Birchtech Corp. 10-K

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY Index to Financial Information Years Ended December 31, 2020 and 2019 Page Consolidated Financial Statements Report of Independent Registered Public Accounting Firm F-1 Report of Independent Registered Public Accounting Firm F-3 Consolidated Balance Sheets F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Stockholders’ Deficit F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 29 Table of Contents 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. F-1 Table of Contents 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 F-2 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Midwest Energy Emissions Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Midwest Energy Emissions Corp. (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 The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 3, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Adoption of New Accounting Standards As discussed in Note 2 to the financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842), as amended, effective January 1, 2019, using the modified retrospective approach. Restatement of Previously Issued Unaudited Financial Statements As discussed in Note 15 to the financial statements, the Company concluded that a gain on debt restructuring recognized during the first quarter of 2019 should have been accounted for as a capital transaction. The effect of restatement, which resulted in a reduction in net gain and no effect on ending equity, 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 have been restated within these financial statements for the periods ended March 31, 2019, June 30, 2019 and September 30, 2019; as further described in Note 15. 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. /s/ Marcum LLP Marcum LLP We served as the Company’s auditor from 2018 to 2020 . Houston, Texas May 14, 2020 F-3 Table of Contents MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2020 AND 2019 December 31, 2020 December 31, 2019 ASSETS Current assets Cash $ 591,019 $ 1,499,287 Accounts receivable 1,116,082 1,222,874 Inventory 560,127 513,498 Prepaid expenses and other assets 107,443 316,199 Total current assets 2,374,671 3,551,858 Property and equipment, net 1,887,029 2,082,343 Right of use asset 795,869 1,106,575 Intellectual property 2,318,796 2,532,462 Total assets $ 7,376,365 $ 9,273,238 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities Accounts payable and accrued expenses (related party of $168,750 and $43,750) $ 1,611,956 $ 1,676,757 Current portion of equipment notes payable 29,255 53,304 Current portion of operating lease liability 407,975 383,307 Current portion of note payable 34,661 - Current portion of convertible notes payable, net of discount and issuance costs - 990,000 Accrued interest 259,230 226,065 Customer credits 167,000 167,000 Accrued salaries 848,706 357,095 Total current liabilities 3,358,783 3,853,528 Equipment notes payable, less current portion 789 22,386 Operating lease liability 394,625 807,409 Note payable 299,300 - Convertible notes payable, net of discount and issuance costs 4,055,122 2,951,137 Profit share liability – related party 2,305,308 2,328,845 Secured note payable – related party 271,686 271,686 Unsecured note payable, net of discount and issuance costs – related party 9,894,284 7,911,898 Total liabilities 20,579,897 18,146,889 COMMITMENTS AND CONTINGENCIES (Note 11) Stockholders’ deficit Preferred stock, $0.001 par value: 2,000,000 shares authorized, no shares issued - - Common stock; $0.001 par value; 150,000,000 shares authorized; 78,096,326 and 76,747,750 shares issued and outstanding as of December 31, 2020 and 2019, respectively 78,096 76,748 Additional paid-in capital 50,202,478 48,708,085 Accumulated deficit (63,484,106 ) (57,658,484 ) Total stockholders’ deficit (13,203,532 ) (8,873,651 ) Total liabilities and stockholders’ deficit $ 7,376,365 $ 9,273,238 The accompanying notes are an integral part of these consolidated financial statements. F-4 Table of Contents MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 For the Year Ended December 31, 2020 For the Year Ended December 31, 2019 Revenues $ 8,158,448 $ 11,417,027 Costs and expenses: Cost of sales 5,440,395 8,335,436 Selling, general and administrative expenses (related party of $175,275 and $329,729) 5,935,517 6,428,580 Interest expense & letter of credit fees (related party of $2,023,818 and $2,061,954) 2,657,554 2,391,395 (Gain) Loss on change in fair value of profit share liability (23,537 ) 374,462 Gain on sale of equipment (35,859 ) (29,560 ) Total costs and expenses 13,974,070 17,500,313 Net loss before provision for income taxes (5,815,622 ) (6,083,286 ) Provision for income taxes (10,000 ) (14,000 ) Net loss $ (5,825,622 ) $ (6,097,286 ) Net loss per common share-basic and diluted: $ (0.07 ) $ (0.08 ) Weighted average common shares outstanding 77,818,780 76,534,957 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 Additional Common Stock Paid-in Accumulated Shares Par Value Capital (Deficit) Total Balance - December 31, 2018 76,246,113 $ 76,246 $ 42,785,990 $ (51,483,332 ) $ (8,621,096 ) Cumulative effect of change in accounting principle related to accounting for leases - - - (77,866 ) (77,866 ) Issuance of warrants, recorded as discount on convertible notes payable - - 485,640 - 485,640 Issuance of stock options - - 898,207 - 898,207 Extension of certain stock option expiration - - 745,989 - 745,989 Stock issued per resignation agreements 464,517 465 118,075 - 118,540 Stock issued upon cashless warrant exercise 37,120 37 (37 ) - - Stock warrants issued for prepaid services - - 243,294 - 243,294 Stock options issued for prepaid services - - 18,723 - 18,723 Capital contribution related to debt restructuring Note 8 - - 3,412,204 - 3,412,204 Net loss - - - (6,097,286 ) (6,097,286 ) Balance - December 31, 2019 76,747,750 $ 76,748 $ 48,708,085 $ (57,658,484 ) $ (8,873,651 ) Stock issued for prepaid services 1,000,000 1,000 199,000 - 200,000 Cashless exercise of stock options/warrants 48,576 48 (48 ) - - Issuance of stock options - - 1,163,168 - 1,163,168 Modification of stock warrant - - 30,573 - 30,573 Stock issued for consulting services 300,000 300 101,700 - 102,000 Net loss - - - (5,825,622 ) (5,825,622 ) Balance – December 31, 2020 78,096,326 $ 78,096 $ 50,202,478 $ (63,484,106 ) $ (13,203,532 ) The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 For the Year Ended December 31, 2020 For the Year Ended December 31, 2019 Cash flows from operating activities Net loss $ (5,825,622 ) $ (6,097,286 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 1,710,226 1,810,267 Amortization of discount on notes payable 1,974,080 1,752,639 Amortization of debt issuance costs 122,291 101,852 Amortization of right to use assets 310,706 378,261 Amortization of customer