What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-04-05 compared with 2020-05-14 · 303 added, 185 removed, 730 unchanged (40% of the section changed)

1 unchanged sentence

MIDWEST ENERGY EMISSIONS CORP.

AND SUBSIDIARIES

AND SUBSIDIARY

Index to Financial Information

2 unchanged sentences

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Midwest Energy Emissions Corp.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Midwest Energy Emissions Corp.

and Subsidiary (the “Company”) as of December 31, 2020, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

As disclosed in the financial statements, the Company has incurred substantial net losses in recent years, has negative working capital and has an accumulated deficit at December 31, 2020 and is dependent on debt and equity financing to fund its operations, all of which raise substantial doubt about the Company’s ability to continue as a going concern.

Management’s plans regarding these matters are disclosed in Note 3.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements.

The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

Valuation of Profit Share Liability – Refer to Notes 2 and 9 to the financial statements

Critical Audit Matter Description

In connection with the Unsecured Note disclosed in Note 9 to the financial statements, the Company shall pay the principal outstanding, as well as a profit participation preference (the “profit share liability”).

The Company calculates the fair value of the profit share liability every quarter utilizing management estimates.

The fair value of the profit share liability is calculated using a discounted cash flow model based on estimated future cash payments.

The fair value of the profit share liability is determined on a Level 3 measurement.

The fair value of the profit share liability fluctuates over time based on management estimates.

As of December 31, 2020, the fair value of the profit share liability was approximately $2.3 million.

Inherent in the valuation of Level 3 financial instruments are certain significant judgments and estimates related to forecasted cash flows.

Changes in these assumptions can significantly impact the valuation of the profit share liability, and the gain or loss on the change in fair value that is recorded.

This required a high degree of auditor judgment and an increased extent of effort, when performing audit procedures to evaluate the reasonableness of management’s forecasted cash flows.

Accordingly, we believe that auditing the fair value of the profit share liability is a critical audit matter.

How the Critical Audit Matter Was Addressed in the Audit

The primary procedures we performed to address this critical audit matter included:

Obtaining an understanding of the Company’s process to determine the fair value of the profit share liability;

Obtaining and reading the Unsecured Note Agreement and evaluated management’s assessment of the terms which included an analysis of valuation of the profit share liability;

Evaluating the reasonableness of management’s sales, costs and expenses forecast by comparing the forecast to historical sales and cost and expense data, historical profit margins and trends;

Utilizing our valuation professionals to assist in (i) assessing the appropriateness of the valuation methodology and (ii) evaluating the reasonableness of the discount rate;

Performing sensitivity analyses to evaluate the impact that changes in the significant assumptions would have on the fair value of the profit share liability;

Testing the mathematical accuracy of the profit share liability calculation.

The outcome of the audit procedures resulted in determining that the fair value of the profit share liability recorded by management is reasonable.

/s/ Rotenberg Meril Solomon Bertiger & Guttilla, P.C.

We have served as the Company's auditor since 2020.

Saddle Brook, New Jersey

April 5, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of

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We have audited the accompanying consolidated balance sheets of Midwest Energy Emissions Corp.

(the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

(the “Company”) as of December 31, 2019, the related consolidated statements of operations, stockholders’ deficit and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Explanatory Paragraph – Going Concern

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These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Marcum LLP

We have served as the Company’s auditor since 2018 .

We served as the Company’s auditor from 2018 to 2020 .

Houston, Texas

MIDWEST ENERGY EMISSIONS CORP.

AND SUBSIDIARIES

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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Prepaid expenses and other assets

Customer acquisition costs, net

Total current assets

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Current liabilities

Accounts payable and accrued expenses

Accounts payable and accrued expenses (related party of $168,750 and $43,750)

Current portion of equipment notes payable

Current portion of operating lease liability

Current portion of note payable

Current portion of convertible notes payable, net of discount and issuance costs

1 unchanged sentence

Customer credits

Deferred compensation

Accrued salaries

Total current liabilities

2 unchanged sentences

Convertible notes payable, net of discount and issuance costs

Profit share liability

Secured note payable

Unsecured note payable, net of discount and issuance costs

Profit share liability – related party

Secured note payable – related party

Unsecured note payable, net of discount and issuance costs – related party

Total liabilities

12 unchanged sentences

Total stockholders’ deficit

(13,203,532 )

Total liabilities and stockholders’ deficit

1 unchanged sentence

MIDWEST ENERGY EMISSIONS CORP.

AND SUBSIDIARIES

AND SUBSIDIARY

STATEMENTS OF OPERATIONS

2 unchanged sentences

Cost of sales

Selling, general and administrative expenses

Interest expense & letter of credit fees

Loss on debt restructuring

Loss on change in fair value of profit share liability

Selling, general and administrative expenses (related party of $175,275 and $329,729)

Interest expense & letter of credit fees (related party of $2,023,818 and $2,061,954)

(Gain) Loss on change in fair value of profit share liability

Gain on sale of equipment

8 unchanged sentences

MIDWEST ENERGY EMISSIONS CORP.

AND SUBSIDIARIES

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

3 unchanged sentences

$ (8,621,096 )

Vesting of stock issued to non-employees in prior year

Issuance of warrants

Issuance of stock options

Balance - December 31, 2018

$ (51,483,332 )

$ (8,621,096 )

Cumulative effect of change in accounting principle related to accounting for leases

10 unchanged sentences

$ (8,873,651 )

Stock issued for prepaid services

Cashless exercise of stock options/warrants

Issuance of stock options

Modification of stock warrant

Stock issued for consulting services

Balance – December 31, 2020

$ (63,484,106 )

$ (13,203,532 )

The accompanying notes are an integral part of these consolidated financial statements.

