Notes to Condensed Consolidated Financial Statements
Note 1 - Organization
Midwest Energy Emissions Corp.
Midwest Energy Emissions Corp. (the “Company") is organized under the laws of the State of Delaware with 150,000,000 authorized shares of common stock, par value $.001 per share and 2,000,000 authorized shares of preferred stock, par value $0.001 per share.
MES, Inc.
MES, Inc. is incorporated in the State of North Dakota. MES, Inc. is a wholly owned subsidiary of Midwest Energy Emissions Corp. and is engaged in the business of developing and commercializing state of the art control technologies relating to the capture and control of mercury emissions from coal fired boilers in the United States and Canada.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the financial position as of September 30, 2018, and results of operations, changes in stockholders’ deficit and cash flows for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year.
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 three accounts 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 September 30, 2018 and December 31, 2017, 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 periodically reviews the carrying value of its property and equipment for impairment.
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. During the quarter ended September 30, 2018, as a result of recurring losses and an accumulated deficit, the Company identified a triggering event requiring a test for the recoverability of long-lived assets and intangible assets. Assessing the recoverability of long-lived assets and intangible assets requires significant judgments and estimates by management. Management concluded that the fair value of long-lived assets and intangible assets exceeded their carrying value and as such, no impairment charges were recognized for the quarters ended September 30, 2018 and 2017, respectively.
A significant decrease in the market price of a long-lived asset, adverse change in the use or condition of a long-lived asset, adverse change in the business climate or legal or regulatory factors impacting a long-lived asset and intangible assets and continued operating losses, accumulated deficit and cash flow deficiencies among other indicators, could cause a future assessment to be performed which may result in an impairment of long-lived assets and intangible assets resulting in a material adverse effect on the financial position and results of operations of the Company.
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:
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·
|
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.
|
|
|
|
|
·
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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 September 30, 2018 and December 31, 2017 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 September 30, 2018 and December 31, 2017 due to their short-term maturities. The fair value of the convertible promissory notes payable at September 30, 2018 and December 31, 2017 approximated the carrying amount as the notes were issued at interest rates prevailing in the market at the time and interest rates have not significantly changed as of September 30, 2018. The fair value of the convertible promissory notes payable was determined on a Level 2 measurement.
Revenue Recognition
The Company records revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company’s revenues are primarily comprised of sales of products. Revenue is recognized when the Company satisfies its performance obligation under the contract by transferring the promised product to its customer that obtains control of the product. A performance obligation is a promise in a contract to transfer a distinct product to a customer. Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales and other taxes are excluded from revenues. Invoiced shipping and handling costs are included in revenue.
The Company’s revenue is primarily from products transferred to customers at a point in time. The Company recognizes revenue at the point in time in which the customer obtains control of the product, which is generally when product title passes to the customer upon shipment.
The Company generated revenues of $8,781,754 and $21,806,528 for the nine months ended September 30, 2018 and 2017, respectively and $4,209,092 and $8,447,967 for the quarters ended September 30, 2018 and 2017, respectively. The Company generated revenue for nine months ended September 30, 2018 and 2017 by delivering product and equipment to its commercial customers and completing demonstrations of its technologies at potential customer sites.
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 current and 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 September 30, 2018 and December 31, 2017. 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 Income (Loss) per Common Share
Basic net loss per common share is computed using the weighted average number of common shares outstanding. Diluted loss per share reflects the potential dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. There were no dilutive potential common shares as of September 30, 2018 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 September 30, 2018 and December 31, 2017 is on deposit in a non-interest-bearing transaction account that is subject to FDIC deposit insurance limits. For the quarters ended September 30, 2018 and 2017, 100% of the Company’s revenue related to eight and eight customers, respectively. For the nine months ended September 30, 2018 and 2017, 100% of the Company’s revenue related to ten and eight customers, respectively. At September 30, 2018 and December 31, 2017, 100% of the Company’s accounts receivable related to seven and six 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 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 have adopted this standard on January 1, 2018, and have determined that the standard did not have a material impact on the company’s financial statements.