acquisition costs - 34,467 Amortization of patent rights 213,666 201,200 Depreciation expense 188,675 314,908 (Gain) Loss on change in fair value of profit share (23,537 ) 374,462 Gain on sale of equipment (35,859 ) (29,560 ) Changes in operating assets and liabilities Decrease in accounts receivable 106,792 419,252 Increase in inventory (46,629 ) (4,082 ) (Increase) Decrease in prepaid expenses and other assets (5,730 ) 34,915 Decrease in accounts payable and accrued liabilities (64,802 ) (426,638 ) Increase (Decrease) in accrued salaries 491,610 (198,782 ) Increase in accrued interest 33,164 129,163 Decrease in operating lease liability (388,116 ) (371,986 ) Net cash used in operating activities (1,239,085 ) (1,576,948 ) Cash flows from investing activities Cash received from sale of equipment 42,500 30,000 Net cash provided by investing activities 42,500 30,000 Cash flows from financing activities Payments of notes payable (165,339 ) - Proceeds from the issuance of notes payable 499,300 - Payments on secured promissory note - (46,682 ) Payments of equipment notes payable (45,646 ) (91,960 ) Proceeds from the issuance of convertible promissory notes and related warrants - 2,600,000 Net cash provided by financing activities 288,315 2,461,358 Net increase (decrease) in cash and cash equivalents (908,268 ) 914,410 Cash and cash equivalents - beginning of year 1,499,287 584,877 Cash and cash equivalents - end of year $ 591,019 $ 1,499,287 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 534,960 $ - Income taxes $ - $ 14,000 SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS Cumulative effect on accumulated deficit of lease accounting change $ - $ 77,866 Discount on convertible promissory notes payable $ - $ 485,640 Net adjustment for extension of lease $ - $ 145,267 Stock Issued for consulting services $ 102,000 $ - Stock issued for prepaid services $ 200,000 $ - Stock warrants issued for prepaid services $ - $ 243,294 Stock options issued for prepaid services $ - $ 18,723 Capital contribution $ - $ (3,412,204 ) The accompanying notes are an integral part of these consolidated financial statements. F-7 Table of Contents MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 Note 1 - Organization Midwest Energy Emissions Corp. Midwest Energy Emissions Corp. (the “Company”) is organized under the laws of the State of Delaware with 150,000,000 authorized shares of common stock, par value $.001 per share and 2,000,000 authorized shares of preferred stock, par value $0.001 per share. MES, Inc. MES, Inc. is incorporated in the State of North Dakota. MES, Inc. is a wholly owned subsidiary of Midwest Energy Emissions Corp. and is engaged in the business of developing and commercializing state of the art control technologies relating to the capture and control of mercury emissions from coal fired boilers in the United States and Canada. Note 2 - Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with the Generally Accepted Accounting Principles in the United States of America (“GAAP”). Principles of Consolidation The consolidated financial statements include the accounts of Midwest Energy Emissions Corp. and its wholly-owned subsidiary, MES, Inc. Intercompany balances and transactions have been eliminated in consolidation. 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 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. Cash Cash and cash equivalents include all highly liquid monetary instruments with original maturities of three months or less when purchased. These investments are carried at cost, which approximates fair value. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash deposits. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, the Company’s cash and cash equivalent balances may be uninsured or in amounts that exceed the FDIC insurance limits. The Company has not experienced any loses on such accounts. At December 31, 2020 and 2019, the Company had no cash equivalents. As of December 31, 2020, approximately $91,000 of cash exceeded the FDIC insurance limits. F-8 Table of Contents Accounts Receivable Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. At December 31, 2020 and 2019, the allowance for doubtful accounts was zero. Inventory Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. Inventories are periodically evaluated to identify obsolete or otherwise impaired products and are written off when management determines usage is not probable. The Company estimates the balance of excess and obsolete inventory by analyzing inventory by age using last used and original purchase date and existing sales pipeline for which the inventory could be used. As of December 31, 2020 and 2019, the Company has no valuation allowance. Property and Equipment Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For consolidated financial statement purposes, 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 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. Management reviews the carrying value of its property and equipment for impairment on an annual basis. Intellectual Property 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. In the event that impairment indicators exist, a further analysis is performed and if the sum of the expected undiscounted future cash flows resulting from the use of the asset or asset group is less than the carrying amount of the asset or asset group, an impairment loss equal to the excess of the asset or asset group’s carrying value over its fair value is recorded. Management considers historical experience and all available information at the time the estimates of future cash flows are made, however, the actual cash values that could be realized may differ from those that are estimated. Recoverability of Long-Lived and Intangible Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of the long-lived and or intangible assets would be adjusted, based on estimates of future discounted cash flows. The Company evaluated the recoverability of the carrying value of the Company’s equipment. No impairment charges were recognized for the years ended December 31, 2020 and 2019, respectively. F-9 Table of Contents Leases In February 2016, the FASB issued new guidance which requires lessees to recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The accounting standard, effective January 1, 2019, requires virtually all leases to be recognized on the Balance Sheet. Effective January 1, 2019, we adopted the standard using the modified retrospective method, under which we elected the package of practical expedients and transition provisions allowing us to bring our existing operating leases onto the Consolidated Balance Sheet without adjusting comparative periods, but recognizing a cumulative-effect adjustment to the opening balance of accumulated deficit on January 1, 2019. 