MIDWEST ENERGY EMISSIONS CORP.

AND SUBSIDIARIES

AND SUBSIDIARY

STATEMENTS OF CASH FLOWS

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Stock-based compensation

Amortization of discount of notes payable

Amortization of discount on notes payable

Amortization of debt issuance costs

Amortizaton of right to use assets

Amortization of right to use assets

Amortization of customer acquisition costs

1 unchanged sentence

Depreciation expense

Loss on debt exchange

Loss on change in fair value of profit share

(Gain) Loss on sale of equipment

(Gain) Loss on change in fair value of profit share

Gain on sale of equipment

Changes in operating assets and liabilities

Decrease in accounts receivable

(Increase) Decrease in inventory

Decrease in prepaid expenses and other assets

(Decrease) Increase in accounts payable and accrued liabilities

Increase in deferred compensation

Increase in inventory

(Increase) Decrease in prepaid expenses and other assets

Decrease in accounts payable and accrued liabilities

Increase (Decrease) in accrued salaries

Increase in accrued interest

Decrease in operating lease liability

(Decrease) in deferred revenue and customer credits

Net cash used in operating activities

Cash flows used in investing activities

Cash flows from investing activities

Cash received from sale of equipment

Purchase of property and equipment

Net cash used in investing activities

Net cash provided by investing activities

Cash flows from financing activities

Payments of notes payable

Proceeds from the issuance of notes payable

Payments on secured promissory note

1 unchanged sentence

Proceeds from the issuance of convertible promissory notes and related warrants

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

7 unchanged sentences

Net adjustment for extension of lease

Stock Issued for consulting services

Stock issued for prepaid services

Stock warrants issued for prepaid services

Stock options issued for prepaid services

Conversion of secured notes payable into unsecured notes payable

Capital contribution

$ (3,412,204 )

Warrants issued upon debt exchange

The accompanying notes are an integral part of these consolidated financial statements.

MIDWEST ENERGY EMISSIONS CORP.

AND SUBSIDIARIES

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

Certain prior year amounts in the consolidated financial statements and the notes thereto have been reclassified where necessary to conform to the current year presentation.

These reclassifications did not affect the prior period total assets, total liabilities, stockholders’ deficit, net loss or net cash used in operating activities.

Restatement of previously issued financial statements

On April 13, 2020, the Company concluded that a gain on debt restructuring recognized during the first quarter of 2019 (relating to the New AC Midwest Unsecured Note) should have been accounted for as a capital transaction.

Since the New AC Midwest Unsecured Note was held by a related party, the gain should have been recorded as a capital transaction under ASC 470-50-40.

The profit-sharing portion also should have been bifurcated from the loan and shown separately on the unaudited condensed consolidated balance sheets of the financial statements for the quarters ended March 31 2019, June 30, 2019 and September 30, 2019.

For more information please see Note 15.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, valuation of equity issuances and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

The Company uses estimates in accounting for, among other items, revenue recognition, allowance for doubtful accounts, stock-based compensation, income tax provisions, excess and obsolete inventory reserve and impairment of intellectual property.

The preparation of consolidated financial statements in conformity with GAAP 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 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, revenue recognition, profit share liability, allowance for doubtful accounts, stock-based compensation, income tax provision, excess and obsolete inventory reserve and impairment of intellectual property.

Actual results could differ from those estimates.

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For consolidated financial statement purposes, equipment is recorded at cost and depreciated using the straight-line method over their estimated useful lives of 2 to 5 years.

Leasehold improvements are recorded at cost and depreciated using the straight-line method over the life of the lease.

Leasehold improvements are recorded at cost and depreciated using the straight-line method over the lesser of their estimated useful lives or the remaining term of the lease.

Expenditures for repairs and maintenance which do not materially extend the useful lives of property and equipment are charged to operations.

1 unchanged sentence

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.

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Under the guidance, we have also elected not to separate lease and non-lease components in recognition of the lease-related assets and liabilities, as well as the related lease expense.

We have operating leases for office space in two multitenant facilities, which are not recorded as assets and liabilities as those leases do not have terms greater than 12 months.

We have operating leases for office space in two multi-tenant facilities, which are not recorded as assets and liabilities as those leases do not have terms greater than 12 months.

We have an operating leases for a multi-purpose facility and bulk trailers used in operations which is recorded as an asset and liability as the lease has a terms greater than 12 months.

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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 December 31, 2019 and December 31, 2018 and is considered to be Level 1.

Financial instruments include cash, accounts receivable, accounts payable, deferred revenue, customer credits and short-term debt.

The carrying amounts of these financial instruments approximated fair value at December 31, 2019 and December 31, 2018 due to their short-term maturities.

The fair value of the promissory notes payable at December 31, 2019 and December 31, 2018 approximated the carrying amount as the notes were issued during the years ended December 31, 2019 and 2018 at interest rates prevailing in the market and interest rates have not significantly changed as of December 31, 2019.

Cash was the only asset measured at fair value on a recurring basis by the Company at December 31, 2020 and 2019 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 December 31, 2020 and 2019 due to their short-term maturities.

The fair value of the promissory notes payable at December 31, 2020 and 2019 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 December 31, 2020 and 2019.

The fair value of the promissory notes payable was determined on a Level 2 measurement.