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 September 30, 2017:
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|
Consolidated Balance Sheet
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|
|
|
Warrant
Liability
|
|
|
Additional
paid in capital
|
|
|
Accumulated
deficit
|
|
Balance, Septermber 30, 2017 (Prior to adoption of ASU 2017-11)
|
|
$
|
163,000
|
|
|
$
|
52,109,076
|
|
|
$
|
(54,787,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse beginning balance as of January 1, 2017
|
|
|
(1,313,000
|
)
|
|
|
(9,806,844
|
)
|
|
|
11,119,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability
|
|
|
919,023
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon cashless warrant exercise
|
|
|
230,977
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017 (After adoption of ASU 2017-11)
|
|
|
-
|
|
|
$
|
42,302,232
|
|
|
$
|
(43,667,969
|
)
|
The following table provide a reconciliation of change in fair value of warrant liability and net loss on the consolidated statement of operations for the nine months ended September 30, 2017:
|
|
Consolidated Statement
Of Operations
|
|
|
|
Change in value of warrant liability
|
|
|
Net
loss
|
|
Balance, September 30, 2017 (Prior to adoption of ASU 2017-11)
|
|
$
|
919,023
|
|
|
$
|
95,410
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability
|
|
|
(919,023
|
)
|
|
|
(919,023
|
)
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017 (After adoption of ASU 2017-11)
|
|
|
-
|
|
|
$
|
(823,613
|
)
|
The Company’s consolidated statement of cash flows for the nine months ended September 30, 2017 was also impacted by the adoption of ASU 2017-11, including increases in net loss of $919,023 and the reduction of loss on the change in value of warrant liability by the same amount.
Recently Issued Accounting Standards
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.
Note 3 – Going Concern
The accompanying consolidated financial statements as of September 30, 2018 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 approximately $50,915,000. The Company has convertible notes maturing during 2018 of $990,000, and current principal payments due in the next twelve months on outstanding promissory notes of $2,875,000. 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
Inventory at September 30, 2018 and December 31, 2017 are as follows:
|
|
September 30
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
112,061
|
|
|
$
|
154,952
|
|
Finished Goods
|
|
|
270,672
|
|
|
|
419,032
|
|
Work In Process
|
|
|
85,595
|
|
|
|
85,595
|
|
Total Inventory
|
|
$
|
468,328
|
|
|
$
|
659,579
|
|
Note 5 - Property and Equipment, Net
Property and equipment at September 30, 2018 and December 31, 2017 are as follows:
|
|
September 30
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Equipment & Installation
|
|
$
|
1,965,659
|
|
|
$
|
1,965,659
|
|
Trucking equipment
|
|
|
1,010,961
|
|
|
|
1,010,961
|
|
Computer equipment and software
|
|
|
117,212
|
|
|
|
117,212
|
|
Office equipment
|
|
|
27,155
|
|
|
|
27,155
|
|
Total equipment
|
|
|
3,120,987
|
|
|
|
3,120,987
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(2,415,598
|
)
|
|
|
(2,067,786
|
)
|
Construction in process
|
|
|
1,807,707
|
|
|
|
1,675,792
|
|
Property and equipment, net
|
|
$
|
2,513,096
|
|
|
$
|
2,728,993
|
|
The Company uses the straight-line method of depreciation over 2 to 5 years. During the nine months ended September 30, 2018 and 2017 depreciation expense was $347,766, and $558,036, respectively. During the three months ended September 30, 2018 and 2017 depreciation expense was $119,799, and $191,220.
