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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
Commission file number
(Exact name of Registrant as Specified in its Charter) |
| ||
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No. |
| ||
(Address of principal Executive offices) |
| (Zip Code) |
(
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
|
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes
State the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date: Common, $.001 par value per share,
MIDWEST ENERGY EMISSIONS CORP.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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Unregistered Sales of Equity Securities and Use of Proceeds. |
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| 2 |
| Table of Contents |
PART I – FINANCIAL INFOMATION
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements,” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and reflect our current expectations regarding our future growth, results of operations, cash flows, performance and business prospects, and opportunities, as well as assumptions made by, and information currently available to, our management. Forward-looking statements are generally identified by using words such as “anticipate,” “believe,” “plan,” “expect,” “intend,” “will,” and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. Forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those discussed under the caption “Risk Factors” in the Company’s 2021 Form 10-K. In addition, matters that may cause actual results to differ materially from those in the forward-looking statements include, among other factors, the gain or loss of a major customer, change in environmental regulations, disruption in supply of materials, capacity factor fluctuations of power plant operations and power demands, a significant change in general economic conditions in any of the regions where our customer utilities might experience significant changes in electric demand, a significant disruption in the supply of coal to our customer units, the loss of key management personnel, availability of capital and any major litigation regarding the Company.
Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances or for any other reason. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the Company’s filings and with the Securities and Exchange Commission.
| 3 |
| Table of Contents |
Item 1. Financial Statements.
MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY
Index to Condensed Consolidated Financial Information
As of and for the three months ended March 31, 2022
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| F-1 |
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| F-2 |
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Condensed Consolidated Unaudited Statements of Stockholders’ Deficit |
| F-3 |
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| F-4 |
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Notes to Condensed Consolidated Unaudited Financial Statements |
| F-5 |
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| 4 |
| Table of Contents |
MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
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| March 31, 2022 (unaudited) |
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| December 31, 2021 |
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ASSETS |
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Current assets |
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Cash |
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Accounts receivable |
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Inventory |
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Prepaid expenses and other current assets (related party of $95,500 and $70,000) |
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Total current assets |
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Security deposits |
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Property and equipment, net |
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Right of use asset - operating lease |
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Intellectual property, net |
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Total assets |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities |
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Accounts payable and accrued expenses (related party of $ |
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Current portion of equipment notes payable |
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Current portion of operating lease liability |
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Customer credits |
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Accrued salaries |
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Secured note payable – related party |
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Unsecured note payable, net of discount and issuance costs – related party |
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Total current liabilities |
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Operating lease liability |
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Profit share liability – related party |
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Total liabilities |
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COMMITMENTS AND CONTINGENCIES |
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Stockholders’ deficit |
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Preferred stock, $ |
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Common stock; $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ deficit |
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Total liabilities and stockholders’ deficit |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-1 |
| Table of Contents |
MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 |
(UNAUDITED) |
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| For the Three Months Ended March 31, 2022 |
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| For the Three Months Ended March 31, 2021 |
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Revenues |
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Costs and expenses: |
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Cost of sales |
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Selling, general and administrative expenses (related party of $75,000 and $100,000) |
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Interest expense letter of credit fees (related party of $497,661 and $497,660) |
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Loss on change in fair value of profit share |
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Gain on extinguishment of debt |
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Total costs and expenses |
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Loss before provision for income taxes |
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Provision for income taxes |
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Net loss |
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Net loss per common share-basic and diluted: |
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Weighted average common shares outstanding - basic and diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-2 |
| Table of Contents |
MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT |
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 |
(UNAUDITED) |
Three Months Ended March 31, 2022 | ||||||||||||||||||||
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| Additional |
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| Accumulated |
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| Par Value |
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| Capital |
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| Total |
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Balance - January 1, 2022 |
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Share based compensation expense |
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Stock issued for cashless exercise of options |
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Net loss |
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Balance - March 31, 2022 |
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Three Months Ended March 31, 2021 | ||||||||||||||||||||
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| Additional |
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Balance - January 1, 2021 |
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Stock issued for interest payable on convertible notes |
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Stock issued for conversion of convertible notes |
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Stock issued for exercise of warrants |
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Stock issued for cashless exercise of warrants |
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Stock issued for services |
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Share based compensation expense |
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Net loss |
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Balance - March 31, 2021 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-3 |
| Table of Contents |
MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 | ||||||||
(UNAUDITED) | ||||||||
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| For the Three Months Ended March 31, 2022 |
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| For the Three Months Ended March 31, 2021 |
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Cash flows from operating activities |
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Net loss |
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| $ | ( | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Stock-based compensation – amortization of prepaid services |
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Stock-based compensation expense |
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Amortization of discount of notes payable |
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Amortization of debt issuance costs |
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Amortization of right to use assets – operating lease |
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Amortization of patent rights |
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Depreciation expense |
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Gain on forgiveness of debt |
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Loss on change in fair value of profit share |
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Changes in operating assets and liabilities |
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(Increase) Decrease in accounts receivable |
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Decrease in inventory |
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(Decrease) Increase in prepaid expenses and other assets |
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(Decrease) Increase in accounts payable and accrued liabilities and accrued salaries |
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Decrease in operating lease liability |
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Net cash (used in) provided by operating activities |
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Cash flows from financing activities |
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Payments of notes payable |
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Payments of equipment notes payable |
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Proceeds from exercise of warrants |
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Proceeds from the issuance of notes payable |
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Net cash (used in) provided by financing activities |
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Net (decrease) increase in cash and cash equivalents |
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Cash and cash equivalents - beginning of period |
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Cash and cash equivalents - end of period |
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SUPPLEMENTAL CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest |
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Taxes |
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SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS |
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Stock issued for conversion of convertible notes |
| $ |
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| $ |
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Stock issued for prepaid services |
| $ |
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| $ |
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Stock issued for interest payable |
| $ |
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| $ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-4 |
| Table of Contents |
MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization
Midwest Energy Emissions Corp.
Midwest Energy Emissions Corp. (the “Company”) is organized under the laws of the State of Delaware with
MES, Inc.