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 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. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities, adjusted for prepaid lease payments, initial direct costs, and lease incentives received. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Upon adoption of the standard on January 1, 2019, we recorded $1,339,569 of right of use assets and $1,417,435 of lease-related liabilities, with the difference charged to accumulated deficit at that date. Stock-Based Compensation The Company accounts for stock-based compensation awards in accordance with the provisions of Accounting Standards Codification (“ASC”) 718, Compensation-Stock Compensation , which requires equity-based compensation, be reflected in the consolidated financial statements over the period of service which is typically the vesting period based on the estimated fair value of the awards. Fair Value of Financial Instruments The fair value hierarchy has three levels based on the inputs used to determine fair value, which are as follows: ☐ Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date. ☐ Level 2 — Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. ☐ Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. Cash 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. Discounts on issued debt, as well as debt issuance costs, are amortized over the term of the individual promissory notes. F-10 Table of Contents The fair value of the profit share liability at December 31, 2020 was calculated using a discounted cash flow model based on estimated future cash payments. The fair value of the profit share liability was determined on a Level 3 measurement. These values are determined using pricing models for which the assumptions utilized management’s estimates. The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. Fair Value Measurement as of December 31, 2020 Total Level 1 Level 2 Level 3 Assets: Cash $ 591,019 $ 591,019 $ - $ - Total Assets $ 591,019 $ 591,019 $ - $ - Liabilities: Promissory notes $ 14,585,097 $ - $ 14,585,097 $ - Profit share liability 2,305,308 - - 2,305,308 Total Liabilities $ 16,890,405 $ - $ 14,585,097 $ 2,305,308 Fair Value Measurement as of December 31, 2019 Total Level 1 Level 2 Level 3 Assets: Cash $ 1,499,287 $ 1,499,287 $ - $ - Total Assets $ 1,499,287 $ 1,499,287 $ - $ - Liabilities: Promissory notes $ 12,200,411 $ - $ 12,200,411 $ - Profit share liability 2,328,845 - - 2,328,845 Total Liabilities $ 14,529,256 $ - $ 12,200,411 $ 2,328,845 Foreign Currency Translation The Company’s functional currency is the United States Dollar (the “U.S. Dollar”). The Company engages in foreign currency denominated transactions with customers that operate in functional currencies other than the U.S. Dollar. Assets and liabilities denominated in foreign currencies are translated into U.S. Dollar amounts at the period-end exchange rates. Sales and purchases and income and expense transactions that are denominated in foreign currencies are translated into U.S. Dollar amounts at the prevailing rates of exchange on the transaction date. Adjustments arising from foreign currency transactions are reflected in the statement of operations. For the 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 The Company records revenue in accordance with ASC 606, Revenue from Contracts with Customers . The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. Revenue is recognized when the Company satisfies its performance obligation under the contract by transferring the promised product to its customer that obtains control of the product. A performance obligation is a promise in a contract to transfer a distinct product to a customer. Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct. F-11 Table of Contents Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales and other taxes are excluded from revenues. Invoiced shipping and handling costs are included in revenue. The adoption of this standard did not have a material impact on the Company’s financial statements. Disaggregation of Revenue 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. Revenue for demonstrations and consulting services is recognized when performance obligations contained in the contract have been completed, typically the completion of necessary field work and the delivery of any required analysis per the terms of the agreement. The following table presents sales by operating segment disaggregated based on the type of product and geographic region for the years ended December 31, 2020, and 2019. Year ended December 31, 2020 Year ended December 31, 2019 United States International Total United States International Total Product revenue $ 7,306,382 $ 113,600 $ 7,419,982 $ 10,746,715 $ 297,840 $ 11,044,555 License revenue 545,547 - 545,547 - - - Demonstrations & Consulting revenue 148,553 - 148,553 183,448 95,543 278,991 Equipment revenue 38,000 6,366 44,366 93,481 - 93,481 $ 8,038,482 $ 119,966 $ 8,158,448 $ 11,023,644 $ 393,383 $ 11,417,027 Income Taxes The Company follows the asset and liability method of accounting for income taxes under FASB ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. F-12 Table of Contents FASB ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of December 31, 2020. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception. The Company may be subject to potential examination by federal, state, and city taxing authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with federal, state, and city tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months. The Company is no longer subject to tax examinations by tax authorities for years prior to 2017. Basic and Diluted Loss Per Common Share Basic net loss per common share is computed using the weighted average number of common shares outstanding. Diluted loss per share reflects the potential dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. For the years ended December 31, 2020 and 2019 basic and diluted earnings per share approximated each other. There were no dilutive potential common shares as of December 31, 2020 and 2019, because the Company incurred net losses and basic and diluted losses per common share are the same. The following common stock equivalents were excluded from the computation of diluted net loss per share of common stock because they were anti-dilutive. The exercise of these common stock equivalents would dilute earnings per share if the Company becomes profitable in the future. December 31, December 31, 2020 2019 Stock Options 16,093,326 12,553,326 Warrants 5,595,378 5,690,378 Convertible debt 9,414,200 9,351,400 Total common stock equivalents excluded from diluted net loss per share 31,102,904 27,595,104 Concentration of Credit Risk Financial instruments that subject the Company to credit risk consist of cash and equivalents on deposit with financial institutions and accounts receivable. The Company’s