Note 6 – Intellectual Property
On April 24, 2017, the Company closed on the acquisition from the Energy and Environmental Research Center Foundation, a non-profit entity (“EERCF”), of all patent rights, including all patents and patents pending, domestic and foreign, relating to the technology which has formed the basis of the Company’s mercury control systems. Prior thereto, such technology had been licensed from EERCF pursuant to a license agreement, as amended, originally entered into in January 2009 (the “License Agreement”). A total of 42 domestic and foreign patents and patent applications were included in the acquisition. In accordance with the terms of the License Agreement, the patent rights were acquired for the purchase price of (i) $2,500,000 in cash, and (ii) 925,000 shares of common stock of which 628,998 shares were issued to EERCF and 296,002 were issued to the inventors who had been designated by EERCF. As a result of the acquisition of the patent rights, no additional monthly license maintenance fees and annual running royalties as provided in the License Agreement 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 for the nine month period ended September 30, 2018 or the year ended December 31, 2017, respectively.
License and patent costs capitalized as of September 30, 2018 and December 31, 2017 are as follows:
|
|
September 30
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
3,068,995
|
|
|
$
|
3,068,995
|
|
Less: Accumulated Amortization
|
|
|
(285,033
|
)
|
|
|
(134,133
|
)
|
License, Net
|
|
$
|
2,783,962
|
|
|
$
|
2,934,862
|
|
The Company is currently amortizing its patents over their estimated useful life of 15 years. Amortization expense for the nine months ended September 30, 2018 and 2017 was $150,900 and $83,833, respectively. Amortization expense for the quarters ended September 30, 2018 and 2017 was $50,300 and $49,310, respectively. Estimated annual amortization for each of the next five years is approximately $200,000.
Note 7 –Notes Payable
The Company has the following notes payable outstanding as of September 30, 2018 and December 31, 2017:
|
|
September 30
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Secured convertible promissory notes which mature on December 15, 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.
|
|
$
|
990,000
|
|
|
$
|
1,550,000
|
|
|
|
|
|
|
|
|
|
|
Secured promissory note which matures on December 15, 2018 and bears interest at 15% per annum.
|
|
|
271,686
|
|
|
|
1,146,686
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory note which matures on December 15, 2020, and bears interest at LIBOR + 500 per annum.
|
|
|
13,000,000
|
|
|
|
13,000,000
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible promissory notes which mature on June 15, 2023, bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share.
|
|
$
|
760,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable before discount
|
|
|
15,021,686
|
|
|
|
15,696,686
|
|
|
|
|
|
|
|
|
|
|
Less discounts
|
|
|
(1,392,361
|
)
|
|
|
(1,841,867
|
)
|
Less debt issuance costs
|
|
|
(65,747
|
)
|
|
|
(160,041
|
)
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
13,563,578
|
|
|
|
13,694,778
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
3,865,000
|
|
|
|
4,050,000
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net of current portion
|
|
$
|
9,698,578
|
|
|
$
|
9,644,778
|
|
As of September 30, 2018, scheduled principal payments due on convertible notes payable are as follows:
Twelve months ended September 30,
|
|
|
|
2019
|
|
$
|
3,865,000
|
|
2020
|
|
|
3,000,000
|
|
2021
|
|
|
7,396,686
|
|
2022
|
|
|
-
|
|
2023
|
|
|
760,000
|
|
|
|
$
|
15,021,686
|
|
From July 30, 2013 through December 24, 2013, the Company sold convertible notes (the “2013 Notes”) and warrants to unaffiliated accredited investors totaling $1,902,500. The 2013 Notes had an original term of three years which was extended to 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. 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 2013 Notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. Notwithstanding the extended maturity date indicated above, the holders of the 2013 Notes are required, pursuant to an Intercreditor Agreement entered into on August 14, 2014, to stand still and not take any action with respect to their 2013 Notes or the previously entered security agreements or pledge agreement securing the same (even in the event of default or maturity), except for the right to convert the 2013 Notes to common stock in their sole discretion until the AC Midwest secured debt (see below) is paid in full. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Interest expense for the nine months ended September 30, 2018 and 2017, was $117,258 and $116,875, 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 nine months ended September 30, 2018 and 2017 on this discount was $80,269 and $115,182, respectively. As of September 30, 2018 and December 31, 2017, total principal of $990,000 and $1,550,000 was outstanding on these notes.