MES, Inc. is incorporated in the State of North Dakota. MES, Inc. is a wholly owned subsidiary of Midwest Energy Emissions Corp. and is engaged in the business of developing and commercializing state of the art control technologies relating to the capture and control of mercury emissions from coal fired boilers in the United States and Canada.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of Rule 8-03 of Regulation S-X promulgated by the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed on April 5, 2022, from which the accompanying condensed consolidated balance sheet dated December 31, 2021 was derived.
In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the financial position as of March 31, 2022, and results of operations, changes in stockholders’ deficit and cash flows for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Midwest Energy Emissions Corp. and its wholly-owned subsidiary, MES, Inc. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, valuation of equity issuances and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company uses estimates in accounting for, among other items, profit share liability, revenue recognition, allowance for doubtful accounts, stock-based compensation, income tax provisions, excess and obsolete inventory reserve and impairment of intellectual property. Actual results could differ from those estimates.
Recoverability of Long-Lived and Intangible Assets
Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of the long-lived and/or intangible assets would be adjusted, based on estimates of future discounted cash flows. The Company evaluated the recoverability of the carrying value of the Company’s property and equipment, right of use asset and intellectual property. No impairment charges were recognized for the three months ended March 31, 2022 and 2021.
| F-5 |
| Table of Contents |
Fair Value of Financial Instruments
The fair value hierarchy has three levels based on the inputs used to determine fair value, which are as follows:
| ☐ | Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date. |
| ☐ | Level 2 — Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. |
| ☐ | Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. |
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Cash was the only asset measured at fair value on a recurring basis by the Company at March 31, 2022 and December 31, 2021 and is considered to be Level 1.
Financial instruments include cash, accounts receivable, accounts payable, customer credits and short-term debt. The carrying amounts of these financial instruments approximated fair value at March 31, 2022 and December 31, 2021 due to their short-term maturities.
The fair value of the promissory notes payable at March 31, 2022 and December 31, 2021 approximated the carrying amount as the notes were recently issued at interest rates prevailing in the market and interest rates have not significantly changed as of March 31, 2022 and December 31, 2021. The fair value of the promissory notes payable was determined on a Level 2 measurement. Discounts on issued debt, as well as debt issuance costs, are amortized over the term of the individual promissory notes.
The fair value of the profit share liability at March 31, 2022 and December 31, 2021 was calculated using a discounted cash flow model based on estimated future cash payments. The fair value of the profit share liability was determined on a Level 3 measurement. These values are determined using pricing models for which the assumptions utilized management’s estimates.
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.
|
|
|
| Fair Value Measurement as of |
| |||||||||||
|
|
|
|
| March 31, 2022 |
| ||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Assets: |
|
|
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|
|
|
|
|
|
|
|
| ||||
Cash |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Assets |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory notes |
|
|
|
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|
| ||||
Profit share liability – related party |
|
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|
|
|
|
|
|
|
|
|
| ||||
Total Liabilities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
| Fair Value Measurement as of |
| |||||||||||
|
|
|
|
| December 31, 2021 |
| ||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Assets: |
|
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|
|
|
|
|
|
|
|
|
| ||||
Cash |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Assets |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory notes |
|
|
|
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|
|
|
| ||||
Profit share liability – related party |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Liabilities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| F-6 |
| Table of Contents |
Foreign Currency Translation
The Company’s functional currency is the United States Dollar (the “U.S. Dollar”). The Company engages in foreign currency denominated transactions with customers that operate in functional currencies other than the U.S. Dollar. Assets and liabilities denominated in foreign currencies are translated into U.S. Dollar amounts at the period-end exchange rates. Sales and purchases and income and expense transactions that are denominated in foreign currencies are translated into U.S. Dollar amounts at the prevailing rates of exchange on the transaction date. Adjustments arising from foreign currency transactions are reflected in the statement of operations. For the three months ended March 31, 2022 and 2021, there were no material foreign exchange gains or losses recognized by the Company in its statements of operations.
Revenue Recognition
The Company records revenue in accordance with ASC 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
Revenue is recognized when the Company satisfies its performance obligation under the contract by transferring the promised product to its customer that obtains control of the product. A performance obligation is a promise in a contract to transfer a distinct product to a customer. Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales and other taxes are excluded from revenues. Invoiced shipping and handling costs are included in revenue.
| F-7 |
| Table of Contents |
Disaggregation of Revenue
The Company generated revenue for the three months ended March 31, 2022 and 2021 by (i) delivering product to its commercial customers, (ii) completing and commissioning equipment projects at commercial customer sites and (iii) performing demonstrations of its technology at customers with the intent of entering into long term supply agreements based on the performance of the Company’s products during the demonstrations and (iv) licensing its technology to customers.
Revenue for product sales is recognized at the point of time in which the customer obtains control of the product, at the time title passes to the customer upon shipment or delivery of the product based on the applicable shipping terms.
Revenue for equipment sales is recognized upon commissioning and customer acceptance of the installed equipment per the terms of the purchase contract.
Revenue for demonstrations and consulting services is recognized when performance obligations contained in the contract have been completed, typically the completion of necessary field work and the delivery of any required analysis per the terms of the agreement.
The following table presents sales by operating segment disaggregated based on the type of product and geographic region for the year ended March 31, 2022 and 2021.
|
| Three months ended March 31, 2022 |
|
| Three months ended March 31, 2021 |
| ||||||||||
|
| United States |
|
| Total |
|
| United States |
|
| Total |
| ||||
Product revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
License revenue |
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| ||||
Demonstrations Consulting revenue |
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| ||||
Equipment revenue |
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|
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Income Taxes
The Company follows the asset and liability method of accounting for income taxes under FASB ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
FASB ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of March 31, 2022 and December 31, 2021. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
| F-8 |
| Table of Contents |
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”).