cash as of December 31, 2020 is maintained at high-quality financial institutions and has not incurred any losses to date. Customer and Supplier Concentration 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. At December 31, 2020 and 2019, 45% and 74% of the Company’s accounts payable and accrued expenses related to two vendors. The Company believes there are numerous other suppliers that could be substituted should the supplier become unavailable or non-competitive. Contingencies Certain conditions may exist which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. F-13 Table of Contents If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in which case the guarantees would be disclosed. Recently Adopted Accounting Standards In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . Under ASU 2016-02, lessees will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 became effective for us on January 1, 2019 and initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. As of January 1, 2019, the Company adopted ASU 2016-02 and has recorded a right-of-use asset and lease liability on the balance sheet for its operating leases. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). The Company accounted for lease and non-lease components separately because such amounts are readily determinable under our lease contracts and because we expect this election will result in a lower impact on our balance sheet. In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815) : (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The Company early adopted ASU 2017-11 and changed its method of accounting for certain warrants that were initially recorded as liabilities during the year ended December 31, 2014 on a full retrospective basis. The adoption of ASU 2017-11 did not have a material impact on the Company’s consolidated financial statements. F-14 Table of Contents 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. 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 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) : Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 modify the disclosure requirements associated with fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. 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): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements. Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements. Note 3 – Going Concern and Financial Condition Under ASC 205-40, Presentation of Financial Statements—Going Concern , the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40. The accompanying consolidated financial statements as of December 31, 2020 have been prepared assuming the Company will continue as a going concern. As reflected in the consolidated financial statements, the Company had an accumulated deficit of $63 million and a negative working capital of $984,112 at December 31, 2020. Additionally, the Company had a net loss in the amount of $5.8 million and cash used by operating activities of $1.2 million for the year ended December 31, 2020. 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 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. While the Company believes in its ability to raise additional funds, no assurances can be given that the Company can maintain sufficient working capital through these efforts, or that the continued implementation of its business plan will generate sufficient revenues in the future to sustain ongoing operations. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern. F-15 Table of Contents Note 4 - Inventory Inventory was comprised of the following at December 31, 2020 and 2019: December 31, 2020 December 31, 2019 Raw Materials $ 169,803 $ 223,790 Work in Process - 43,814 Spare Parts 23,432 27,632 Finished goods 366,892 218,262 $ 560,127 $ 513,498 Note 5 - Property and Equipment, Net Property and equipment at December 31, 2020 and 2019 are as follows: December 31, December 31, 2020 2019 Equipment & Installation $ 1,965,659 $ 1,965,659 Trucking equipment 834,375 922,441 Computer equipment and software 67,126 67,126 Office equipment 27,155 27,155 Total equipment 2,894,315 2,982,381 Less: accumulated depreciation (2,814,993 ) (2,707,745 ) Construction in process 1,807,707 1,807,707 Property and equipment, net $ 1,887,029 $ 2,082,343 The Company uses the straight-line method of depreciation over 2 to 5 years. During the years ended December 31, 2020 and 2019 depreciation expense was $188,675, and $314,908, respectively. Note 6 – Intellectual Property On January 15, 2009, the Company entered into an “Exclusive Patent and Know-How License Agreement Including Transfer of Ownership” with the Energy and Environmental Research Center Foundation, a non-profit entity (“EERCF”). Under the terms of the Agreement, the Company has been granted an exclusive license by EERCF for the technology to develop, make, have made, use, sell, offer to sell, lease, and import the technology in any coal-fired combustion systems (power plant) worldwide and to develop and perform the technology in any coal-fired power plant in the world. On April 24, 2017, the Company closed on the acquisition of all patent rights from EERCF including all patents and patents pending, domestic and foreign, relating to the foregoing technology. A total of 42 domestic and foreign patents and patent applications were included in the acquisition. In accordance with the terms of the License Agreement, the patent rights were acquired for the purchase price of (i) $2,500,000 in cash, and (ii) 925,000 shares of common stock of which 628,998 shares were issued to EERCF and 296,002 were issued to the inventors who had been designated by EERCF. The shares issued were valued at $518,000 ($0.56 per share), representing the value as of the closing date. License and patent costs capitalized as of December 31, 2020 and 2019 are as follows: December 31 December 31 2020 2019 Patents $ 3,068,995 $ 3,068,995 Less: Accumulated amortization (750,199 ) (536,533 ) License, net $ 2,318,796 $ 2,532,462 Amortization expense for the years ended December 31, 2020 and 2019 was $213,666 and $201,200, respectively. Estimated annual amortization for each of the next five years is $204,600. F-16 Table of Contents Note 7 –Notes Payable On February 25, 2020, and pursuant to a Business Loan Agreement entered into with a banking institution, the Company’s wholly owned subsidiary, MES, Inc. closed on a one-year secured loan in the principal amount of $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. See Note 16. 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. See Note 16. Note 8 –Convertible Notes Payable The Company has the following convertible notes payable outstanding as of December 31, 2020 and 2019: December 31, December 31, 2020 2019 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. $ 990,000 $ 990,000 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. 