During the second quarter of 2018, the Company commenced and continues to make a private placement offering exempt from registration under the Securities Act, of up to $3,500,000 12.0% unsecured convertible promissory notes (the “2018 Unsecured Notes”) and warrants, to certain (i) accredited investors and (ii) holders of the 2013 Notes in the aggregate principal amount of $1,550,000 which holders have been given the opportunity to exchange their current notes for the new unsecured notes and warrants. The information provided herein does not constitute an offer to sell or a solicitation of an offer to buy any of the securities described herein. Such securities have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration with the SEC or an applicable exemption from such registration requirements.
On June 15, 2018, the Company issued 2018 Unsecured Notes totaling $560,000 and warrants to certain holders of the 2013 Notes in exchange for their secured 2013 Notes (see description above of the private placement offering commenced during the second quarter of 2018). The 2018 Unsecured Notes have a term of five years, bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share. For each dollar exchanged, the investor received a warrant to purchase one share of common stock of the Company at an exercise price of $0.70 per share. The 2018 Unsecured Notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. Loss on this debt exchange was $44,036. Interest expense for the nine months ended September 30, 2018 and 2017, was $22,140 and $0, respectively. A discount on the notes payable of $45,464 was recorded based on the value of the fair value of the note and warrants exchanged. On August 31, 2018, the Company issued an additional 2018 Note totaling $200,000 and warrants to an unaffiliated accredited investor. A discount on the notes payable of $28,900 was recorded based on the fair value of the warrants issued with this note. Amortized interest expense for the nine months ended September 30, 2018 and 2017 on this discount was $3,822 and $0, respectively. These securities were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act as well as under Section 3(a)(9) under the Securities Act. As of September 30, 2018 and December 31, 2017, total principal of $760,000 and $0 was outstanding on the 2018 Unsecured Notes.
New AC Midwest Secured Note
On November 29, 2016 the Company closed on the transactions contemplated by a new Amended and Restated Financing Agreement (the “Restated Financing Agreement”) entered into with AC Midwest Energy LLC (“AC Midwest”) on November 1, 2016 whereby at closing AC Midwest, which held various warrants to acquire shares of the Company’s common stock, exercised on a cashless basis a portion of its warrants for 10,000,000 shares of the Company’s common stock and exchanged previous AC Midwest Notes, together with all accrued and unpaid interest thereon, and the remaining unexercised portion of its warrants, for (i) a new 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 New AC Midwest Secured Note, which was to mature on December 15, 2018 and is guaranteed by MES, is nonconvertible 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 shall pay principal on the New AC Midwest Secured Note in equal installments of (i) $500,000 per quarter for the 2017 calendar year, (ii) $625,000 on March 15, 2018, (iii) 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.
On June 14, 2018, the Company along with MES entered into Amendment No. 1 (“Amendment No. 1”) to the Restated Financing Agreement with AC Midwest. Pursuant to Amendment No. 1, the parties agreed that the remaining principal balance ($521,686) due under the New AC Midwest Secured Note referenced therein (which prior to Amendment No. 1 was due on June 15, 2018) would be paid as follows: (a) $250,000 on or prior to June 15, 2018 (which was paid on that date), and (ii) the balance thereof on or prior to September 1, 2018. In addition, the parties agreed that following June 15, 2018, the New AC Midwest Secured Note shall bear interest on the unpaid principal balance thereof at a rate equal to the current interest rate provided therein plus 3.0% per annum until the remaining principal balance is paid in full.