In addition, the CARES Act raises the corporate charitable
Basic and Diluted Loss Per Common Share
Basic net loss per common share is computed using the weighted average number of common shares outstanding. Diluted loss per share reflects the potential dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. There were no dilutive potential common shares as of March 31, 2022 and 2021, because the Company incurred net losses and basic and diluted losses per common share are the same. The following common stock equivalents were excluded from the computation of diluted net loss per share of common stock because they were anti-dilutive. The exercise of these common stock equivalents would dilute earnings per share if the Company becomes profitable in the future.
|
| March 31, |
|
| March 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
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| ||
Stock Options |
|
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|
| ||
Warrants |
|
|
|
|
|
| ||
Convertible debt |
|
| - |
|
|
|
| |
Total common stock equivalents excluded from diluted net loss per share |
|
|
|
|
|
| ||
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk consist of cash and equivalents on deposit with financial institutions and accounts receivable. The Company’s cash as of March 31, 2022 and December 31, 2021 is maintained at high-quality financial institutions and has not incurred any losses to date.
Customer and Supplier Concentration
For each of the three months ended March 31, 2022 and 2021,
| F-9 |
| Table of Contents |
For each of the three months ended March 31, 2022 and 2021,
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.
| F-10 |
| Table of Contents |
Recently Issued Accounting Standards
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.
Note 3 – Going Concern and Financial Condition
Under ASC 205-40, Presentation of Financial Statements—Going Concern, the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40.
The accompanying condensed consolidated financial statements as of March 31, 2022 have been prepared assuming the Company will continue as a going concern. As reflected in the condensed consolidated financial statements, the Company had approximately $
These factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the issuance of these condensed consolidated financial statements. The Company has taken steps to alleviate the doubt raised by the application of ASC 205-40. During 2021, the Company eliminated $
The accompanying condensed consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
Note 4 - Inventory
Inventory was comprised of the following at March 31, 2022 and December 31, 2021:
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Raw Materials |
| $ |
|
| $ |
| ||
Spare Parts |
|
|
|
|
|
| ||
Finished goods |
|
|
|
|
|
| ||
|
| $ |
|
| $ |
| ||
| F-11 |
| Table of Contents |
Note 5 - Property and Equipment, Net
Property and equipment at March 31, 2022 and December 31, 2021 are as follows:
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Equipment installation |
| $ |
|
| $ |
| ||
Trucking equipment |
|
|
|
|
|
| ||
Office equipment, computer equipment and software |
|
|
|
|
|
| ||
Total equipment |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
Construction in process |
|
|
|
|
|
| ||
Property and equipment, net |
| $ |
|
| $ |
| ||
Note 6 - Intellectual Property
On January 15, 2009, the Company entered into an “Exclusive Patent and Know-How License Agreement Including Transfer of Ownership” with the Energy and Environmental Research Center Foundation, a non-profit entity. Under the terms of the Agreement, the Company has been granted an exclusive license by the Energy and Environmental Research Center Foundation for the technology to develop, make, have made, use, sell, offer to sell, lease, and import the technology in any coal-fired combustion systems (power plant) worldwide and to develop and perform the technology in any coal-fired power plant in the world.
On April 24, 2017, the Company closed on the acquisition of all patent rights from the Energy and Environmental Research Center Foundation including all patents and patents pending, domestic and foreign, relating to the foregoing technology. A total of
License and patent costs capitalized as of March 31, 2022 and December 31, 2021 are as follows:
March 31, December 31, 2022 2021 Licenses and patents Less: Accumulated amortization Intellectual property, net $ $ ( ) ( ) $ $
| F-12 |
| Table of Contents |
Note 7 - Notes Payable
On February 25, 2020, and pursuant to a Business Loan Agreement entered into with a banking institution, the Company’s wholly owned subsidiary, MES, Inc. closed on a one-year secured loan in the principal amount of $
On April 14, 2020, the Company received loan proceeds in the amount of $
In February 2021, the Company received second draw loan proceeds in the amount of $
| F-13 |
| Table of Contents |
Note 8 - Convertible Notes Payable
From July 30, 2013 through December 24, 2013, the Company sold convertible notes and warrants to unaffiliated accredited investors totaling $
On June 15, 2018, the Company issued 2018 Unsecured Convertible Notes (the “2018 Unsecured Notes”) totaling $
| F-14 |
| Table of Contents |
Note 9 - Related Party
Secured Note Payable
On November 29, 2016, pursuant to a new restated financing agreement entered with AC Midwest Energy, LLC (“AC Midwest”) on November 1, 2016, the Company closed on a new secured note with AC Midwest (the “AC Midwest Secured Note”) in the original principal amount of $
Unsecured Note Payable
The Company has the following unsecured note payable - related party outstanding as of March 31, 2022 and December 31, 2021:
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Unsecured note payable |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Less discounts and debt issuance costs |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
Total unsecured note payable |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Less current portion |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
Unsecured note payable, net of current portion |
| $ |
|
| $ |
| ||
| F-15 |
| Table of Contents |
In accordance with ASC 470-60-15-5, since the present value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted for the amendment to note as a debt extinguishment. Accordingly, the Company wrote off the remaining debt discount on the original debentures of $
The New AC Midwest Unsecured Note, which has been issued in exchange for the AC Midwest Subordinated Note which has now been cancelled, will mature on
AC Midwest shall be entitled to a profit participation preference equal to 1.0 times the original principal amount (the “Profit Share”). If the original principal amount had been paid in full on or prior to August 25, 2020, AC Midwest would have been entitled to a profit participation preference equal to 0.5 times the original principal amount.
The Profit Share is “non-recourse” and shall only be derived from and computed on the basis of, and paid from, Net Litigation Proceeds from claims relating to the Company’s intellectual property, Net Revenue Share and Adjusted Free Cash Flow (as such terms are defined in the Unsecured Note Financing Agreement).
The Profit Share
In connection with the New AC Midwest Unsecured Note the Company shall pay the principal outstanding, as well as the Profit Share,
| F-16 |
| Table of Contents |
The following are the changes in the profit share liabilities during the three months ended March 31, 2022 and 2021.