860,000 860,000 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. 2,600,000 2,600,000 Total convertible notes payable before discount 4,450,000 4,450,000 Less unamortized discounts and debt issuance costs (394,878 ) (508,863 ) Total convertible notes payable 4,055,122 3,941,137 Less current portion - (990,000 ) Convertible notes payable, net of current portion $ 4,055,122 $ 2,951,137 As of December 31, 2020, remaining scheduled principal payments due on convertible notes payable are as follows: Twelve months ended December 31, 2021 $ - 2022 990,000 2023 860,000 2024 2,600,000 $ 4,450,000 As of December 31, 2020, the remaining future amortization of discounts are as follows: Twelve months ended December 31, Discounts 2021 $ 114,334 2022 114,334 2023 105,477 2024 60,733 $ 394,878 F-17 Table of Contents From July 30, 2013 through December 24, 2013, the Company sold convertible notes and warrants to unaffiliated accredited investors totaling $1,902,500. The notes bear interest at 10% per annum, are secured by the Company’s assets, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share. The notes had an initial term of three years, but the maturity of the notes was extended during 2014 to match the retirement of the New AC Midwest Secured Debt. These securities were sold in reliance upon the exemption provided by Section 4(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Interest expense for the years ended December 31, 2020 and 2019, was $99,000 and $99,000, respectively. A discount on the notes payable of $841,342 was recorded based on the value of the warrants issued using a Black-Scholes options pricing model and was amortized over the initial five year life of the notes. 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. For each dollar exchanged, the investor received a warrant to purchase one share of common stock of the Company at an exercise price of $0.70 per share. The 2018 Unsecured Notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. Loss on this debt exchange was $44,036. A discount on the notes payable of $89,500 was recorded based on the value of the fair value of the note and warrants exchanged. The included warrants were valued using a Black-Scholes options pricing model. From August 31, 2018 through October 30, 2018, the Company issued additional 2018 Notes totaling $300,000 and warrants to unaffiliated accredited investors. A discount on the notes payable of $40,350 was recorded based on the fair value of the warrants issued with this note using a Black-Scholes options pricing model. Amortized interest expense for the years ended December 31, 2020 and 2019 on these discounts was $16,176 and $24,323, respectively. Interest expense for the years ended December 31, 2020 and 2019, was $103,200 and $202,200, respectively. 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%. 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 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 Company. Interest expense for the years ended December 31, 2020 and 2019 was $41,432 and $40,753, respectively. On February 25, 2019, per Amendment No. 3 to the Amended and Restate Financing Agreement, AC Midwest agreed to waive compliance with a certain financial covenant of the Restated Financing Agreement and strike this covenant in its entirety as of the effective date of the amendment. Also, pursuant to Amendment No. 3, the parties agreed that the maturity date for the remaining principal balance due under the AC Midwest Secured Note would be extended from December 15, 2018 to August 25, 2022. The amendment was accounted for as an extinguishment in accordance with ASC 470-50 with no gain or loss recorded. As of December 31, 2020 and 2019, total principal of $271,686 was outstanding on this note. F-18 Table of Contents 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 $ 13,154,931 $ 13,154,931 Less unamortized discounts and debt issuance costs (3,260,647 ) (5,243,033 ) Total unsecured notes payable 9,894,284 7,911,898 Less current portion - - Unsecured notes payable, net of current portion $ 9,894,284 $ 7,911,898 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. On February 25, 2019, the Company, entered into an Unsecured Note Financing Agreement (the “Unsecured Note Financing Agreement”) with AC Midwest, pursuant to which AC Midwest issued an unsecured note in the principal amount of $13,154,931 (the “New AC Midwest Unsecured Note”), which represented the outstanding principal and accrued and unpaid interest at closing. In accordance with ASC 470-60-15-5, since the present value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted for the amendment to note as a debt extinguishment. Accordingly, the Company wrote off the remaining debt discount on the original Debentures of $1,070,819. Since the amendment was with a related party defined in ASC 470-50-40-2 the Company recorded a Capital contribution of $3,412,204 on this exchange which is primarily related to the difference in fair value of the note on the date of the exchange. The Company determined that the rate of interest on the AC Midwest Subordinated Note was a below market rate of interest and determined that a discount of $6,916,687 should be recorded. 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 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. 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). F-19 Table of Contents The Profit Share In connection with the New AC Midwest Unsecured Note the Company shall pay the principal outstanding, as well as the Profit Share, in an amount equal to 60.0% of Net Litigation Proceeds until such time as any litigation funder has been paid in full and, thereafter, in an amount equal to 75.0% of such Net Litigation Proceeds until the Unsecured Note and Profit Share have been paid in full. In addition, and within 30 days following the end of each fiscal quarter, the Company shall pay the principal outstanding and Profit Share in an aggregate amount equal to the Net Revenue Share (which means 60.0% of Net Licensing Revenue (as defined) from licensing the Company’s intellectual property) plus Adjusted Free Cash Flow until the Unsecured Note and Profit Share have been paid in full, provided, however, that such payments shall exclude the first $3,500,000 of Net Licensing Revenue and Adjusted Free Cash Flow achieved commencing with the fiscal quarter ending March 31, 2019. Any remaining principal balance due on the Unsecured Note shall be due and payable in full on the Maturity Date. 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 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. 