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Promissory notes

Profit share liability

Total Liabilities

Foreign Currency Transactions

Foreign Currency Translation

The Company’s functional currency is the United States Dollar (the “U.S.

Transactions denominated in currencies other than the U.S.

Dollar are re-measured to the U.S.

Dollar at the period-end exchange rates.

Any associated transactional currency re-measurement gains and losses are recognized in current operations.

At both December 31, 2019 and December 31, 2018, there were no material gains or losses recognized.

The Company engages in foreign currency denominated transactions with customers that operate in functional currencies other than the U.S.

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 years ended December 31, 2020 and 2019, there were no material foreign exchange gains or losses recognized by the Company in its statements of operations.

Revenue Recognition

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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.

Revenue for licensing is recognized at the point of time in which the customer obtains the license.

Lump sum payments made pursuant to agreements in which the primary consideration is a license to the company’s technology is accounted for as license revenue.

Certain arrangements provide for repayment of license fees in the event the company enters into a supply agreement that results in a specified amount of sales.

Nothing is recognized for this contingency.

Revenue for equipment sales is recognized upon commissioning and customer acceptance of the installed equipment per the terms of the purchase contract.

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Product revenue

License revenue

Demonstrations & Consulting revenue

Equipment revenue

Customer Acquisition Costs

Customer acquisition costs are amortized on a straight-line bases over the life of the initial customer contract.

The capitalized balance of customer acquisition costs was $0 and $34,467 on December 31, 2019 and December 31, 2018, respectively.

Amortization expense for the years ended December 31, 2019 and 2018 was $0 and $137,866, respectively and included in cost of sales.

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.

As of December 31, 2019 and 2018 the Company had no deferred revenue.

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.

25 unchanged sentences

Customer and Supplier Concentration

For each of the years ended December 31, 2019 and 2018, 100% of the Company’s revenue related to eleven and eight customers respectively.

At December 31, 2019 and 2018, 100% of the Company’s accounts receivable related to eight and seven customers respectively.

For each of the years ended December 31, 2020 and 2019, 100% of the Company’s revenue related to thirteen and eleven customers, respectively.

At December 31, 2020 and 2019, 100% of the Company’s accounts receivable related to nine and eight customers, respectively.

For each of the years ended December 31, 2020 and 2019, 88% and 91% of the Company’s purchases related to two suppliers, respectively.

32 unchanged sentences

The Company early adopted ASU 2017-11 and changed its method of accounting for certain warrants that were initially recorded as liabilities during the year ended December 31, 2014 on a full retrospective basis.

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.

The adoption of ASU 2017-11 did not have a material impact on the Company’s consolidated financial statements.

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):

12 unchanged sentences

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 consolidated financial statements within the Company’s Annual Report on Form 10-K.

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

In February 2020, the Company closed on a one-year secured loan with a bank in the principal amount of $200,000, and in April 2020, the Company received loan proceeds in the amount of $299,300 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.

Although we anticipate continued significant revenues for products used in MATS compliance activities and from licensing of our technologies, no assurances can be given that the Company 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 under the Cares Act which was enacted on March 27, 2020 as a result of the COVID-19 pandemic.

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 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.

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The Company uses the straight-line method of depreciation over 2 to 5 years.

During the years ended December 31, 2019 and 2018 depreciation expense was $314,908, and $456,914.

During the years ended December 31, 2020 and 2019 depreciation expense was $188,675, and $314,908, respectively.

Note 6 – Intellectual Property

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Estimated annual amortization for each of the next five years is $204,600.

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 $200,000 bearing interest at 8.75% per annum.

Principal and interest is to be paid in equal monthly installments until the loan is paid in full on February 26, 2021.

The note is secured by substantially all of the assets of MES, Inc.

During the year ended December 31, 2020 the Company repaid $165,339 of principal and $9,428 of interest.

In February 2021, the loan was repaid in full.

On April 14, 2020, the Company received loan proceeds in the amount of $299,300 from First International Bank & Trust pursuant to the Paycheck Protection Program (the “PPP Loan”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020.

The PPP Loan, which is in the form of a Note dated April 14, 2020, matures on April 14, 2022 and bears interest at a rate of 1.0% per annum, with one interest payment on April 14, 2021 and one principal and interest payment on maturity.

The principal and accrued interest under the PPP Loan is forgivable after eight or twenty-four weeks if the Company uses 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, the Company must submit a request and provide satisfactory documentation regarding its compliance with applicable requirements.

In January 2021, the PPP Loan was forgiven.

Note 8 –Convertible Notes Payable

The Company has the following convertible notes payable outstanding as of December 31, 2020 and 2019:

Secured convertible promissory notes which mature upon the retirement of the New AC Midwest Secured Debt, bear interest at 10% per annum, and are convertible into one share of common stock, par value $0.001 per share.

Unsecured convertible promissory notes which mature beginning on June 15, 2023, bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share.

Unsecured convertible promissory notes which mature beginning on June 18, 2024, bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share.

Secured convertible promissory notes which mature upon the retirement of the New AC Midwest Secured Debt (see Note 9) bear interest at 10% per annum, and are convertible into shares of common stock at $0.50 per share, and are secured by the assets of the Company.

Unsecured convertible promissory notes which mature beginning on June 15, 2023 through October 31, 2023, bear interest at 12% per annum, and are convertible into shares of common stock at $0.50 per share.

Unsecured convertible promissory notes which mature beginning on June 18, 2024 through October 23, 2024, bear interest at 12% per annum, and are convertible into shares of common stock at $0.50 per share.

