase 23,799 shares of common stock for $0.35 per share based on a market value of $1.21 per share as determined under the terms of the warrant.
On March 30, 2017, the Company issued 51,236 shares of common stock upon the conversion of a note with principal and accrued interest totaling $25,618, 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 April 5, 2017, the Company issued 45,488 shares of common stock upon the cashless exercise of warrants to purchase 64,444 shares of common stock for $0.35 per share based on a market value of $1.19 per share as determined under the terms of the warrant.
On April 12, 2017, the Company issued 43,200 shares of common stock upon the cashless exercise of warrants to purchase 60,000 shares of common stock for $0.35 per share based on a market value of $1.25 per share as determined under the terms of the warrant.
On April 24, 2017, the Company issued 925,000 shares of common stock in connection with the closing on the acquisition of certain patent rights from Energy & Environmental Research Center Foundation (“EERCF”) for the purchase price of $2,500,000 paid to EERCF in cash, 628,998 shares of common stock to EERCF and 296,002 shares to inventors designated by EERCF. The shares issued were valued at $0.56 per share, representing the value as of the closing date.
On May 2, 2017, the Company issued 345,071 shares of common stock upon the cashless exercise of warrants to purchase 500,910 shares of common stock for $0.35 per share based on a market value of $1.125 per share as determined under the terms of the warrant.
On May 3, 2017, the Company issued 50,226 shares of common stock upon the cashless exercise of warrants to purchase 72,948 shares of common stock for $0.35 per share based on a market value of $1.1237 per share as determined under the terms of the warrant.
On May 16, 2017, the Company issued 130,000 shares of common stock pursuant to a Settlement Agreement with two unrelated third parties which shares were valued at $0.47 per share based on the market value as of May 16, 2017.
Pursuant to the terms of a consulting agreement entered into on July 31, 2017, effective as of July 1, 2017, the Company issued 1,000,000 shares of common stock to Dathna Partners, LLC which shall be earned in the following manner: 250,000 shares will be earned by the consultant and deemed immediately vested on the effective date, and the remaining 750,000 shares will be earned by the consultant and deemed vested, in 12 equal monthly installments of 62,500 shares beginning on July 31, 2017 and monthly thereafter until June 30, 2018. The shares issued were valued at $0.37 per share, representing the value as of the issuance date.
Note 11 - Stock Based Compensation
Effective July 20, 2005, the Board of Directors of the Company approved the 2005 Stock Option and Restricted Stock Plan (the “
2005 Plan
”). The 2005 Plan reserves approximately 136,364 post Reverse Stock Split shares of common stock for grants of incentive stock options, nonqualified stock options, warrants and restricted stock awards to employees, non-employee directors and consultants performing services for the Company. Options and warrants granted under the 2005 Plan have an exercise price equal to or greater than the fair market value of the underlying common stock at the date of grant and become exercisable based on a vesting schedule determined at the date of grant. The options expire 10 years from the date of grant whereas warrants generally expire 5 years from the date of grant. Restricted stock awards granted under the 2005 Plan are subject to a vesting period determined at the date of grant.
On May 6, 2009, the Board of Directors adopted, subject to stockholder approval, which was obtained at the annual stockholders meeting held on June 19, 2009, an amendment to the 2005 Plan that increased the number of shares subject to the Stock Plan. The total number of shares subject to the Stock Plan was revised to 454,545 shares by the Reverse Stock Split. On October 9, 2014, the Board of Directors terminated this plan upon the approving an amendment to the 2014 Equity Incentive Plan.
On January 10, 2014, the Board of Directors of the Company approved and adopted, subject to stockholder approval, which was obtained at the annual stockholders meeting held on November 16, 2014, the Midwest Energy Emissions Corp. 2014 Equity Incentive Plan (the “2014 Equity Plan”). The number of shares of the Company’s Common Stock that may be issued under the 2014 Equity Plan is 2,500,000 shares, subject to the adjustment for stock dividends, stock splits, recapitalizations and similar corporate events. Eligible participants under the 2014 Equity Plan shall include officers, employees of or consultants to the Company or any of its subsidiaries, or any person to whom an offer of employment is extended, or any person who is a non-employee director of the Company. On October 9, 2014, the Board of Directors approved and adopted the First Amendment to the plan, subject to stockholder approval, which was obtained at the annual stockholders meeting held on November 18, 2014, which increased the number of shares issuable under the plan to 7,500,000.
On February 9, 2017, the Board of Directors of the Company adopted the Midwest Energy Emissions Corp. 2017 Equity Incentive Plan (the “2017 Equity Plan”), which was approved by stockholders at the annual stockholders meeting held on June 6, 2017. The 2017 Equity Plan provides for the grant of incentive stock options (subject to applicable stockholder approval), nonqualified stock options, restricted stock awards, stock appreciation rights, restricted share units, performance awards and other type of awards described therein. Eligible recipients under the 2017 Equity Plan include the Company’s officers, directors, employees and consultants of the Company or one of its subsidiaries. The maximum number of shares of common stock that may be issued under the 2017 Equity Plan is 8,000,000. The 2017 Equity Plan will be administered by the Board or one or more committees appointed by the Board. The 2017 Equity Plan replaces the 2014 Equity Plan which was terminated by the Board of Directors on April 28, 2017.
The Company accounts for stock-based compensation awards in accordance with the provisions of ASC 718, which addresses the accounting for employee stock options which requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the consolidated financial statements over the vesting period based on the estimated fair value of the awards.
A summary of stock option activity for the years ended December 31, 2017 and 2016 is presented below:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining Contractual
Life (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
6,720,458
|
|
|
|
1.35
|
|
|
|
3.7
|
|
|
|
-
|
|
Grants
|
|
|
1,600,000
|
|
|
|
0.99
|
|
|
|
4.6
|
|
|
|
-
|
|
Exercises
|
|
|
(100,000
|
)
|
|
|
0.37
|
|
|
|
-
|
|
|
|
-
|
|
Expirations
|
|
|
(5,001
|
)
|
|
|
22.00
|
|
|
|
-
|
|
|
|
-
|
|
Cancellations
|
|
|
(665,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
December 31, 2016
|
|
|
7,550,457
|
|
|
|
1.29
|
|
|
|
3.2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
1,615,000
|
|
|
|
0.98
|
|
|
|
4.8
|
|
|
|
-
|
|
Expirations
|
|
|
(577,273
|
)
|
|
|
1.02
|
|
|
|
-
|
|
|
|
-
|
|
Cancellations
|
|
|
(125,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
December 31, 2017
|
|
|
8,463,184
|
|
|
|
1.26
|
|
|
|
3.0
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
6,700,457
|
|
|
|
1.31
|
|
|
|
3.0
|
|
|
|
|
|
December 31, 2017
|
|
|
7,688,184
|
|
|
|
1.27
|
|
|
|
3.0
|
|
|
|
|
|
The Company utilized the Black-Scholes options pricing model. The significant assumptions utilized for the Black Scholes calculations consist of an expected life of equal to the expiration term of the option, historical volatility of 74.9%, and a risk free interest rate of 3%.
On May 1, 2016, the Company issued nonqualified stock options to acquire 25,000 shares each of the Company’s common stock to Christopher Greenberg, Brian Johnson and Christopher Lee, current directors of the Company, under the Company’s 2014 Equity Plan. The options granted are exercisable at $0.42 per share, representing the fair market value of the common stock as of the date of the grant as determined under the 2014 Equity Plan. These options are to vest one year after the original grant date, subject to continuing service to the Company, are exercisable as of the date of vesting and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $19,376 in accordance with FASB ASC Topic 718. Compensation expense for the year ended December 31, 2016 on the issued options was $12,920.
On June 1, 2016, the Company granted nonqualified stock options to acquire 250,000 shares of the Company’s common stock to Patrick Mongovan. The options granted are exercisable at $0.42 per share, representing the fair market value of the common stock as of the date of grant. These options are fully vested and are exercisable as of the date of the grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $28,836 in accordance with FASB ASC Topic 718. Compensation expense for the year ended December 31, 2016 on the issued options was $28,836.
On June 30, 2016, the Company issued nonqualified stock options to acquire 125,000 shares of the Company’s common stock to Christopher Greenberg, nonqualified stock options to acquire 75,000 shares of the Company’s common stock to Christopher Lee, and nonqualified stock options to acquire 50,000 shares of the Company’s common stock to each of Brian Johnson and Allan Grantham, current directors of the Company, under the Company’s 2014 Equity Plan. The options granted are exercisable at $0.81 per share, representing the fair market value of the common stock as of the date of the grant as determined under the 2014 Equity Plan. These options are fully vested and are exercisable as of the date of the grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $174,902 in accordance with FASB ASC Topic 718. Compensation expense for the year ended December 31, 2016 on the issued options was $174,902.
On June 30, 2016, the Company issued nonqualified stock options to acquire 250,000 shares of the Company’s common stock to Richard MacPherson, CEO and a current director of the Company, under the Company’s 2014 Equity Plan. The options granted are exercisable at $0.81 per share, representing the fair market value of the common stock as of the date of the grant as determined under the 2014 Equity Plan. These options vested after such time that the closing price of the Company’s common stock is equal to or in excess of $0.80 per share for any consecutive 30 day trading period following the grant date and will expire five years after the date of the grant. Based on a Black-Scholes valuation model, these options were valued at $145,752 in accordance with FASB ASC Topic 718. Compensation expense for the year ended December 31, 2016 on the issued options was $145,752.
On August 31, 2016, the Company issued nonqualified stock options to acquire 750,000 shares of the Company’s common stock to Richard MacPherson, CEO and a current director of the Company, under the Company’s 2014 Equity Plan. The options granted are exercisable at $1.20 per share, representing the fair market value of the common stock as of the date of the grant as determined under the 2014 Equity Plan. These options are to vest on a cumulative basis in accordance with the following schedule: (i) 250,000 shares at such time that the closing price of the Company’s common stock is equal to or in excess of $2.00 per share for any consecutive 30 day trading period following the grant date, (ii) 250,000 shares at such time that the closing price of the Company’s common stock is equal to or in excess of $3.00 per share for any consecutive 30 day trading period following the grant date, and (iii) 250,000 shares at such time that the Company’s common stock is listed for trading on either the NASDAQ Stock Market or the New York Stock Exchange (including NYSE-MKT). Based on a Black-Scholes valuation model, these options were valued at $595,651 in accordance with FASB ASC Topic 718. These options have not yet vested and no compensation expense has been recorded for the year ended December 31, 2017.
On October 4, 2016 the Company granted nonqualified stock options to acquire 100,000 shares of the Company’s common stock to Rob Rians. The options granted are exercisable at $1.36 per share, representing the fair market value of the common stock as of the date of grant. These options are fully vested and are exercisable as of the date of the grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $88,629 in accordance with FASB ASC Topic 718. Compensation expense for the year ended December 31, 2016 on the issued options was $88,629.
On October 4, 2016 the Company granted nonqualified stock options to acquire 25,000 shares of the Company’s common stock to Todd Ferrell. The options granted are exercisable at $1.36 per share, representing the fair market value of the common stock as of the date of grant. These options will vest and become exercisable on February 1, 2018 and will expire five years from the grant date. Based on a Black-Scholes valuation model, these options were valued at $22,157 in accordance with FASB ASC Topic 718. Compensation expense for the year ended December 31, 2016 on the issued options was $3,915.
On February 1, 2017, the Company issued nonqualified stock options to acquire 50,000 shares each of the Company’s common stock to Brian Johnson, Christopher Lee and Allan Grantham and nonqualified stock options to acquire 100,000 shares of the Company’s common stock to Christopher Greenberg, each then a director of the Company, under the Company’s 2014 Equity Plan. The options granted are exercisable at $1.20 per share, representing the fair market value of the common stock as of the date of the grant as determined under the 2014 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five years thereafter. As a result of the resignations of Brian Johnson and Christopher Lee on April 27, 2017, the options granted to them remain exercisable for 90 days following their resignation after which such options shall terminate. Based on a Black-Scholes valuation model, these options were valued at $233,817 in accordance with FASB ASC Topic 718.
