What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-04-05 compared with 2020-05-14 · 68 added, 81 removed, 211 unchanged (41% of the section changed)

4 unchanged sentences

Midwest Energy Emissions Corp.

(the “Company”, “we”, “us” and “our”) is an environmental services and technology company specializing in mercury emission control technologies, primarily to utility and industrial coal-fired units.

We deliver patented and proprietary solutions to the global coal-power industry to remove mercury from power plant emissions, providing performance guarantees, and leading-edge emissions services.

We have developed patented technology and proprietary products that have been shown to achieve mercury removal at a significantly lower cost and with less operational impact than currently used methods, while maintaining and/or increasing unit output and preserving the marketability of fly-ash for beneficial use.

(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.

9 unchanged sentences

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, and 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.

The Court remanded the case back to the U.S.

Court of Appeals for the District of Columbia Circuit for further proceedings, but left the rule in place.

In December 2015, the D.C.

Circuit remanded the rule back to the EPA for further consideration while allowing MATS to remain in effect pending the EPA’s finding;

the Supreme Court later denied a petition challenging the lower court’s decision to remand without vacating.

On April 14, 2016, EPA 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 is under review by the D.C.

Circuit, and the Company is unable to predict with certainty the outcome of these proceedings.

On April 18, 2017, EPA asked the court to place that litigation in abeyance, stating that the Agency is reviewing the supplemental finding to determine whether it should be reconsidered in whole or in part.

The court granted EPA’s abeyance request on April 27, 2017, and ordered EPA to file 90-day status reports starting July 26, 2017.

In February 2019, the EPA published a proposed revised supplemental cost-benefits finding for MATS in which EPA proposed to conclude that the 2016 supplemental finding was flawed in part due to its reliance on co-benefits to justify MATS.

Nevertheless, the EPA proposed to leave the MATS rule in place.

At the same time, EPA also requested public comment on whether MATS may or must be rescinded if EPA reversed its earlier conclusion that it is “appropriate and necessary” to regulate power plant emissions of mercury and other hazardous air pollutants under the statutory provision authorizing MATS.

Following the close of the public comment period, on April 16, 2020, the EPA issued a final rule which finalized the proposed supplemental cost-benefits finding in substantially the form proposed in 2019.

The final rule withdraws EPA’s 2016 “appropriate-and-necessary” determination as erroneous, but leaves the 2011 MATS rule in place pursuant to D.C.

The MATS regulation has been subject to legal challenge since being enacted.

In June 2015, the U.S.

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.

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 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 EPA.

EPA’s final action will almost certainly be challenged in the courts, both by those who favor retention of MATS (such as the electric utility industry) and by those who oppose it (such as certain coal interests and deregulatory groups).

This litigation could extend uncertainty over the status of MATS for a number of years.

Upon taking office, the Biden Administration in January 2021 directed the EPA to review the previous Administration’s actions on various environmental matters including the withdrawal of the “appropriate and necessary” determination, for conformity with Biden Administration environmental policy.

Nevertheless, legal challenges may continue with respect to the MATS regulation which could extend uncertainty over the status of MATS for a number of years.

Investors should note that any changes to the MATS rule could have a negative impact on our business.

4 unchanged sentences

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.

Our acquisition of all the patent rights, including all patents and patents pending, domestic and foreign, which forms the basis of our mercury control technology, which acquisition was completed in April 2017 provides a strong foundation for us to seek new customers for product using a two-part mercury control process or to offer licenses on a case by case basis.

In the United States, we continue to seek new utility customers for our technology in order for them to meet the MATS requirements as well as maintaining our contractual arrangements with our current customers.

In this regard, in October 2018, we secured a supply contract extension with our largest customer and also expanded into this customer’s fleet by securing two additional coal-fired boilers to which we supply our technology and products.

In March 2019, we secured two additional coal-fired boilers within this customer’s fleet.

In addition, in March 2019, we secured a contract renewal with another long-term customer and entered into an agreement with a new utility customer to supply our technology and products.

In May 2019, we announced that we had signed a multi-year contract renewal with a long-term customer located in the U.S.

Southwest, and in July 2019 we announced a two-year contract extension with another long-term customer.

In Europe, we are working to penetrate this market through our licensing agreement entered into in March 2018 with one of our primary suppliers.

We believe such arrangement will make our technology more marketable throughout Europe and which will benefit the Company from such supplier’s knowledge and operations in the region.