Total convertible notes payable before discount

Less discounts and debt issuance costs

Less unamortized discounts and debt issuance costs

Total convertible notes payable

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A discount on the notes payable of $841,342 was recorded based on the value of the warrants issued using a Black-Scholes options pricing model and was amortized over the initial five year life of the notes.

Amortized interest expense for the years ended December 31, 2019 and 2018 on this discount was $0 and $74,447, respectively.

As of December 31, 2019 and 2018, total principal of $990,000 and $990,000, respectively, was outstanding on these notes.

On June 15, 2018, the Company issued 2018 Unsecured Notes totaling $560,000 and warrants to certain holders of the 2013 Notes in exchange for their secured 2013 Notes (see description above of the private placement offering commenced during the second quarter of 2018).

Amortized interest expense for the years ended December 31, 2020 and 2019 on this discount was $0.

As of December 31, 2020 and 2019, total principal of $990,000, was outstanding on these notes.

See Note 16 for information on the conversion of $940,000 of the principal of these notes which have been converted into shares of common stock.

On June 15, 2018, the Company issued 2018 Unsecured Convertible Notes (the “2018 Unsecured Notes”) totaling $560,000 and warrants to certain holders of the 2013 Notes in exchange for their secured 2013 Notes (see description above of the private placement offering commenced during the second quarter of 2018).

The 2018 Unsecured Notes have a term of five years, bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share.

8 unchanged sentences

Interest expense for the years ended December 31, 2020 and 2019, was $103,200 and $202,200, respectively.

As of December 31, 2019 and 2018, total principal of $860,000 and $860,000 was outstanding on the 2018 Unsecured Notes.

As of December 31, 2020 and 2019, total principal of $860,000 was outstanding on the 2018 Unsecured Notes.

The significant assumptions utilized for these Black-Scholes calculations consist of an expected life of equal to the expiration term of the option, historical volatility of 100% respectively, and a risk free interest rate of 3%.

From June 18, 2019 through October 23, 2019, the Company sold convertible notes and warrants to unaffiliated accredited investors totaling $2,600,000.

The notes bear interest at 12% per annum, are secured by the Company’s assets, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share.

The notes have a term of five years.

Interest expense for the year ended December 31, 2019 was $124,600.

See Note 16 for information on the forced conversion of all of the outstanding principal of the 2018 Unsecured Notes.

From June 18, 2019 through October 23, 2019, the Company sold 2019 Unsecured Convertible Notes (the “2019 Unsecured Notes”) totaling $2,600,000 and warrants to unaffiliated accredited investors.

The 2019 Unsecured Notes bear interest at 12% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share.

The 2019 Unsecured Notes have a term of five years.

Interest expense for the years ended December 31, 2020 and 2019 was $312,000 and $124,600, respectively.

A discount on the notes payable of $488,245 was recorded based on the relative fair value of the warrants issued using a Black-Scholes options pricing model and was amortized over the initial five year life of the notes.

Amortized interest expense for the year ended December 31, 2019 on this discount was $37,737.

As of December 31, 2019, total principal of $2,600,000 was outstanding on these notes.

Amortized interest expense for the years ended December 31, 2020 and 2019 on this discount was $97,809 and $37,737, respectively.

As of December 31, 2020 and 2019, total principal of $2,600,000 was outstanding on the 2019 Unsecured Notes.

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 “New AC Midwest Secured Note”) in the original principal amount of $9,646,686, which was to mature on December 15, 2018.The New AC Midwest Secured Note is guaranteed by MES, is non-convertible and bears interest at a rate of 15.0% per annum, payable quarterly in arrears on or before the last day of each fiscal quarter.

The New AC Midwest Secured Note is secured by all of the assets of the Companies.

The New AC Midwest Secured Note is guaranteed by MES, is non-convertible and bears interest at a rate of 15.0% per annum, payable quarterly in arrears on or before the last day of each fiscal quarter.

The New AC Midwest Secured Note is secured by all of the assets of the Company.

Interest expense for the years ended December 31, 2020 and 2019 was $41,432 and $40,753, respectively.

4 unchanged sentences

The amendment was accounted for as an extinguishment in accordance with ASC 470-50 with no gain or loss recorded.

As of December 31, 2019 and December 31, 2018, total principal of $271,686 and $271,686 was outstanding on this note.

As of December 31, 2020 and 2019, total principal of $271,686 was outstanding on this note.

Unsecured Note Payable

The Company has the following unsecured note payable - related party outstanding as of December 31, 2020 and 2019:

December 31, 2020

December 31, 2019

Unsecured Note Payable

Less discounts and debt issuance costs

Total convertible notes payable

Less unamortized discounts and debt issuance costs

Total unsecured notes payable

Less current portion

Convertible notes payable, net of current portion

Unsecured notes payable, net of current portion

On November 29, 2016, pursuant to a new restated financing agreement entered with AC Midwest on November 1, 2016, the Company closed on an unsecured note with AC Midwest (the “AC Midwest Subordinated Note”) in the principal amount of $13,000,000, which was to mature on December 15, 2020.

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This discount is based on an applicable market rate for unsecured debt for the Company of 21% and will be amortized as interested expense over the life of the loan.

Amortized discount recorded as interest expense for the year ended December 31, 2019 was $1,763,024.

As of December 31, 2019, the unamortized balance of the discount was $5,243,033.

Amortized discount recorded as interest expense for the years ended December 31, 2020 and 2019 was $1,860,096 and $1,763,024, respectively.

As of December 31, 2020 and 2019, the unamortized balance of the discount was $3,260,647 and $5,243,033, respectively.

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 August 25, 2022 (the “Maturity Date”).

It bears a zero cash interest rate.

If the original principal amount is paid in full on or before August 25, 2020 (18 months from issuance), AC Midwest shall be entitled to a profit participation preference equal to 0.5 times the original principal amount, and if the original principal amount is paid in full after August 25, 2020, AC Midwest shall be entitled to a profit participation preference equal to 1.0 times the original principal amount (the “Profit Share”).

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).

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The Profit Share, however, if not paid in full on or before the Maturity Date, shall remain subject to Unsecured Note Financing Agreement until full and final payment.

The company is utilizing the methodology behind the ASC 815 and ASC 480 to determine how to account for the profit-sharing portion of the note payable.

The Company is utilizing the methodology in ASC 815 and ASC 480 to determine how to account for the profit-sharing portion of the note payable.

Although the transaction is not indexed to MEEC’s stock the profit sharing seems like a freestanding financial instrument because the profit sharing is not callable by the lender, it will be paid out past the maturity of the note payable and, the fair value will fluctuate over time based on payment predictions.

The Profit Share was determined to have a fair value of $1,954,383 upon grant.

This was calculated with discounted cash flow model, with the following key valuation assumptions:

estimated term of seventeen years with $250,000 paid quarterly after the first three years, and an annual market interest rate of 21%.

The profit share liability will be marked to market every quarter utilizing managements estimates.

The following are the changes in the profit share liabilities during the year ended December 31, 2019.

The discounted cash flow model assumptions used at December 31, 2020 to calculate the Profit Share liability included:

estimated term of sixteen years with between $100,000 to $350,000 paid quarterly after the first three years, and an annual market interest rate of 21%.

The profit share liability will be marked to market every quarter utilizing management’s estimates.

The following are the changes in the profit share liabilities during the years ended December 31, 2020 and 2019.

Profit Share as of January 1, 2020

Gain on change in fair value of profit share

Profit Share as of December 31, 2020

Profit Share as of January 1, 2019

Loss on change in fair value of profit share

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Related Party Transactions

Kaye Cooper Kay & Rosenberg, LLP provides certain legal services to the Company and was paid $329,729 in 2019 for legal services rendered and disbursement incurred.

Kaye Cooper Kay & Rosenberg, LLP provides certain legal services to the Company and was paid $175,275 and $329,729 in 2020 and 2019, respectively, for legal services rendered and disbursements incurred.

Kaye, a Director and Secretary of the Company, is a partner of the law firm.

At December 31, 2020 and 2019, $168,750 and $43,750, respectively, was owed to the firm for services rendered.

Note 10 - Operating Leases

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Monthly rent is $590 a month through August 2020.

This lease was not renewed and the Company vacated the space.

Future remaining minimum lease payments under these non-cancelable leases are as follows:

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The Company’s multi-year contracts with its commercial customers contain fixed prices for product.

These contracts expire through 2019 and expose the Company to the potential risks associated with rising material costs during that same period.

These contracts expire through 2020 and 2025 and expose the Company to the potential risks associated with rising material costs during that same period.

Revenue reported during interim periods were recorded based on the facts and circumstances at the time and any differences noted when the final revenue is determined is considered to be a change in estimate for the period.

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In the lawsuit, the Company alleges that each of the defendants has willfully infringed the Company’s ‘114 Patent and ‘147 Patent and seeks a permanent injunction from further acts of infringement and monetary damages.

Such litigation is currently pending and in its early stages.

On April 21, 2020, NRG Energy, Inc., Talen Energy Corporation and Vistra Energy Corp., three of the defendants in the above action, filed two petitions for Inter Partes Review (IPR) with the United States Patent and Trademark Office (USPTO), seeking to invalidate certain claims to the ‘114 Patent.

The Company believes that such claims of invalidity are without merit.

During 2020, each of the four major utility defendants in the above action filed petitions for Inter Partes Review (IPR) with the United States Patent and Trademark Office (USPTO), 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 IPR with the USPTO.

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 will continue with respect to the other parties involved.

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.

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Note 12 - Stock Based Compensation

As of January 1, 2020, and pursuant to an advisory agreement dated as of November 20, 2019 and effective as of January 1, 2020 for a term of one year with a nonaffiliated third party, the Company issued 1,000,000 shares of common stock of the Company to such third party as and for the entire compensation to be paid for all services to be rendered during the term.

These shares of common stock were valued at $200,000 in accordance with FASB ASC Topic 718.

The fair value of the shares was amortized to selling, general and administrative expenses within the Company’s condensed consolidated statements of operations during 2020.

On October 5, 2020, the Company issued 300,000 shares of common stock of the Company to a nonaffiliated third-party pursuant to a consulting agreement entered into on October 1, 2020.

The value of the stock award was $102,000 and was charged to selling, general and administrative expenses in the statement of operations.

The Company accounts for stock-based compensation awards in accordance with the provisions of ASC 718, which addresses the accounting for employee stock options which requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the consolidated financial statements over the vesting period based on the estimated fair value of the awards.

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The assumptions used for options granted during the years ended December 31, 2020 and 2019 are as follows:

December 31, 2020

December 31, 2019

Exercise price

$0.19 - $0.58

Expected dividends

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Expected life

During 2018, the Company issued nonqualified stock options to acquire 1,423,236 shares under the Company’s 2017 Equity Plan.

The options granted are exercisable at prices ranging from $0.17 to $0.33 per share, representing the fair market value of the common stock as of the date of the grant as determined under the 2017 Equity Plan.

The options are fully vested and exercisable as of the date of grant and will expire five year thereafter.

Based on a Black-Scholes valuation model, these options were valued at $272,620 in accordance with FASB ASC Topic 718.

On February 5, 2018, the Company released the restriction on stock options to acquire 750,000 shares of the Company’s common stock issued to Rick MacPherson on August 31, 2016 making them now fully vested and exercisable.

Based on a Black-Scholes valuation model, these options were valued at $76,543 in accordance with FASB ASC Topic 718.

On May 14, 2019, Frederick Van Zijl resigned as a director of the Company.

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The options are fully vested and exercisable and will now expire five years from the date of the extension.

Based on a Black-Scholes valuation model, these options were valued at $745,989 in accordance with FASB ASC Topic 718 which was included in selling, general and administrative expenses within the Company’s consolidated statements of operations.

Based on a Black-Scholes valuation model, the stock option modification was valued at $745,989 in accordance with FASB ASC Topic 718 which was included in selling, general and administrative expenses within the Company’s consolidated statements of operations.

On December 20, 2019, the Company granted nonqualified stock options to acquire an aggregate of 100,000 shares of the Company’s common stock under the Company’s 2017 Equity Plan.

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The fair value of the option will be amortized to selling, general and administrative expenses within the Company’s consolidated statements of operations over one year.

On June 15, 2020, the Company granted nonqualified stock options to acquire an aggregate of 250,000 shares of the Company’s common stock under the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) to an employee.

The options granted are exercisable at $0.19 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Plan.

Fifty percent of the options are fully vested and exercisable as of the date of grant and fifty percent of the options vest on April 1, 2021.

The options will expire five years from the date of grant.

Based on a Black-Scholes valuation model, these options were valued at $37,882 in accordance with FASB ASC Topic 718 which will be expensed over the vesting period in selling, general and administrative expenses within the Company’s consolidated statements of operations.

On July 8, 2020, the Board of Directors of the Company approved an amendment to the 2017 Plan to increase the maximum number of shares of common stock that may be issued under the 2017 Plan from 8,000,000 to 12,000,000 shares.

On the same date, the Company granted nonqualified stock options to the following executive officers to each acquire 500,000 shares of the Company’s common stock:

Richard MacPherson (President and Chief Executive Officer), John Pavlish (Senior Vice President and Chief Technology Officer) and James Trettel (Vice President of Operations);

and, also granted nonqualified stock options to the following persons to each acquire 250,000 shares of the Company’s common stock:

Christopher Greenberg (Chairman of the Board) and David M.

Kaye (director).

All of such options were granted under the 2017 Plan and are exercisable at $0.19 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Plan.

The options are fully vested and exercisable as of the date of grant and will expire five years thereafter.

Based on a Black-Scholes valuation model, these options were valued at $246,965 in accordance with FASB ASC Topic 718 which was expensed on the grant date in selling, general and administrative expenses within the Company’s consolidated statements of operations.

On December 14, 2020, the Company granted nonqualified stock options to the following executive officers to each acquire 500,000 shares of the Company’s common stock:

Richard MacPherson (President and Chief Executive Officer), John Pavlish (Senior Vice President and Chief Technology Officer) and James Trettel (Vice President of Operations);

and, also granted nonqualified stock options to the following persons to each acquire 250,000 shares of the Company’s common stock:

Christopher Greenberg (Chairman of the Board) and David M.

Kaye (director);

and, also granted nonqualified stock options to the following persons to acquire 125,000 and 50,000, respectively, shares of the Company’s common stock:

Jami Satterthwaite and Stacey Hyatt.

All of such options were granted under the 2017 Plan and are exercisable at $0.58 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Plan.

The options are fully vested and exercisable as of the date of grant and will expire five years thereafter.

Based on a Black-Scholes valuation model, these options were valued at $884,264 in accordance with FASB ASC Topic 718 which was expensed on the grant date in selling, general and administrative expenses within the Company’s consolidated statements of operations.

In December 2020, the Company issued 1,082 shares of common stock to a certain option holder upon the cashless exercise of an option to purchase 1,500 shares of common stock at an exercise price of $0.17 per share based upon a market value of $0.61 per share as determined under the terms of the option.

Note 13 - Warrants

1 unchanged sentence

This model requires the input of highly subjective assumptions such as the expected stock price volatility and the expected period until the warrants are exercised.

When calculating the value of warrants issued, the Company uses a volatility factor of 100%, a risk free interest rate and the life of the warrant for the exercise period.

When 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.

The following is a summary of the Company’s warrant activity:

11 unchanged sentences

The Company utilized the Black-Scholes options pricing model.

The assumptions used for warrants granted during the years ended December 31, 2019 and 2018 are as follows:

The assumptions used for warrants granted during the year ended December 31, 2019 are as follows.

There were no warrants granted during the year ended December 31, 2020.

December 31, 2019

Exercise price

3 unchanged sentences

Expected life

On June 15, 2018, the Company issued unsecured convertible notes and warrants to unaffiliated accredited investors totaling $560,000 in exchange for outstanding secured convertible notes payable.

The notes are convertible into one share of common stock, with the initial conversion ratio equal to $0.50 per share.

The investors received a total of 560,000 warrants to purchase one shares of common stock with an exercise price of $0.70 per share.

These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act, as well as under Section 3(a)(9) under the Securities Act.

Using a Black-Scholes Valuation model these warrants had a value of $89,450 which was recorded as a discount on the notes payable and will be amortized over the life of the associated notes payable.