On February 10, 2017, the Company issued nonqualified stock options to acquire 25,000 shares each of the Company’s common stock to Nicholas Lentz and Johnny Battle, nonqualified stock options to acquire 50,000 shares of the Company’s common stock to John Pavlish, nonqualified stock options to acquire 150,000 shares of the Company’s common stock to Richard Gross and nonqualified stock options to acquire 500,000 shares of the Company’s common stock to James Trettel under the Company’s 2017 Equity Plan. The options granted are exercisable at $1.15 per share, representing the fair market value of the common stock as of the date of the grant as determined under the 2017 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five year thereafter. Based on a Black-Scholes valuation model, these options were valued at $712,050 in accordance with FASB ASC Topic 718.
On April 27, 2017, the Company issued nonqualified stock options to acquire 125,000 shares each of the Company’s common stocks to Brian Johnson and Christopher Lee under the Company’s 2017 Equity Plan. The options granted are exercisable at $0.96 per share, representing the fair market value of the common stock as of the date of the grant as determined under the 2017 Equity Plan. Notwithstanding their resignations as directors, the options are fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $194,732 in accordance with FASB ASC Topic 718.
On June 1, 2017, the Company issued nonqualified stock options to acquire 100,000 shares of the Company’s common stock to Patrick Mongoven under the Company’s 2017 Equity Plan. The options granted are exercisable at $1.01 per share, which is greater than the fair market value of the common stock on the date of grant and represents the fair market value of the common stock on March 1, 2017. The options are fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $81,903 in accordance with FASB ASC Topic 718.
On September 18, 2017, the Company issued nonqualified stock options to acquire 250,000 shares of the Company’s common stock to Gary Graves under the Company’s 2017 Equity Plan. The options granted are exercisable at $0.35 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan. Fifty percent (50.0%) of the options are fully vested and exercisable as of the date of grant and the remaining fifty percent (50.0%) were canceled on December 20, 2017. Based on a Black-Scholes valuation model, these options were valued at $70,170 in accordance with FASB ASC Topic 718.
On December 28, 2017, the Company issued nonqualified stock options to acquire 15,000 shares of the Company’s common stock to Stacey Hyatt under the Company’s 2017 Equity Plan. The options granted are exercisable at $0.24 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $3,159 in accordance with FASB ASC Topic 718.
Note 12 - Warrants
Unless sold and issued warrants are subject to the provisions of FASB ASC 815-10, the Company utilized a Black-Scholes options pricing model to value the warrants sold and issued. This model requires the input of highly subjective assumptions such as the expected stock price volatility and the expected period until the warrants are exercised. When calculating the value of warrants issued, the Company uses a volatility factor of 72.4%, a risk free interest rate and the life of the warrant for the exercise period.
On February 16, 2016, the Company entered into a 2013 Noteholder Modification Agreement (the “Noteholder Modification Agreement”) with each of the investors (through their designated Note Agent) of certain secured promissory notes issued by the Company in 2013 (the “2013 Secured Notes”). Such 2013 Secured Notes contain a most favored nations clause (“MFN”) which provides that following the Company’s completion of an equity or equity-linked new financing (each a “New Financing”), the Company shall provide each of the holders of the 2013 Secured Notes (the “Holders”) written notice thereof and a 60 day period in which to exchange the 2013 Secured Notes at a value equal to the outstanding principal balance plus accrued outstanding interest into the same securities as issued in the New Financing. Pursuant to the Noteholder Modification Agreement, which was entered into in order to resolve the differences between the parties as to the applicability of the MFN provision to the Second Amended Financing Agreement, the Company (i) agreed that the exercise price for each share of common stock purchasable with respect to the 2013 Warrants held by currently outstanding Holders be reduced to $0.35 per share of common stock (resulting in the exercise price being reduced for 2013 Warrants exercisable for 3,290,000 shares), and (ii) agreed to issue to such currently outstanding Holders of 2013 Secured Notes in the aggregate warrants to purchase up to 1,600,000 shares of common stock at $0.35 per share, exercisable at any time on or before November 15, 2020. In addition, the Noteholder Modification Agreement provided additional carveouts to the applicability of the MFN provision to certain other transactions in the future as described therein. The warrants are fully vested and exercisable as of the date of grant and will expire five year thereafter. Based on a Black-Scholes valuation model, these options were valued at $495,394 in accordance with FASB ASC Topic 718 and this cost was recorded as settlement charge expense during the year ended December 31, 2015.
On February 19, 2016, the Company issued to Drexel pursuant to an amendment to its engagement agreement a 5-year warrant to purchase up to 300,000 shares of common stock at $0.35 per share. The warrant is subject to adjustments similar to the Warrant issued to the Lender on November 16, 2014. Approximately 200,000 of these warrants were owed to Drexel as of December 31, 2015 for services rendered. Also pursuant to this agreement, the exercise price on all warrants issued to Drexel on November 16, 2014 was reset to $0.35 per share.
On April 26, 2016, pursuant to a consulting agreement executed on that date, the Company granted MZHCI, LLC, a vested warrant with a term of three years to purchase 75,000 shares of common stock with an exercise price of $0.65 per share. Per the terms of the agreement, the Company issued MZHCI, LLC an additional warrant to purchase 75,000 shares of common stock with an exercise price of $0.90 per share 91 days after the effective date of the agreement. These warrants will each include a cashless exercise provision. Based on a Black-Scholes valuation model, the warrants issued on April 26, 2016 were valued at $19,240 in accordance with FASB ASC Topic 718. Based on a Black-Scholes valuation model, the warrants issued on July 26, 2016 were valued at $58,780 in accordance with FASB ASC Topic 718. On November 30, 2017, pursuant to an amendment to the consulting agreement, these two warrants were canceled and a new warrant with a term of three years to purchase 150,000 shares of common stock with an exercise price of $0.45 was issued. Based on a Black-Scholes valuation model, an additional value of $17,922 was recorded for the warrant issued on November 30, 2017 in accordance with FASB ASC Topic 718.
The following table summarizes information about common stock warrants outstanding at December 31, 2017:
Outstanding
|
|
|
Exercisable
|
|
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining
Contractual Life
(years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
1.25
|
|
|
|
13,950
|
|
|
|
0.75
|
|
|
|
1.25
|
|
|
|
13,950
|
|
|
|
1.25
|
|
|
0.87
|
|
|
|
1,303,300
|
|
|
|
1.36
|
|
|
|
0.87
|
|
|
|
1,303,300
|
|
|
|
0.87
|
|
|
0.75
|
|
|
|
683,415
|
|
|
|
0.80
|
|
|
|
0.65
|
|
|
|
683,415
|
|
|
|
0.65
|
|
|
0.65
|
|
|
|
515,000
|
|
|
|
0.82
|
|
|
|
0.65
|
|
|
|
515,000
|
|
|
|
0.50
|
|
|
0.45
|
|
|
|
150,000
|
|
|
|
2.92
|
|
|
|
0.45
|
|
|
|
150,000
|
|
|
|
0.45
|
|
|
0.35
|
|
|
|
4,572,098
|
*
|
|
|
1.44
|
|
|
|
0.35
|
|
|
|
4,572,098
|
|
|
|
0.35
|
|
$
|
0.50 - $3.30
|
|
|
|
7,237,763
|
|
|
|
1.35
|
|
|
|
|
|
|
|
7,237,763
|
|
|
|
|
|
Note * 916,720 warrants exercisable at $0.35 contain dilution protections that increase the number of shares purchasable at exercise upon the issuance of securities at a price below the current exercise price.
Note 13 – Tax
Below is breakdown of the tax provisions for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State and local
|
|
$
|
40,422
|
|
|
$
|
27,331
|
|
Total Current
|
|
|
40,422
|
|
|
|
27,331
|
|
Deferred federal income tax benefit
|
|
|
500,000
|
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
.