Profit Share as of January 1, 2022 |
| $ |
| |
Addition |
|
|
| |
Loss on change in fair value of profit share |
|
|
| |
Profit Share as of March 31, 2022 |
| $ |
|
Profit Share as of January 1, 2021 |
| $ |
| |
Addition |
|
|
| |
Loss on change in fair value of profit share |
|
|
| |
Profit Share as of March 31, 2021 |
| $ |
|
Debt Repayment and Exchange Agreement
On June 1, 2021, the Company, along with MES, entered into a Debt Repayment and Exchange Agreement with AC Midwest, which will repay all existing secured and unsecured debt obligations presently held by AC Midwest (the “Debt Repayment Agreement”).
Pursuant to the Debt Repayment Agreement, the Company shall at closing repay the principal balance outstanding on the AC Midwest Secured Note in cash, together with any other amounts due and owing under such note, and repay the outstanding debt under the New AC Midwest Unsecured Note by paying and issuing a combination of cash and shares of common stock which AC Midwest has agreed to accept in full and complete repayment of the obligations thereunder.
At closing, and with regard to the New AC Midwest Unsecured Note, the Company shall pay AC Midwest $
The closing is subject to various conditions including but not limited to the completion of an offering of equity securities resulting in net proceeds of at least $
| F-17 |
| Table of Contents |
Related Party Transactions
As of December 31, 2021 the Company has a $
Note 10 - Operating Leases
In 2016, the Company entered into a six-year agreement to lease trailers used in the delivery of its products. Monthly payments currently total $
On January 27, 2015, the Company entered into a lease for office space in Lewis Center, Ohio, commencing
On July 1, 2015, the Company entered into a five-year lease for warehouse space in Corsicana, Texas. Rent is $
On September 1, 2019, the Company entered into a one-year lease for office space in Grand Forks, North Dakota. Monthly rent is $
Future remaining minimum lease payments under these non-cancelable leases are as follows:
For the twelve months ended March 31, |
|
|
| |
2023 |
| $ |
| |
2024 |
|
|
| |
Total |
|
|
| |
Less discount |
|
| ( | ) |
Total lease liabilities |
|
|
| |
Less current portion |
|
| ( | ) |
Operating lease obligation, net of current portion |
| $ |
| |
The weighted average remaining lease term for operating leases is
For the three months ended March 31, 2022, the Company’s lease cost consists of the following components, each of which is included in costs and expenses within the Company’s consolidated statements of operations:
| F-18 |
| Table of Contents |
For the Three Months Ended March 31, 2022 For the Three Months Ended March 31, 2021 Operating lease cost Short term lease costs Total lease costs $ $ $ $
Note 11 - Commitments and Contingencies
Fixed Price Contract
The Company’s multi-year contracts with its commercial customers contain fixed prices for product.
Legal proceedings
On July 17, 2019,
During 2020, each of the four major utility defendants in the above action filed petitions for Inter Partes Review with the United States Patent and Trademark Office, seeking to invalidate certain claims to the patents which are subject to the litigation.
Between July 2020 and January 2021, we entered into agreements with each of the four major utility defendants in such action which included certain monetary arrangements and pursuant to which we have dismissed all claims brought against each of them and their affiliates, and such parties have withdrawn from petitions for Inter Partes Review with the United States Patent and Trademark Office. Such agreements entered into with such parties provide each of them and their affiliates with a non-exclusive license to certain Company patents (related to the Company’s two-part Sorbent Enhancement Additive (SEA®) process) for use in connection with such parties’ coal-fired power plants.
The above described proceedings are continuing with respect to the other parties involved. On May 20, 2021, a U.S. District Court Magistrate Judge issued a report and recommendation that the above action should be permitted to proceed against 16 refined coal defendants named in the action directly involved in the refined coal program and operations, and be dismissed against 12 other defendants, primarily affiliated entities of the refined coal operators. Such report was issued in connection with certain motions to dismiss filed by the refined coal defendants. In September 2021, the Company received approval from the District Judge of the U.S. District Court in Delaware of the adoption of this report and recommendation of the Magistrate Judge to allow the Company to proceed with litigation claims against certain refined coal entities.
As a result of an application made by the Company to the Court in March 2022 to add additional parties to the action (all affiliated entities of the already named defendants), there are now 24 refined coal defendants named in the action. In connection with such application, the District Court Magistrate Judge ruled in April 2022 that certain parties could be added but denied the application with respect to certain others. A jury trial date has been scheduled for September 2023.
| F-19 |
| Table of Contents |
Except for the foregoing disclosures, the Company is not presently aware of any other material pending legal proceedings to which the Company is a party or of which any of its property is the subject.
Litigation, including patent litigation, is inherently subject to uncertainties. As such, there can be no assurance that the Company will be successful in litigating and/or settling any of these claims.
Note 12 - Stock Based Compensation
Stock Based Compensation
Stock based compensation consists of the amortization of common stock, stock options and warrants issued to employees, directors and consultants. For the three months ended March 31, 2022 and 2021, stock based compensation expense amounted to $
Common Stock
On March 23, 2021, and pursuant to a consulting agreement dated November 1, 2020, as amended on March 19, 2021, with a nonaffiliated third party, the Company issued
On March 30, 2021, and pursuant to a business development agreement dated March 30, 2021 with a nonaffiliated third party, the Company issued
On December 1, 2021, and pursuant to a consulting agreement dated December 1, 2021 with a nonaffiliated third party, the Company issued
| F-20 |
| Table of Contents |
Stock Options
The Company accounts for stock-based compensation awards in accordance with the provisions of ASC 718, which addresses the accounting for employee stock options which requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the condensed consolidated financial statements over the vesting period based on the estimated fair value of the awards.
On January 24, 2022, the Company extended the expiration dates of certain previously granted nonqualified stock options (which were due to expire in February 2022) which were granted to five individuals to acquire an aggregate of
On February 2, 2022, the Company issued
A summary of stock option activity is presented below:
|
| Number of Shares |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Life (years) |
|
| Aggregate Intrinsic Value |
| ||||
December 31, 2021 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants |
|
| - |
|
|
|
|
|
|
| - |
|
| $ | - |
|
Expirations |
|
| ( | ) |
| $ |
|
|
|
|
|
|
|
|
| |
Exercised |
|
| ( | ) |
| $ |
|
|
| - |
|
|
| - |
| |
March 31, 2022 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $
| F-21 |
| Table of Contents |
Note 13 - Warrants
Sold and issued warrants are subject to the provisions of FASB ASC 815-10, the Company utilized a Black-Scholes options pricing model to value the warrants sold and issued. This model requires the input of highly subjective assumptions such as the expected stock price volatility and the expected period until the warrants are exercised. When calculating the value of warrants issued, the Company uses a volatility factor, a risk-free interest rate and the life of the warrant for the exercise period.