On August 31, 2018, the Company issued unsecured convertible notes and warrants to unaffiliated accredited investors totaling $200,000.

The notes are convertible into one share of common stock, with the initial conversion ratio equal to $0.50 per share.

The investors received a total of 200,000 warrants to purchase one shares of common stock with an exercise price of $0.70 per share.

These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act.

Using a Black-Scholes Valuation model these warrants had a value of $28,900 which was recorded as a discount on the notes payable and will be amortized over the life of the associated notes payable.

On October 31, 2018, the Company issued unsecured convertible notes and warrants to unaffiliated accredited investors totaling $100,000.

The notes are convertible into one share of common stock, with the initial conversion ratio equal to $0.50 per share.

The investors received a total of 100,000 warrants to purchase one shares of common stock with an exercise price of $0.70 per share.

These securities were sold in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act.

Using a Black-Scholes Valuation model these warrants had a value of $11,450 which was recorded as a discount on the notes payable and will be amortized over the life of the associated notes payable.

On August 12, 2019, the Company issued 37,210 shares of common stock upon the cashless exercise of warrants to purchase 167,039 shares of common stock for $0.35 per share based on a market value of $0.45 per share as determined under the terms of the warrant.

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The fair value of the option will be amortized to selling, general and administrative expenses within the Company’s consolidated statements of operations over one year.

On October 1, 2020, the Company extended the expiration date of a previously issued warrant to acquire 150,000 shares of common stock of the Company at an exercise price of $0.45 per share.

Such warrant was issued to a nonaffiliated third-party providing investor relations consulting services to the Company.

The warrant will now expire November 30, 2023.

Based on a Black-Scholes valuation model, the warrant modification was valued at $30,573 in accordance with FASB ASC Topic 718 which was included in selling, general and administrative expenses within the Company’s consolidated statements of operations.

On December 14, 2020, the Company issued 47,494 shares of common stock to a certain warrant holder upon the cashless exercise of a warrant to purchase 95,000 shares of common stock at an exercise price of $0.35 per share based upon a market value of $0.6999 per share as determined under the terms of the warrant.

Note 14 - Income Taxes

2 unchanged sentences

Change in valuation allowance

Income tax provision (benefit)

Income tax provision

The expected tax expense (benefit) based on the statutory rate is reconciled with actual tax expense benefit as follows:

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The Company has U.S.

federal net operating loss carryovers (“NOLs”) of approximately $22,640,000 and $20,608,000 at December 31, 2019 and 2018, respectively, available to offset 80% of taxable net income in a given year.

The Company has state net operating loss carryovers (“NOLs”) of approximately $3,531,815 and $2,873,351 at December 31, 2019 and 2018, respectively.

federal net operating loss carryovers (“NOLs”) of approximately $33,366,000 and $22,640,000 at December 31, 2020 and 2019, respectively, available to offset taxable net income in a given year.

The Company has state net operating loss carryovers (“NOLs”) of $4,188,000 and $3,531,815 at December 31, 2020 and 2019, respectively.

If not used, these NOLs may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under the regulations.

The Company plans on undertaking a detailed analysis of any historical and/or current Section 382 ownership changes that may limit the utilization of the net operating loss carryovers.

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 ”).

Corporate taxpayers may carryback net operating losses ( “NOLs ”) originating between 2018 and 2020 for up to five years, which was not previously allowed under the 2017 Tax Act.

The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020.

Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for 2019 and 2020.

The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

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Since the New AC Midwest Unsecured Note was held by a related party, the gain should have been recorded as a capital transaction under ASC 470-50-40.

The profit-sharing portion also should have been bifurcated from the loan and shown separately on the Consolidated Balance Sheets of the financial statements.

The following tables summarize the effects of the restatements on the specific items presented in the Company’s historical unaudited interim consolidated financial statements previously included in the Company’s Quarterly Reports on Form 10-Q as of and for the three month period ended March 31, 2019:

CONSOLIDATED BALANCE SHEETS

The profit-sharing portion also should have been bifurcated from the loan and shown separately on the Condensed Consolidated Balance Sheets of the financial statements.

The following tables summarize the effects of the restatements on the specific items presented in the Company’s historical unaudited interim condensed consolidated financial statements previously included in the Company’s Quarterly Reports on Form 10-Q as of and for the three month period ended March 31, 2019:

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2019

As previously

As previously reported

LIABILITIES AND STOCKHOLDERS’ DEFICIT

12 unchanged sentences

FOR THE THREE MONTHS ENDED MARCH 31, 2019

As previously

As previously reported

Interest expense & letter of credit fees

6 unchanged sentences

Net loss per common share - basic and diluted:

CONSOLIDATED STATEMENTS OF CASH FLOWS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2019

As previously

As previously reported

Cash flows from operating activities

1 unchanged sentence

$ (3,422,576 )

$ (1,058,779 )

Adjustments to reconcile net loss to net cash

3 unchanged sentences

Net cash provided by (used in) operating activities

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2019

As previously

As previously reported

LIABILITIES AND STOCKHOLDERS’ DEFICIT

10 unchanged sentences

Total liabilities and stockholders’ deficit

CONSOLIDATED STATEMENTS OF OPERATIONS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS

2 unchanged sentences

ENDED JUNE 30, 2019

As previously

As previously reported

Interest expense & letter of credit fees

7 unchanged sentences

Net loss per common share - basic and diluted:

CONSOLIDATED STATEMENTS OF CASH FLOWS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2019