On September 12, 2018, the Company along with MES entered into Amendment No. 2 (“Amendment No. 2”) to the Restated Financing Agreement with AC Midwest. Pursuant to Amendment No. 2, the parties agreed that the remaining principal balance of $271,686 due under the New AC Midwest Secured Note referenced therein would be paid on or prior to December 15, 2018.
The New AC Midwest Secured Note is secured, like the previous AC Midwest Notes which were exchanged and cancelled, by all of the assets of the Company and MES. Interest expense for the nine months ended September 30, 2018 and 2017 was $56,127 and $220,182, respectively. As of September 30, 2018 and December 31, 2017, total principal of $271,686 and $1,146,686 was outstanding on this note.
AC Midwest Subordinated Note
The AC Midwest Subordinated Note, which will mature on December 15, 2020 and is guaranteed by MES, is nonconvertible 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 shall pay principal on the AC Midwest Subordinated Note in equal installments of (i) $500,000 per quarter for the 2017 calendar year, (ii) $625,000 per quarter for the 2018 calendar year, and (iii) thereafter $750,000 per quarter, with a final payment of all outstanding principal together with such other amounts as shall then be due and owing from the Company to AC Midwest on the maturity date. Notwithstanding the foregoing, until the New AC Midwest Secured Note and a letter of credit note issued by the Company to AC Midwest on January 28, 2016 in the amount of $2,000,000 (the “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 on the AC Midwest Subordinated Note for the nine months ended September 30, 2018 was $698,563. As of September 30, 2018 and December 31, 2017, 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 nine months ended September 30, 2018 was $294,110. The LC Note was issued to evidence any indebtedness owed by the Company arising from any draws made under a letter of credit arranged for the Company by AC Midwest with its bank. Although no amounts have yet to be drawn on the letter of credit, the letter of credit remains available.
Note 8 – Equipment Notes Payable
The Company has the following equipment notes payable outstanding as of September 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
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.
|
|
$
|
24,252
|
|
|
$
|
32,833
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
27,002
|
|
|
|
35,449
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
28,943
|
|
|
|
34,468
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
32,088
|
|
|
|
40,385
|
|
|
|
|
|
|
|
|
|
|
On January 23, 2017, the Company entered into a retail installment purchase contract in the amount of $58,926, 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.
|
|
|
40,810
|
|
|
|
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.
|
|
|
30,625
|
|
|
|
36,554
|
|
|
|
|
|
|
|
|
|
|
Total equipment notes payable
|
|
|
183,720
|
|
|
|
228,827
|
|
|
|
|
|
|
|
|
|
|
Less Current Portion
|
|
|
63,359
|
|
|
|
61,177
|
|
|
|
|
|
|
|
|
|
|
Equipment notes payable, net of current portion
|
|
$
|
120,361
|
|
|
$
|
167,650
|
|
As of September 30, 2018, scheduled principal payments due on equipment notes payable are as follows:
For the year ended September 30,
|
|
|
|
2019
|
|
$
|
63,359
|
|
2020
|
|
|
65,686
|
|
2021
|
|
|
42,018
|
|
2022
|
|
|
12,657
|
|
|
|
$
|
183,720
|
|
Note 9 – Commitments and Contingencies
Property Leases
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 three times 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. The lease ended September 1, 2018.
On September 1, 2018, the Company entered into a one year lease for office space in Grand Forks, North Dakota. Rent is $575 monthly 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 September 30
|
|
|
|
2019
|
|
$
|
59,000
|
|
2020
|
|
|
34,000
|
|
|
|
$
|
93,000
|
|
Rent expense was approximately $76,000 and $84,000 for the nine months ended September 30, 2018 and 2017, respectively. Rent expense was approximately $24,000 and $29,000 for the three months ended September 30, 2018 and 2017.
Fixed Price Contract
The Company’s multi-year contracts with its commercial customers contain fixed prices for product. These contracts expire through 2019 and expose the Company to the potential risks associated with rising material costs during that same period.
Legal proceedings
In December 2017, one of our customers commenced an arbitration against us before the American Arbitration Association alleging that we breached certain price guarantees provided in a supply agreement and maximum contract year billings. On April 12, 2018, the parties executed an agreement settling this matter, which agreement includes certain revised billing terms for product which is sold to and purchased by such customer between April 16, 2018 and April 15, 2019. We do not expect the settlement to have a material adverse effect on our business, financial condition or results of operations.
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
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. Compensation expense for the nine months ended September 30, 2018 and 2017 on the issued shares was $138,750 and $69,375, respectively.
Note 11 - Stock Based Compensation
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 quarter ended September 30, 2018 is presented below:
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
7,550,457
|
|
|
$
|
1.29
|
|
|
|
3.2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
1,565,000
|
|
|
|
0.98
|
|
|
|
4.8
|
|
|
|
-
|
|
Expirations
|
|
|
(527,273
|
)
|
|
|
1.02
|
|
|
|
-
|
|
|
|
-
|
|
Cancellations
|
|
|
(125,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
December 31, 2017
|
|
|
8,463,184
|
|
|
|
1.26
|
|
|
|
3.0
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
1,174,105
|
|
|
|
0.26
|
|
|
|
4.6
|
|
|
|
-
|
|
Expirations
|
|
|
(625,000
|
)
|
|
|
0.70
|
|
|
|
-
|
|
|
|
-
|
|
September 30, 2018
|
|
|
9,012,289
|
|
|
|
1.17
|
|
|
|
2.2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
7,688,184
|
|
|
|
1.27
|
|
|
|
3.0
|
|
|
|
|
|
September 30, 2018
|
|
|
9,012,289
|
|
|
|
1.17
|
|
|
|
2.2
|
|
|
|
|
|
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 100%, and a risk free interest rate of 3%.
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.
On June 8, 2018, the Company granted nonqualified stock options to acquire an aggregate of 27,819 shares of the Company’s common stock under the Company’s 2017 Equity Plan to certain executive officers, employees and others. The options granted are exercisable at $0.29 per share, which is greater than the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan and represents the fair market value on May 31, 2018. 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 $4,882 in accordance with FASB ASC Topic 718.
On June 30, 2018, the Company granted nonqualified stock options to acquire an aggregate of 61,890 shares of the Company’s common stock under the Company’s 2017 Equity Plan to certain executive officers, employees and others. The options granted are exercisable at $0.21 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 $9,823 in accordance with FASB ASC Topic 718.
On July 31, 2018, the Company granted nonqualified stock options to acquire an aggregate of 92,681 shares of the Company’s common stock under the Company’s 2017 Equity Plan to certain executive officers, employees and others. The options granted are exercisable at $0.17 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 $11,093 in accordance with FASB ASC Topic 718.
On August 31, 2018, the Company granted nonqualified stock options to acquire an aggregate of 92,681 shares of the Company’s common stock under the Company’s 2017 Equity Plan to certain executive officers, employees and others. The options granted are exercisable at $0.25 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $16,696 in accordance with FASB ASC Topic 718.
On September 30, 2018, the Company granted nonqualified stock options to acquire an aggregate of 92,681 shares of the Company’s common stock under the Company’s 2017 Equity Plan to certain executive officers, employees and others. The options granted are exercisable at $0.26 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $18,213 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 100%, a risk free interest rate and the life of the warrant for the exercise period. When sold and issued warrants were valued in accordance with FASB ASC 815-10, the fair value was determined using a Monte Carlo Simulation Model.
On June 15, 2018, the Company issued unsecured convertible notes and warrants to unaffiliated accredited investors totaling $560,000 in exchange for outstanding secured convertible notes payable. The notes are convertible into one share of common stock, with the initial conversion ratio equal to $0.50 per share. The investors received a total of 560,000 warrants to purchase one shares of common stock with an exercise price of $0.70 per share. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act, as well as under Section 3(a)(9) under the Securities Act. Using a Black-Scholes Valuation model these warrants had a value of $89,450 which was recorded as a discount on the notes payable and will be amortized over the life of the associated notes payable.
On August 31, 2018, the Company issued unsecured convertible notes and warrants to unaffiliated accredited investors totaling $200,000. The notes are convertible into one share of common stock, with the initial conversion ratio equal to $0.50 per share. The investors received a total of 200,000 warrants to purchase one shares of common stock with an exercise price of $0.70 per share. These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Using a Black-Scholes Valuation model these warrants had a value of $28,900 which was recorded as a discount on the notes payable and will be amortized over the life of the associated notes payable.
The following table summarizes information about common stock warrants outstanding at September 30, 2018:
Outstanding
|
|
|
Exercisable
|
|
Exercise Price
|
|
|
Number Outstanding
|
|
|
Weighted
Average
Remaining Contractual Life (years)
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
0.87
|
|
|
|
1,303,300
|
|
|
|
0.61
|
|
|
$
|
0.87
|
|
|
|
1,303,300
|
|
|
$
|
0.87
|
|
|
0.75
|
|
|
|
627,924
|
|
|
|
0.07
|
|
|
|
0.65
|
|
|
|
627,924
|
|
|
|
0.65
|
|
|
0.70
|
|
|
|
760,000
|
|
|
|
4.77
|
|
|
|
0.50
|
|
|
|
760,000
|
|
|
|
0.50
|
|
|
0.65
|
|
|
|
270,000
|
|
|
|
0.22
|
|
|
|
0.65
|
|
|
|
270,000
|
|
|
|
0.50
|
|
|
0.45
|
|
|
|
150,000
|
|
|
|
2.17
|
|
|
|
0.45
|
|
|
|
150,000
|
|
|
|
0.45
|
|
|
0.35
|
|
|
|
2,712,098
|
*
|
|
|
1.24
|
|
|
|
0.35
|
|
|
|
2,712,098
|
|
|
|
0.35
|
|
$
|
0.35-$0.87
|
|
|
|
5,823,322
|
|
|
|
1.41
|
|
|
|
|
|
|
|
5,823,322
|
|
|
|
|
|
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
For the nine months ended September 30, 2018, the Company had a net operating loss carryforward offset by a valuation allowance and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At September 30, 2018, the Company's net operating loss carryforward was approximately $23.6 million. The deferred tax asset primarily related to accrued compensation and net operating losses. A 100% valuation allowance has been established due to the uncertainty of the utilization of these assets in future periods. As a result, the deferred tax asset was reduced to zero and no income tax benefit was recorded. The net operating loss carryforward, if not utilized, will begin to expire in 2031.
Section 382 of the Internal Code allows post-change corporations to use pre-change net operating losses, but limit the amount of losses that may be used annually to a percentage of the entity value of the corporation at the date of the ownership change. The applicable percentage is the federal long-term tax-exempt rate for the month during which the change in ownership occurs.
Note 14 – Subsequent Events
On October 8, 2018, the Company granted a nonqualified stock option to acquire 10,000 shares of the Company’s common stock under the Company’s 2017 Equity Plan to Frederick Van Zijl, who was appointed a director of the Company on that date. The option granted is 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 option is fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, this option was valued at $1,726 in accordance with FASB ASC Topic 718.
On October 31, 2018, the Company granted nonqualified stock options to acquire an aggregate of 92,681 shares of the Company’s common stock under the Company’s 2017 Equity Plan to certain executive officers, employees and others. The options granted are exercisable at $0.20 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 $14,010 in accordance with FASB ASC Topic 718.
On October 31, 2018, the Company issued an additional 2018 Unsecured Note totaling $100,000 and warrants to an unaffiliated accredited investor. A discount on the notes payable of $11,450 was recorded based on the fair value of the warrants issued with this note.