|
|
Net Provision (Benefit)
|
|
$
|
540,422
|
|
|
$
|
(472,669
|
)
|
A reconciliation of the provision (benefit) for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
Computed tax at the federal statutory rate
|
|
$
|
(803,000
|
)
|
|
$
|
(5,901,000
|
)
|
Return to provision adjustment
|
|
|
-
|
|
|
|
2,019,000
|
|
Debt discounts
|
|
|
254,000
|
|
|
|
6,279,000
|
|
Other
|
|
|
36,000
|
|
|
|
16,000
|
|
Valuation allowance
|
|
|
513,000
|
|
|
|
(2,913,000
|
)
|
Federal income tax benefit
|
|
$
|
-
|
|
|
$
|
(500,000
|
)
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
3,840,000
|
|
|
$
|
5,927,000
|
|
Stock based compensation
|
|
|
903,000
|
|
|
|
1,211,000
|
|
Total deferred tax assets
|
|
|
4,743,000
|
|
|
|
7,138,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(137,000
|
)
|
|
|
(228,000
|
)
|
Other
|
|
|
(11,000
|
)
|
|
|
(33,000
|
)
|
Total deferred tax liabilites
|
|
|
(148,000
|
)
|
|
|
(261,000
|
)
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
(4,595,000
|
)
|
|
|
(6,377,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
500,000
|
|
The Tax Act reduces the federal statutory corporate tax rate from 34.0% to 21.0% for the Company’s tax years beginning in 2018, which resulted in the re-measurement of the federal portion of its deferred tax assets and liabilities, and its related valuation allowance against net deferred tax assets, at December 31, 2017, from 34.0% to the new 21.0% tax rate. Refer to Note 13 for further discussion related to the impact of the Tax Act on the Company’s accounting for income taxes at December 31, 2017. On a gross basis, the Tax Act resulted in a reduction to the Company’s deferred tax assets, deferred tax liabilities and valuation allowance of approximately $2,936,000, $92,000 and $2,844,000, respectively.
For the year ended December 31, 2016, the Company had net operating income, however, the use of net operating loss carryforwards eliminate the provision for income tax. The Company recorded a valuation allowance against all of our deferred tax assets as of December 31, 2015. As of December 31, 2016, we determined there is sufficient evidence to support the reversal of some portion of these allowances and recorded a deferred tax asset of $500,000.
However, for the year ended December 31, 2017, the Company incurred net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, it was determined that sufficient evidence did not exist to support the reversal of some portions of the valuation allowance against our deferred tax assets, we no longer recorded any deferred tax asset, and no benefit for income taxes was recorded due to the uncertainty of the realization of any tax assets.
At December 31, 2017, the Company had approximately $18,284,000 of net operating losses. The net operating loss carryforwards, if not utilized, will begin to expire in 2031.
The Company’s effective income tax rates for the years ended December 31, 2017 and 2016, respectively are different than what would be expected if the statutory rate were applied to net income before income tax expense primarily because of expense charges in connection with various non-cash financing transactions, the use of net operating loss carryforwards, and the change in the valuation allowance.
Note 14 – Subsequent Events
On February 5, 2018, the Company issued nonqualified stock options to acquire 250,000 shares of the Company’s common stock to Rick MacPherson, nonqualified stock options to acquire 150,000 shares of the Company’s common stock to Christopher Greenberg and nonqualified stock options to acquire 108,000 shares of the Company’s common stock to Allan Grantham, each a director of the Company, under the Company’s 2014 Equity Plan. The options granted are exercisable at $0.28 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $100,887 in accordance with FASB ASC Topic 718.
On February 5, 2018, the Company released the restriction on stock options to acquire 750,000 shares of the Company’s common stock issued to Rick MacPherson on August 31, 2016 making them now fully vested and exercisable. Based on a Black-Scholes valuation model, these options were valued at $76,543 in accordance with FASB ASC Topic 718.
On February 23, 2018, Company issued nonqualified stock options to acquire 50,000 shares each of the Company’s common stock to John Pavlish, Richard Gross and James Trettel, nonqualified stock options to acquire 25,000 shares each of the Company’s common stock to Nicholas Lentz and Johnny Battle and nonqualified stock options to acquire 15,000 shares each of the Company’s common stock to Gabriel Brooks, Ethan Gaius and Terry Johnson under the Company’s 2017 Equity Plan. The options granted are exercisable at $0.28 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $51,129 in accordance with FASB ASC Topic 718.