As previously

As previously reported

Cash flows from operating activities

6 unchanged sentences

Net cash used in operating activities

CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2019

As previously

As previously reported

LIABILITIES AND STOCKHOLDERS’ DEFICIT

10 unchanged sentences

Total liabilities and stockholders’ deficit

CONSOLIDATED STATEMENT OF OPERATIONS

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS

2 unchanged sentences

ENDED SEPTEMBER 30, 2019

As previously

As previously reported

Interest expense & letter of credit fees

1 unchanged sentence

(Gain)/Loss on debt restructuring

(3,412,204.00 )

Total costs and expenses

3 unchanged sentences

Net loss per common share-basic and diluted:

CONSOLIDATED STATEMENT OF CASH FLOWS

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS

ENDED SEPTEMBER 30, 2019

As previously

As previously reported

Cash flows from operating activities

9 unchanged sentences

$ (1,304,626 )

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE MONTHS ENDED MARCH 31, 2019, THE SIX MONTHS ENDED JUNE 30, 2019 AND

22 unchanged sentences

Note 16 – Subsequent Events

On February 25, 2020, and pursuant to a Business Loan Agreement entered into with First International Bank & Trust in Grand Forks, ND, the Company’s wholly owned subsidiary, MES, Inc.

closed on a one-year secured loan in the principal amount of $200,000 bearing interest at 8.75% per annum.

Principal and interest is to be paid in equal monthly installments until the loan is paid in full on February 26, 2021.

The loan, which is in the form of a Note dated April 14, 2020, matures on April 14, 2022 and bears interest at a rate of 1.0% per annum, with one interest payment on April 14, 2021 and one principal and interest payment on maturity.

The principal and accrued interest under the PPP Loan is forgivable after eight weeks if the Company uses 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, the Company must submit a request and provide satisfactory documentation regarding its compliance with applicable requirements.

See Note 11 for information on the agreements entered into between July 2020 and January 2021with each of the four major utility defendants in the patent litigation commenced in 2019, two of which agreements were entered into in January 2021 and which provide such defendants and their affiliated entities 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.

See Note 7 for information on loan proceeds in the amount of $299,300 which the Company received on April 14, 2020 from First International Bank & Trust pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020.

Such loan was forgiven in January 2021 pursuant to the applicable PPP requirements.

From January 27, 2021 to January 31, 2021, the Company issued 494,400 shares of common stock to certain holders of convertible promissory notes issued in 2013, 2018 and 2019 as payment for accrued interest due on January 1, 2021 in the aggregate amount of $247,200, based upon a rate of $0.50 per share.

From February 8, 2021 to February 15, 2021, the Company issued 1,880,000 shares of common stock to certain holders of convertible promissory notes issued in 2013 for the conversion of the outstanding principal of such notes in the aggregate amount of $940,000, based upon a conversion rate of $0.50 per share.

From January 23, 2021 to February 16, 2021, the Company issued 705,166 shares of common stock to certain warrant holders upon the cash exercise of warrants to purchase an aggregate of 705,166 shares of common stock at an exercise price of $0.35 per share or $246,808 in the aggregate.

On February 17, 2021, the Company issued 97,675 shares of common stock to a certain warrant holder upon the cashless exercise of a warrant to purchase 150,000 shares of common stock at an exercise price of $0.45 per share based upon a market value of $1.29 per share as determined under the terms of the warrant.

On March 8, 2021, the Company issued an aggregate of 97,015 shares of common stock to certain warrant holders upon the cashless exercise of warrants to purchase an aggregate of 175,000 shares of common stock at an exercise price of $0.70 per share based upon market values from $1.44 to $1.63 per share as determined under the terms of the warrants.

From February 26, 2021 to March 8, 2021, the Company issued 790,000 shares of common stock to certain holders of convertible promissory notes issued in 2018 and 2019 for the conversion of the outstanding principal of such notes in the aggregate amount of $395,000, based upon a conversion rate of $0.50 per share.

On March 17, 2021, as a result of the election by the Company to force convert all of the outstanding principal of certain convertible promissory notes issued in 2018 if the closing price of the Company’s common stock exceeds $1.00 per share for 10 consecutive trading days, the Company issued 1,030,000 shares of common stock to such holders for the conversion of the remaining outstanding principal of such notes in the aggregate amount of $515,000, based upon a conversion rate of $0.50 per share.

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 500,000 shares of common stock to such party as part of its compensation thereunder.

On March 30, 2021, and pursuant to a business development agreement dated March 30, 2021 with a nonaffiliated third party, the Company issued 25,000 shares of common stock to such party for its compensation thereunder.

See Note 7 for information on a one-year secured loan in the principal amount of $200,000 which the Company received on February 25, 2020.

Such loan was repaid in full in February 2021.

In February 2021, the Company received second draw loan proceeds in the amount of $299,380 from First International Bank & Trust pursuant to the Paycheck Protection Program (the “Second PPP Loan”) under the CARES Act.

The Second PPP Loan is in the form of a Note dated February 2, 2021, matures on April 14, 2026 and bears interest at a rate of 1.0% per annum, with one interest payment on February 2, 2022, 47 monthly consecutive principal and interest payments of $6,366.89 each, beginning March 2, 2022, and one final principal and interest payment of $6,366.92 on February 2, 2026.

The principal and accrued interest under the Second PPP Loan is forgivable after eight or twenty-four weeks if the Company uses the Second PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise complies with the PPP requirements.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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 8. Financial Statements and Supplementary Data