In this regard, during the first quarter of 2021, we announced that we had secured supply contract extensions with two long-term customers.

In Europe, we had been working to penetrate this market through our licensing agreement entered into in March 2018 with one of our primary suppliers.

Such arrangement has been terminated effective as of December 6, 2020.

We intend to continue to pursue the European market when certain new regulations are expected to take effect in 2021 and 2022 although no assurance can be made that any such efforts will be successful.

On February 25, 2019, we were able to complete the restructuring of our unsecured and secured debt obligations held by AC Midwest Energy LLC extending the maturity dates of these debts until 2022 and eliminating quarterly principal payment requirements.

3 unchanged sentences

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.

In October 2019, we entered into a license and development agreement with an unaffiliated entity located in Alabama pursuant to which the parties will work together to develop a plan to commercialize and market certain technology owned by such unaffiliated entity related to the removal of mercury from air and water emissions generated by coal burning power plants.

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.

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 IPR 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 the Company’s 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.

During the first quarter of 2021, we eliminated $1,850,000 of convertible notes through conversions to shares of common stock.

During the first quarter of 2021, we announced that we are in the process of developing a proprietary methane gas emissions control technology which we believe can be adopted within the oil and gas industry.

While we have not established a timeline for the introduction of our methane gas emissions control technology, we hope to be able to commercialize our efforts in 2022 and thereafter.

In addition, during the first quarter of 2021, we announced new technologies under development intended to improve the processing of rare earth elements (REEs) in North America.

Our new technologies are under development in conjunction with our collaboration with the Alabama third party entity mentioned above and its affiliates.

Such technologies focus on improving the cost of extracting rare earth minerals along with improving the environmental footprint of extracting those rare earth elements from their solvent state.

While there is no established timeline for the introduction of these technologies after further testing is performed, we hope that if such further testing is successful, these technologies can be commercialized in 2022 and thereafter.

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

It should be noted that our operations may be affected by the recent and ongoing outbreak of the coronavirus disease (COVID-19) which was declared a pandemic by the World Health Organization in March 2020.

The ultimate disruption which may be caused by the outbreak is uncertain;

however, it may result in a material adverse impact on our financial position, operations and cash flow.

Such disruptions may include, but are not limited to, the availability of raw materials and equipment, and disruptions to our workforce or to our business relationships with other third parties.

It should be noted that our operations may be affected by the ongoing coronavirus outbreak which began in China at the beginning of 2020 which has impacted various businesses throughout the world, including travel restrictions and the extended shutdown of certain businesses in impacted geographic regions.

If the coronavirus situation does not improve during 2021 or should worsen, we may experience disruptions to our business including, but not limited to, the availability of raw materials, equipment, to our workforce, or to our business relationships with other third parties.

Restatement of Previously Issued Financial Statements (Unaudited)

10 unchanged sentences

Such revenues were primarily derived from sorbent product sales which were approximately $7,420,000 and $11,045,000 for the years ended December 31, 2020 and 2019, respectively.

The decrease from the prior year is primarily due to decreased generation in the coal fired power sector principally due to renewables and low natural gas prices.

Equipment sales and other revenues for the years ended December 31, 2019 and 2018 were approximately $93,000 and $49,000 respectively.

The decrease is primarily due to decreased generation in the coal fired power sector principally due to renewables and low natural gas prices.

Costs and Expenses

Total costs and expenses were approximately $13,929,000 and $17,090,000 during the years ended December 31, 2019 and 2018, respectively.

The decrease in costs and expenses from the prior year to date is primarily attributable to the decrease in cost of sales.

This was offset by an increase in selling, general and administrative expenses and interest expense.

Costs of sales were approximately $5,440,000 and $8,335,000 for the year ended December 31, 2020 and 2019, respectively.

The year to date decreases in cost is primarily attributable to decreased sales.

The decrease is primarily attributable to decreased sales.

Selling, general and administrative expenses were approximately $5,936,000 and $6,429,000 for the years ended December 31, 2020 and 2019, respectively.

The increase is primarily attributed to an increase in stock-based compensation of $1,810,000 in 2019 compared to $491,000 in 2018.

This increase was offset by decreases in salaries and other compensation which totaled $1,910,000 in 2019 compared to $2,400,000 in 2018.