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 $ 2,328,845 Addition - Gain on change in fair value of profit share (23,537 ) Profit Share as of December 31, 2020 $ 2,305,308 Profit Share as of January 1, 2019 $ - Addition 1,954,383 Loss on change in fair value of profit share 374,462 Profit Share as of December 31, 2019 $ 2,328,845 Related Party Transactions 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. David M. 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 In 2016, the Company entered into a six-year agreement to lease trailers used in the delivery of its products. Monthly payments currently total $32,820. On January 27, 2015, the Company entered into a lease for office space in Lewis Center, Ohio, commencing February 1, 2015 which lease as amended expired in February 2020. The lease provides for the option to extend the lease for up to five additional years. Monthly rent is $1,575 through February 2020. The Company did not renew this lease. On July 1, 2015, the Company entered into a five-year lease for warehouse space in Corsicana, Texas. Rent is $3,750 monthly throughout the term of the lease. The Company is also responsible for the pro rata share of the projected monthly expenses for the property taxes. The current pro rata share is $882. The lease was extended on June 1, 2019 for five years. The company recorded a right of use asset and an operating lease liability of $145,267. This amount represents the difference between the value from the remaining lease and the extended lease. On September 1, 2019, the Company entered into a one-year lease for office space in Grand Forks, North Dakota. 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: For the twelve months ended December 31 2021 $ 438,840 2022 351,100 2023 45,000 2024 11,250 Total 846,190 Less discount (43,590 ) Total lease liabilities 802,600 Less current portion (407,975 ) Operating lease obligation, net of current portion $ 394,625 F-20 Table of Contents The weighted average remaining lease term for operating leases is 2 years and the weighted average discount rate used in calculating the operating lease asset and liability is 5%. For the year ended December 31, 2020, payments on lease obligations were $438,840 and amortization on the right of use assets was $310,706. For the year ended December 31, 2020, the Company’s lease cost consists of the following components, each of which is included in costs and expenses within the Company’s consolidated statements of operations: Year Ended December 31, 2020 Operating lease cost $ 363,100 Short-term lease cost (1) 7,080 Total lease cost $ 370,180 (1) Short-term lease costs includes any lease with a term of less than 12 months Note 11 – Commitments and Contingencies Fixed Price Contract The Company’s multi-year contracts with its commercial customers contain fixed prices for product. 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. Legal proceedings On July 17, 2019, the Company initiated patent litigation against certain defendants in the U.S. District Court for the District of Delaware for infringement of United States Patent Nos. 10,343,114 (the “‘114 Patent”) and 8,168,147 (the “‘147 Patent”) owned by the Company. These patents relate to the Company’s two-part Sorbent Enhancement Additive (SEA ® ) process for mercury removal from coal-fired power plants. Named as defendants in the lawsuit are (i) Vistra Energy Corp., AEP Generation Resources Inc., NRG Energy, Inc., Talen Energy Corporation, and certain of their respective affiliated entities, all of which are owners and/or operators of coal-fired power plants in the United States, and (ii) Arthur J. Gallagher & Co., DTE REF Holdings, LLC, CERT Coal Holdings LLC, Chem-Mod LLC, and certain of their respective affiliated entities, and additional named and unnamed defendants, all of which operate or are involved in operations of coal facilities in the United States. 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. 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. Litigation, including patent litigation, is inherently subject to uncertainties. As such, there can be no assurance that the Company will be successful in litigating and/or settling any of these claims. F-21 Table of Contents Note 12 - Stock Based Compensation Common Stock 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. Stock. Options The Company accounts for stock-based compensation awards in accordance with the provisions of ASC 718, which addresses the accounting for employee stock options which requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the consolidated financial statements over the vesting period based on the estimated fair value of the awards. A summary of stock option activity for the years ended December 31, 2020 and 2019 is presented below: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value December 31, 2018 9,161,510 $ 1.15 2.00 $ - Grants 4,700,000 0.27 5.00 - Expirations (1,308,184 ) 0.27 - - December 31, 2019 12,553,326 $ 0.55 4.02 $ 927 Grants 4,425,000 $ 0.38 4.73 $ - Exercised (1,500 ) 0.17 - - Expirations (758,500 ) 0.68 - - December 31, 2020 16,218,326 $ 0.50 3.57 $ 3,588,631 Options exercisable at: December 31, 2019 12,563,326 $ 0.55 4.02 $ 927 December 31, 2020 16,093,326 $ 0.50 3.56 $ 3,532,381 The Company utilized the Black-Scholes options pricing model to value its options granted. 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 $0.25-$0.27 Expected dividends 0% 0% Expected volatility 84% - 103% 100% - 109% Risk free interest rate 0.30 - 0.37% 1.73 - 3% Expected life 4.12-5 years 5 years On May 14, 2019, Frederick Van Zijl resigned as a director of the Company. In connection with such resignation, the Company has agreed to issue, and Mr. Van Zijl has agreed to accept, an aggregate of 235,184 shares of common stock of the Company in full and complete payment for service on the Board since his appointment in October 2018. Compensation of $63,500 based on the market price of the shares on the date of issuance was included in selling, general and administrative expenses within the Company’s consolidated statements of operations. F-22 Table of Contents On June 4, 2019, Allan T. Grantham resigned as a director of the Company. In connection with such resignation, the Company has agreed to issue, and Mr. Grantham has agreed to accept, an aggregate of 229,333 shares of common stock of the Company in full and complete payment for service on the Board for 2018 and 2019. Compensation of $55,040 based on the market price of the shares on the date of issuance was included in selling, general and administrative expenses within the Company’s consolidated statements of operations. On June 28, 2019, the Company granted nonqualified stock options to acquire an aggregate of 4,600,000 shares of the Company’s common stock under the Company’s 2017 Equity Plan to certain executive officers, employees and others. The options granted are exercisable at $0.27 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $898,207 in accordance with FASB ASC Topic 718 which was included in selling, general and administrative expenses within the Company’s consolidated statements of operations. Also on June 28, 2019, the Company extended the expiration dates of previously granted nonqualified stock options to acquire an aggregate of 4,675,000 shares of the Company’s common stock under the Company’s 2014 Equity Plan to certain executive officers, employees and others. The extended options are exercisable from $0.42 to $1.36 per share, representing the original fair market value of the common stock on the date of grant as determined under the 2014 Equity Plan. 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, 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. The options were granted as compensation for a one year consulting agreement. The options granted are exercisable at $0.25 per share, representing the fair market value of the common stock on the date of grant as determined under the 2017 Equity Plan. The options are fully vested and exercisable as of the date of grant and will expire five years thereafter. Based on a Black-Scholes valuation model, these options were valued at $18,723 in accordance with FASB ASC Topic 718. 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 Sold and issued warrants are subject to the provisions of FASB ASC 815-10, the Company utilized a Black-Scholes options pricing model to value the warrants sold and issued. This model requires the input of highly subjective assumptions such as the expected stock price volatility and the expected period until the warrants are exercised. When calculating the value of warrants issued, the Company uses a volatility factor, a risk free interest rate and the life of the warrant for the exercise period. F-23 Table of Contents The following is a summary of the Company’s warrant activity: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value December 31, 2018 4,105,398 $ 0.59 1.79 $ - Grants 3,600,000 0.70 5.00 - Expirations (2,015,020 ) 0.69 - - December 31, 2019 5,690,378 $ 0.63 3.72 $ - Grants - - - - Exercised (95,000 ) 0.35 - - December 31, 2020 5,595,378 $ 0.63 2.85 $ 314,260 Warrants exercisable at: December 31, 2019 5,690,378 $ 0.63 3.72 $ - December 31, 2020 5,595,378 $ 0.63 2.85 $ 314,260 The following table summarizes information about common stock warrants outstanding at December 31, 2020: Outstanding Exercisable Exercise Price Number Outstanding Weighted Average Remaining Contractual Life (years) Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price $ 0.70 4,460,000 3.44 $ 0.70 4,460,000 $ 0.70 0.45 150,000 2.92 0.45 150,000 0.45 0.35 985,378 0.13 0.35 985,378 0.35 $ 0.35-0.70 5,595,378 2.85 $ 0.63 5,595,378 $ 0.63 * 110,000 warrants exercisable at $0.35 contain dilution protections that increase the number of shares purchasable at exercise upon the issuance of securities at a price below the current exercise price. The Company utilized the Black-Scholes options pricing model. 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 $ 0.70 Expected dividends 0% Expected volatility 100% - 112% Risk free interest rate 1.58% - 3% Expected life 5 years 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. F-24 Table of Contents From June through October 2019, the Company issued unsecured convertible notes and five-year warrants to unaffiliated accredited investors totaling $2,600,000. The notes are convertible into shares of common stock, with the initial conversion ratio equal to $0.50 per share. The investors received warrants to purchase a total of 2,600,000 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 $525,142 which was recorded as a discount on the notes payable and will be amortized over the life of the associated notes payable. On October 23, 2019, and pursuant to an advisory agreement executed on that date for a term of one year with an unaffiliated third party, the Company granted such unaffiliated third party a vested three-year warrant to purchase 1,000,000 shares of common stock with an exercise price of $0.70 per share, exercisable on a cash basis only. Such warrants were issued as and for the entire compensation to paid to the advisor for all services to be rendered during the term. Based on a Black-Scholes valuation model, these options were valued at $243,294 in accordance with FASB ASC Topic 718. 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 Below is breakdown of the income tax provisions for the years ended December 31: 2020 2019 Federal Current $ - $ - Deferred (1,833,000 ) (1,278,000 ) State and local Current 10,000 14,000 Deferred (251,000 ) (196,000 ) Change in valuation allowance 2,084,000 1,474,000 Income tax provision $ 10,000 $ 14,000 The expected tax expense (benefit) based on the statutory rate is reconciled with actual tax expense benefit as follows: For the Year Ended December 31, 2020 For the Year Ended December 31, 2019 U.S. federal statutory rate 21.0% 21.0% State taxes 4.3% 4.3% Other permanent and prior period adjustments 10.6% (1.4)% Valuation allowance (36.1)% (24.2)% Income tax provision (0.2)% (0.3)% Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31: 2020 2019 Deferred tax assets: Net operating loss carryforwards $ 7,189,000 $ 5,456,000 Stock based compensation 1,518,000 1,285,000 Other 212,000 81,000 Total deferred tax assets 8,919,000 6,822,000 Deferred tax liabilities: Property and equipment (48,000 ) (57,000 ) Other (67,000 ) (44,000 ) Total deferred tax liabilities (115,000 ) (101,000 ) Valuation Allowance (8,804,000 ) (6,721,000 ) Net deferred tax asset $ - $ - F-25 Table of Contents The Company has U.S. 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. The ultimate realization of deferred tax assets is dependent upon future generation for taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all the information available, Management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance. For the years ended December 31, 2020 and 2019, the change in the valuation allowance was $2,084,000 and $1,474,000, respectively. The Company evaluated the provisions of ASC 740-10 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the Company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740-10. If applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other expenses – Interest” in the statement of operations. Penalties would be recognized as a component of “General and administrative.” No interest or penalties on unpaid tax were recorded during the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next year. Note 15 - Restatement of previously issued financial statements (unaudited) 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 Condensed Consolidated Balance Sheets of the financial statements. See Note 9. F-26 Table of Contents 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 reported Adjustment As restated LIABILITIES AND STOCKHOLDERS’ DEFICIT Profit Share liability $ - $ 1,991,940 $ 