From January 23, 2021 to February 16, 2021, the Company issued
On February 17, 2021, the Company issued
On March 8, 2021, the Company issued an aggregate of
The following is a summary of the Company’s warrant activity:
|
| Number of Shares |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Life (years) |
|
| Aggregate Intrinsic Value |
| ||||
December 31, 2021 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Expirations |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| |
Exercised |
|
| - |
|
|
|
|
|
| - |
|
|
| - |
| |
March 31, 2022 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at: |
|
|
|
|
|
|
|
|
|
|
|
|
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March 31, 2022 |
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| $ |
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| $ |
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| F-22 |
| Table of Contents |
The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.43 as of March 31, 2022, which would have been received by the warrant holders had all warrant holders exercised their warrants as of that date.
The following table summarizes information about common stock warrants outstanding at March 31, 2022:
Outstanding and Exercisable | ||||||||||||||
Exercise Price |
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| Number Outstanding |
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| Weighted Average Remaining Contractual Life (years) |
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| Weighted Average Exercise Price |
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$ |
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| $ |
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$ |
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| $ |
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Note 14 - Subsequent Events
The Company has performed an evaluation of subsequent events through the date the condensed consolidated financial statements for the period ended March 31, 2022 were issued, and has determined that there have been no material subsequent events requiring disclosure.
| F-23 |
| Table of Contents |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere within this report. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Forward-Looking Statements” in “Part I” preceding “Item 1 – Financial Statements.” You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2021, as well as our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission.
Overview
Midwest Energy Emissions Corp. (the “Company”, “we”, “us” and “our”) is an environmental services and technologies company developing and delivering patented and proprietary solutions to the global power industry. Our leading-edge services have been shown to achieve mercury emissions removal at a significantly lower cost and with less operational impact to coal-fired power plants than currently used methods, while maintaining and/or increasing power plant output and preserving the marketability of byproducts for beneficial use.
North America is currently the largest market for our technology. The U.S. EPA MATS (Mercury and Air Toxics Standards) rule requires that all coal and oil-fired power plants in the U.S., larger than 25MWs, must limit mercury in its emissions to below certain specified levels, according to the type of coal burned. Power plants were required to begin complying with MATS on April 16, 2015, unless they were granted a one-year extension to begin to comply. MATS, along with many state and provincial regulations, form the basis for mercury emission capture at coal fired plants across North America. Under the MATS regulation, Electric Generating Units (“EGUs”) are required to remove about 90% of the mercury from their emissions. We believe that we continue to meet the requirements of the industry as a whole and our technologies have been shown to achieve mercury removal levels compliant with all state, provincial and federal regulations at a lower cost and with less plant impact than our competition.
As is typical in this market, we are paid by the EGU based on how much of our material is injected to achieve the needed level of mercury removal. Our current clients pay us as material is delivered to their facility. Clients will use our material whenever their EGUs operate, although EGUs are not always in operation. EGUs typically may not be in operation due to maintenance reasons or when the price of power in the market is less than their cost to produce power. Thus, our revenues from EGU clients will not typically be a consistent stream but will fluctuate, especially seasonally as the market demand for power fluctuates.
The MATS regulation has been subject to legal challenge since being enacted. In June 2015, the U.S. Supreme Court held that the EPA unreasonably failed to consider costs in determining whether it is “appropriate and necessary” to regulate hazardous air pollutants, including mercury, from power plants, but left the rule in place. On remand, following the Supreme Court’s instructions to consider costs, the EPA in April 2016 issued a final supplemental finding reaffirming the MATS rule on the ground that it is supported by the cost analysis the Supreme Court required. That supplemental finding remains under review by the D.C. Circuit. In April 2017, the EPA asked the court to place that litigation in abeyance, stating that the Agency then under the Trump Administration was reviewing the supplemental finding to determine whether it should be reconsidered in whole or in part. The court granted the EPA’s abeyance request which has remained in place. In April 2020, the EPA concluded that the 2016 supplemental finding was flawed in part due to its reliance on co-benefits to justify MATS and withdrew EPA’s 2016 “appropriate-and-necessary” determination as erroneous, but left the 2011 MATS rule in place pursuant to D.C. Circuit case law holding that a source category may only be removed from the list of categories to be regulated through a rigorous delisting process that cannot currently be satisfied by the EPA. Upon taking office, the Biden Administration in January 2021 directed the EPA to review the previous Administration’s actions on various environmental matters including the withdrawal of the “appropriate and necessary” determination, for conformity with Biden Administration environmental policy. In February 2021, the Biden Administration requested that the judicial review of the supplemental finding withdrawal be held in abeyance which was granted by the court and remains in place. On January 31, 2022, the EPA issued a proposal to revoke the reconsideration step made by the EPA in April 2020 and affirm that it is appropriate and necessary to regulate hazardous pollutants for coal and oil-fired EGUs.
Nevertheless, legal challenges may continue with respect to the MATS regulation which could extend uncertainty over the status of MATS for a number of years. Investors should note that any changes to the MATS rule could have a negative impact on our business.
| 5 |
| Table of Contents |
We remain focused on positioning the Company for short and long-term growth, including focusing on execution at our customer sites and on continual operation improvement. We continue to make refinements to all of our key products, as we continue to focus on the customer and its operations. As part of our overall strategy, we have a number of initiatives which we believe will be able to drive our short and long-term growth.
We continue to seek new utility customers for our technology in order for them to meet the MATS requirements as well as maintaining our contractual arrangements with our current customers. We also seek license agreements with utilities while allowing them to use our SEA® technologies without our supply of products. During 2021 and early 2022, we have announced various supply contract extensions, new supply business and license agreements. We expect additional supply business and license agreements during the remainder of 2022 and thereafter, including converting certain licensees to supply customers.
In February 25, 2019, we were able to complete the restructuring of our unsecured and secured debt obligations held by AC Midwest Energy LLC extending the maturity dates of these debts until 2022 and eliminating quarterly principal payment requirements. This restructuring reflected the commitment of our financial partner in our efforts to attract new business, manage our present customers and monetize our patent portfolio. In June 2021, we announced that we had entered into a Debt Repayment and Exchange Agreement with AC Midwest which will repay all existing secured and unsecured debt obligations held by AC Midwest. Pursuant to such agreement, we will repay the existing $0.3 million secured note outstanding in cash as well as the existing $13.2 million principal amount outstanding under the unsecured note held by AC Midwest through a combination of cash and stock. AC Midwest is also entitled to a certain non-recourse profit share under the unsecured note which will be satisfied through a combination of cash and stock. The closing is subject to various conditions including but not limited to the completion of an offering of equity securities resulting in net proceeds of at least $12.0 million by December 31, 2021, which has been extended to June 30, 2022.
From June through October 2019, we raised $2,600,000 in a private placement offering of 12.0% unsecured convertible promissory notes and warrants sold and issued to certain accredited investors. In February 2021, $50,000 of such principal was voluntarily converted into shares of common stock, and in June 2021, the remaining principal balance of $2,550,000 was voluntarily converted by the holders thereof into shares of common stock of the Company.
In July 2019, we announced that we had initiated patent litigation against defendants in the U.S. District Court for the District of Delaware for infringement of certain patents which relate to our two-part Sorbent Enhancement Additive (SEA®) process for mercury removal from coal-fired power plants. Between July 2020 and January 2021, we entered into agreements with each of the four major utility defendants in the patent litigation commenced in 2019 which agreements included certain monetary arrangements and pursuant to which we have dismissed all claims brought against each of them and their affiliates, and such parties have withdrawn from petitions for Inter Partes Review with the U.S. Patent and Trademark Office. Such agreements entered into with such parties provide each of them and their affiliates with a non-exclusive license to certain Company patents (related to our two-part Sorbent Enhancement Additive (SEA®) process) for use in connection with such parties’ coal-fired power plants. One of the agreements has facilitated an ongoing business relationship with that party. The above described proceedings are continuing with respect to the other parties involved. In May 2021, a U.S. District Court Magistrate Judge issued a report and recommendation that such litigation should be permitted to proceed against 16 refined coal defendants named in the action directly involved in the refined coal program and operations, and be dismissed against 12 other defendants, primarily affiliated entities of the refined coal operators. In September 2021, such report and recommendation was approved by the District Judge for the United States District Court for the District of Delaware which will allow us to proceed against certain refined coal entities named in the lawsuit. As a result of an application made by the Company to the Court in March 2022 to add additional parties to the action (all affiliated entities of the already named defendants), there are now 24 refined coal defendants named in the action. In connection with such application, the District Court Magistrate Judge ruled in April 2022 that certain parties could be added but denied the application with respect to certain others. A jury trial date has been scheduled for September 2023.
In October 2019, we entered into a license and development agreement with a nonrelated third-party entity located in Alabama pursuant to which the parties have agreed to work together to develop a plan to commercialize and market certain technology owned by such entity related to the removal of mercury from air and water emissions generated by coal burning power plants.
During the first quarter of 2021, we announced new technologies under development intended to improve the processing of rare earth elements (REEs) in North America. Such technologies are under development in conjunction with our collaboration with such Alabama third party entity and its affiliates. Such technologies focus on improving the cost of extracting rare earth minerals along with improving the environmental footprint of extracting those REEs from their solvent state. Such technologies are being evaluated and tested at Pennsylvania State University’s College of Earth and Mineral Sciences. While there can be no assurance, we are hopeful that these technologies can be commercialized at a future date.
In addition to the $2.6 million in convertible notes which were converted into shares of common stock in the first and second quarters as described above, during the first quarter of 2021, we eliminated $1,830,000 of other convertible notes originally issued in 2013 and 2018 through conversions to shares of common stock. During the third quarter of 2021, we issued 20,000 shares of common stock to a certain holder of notes issued in 2013 for the conversion of outstanding principal in the amount of $10,000 and prepaid the outstanding principal balance of another of such notes issued in 2013 in the principal amount of $10,000. As a result, there are no convertible notes outstanding as of December 31, 2021, compared to $4,450,000 in convertible notes outstanding as of December 31, 2020.
Although we face a host of challenges and risks, we are optimistic about our future and expect our business to grow substantially.
Effects of the COVID-19 Pandemic
It should be noted that the coronavirus (COVID-19) pandemic has impacted various businesses throughout the world since early 2020, including travel restrictions and the extended shutdown of certain businesses in impacted geographic regions. During this time, we have continued to conduct our operations while responding to the pandemic with actions to mitigate adverse consequences to our employees, business, supply chain and customers. Nevertheless, the duration and scope of the COVID-19 pandemic continues to be uncertain. If the coronavirus situation does not improve during 2022 or should worsen, we may experience disruptions to our business including, but not limited to, the availability of raw materials, equipment, to our workforce, or to our business relationships with other third parties.
| 6 |
| Table of Contents |
Results of Operations
Revenues
We generated revenues of approximately $3,342,000 and $3,027,000 for the three months ended March 31, 2022 and 2021, respectively. Such revenues were primarily derived from sorbent product sales which were approximately $3,198,000 and $2,031,000 for the three months ended March 31, 2022 and 2021, respectively. The increase in revenues from prior year period is primarily driven by increased sorbent product sales due to the increased supply demands in the coal-fired market as well as expansion of our customer base, offset by a decrease in licensing revenues which were approximately $70,000 for the three months ended March 31, 2022 compared to approximately $946,000 for the three months ended March 31, 2021.
Costs and Expenses
Cost of sales were approximately $2,342,000 and $1,491,000 for the three months ended March 31, 2022 and 2021, respectively. This increase in cost of sales of approximately $851,000 is primarily attributable to an approximate $1,167,000 increase in sorbent product sales in the first quarter compared to the prior year period.