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 $374,000 and $0 for the years ended December 31, 2019 and 2018, respectively.

The increase is primarily attributed to an increase in the fair value of the profit share liability.

Interest expense related to the financing of capital was approximately $2,391,000 and $2,004,000 for the years ended December 31, 2019 and 2018, respectively.

The increase in the year ended 2019 is due to the incentives provided with the notes issued in 2019, offset by the reduced interest on the notes payable.

The breakdown of interest expense for the years ended December 2019 and 2018 is as follows:

The decrease is primarily attributed to less travel due to COVID-19 and less business development and outside consulting expenses.

Total costs and expenses were approximately $13,974,000 and $17,500,000 during the years ended December 31, 2020 and 2019, respectively.

The decrease is primarily attributable to the decrease in cost of sales.

Interest expense and letter of credit fees for the years ended December 2020 and 2019 is as follows:

(In thousands)

2 unchanged sentences

Amortization of debt issuance costs

(Gain) 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 a gain of $24,000 and a loss of $374,000 for the years ended December 31, 2020 and 2019, respectively.

The change is primarily attributed to the change in the fair value of the profit share liability.

Net Income (Loss)

For the years ended December 31, 2020 and 2019, we had a net loss of approximately $5,826,000 and $6,097,000, respectively.

The change in net loss for the year ended December 31, 2019 is primarily due to the decrease in revenue and an increase in Selling, general and administrative expenses.

This was offset by a decrease in cost of sale.

The change in net loss is primarily due to the decrease in revenue offset by a decrease in cost of sales and a decrease in selling, general and administrative expenses.

Liquidity and Capital Resources

We had approximately $1,499,000 in cash on its balance sheet at December 31, 2019.

We had approximately $591,000 in cash on our balance sheet at December 31, 2020.

Total current assets were $2,375,000, and total current liabilities were $3,359,000 at December 31, 2020, resulting in a working capital deficit of approximately $984,000.

4 unchanged sentences

From June through October 2019, we sold $2,600,000 new convertible notes which mature in 2024 to investors.

In February 2020, we closed on a one-year secured loan with a bank in the principal amount of $200,000, and in April 2020, we received loan proceeds in the amount of $299,300 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act which was enacted on March 27, 2020 as a result of the COVID-19 pandemic.

The principal and accrued interest under the PPP Loan is forgivable after eight weeks if we use the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise complies with the PPP requirements.

In order to obtain forgiveness of the PPP Loan, we must submit a request and provide satisfactory documentation regarding our compliance with applicable requirements.

Such PPP loan was forgiven in January 2021 and the one-year secured loan was repaid in full in February 2021.

Nevertheless, the accompanying consolidated financial statements as of December 31, 2020 have been prepared assuming we will continue as a going concern.

2 unchanged sentences

These factors raise substantial doubt about our ability to continue as a going concern for the next twelve months from the issuance of this Annual Report on Form 10-K.

Although we anticipate continued significant revenues for products to be used in MATS compliance activities, no assurances can be given that we can obtain sufficient working capital through these activities and additional financing may be needed to meet its obligations.

In order to obtain forgiveness of the PPP Loan, we must submit a request and provide satisfactory documentation regarding our compliance with applicable requirements.

Notwithstanding the foregoing loans, we may need to raise additional equity or debt financing.

Although we anticipate continued significant revenues for products to be used in MATS compliance activities and from licensing of our technologies, no assurances can be given that we can obtain sufficient working capital through these activities and additional financing may be needed to meet its obligations.

In February 2021, the Company received second draw loan proceeds in the amount of $299,380 pursuant to the Paycheck Protection Program.

In January and February 2021, certain warrant holders exercised warrants for cash and the Company received proceeds of approximately $246,808.

Also, in January and February 2021, the Company substantially reduced the aggregate principal amount outstanding on various debt obligations.

In this regard, $940,000 of the outstanding principal amount of convertible promissory notes issued in 2013 was converted to common stock, leaving $50,000 remaining outstanding on such notes issued in 2013.

In February and March 2021, the Company eliminated $860,000 of outstanding convertible notes issued in 2018 by force converting all of such notes based on the terms thereof.

Nevertheless, the Company may need to raise additional equity or debt financing.

While we believe in our ability to raise additional funds, no assurances can be given that we can maintain sufficient working capital through these efforts, or that the continued implementation of our business plan will generate sufficient revenues in the future to sustain ongoing operations.