1,991,940 Unsecured note payable, net of discount and issuance costs 8,403,968 (1,981,568 ) 6,422,400 Total liabilities 14,801,425 10,372 14,811,797 Stockholders’ deficit Additional paid-in capital 42,785,990 3,412,204 46,198,194 Accumulated deficit (49,197,401 ) (3,422,576 ) (52,619,977 ) Total stockholders’ deficit (6,335,165 ) (10,372 ) (6,345,537 ) Total liabilities and stockholders’ deficit $ 8,466,260 $ - $ 8,466,260 F-27 Table of Contents MIDWEST ENERGY EMISSIONS CORP. AND SUBSIDIARIES FOR THE THREE MONTHS ENDED MARCH 31, 2019 As previously reported Adjustment As restated Interest expense & letter of credit fees $ 529,193 $ (27,185 ) $ 502,008 Loss on change in fair value of profit share - 37,557 37,557 Gain on debt restructuring (3,412,204 ) 3,412,204 - Total costs and expenses 423,524 3,422,576 3,846,100 Net income (loss) $ 2,363,797 $ (3,422,576 ) $ (1,058,779 ) Net loss per common share - basic and diluted: $ 0.03 $ (0.04 ) $ (0.01 ) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2019 As previously reported Adjustment As restated Cash flows from operating activities Net income (loss) $ 2,363,797 $ (3,422,576 ) $ (1,058,779 ) Adjustments to reconcile net loss to net cash Amortization of discount of notes payable 303,697 (27,185 ) 276,512 Loss on change in fair value of profit share - 37,557 37,557 Gain on debt restructuring (3,412,204 ) 3,412,204 - Net cash provided by (used in) operating activities $ 68,245 $ - $ 68,245 F-28 Table of Contents 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 and six month periods ended June 30, 2019: CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2019 As previously reported Adjustment As restated LIABILITIES AND STOCKHOLDERS’ DEFICIT Profit Share liability $ - $ 2,097,655 $ 2,097,655 Secured note payable 271,686 - 271,686 Unsecured note payable, net of discount and issuance costs 9,095,119 (2,179,831 ) 6,915,288 Total liabilities 16,654,136 (82,176 ) 16,571,960 Stockholders’ deficit Additional paid-in capital 44,745,926 3,412,204 48,158,130 Accumulated deficit (52,036,522 ) (3,330,028 ) (55,366,550 ) Total stockholders’ deficit (7,213,886 ) 82,176 (7,131,710 ) Total liabilities and stockholders’ deficit $ 9,440,250 $ - $ 9,440,250 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2019 FOR THE SIX MONTHS ENDED JUNE 30, 2019 As previously reported Adjustment As restated As previously reported Adjustment As restated Interest expense & letter of credit fees $ 763,873 $ (198,263 ) $ 565,610 $ 1,293,067 $ (225,448 ) $ 1,067,619 Loss on change in fair value of profit share - 105,715 105,715 - 143,272 143,272 (Gain)/Loss on debt restructuring - - - (3,412,204 ) 3,412,204 - Total costs and expenses 5,348,871 (92,548 ) 5,256,323 5,772,394 3,330,028 9,102,422 Net loss $ (2,839,121 ) $ 92,548 $ (2,746,573 ) $ (475,324 ) $ (3,330,028 ) $ (3,805,352 ) Net loss per common share - basic and diluted: $ (0.04 ) $ (0.00 ) $ (0.04 ) $ (0.01 ) $ (0.04 ) $ (0.05 ) F-29 Table of Contents CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2019 As previously reported Adjustment As restated Cash flows from operating activities Net loss $ (475,324 ) $ (3,330,028 ) $ (3,805,352 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of discount of notes payable 938,532 (225,448 ) 713,084 Loss on change in fair value of profit share - 143,272 143,272 Gain on debt restructuring (3,412,204 ) 3,412,204 - Net cash used in operating activities $ (506,674 ) $ - $ (506,674 ) 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 and nine month periods ended September 30, 2019: CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2019 As previously reported Adjustment As restated LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities Profit Share liability $ - $ 2,210,230 $ 2,210,230 Unsecured note payable, net of discount and issuance costs 9,752,882 (2,339,289 ) 7,413,593 Total liabilities 17,177,693 (129,059 ) 17,048,634 Stockholders’ deficit Additional paid-in capital 44,882,209 3,412,204 48,294,413 Accumulated deficit (52,887,063 ) (3,283,145 ) (56,170,208 ) Total stockholders’ deficit (7,928,107 ) 129,059 (7,799,048 ) Total liabilities and stockholders’ deficit $ 9,249,586 $ - $ 9,249,586 F-30 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 As previously reported Adjustment As restated As previously reported Adjustment As restated Interest expense & letter of credit fees $ 782,695 $ (159,458 ) $ 623,237 $ 2,075,761 $ (384,906 ) $ 1,690,855 Loss on change in fair value of profit share - 112,575 112,575 - 255,847 255,847 (Gain)/Loss on debt restructuring - - - (3,412,204 ) 3,412,204 - Total costs and expenses 4,446,648 (46,883 ) 4,399,765 10,219,042 3,283,145 13,502,187 Net loss $ (850,541 ) $ 46,883 $ (803,658 ) $ (1,325,865 ) $ (3,283,145 ) $ (4,609,010 ) Net loss per common share-basic and diluted: $ (0.01 ) $ - $ (0.01 ) $ (0.02 ) $ (0.04 ) $ (0.06 ) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 As previously reported Adjustment As restated Cash flows from operating activities Net loss $ (1,325,865 ) $ (3,283,145 ) $ (4,609,010 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of discount of notes payable 1,585,686 (384,906 ) 1,200,780 Loss on change in fair value of profit share - 255,847 255,847 Gain on debt restructuring (3,412,204 ) 3,412,204 - Net cash used in operating activities $ (1,304,626 ) $ - $ (1,304,626 ) F-31 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT FOR THE MONTHS ENDED MARCH 31, 2019, THE SIX MONTHS ENDED JUNE 30, 2019 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2019 (Restated) Common Stock Additional Accumulated Shares Par Value Paid-in Capital (Deficit) Total Balance - January 1, 2019 76,246,113 $ 76,246 $ 42,785,990 $ (51,483,332 ) $ (8,621,096 ) Cumulative effect of change in accounting principle related to accounting for leases - - - (77,866 ) (77,866 ) Capital contribution - - 3,412,204 - 3,412,204 Net income - - - (1,058,779 ) (1,058,779 ) Balance - March 31, 2019 76,246,113 $ 76,246 $ 46,198,194 $ (52,619,977 ) $ (6,345,537 ) Stock issued per resignation agreements 464,517 464 118,076 - 118,540 Issuance of stock options - - 898,207 - 898,207 Extension of certain stock option expiration - - 745,989 - 745,989 Issuance of warrants, recorded as discount on convertible notes payable - - 197,664 - 197,664 Net loss - - - (2,746,573 ) (2,746,573 ) Balance - June 30, 2019 76,710,630 $ 76,710 $ 48,158,130 $ (55,366,550 ) $ (7,131,710 ) Stock issued upon cashless warrant exercise 37,120 37 (37 ) - - Issuance of warrants, recorded as discount on convertible notes payable - - 136,320 - 136,320 Net loss - - - (803,658 ) (803,658 ) Balance - September 30, 2019 76,747,750 $ 76,747 $ 48,294,413 $ (56,170,208 ) $ (7,799,048 ) F-32 Table of Contents Note 16 – Subsequent Events 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. F-33 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.