Selling, general and administrative expenses were approximately $1,486,000 and $1,453,000 for the three months ended March 31, 2022 and 2021, respectively.
Total costs and expenses were approximately $4,476,000 and $3,441,000 during the three months ended March 31, 2022 and 2021, respectively. The increase in total costs and expenses for the three months ended March 31, 2022 is primarily attributable to the increase in cost of sales. In addition, there was a gain on extinguishment of debt recognized in the three months ended March 31, 2021 in the approximate amount of $299,000, for which there was not a comparable item recognized in the three months ended March 31, 2022.
Interest expense related to the financing of capital was approximately $498,000 and $676,000 for the three months ended March 31, 2022 and 2021, respectively. The breakdown of interest expense for the three months ended March 2022 and 2021 is as follows:
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
| (In thousands) |
| |||||
|
|
|
|
|
|
| ||
Interest expense on notes payable |
| $ | 11 |
|
| $ | 146 |
|
Accelerated interest expense upon conversion of notes |
|
| - |
|
|
| 43 |
|
Amortization of discount of notes payable |
|
| 457 |
|
|
| 457 |
|
Amortization of debt issuance costs |
|
| 30 |
|
|
| 30 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 498 |
|
| $ | 676 |
|
| 7 |
| Table of Contents |
Loss on change in fair value of profit share liability (relating to the restructured unsecured debt obligation held by AC Midwest Energy LLC) were approximately $149,000 and $121,000 for the three months ended March 31, 2022 and 2021, respectively. The change is primarily attributed to an increase in the fair value of the profit share liability. There were no significant changes to the underlying model during the three months ended March 31, 2022.
Gain on forgiveness of debt of $299,300 relates to the loan proceeds we received in April 2020 pursuant to the Paycheck Protection Program (“PPP”) under the CARES Act. Such loan was forgiven in January 2021 pursuant to the applicable PPP requirements.
Net Loss
For the three months ended March 31, 2022 and 2021, we had a net loss of approximately $1,148,000 and $418,000, respectively. Although revenues increased in the three months ended March 31, 2022 compared to the prior year period, such change in net loss was primarily due to the increase in cost of sales, together with the gain on extinguishment of debt which occurred in 2021 for which there was not a comparable item in the first three months of 2022, offset by a decrease in interest expense in the first quarter of 2022 compared to the prior year period.
Liquidity and Capital Resources
We had approximately $377,000 in cash on our balance sheet at March 31, 2022 compared to approximately $1,388,000 at December 31, 2021. Total current assets were approximately $3,428,000 and total current liabilities were approximately $15,827,000 at March 31, 2022, resulting in working capital deficit of approximately $12,399,000. This compares to total current assets of approximately $3,791,000 and total current liabilities of approximately $15,483,000 at December 31, 2021, resulting in a working capital deficit of approximately $11,692,000. Our accumulated deficit was approximately $68.3 million at March 31, 2021 compared to $67.1 million at December 31, 2021. Additionally, we had a net loss in the amount of approximately $1,148,000 and cash used in operating activities of approximately $1,009,000 for the three months ended March 31, 2022.
The accompanying consolidated financial statements as of March 31, 2022 have been prepared assuming we will continue as a going concern. As reflected in the condensed consolidated financial statements, we had approximately $377,000 in cash at March 31, 2022, and cash used in operating activities of approximately $1.0 million for the three months ended March 31, 2022. Further, we had a working capital deficit of $12.4 million, an accumulated deficit of $68.3 million at March 31, 2022, and had a net loss in the amount of approximately $1,148,000 for the three months ended March 31, 2022. In addition, all existing secured and unsecured debt held by its principal lender in the principal amount of $13.4 million matures on August 25, 2022, other than the profit share liability, which is within four months from the issuance of these condensed consolidated financial statements.
These factors raise substantial doubt about our ability to continue as a going concern for the next twelve months from the issuance of these condensed consolidated financial statements. We have taken steps to alleviate such doubt. During 2021, we eliminated $4,440,000 of convertible notes through conversions to shares of common stock and repaid $10,000 of convertible notes, leaving no convertible notes outstanding as of March 31, 2022. In addition, in June 2021, we announced that we had entered into a Debt Repayment and Exchange Agreement with our principal lender which, subject to various closing conditions, including but not limited to the completion of an offering of equity securities resulting in net proceeds of at least $12.0 million by June 30, 2022, will repay all existing secured and unsecured debt obligations held by such lender. Although we anticipate continued significant revenues in our business operations, no assurances can be given that we can obtain sufficient working capital through our business operations or that we will be able to raise the funds necessary to complete the transaction contemplated under the Debt Repayment Agreement by June 30, 2022, or at all, in order to sustain ongoing operations.
The accompanying consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of us to continue as a going concern.
| 8 |
| Table of Contents |
Total Assets
Total assets were approximately $7,607,000 at March 31, 2022 versus approximately $8,135,000 at December 31, 2021. The change in total assets is primarily attributable to a decrease in cash partially offset by an increase in accounts receivable.
Total Liabilities
Total liabilities were approximately $18,856,000 at March 31, 2022 versus approximately $18,374,000 at December 31, 2021.
Operating Activities
Net cash used in operating activities consists of net loss, adjusted by certain non-cash items, and changes in operating assets and liabilities.
Net cash used in operating activities was approximately $1,009,000 for the three months ended March 31, 2022 compared to net cash provided operating activities of approximately $888,000 for the three months ended March 31, 2021. The decrease in cash provided by operating activities of approximately $1,897,000 was primarily due to an approximate $1,566,000 increase in net loss, an approximate $1,110,000 change in accounts receivable, partially offset by a $220,000 increase in share-based compensation and a $299,000 change in gain on forgiveness of debt.
Investing Activities
There was no net cash provided or used in investing activities for the three months ended March 31, 2022 and March 31, 2021.
Financing Activities
Net cash used in financing activities was $2,677 for the three months ended March 31, 2022 compared to net cash provided by financing activities of approximately $503,000 for the three months ended March 31, 2021. During the three months ended March 31, 2021, we received $299,000 from the issuance of a note pursuant to a Second PPP Loan we received under the CARES Act and $247,000 from the exercise of warrants.
Critical Accounting Policies and Estimates
For detailed information regarding our critical accounting policies and estimates, see our financial statements and notes thereto included in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to our critical accounting policies and estimates from those disclosed in our most recent Annual Report on Form 10-K.
Non-GAAP Financial Measures
Adjusted EBITDA
To supplement our consolidated financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we consider and are including herein Adjusted EBITDA, a Non-GAAP financial measure. We view Adjusted EBITDA as an operating performance measure and, as such, we believe that the GAAP financial measure most directly comparable to it is net income (loss). We define Adjusted EBITDA as net income adjusted for interest and financing fees, income taxes, depreciation, amortization, stock based compensation, and other non-cash income and expenses. We believe that Adjusted EBITDA provides us an important measure of operating performance because it allows management, investors, debtholders and others to evaluate and compare ongoing operating results from period to period by removing the impact of our asset base, any asset disposals or impairments, stock based compensation and other non-cash income and expense items associated with our reliance on issuing equity-linked debt securities to fund our working capital.
| 9 |
| Table of Contents |
Our use of Adjusted EBITDA has limitations as an analytical tool, and this measure should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition. Additionally, our measure of Adjusted EBITDA may differ from other companies’ measure of Adjusted EBITDA. When evaluating our performance, Adjusted EBITDA should be considered with other financial performance measures, including various cash flow metrics, net income and other GAAP results. In the future, we may disclose different non-GAAP financial measures in order to help our investors and others more meaningfully evaluate and compare our future results of operations to our previously reported results of operations.
The following table shows our reconciliation of net loss to adjusted EBITDA for the three months ended March 31, 2022 and 2021, respectively:
|
| For the Three Months Ended |
| |||||
|
| March 31, 2022 |
|
| March 31, 2021 |
| ||
|
| (In thousands) |
| |||||
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|
|
|
|
|
| ||
Net loss |
| $ | (1,148 | ) |
| $ | (418 | ) |
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|
|
|
|
|
|
|
|
Non-GAAP adjustments: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 60 |
|
|
| 75 |
|
Interest and letter of credit fees |
|
| 498 |
|
|
| 676 |
|
Income taxes |
|
| 14 |
|
|
| 3 |
|
Gain on forgiveness of debt |
|
| - |
|
|
| (299 | ) |
Stock based compensation |
|
| 182 |
|
|
| 32 |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | (394 | ) |
| $ | 69 |
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
| 10 |
| Table of Contents |
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were not effective as a result of material weaknesses in our internal control over financial reporting. The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses in our internal control over financial reporting, which are common to many small companies: (i) lack of a sufficient complement of personnel commensurate with the Company’s reporting requirements; and (ii) insufficient written documentation or training of our internal control policies and procedures which provide staff with guidance or framework for accounting and disclosing financial transactions.
Despite the existence of the material weaknesses above, we believe that the consolidated financial statements contained in this Form 10-Q fairly present our financial position, results of operations and cash flows as of and for the periods presented in all material respects.
Changes in Internal Control over Financial Reporting
Except as discussed below, there have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting except the updated business processes and internal controls made in support of the adoption of the new lease accounting standard.
Certain actions have been taken to address certain aspects of the material weaknesses disclosed above. As of January 1, 2020, we replaced our previous accounting software with a more efficient software package to manage our business activities and accounting needs. During the fourth quarter of 2019 we hired a new full-time Controller at our Corsicana, Texas location, closed our Lewis Center, Ohio office and moved our corporate headquarters to our Corsicana, Texas address which has allowed us to consolidate our manufacturing and distribution activities, bookkeeping and accounting at one location. As of October 21, 2020, our Controller was appointed and promoted to Chief Accounting Officer and Principal Accounting Officer of the Company, and as of June 1, 2021, was appointed and promoted to Chief Financial Officer and Principal Financial Officer. Also, in the fourth quarter of 2019, we hired a financial consulting firm to assist us in bookkeeping and preparing financial statements for our SEC filings, assist us in evaluating our internal controls over financial reporting and assist us in other related matters.
Although we believe that these efforts effectively strengthen our disclosure controls and procedures as well as our internal control over financial reporting, our management team intends to continue to actively plan for and implement additional control procedures to improve our overall control environment and expect these efforts to continue throughout 2022 and beyond. Due to the nature of the remediation process, the need to have sufficient resources (cash or otherwise) to devote to such efforts, and the need to allow adequate time after implementation to evaluate and test the effectiveness of the controls, no assurance can be given as to the timing of achievement of remediation.
| 11 |
| Table of Contents |
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 11 “Commitments and Contingencies” to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this report for a summary of our legal proceedings, which is incorporated by reference herein.
Item 1A. Risk Factors.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On February 2, 2022, the Company issued 5,181 shares of common stock to a certain option holder upon the cashless exercise of options to purchase an aggregate of 9,750 shares of common stock at exercise prices ranging from $0.20 to $0.33 per share based upon a market price of $0.54 per share as determined under the terms of the options.
The foregoing securities were issued in reliance upon the exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”), and where applicable, under Section 3(a)(9) of the 1933 Act.
| 12 |
| Table of Contents |
Item 3. Default Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit Number |
| Description |
|
| |
| ||
| ||
| ||
| ||
101.INS* |
| Inline XBRL Instance Document |
101.SCH* |
| Inline XBRL Taxonomy Extension Schema Document |
101.CAL* |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104* |
| Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
_______
* Filed herewith.
| 13 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MIDWEST ENERGY EMISSIONS CORP. | ||
|
|
|
|
Dated: May 18, 2022 | By: | /s/ Richard MacPherson | |
|
| Richard MacPherson |
|
|
| President and Chief Executive Officer |
|
|
| (Principal Executive Officer) |
|
|
|
|
|
Dated: May 18, 2022 | By: | /s/ Jami L. Satterthwaite |
|
|
| Jami L. Satterthwaite |
|
|
| Chief Financial Officer |
|
|
| (Principal Financial Officer) |
|
| 14 |