Total assets were approximately $7,376,000 at December 31, 2020 versus approximately $9,273,000 at December 31, 2019.

The change in total assets is primarily attributable to the increase in right of use assets.

The change in total assets is primarily attributable to the decrease in cash.

Total liabilities were approximately $20,580,000 at December 31, 2020 versus approximately $18,147,000 at December 31, 2019.

The increase in liabilities is primarily due to an increase in convertible notes payable and operating lease liabilities offset by a decrease in unsecured notes payable, net of discount and issuance costs.

The increase in liabilities is primarily due to an increase in debt.

Operating activities used approximately $1,239,000 and $1,577,000 of cash during the years ended December 31, 2020 and 2019, respectively.

The increase in cash used in operating activities is primarily due to a decrease in accounts payable, accrued liabilities and operating lease liability partially offset by a decrease in accounts receivable.

Investing activities provided $30,000 during the year ended December 31, 2019 and used approximately $132,000 during the years ended December 31, 2018.

The increase in cash provided by investing activities is due the increase in cash received from the sale of equipment and the decrease in cash used to purchase equipment.

Financing activities provided approximately $2,461,000 during the year ended December 31, 2019 and used approximately $636,000 during the year ended December 31, 2018, respectively.

In 2019, the Company raised $2,600,000 in unsecured convertible debt and repaid $139,000 on notes payable compared to $300,000 in unsecured convertible debt and repaid $936,000 on notes payable during 2018.

The decrease in cash used in operating activities is primarily due to a decrease in net loss.

Investing activities provided $42,500 during the year ended December 31, 2020 and $30,000 during the year ended December 31, 2019.

The increase in cash provided by investing activities is due the increase in cash received from the sale of equipment.

Financing activities provided approximately $288,000 during the year ended December 31, 2020 and $2,461,000 during the year ended December 31, 2019, respectively.

In 2020, the Company obtained $499,000 in notes payable and repaid $165,000 of notes payable as compared to raising $2,600,000 in unsecured convertible debt and repaying $139,000 on notes payable in 2019.

Off-Balance Sheet Arrangements

21 unchanged sentences

Intellectual Property

Intellectual is recorded at cost and amortized over its estimated useful life of 15 years.

Intellectual property is recorded at cost and amortized over its estimated useful life of 15 years.

Management reviews intellectual property for impairment when events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable.

47 unchanged sentences

Disaggregation of Revenue

The Company generated revenue for the years ended December 31, 2019 and 2018 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.

The Company generated revenue for the years ended December 31, 2020 and 2019 by (i) delivering product to its commercial customers, (ii) completing and commissioning equipment projects at commercial customer sites, (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.

1 unchanged sentence

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.

Deferred Revenue

Revenue is recognized in the period that delivery is made and performance obligations are met.

In accordance with the terms of an agreement with one customer, the Company allocated a fixed amount of payments made against the total deliveries of product made during the contract period.

Due to this agreement $517,060 was deferred as of December 31, 2017 and was recognized in 2018 when product was delivered to the customer .

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.

35 unchanged sentences

The adoption of ASU 2017-11 did not have a material impact on its consolidated financial statements.

Recently Issued Accounting Standards

In June 2018, the FASB issued ASU No.

Effective January 1, 2020, the Company adopted ASU No.

2018-07, Compensation — Stock Compensation (Topic 718) .

ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share based payments.

Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different.

ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services.

Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned.

Prior to the issuance of this guidance, the accounting requirements for nonemployee and employee share-based payment transactions were significantly different.

ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which only included share-based payments to employees) to include share-based payments issued to nonemployees for goods or services.

Consequently, the accounting for share-based payments to nonemployees and employees is substantially aligned.

This ASU supersedes Subtopic 505-50, Equity — Equity-Based Payments to Nonemployees.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and including interim periods within that fiscal year.

Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers.

The Company is currently evaluating ASU 2018-07 and its impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No.

The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.

Effective January 1, 2020, the Company adopted ASU No.

2018-13, Fair Value Measurement (Topic 820) :

3 unchanged sentences

All other amendments should be applied retrospectively to all periods presented upon their effective date.

The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

Early adoption is permitted, including adoption in an interim period.

The Company is currently evaluating ASU 2018-13 and its impact on its consolidated financial statements.

The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Standards

In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 740):

24 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis