What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-04-05 compared with 2021-04-05 · 145 added, 122 removed, 157 unchanged (63% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with consolidated financial statements and the related notes that appear elsewhere within this report.

Certain statements we make under this Item 7 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995.

See “Forward-Looking Statements” in “Part I” preceding “Item 1 - Business.” You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors” in Item 1A above, as well as our consolidated financial statements, related notes and other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission.

Midwest Energy Emissions Corp.

(the “Company”, “we”, “us” and “our”) is an environmental services and technologies company developing and delivering patented and proprietary solutions to the global power industry.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this report.

Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties, and assumptions.

You should read the “Forward-Looking Statements” and “Risk Factors” sections of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

We are an environmental services and technologies company developing and delivering patented and proprietary solutions to the global power industry.

Our leading-edge services have been shown to achieve mercury emissions removal at a significantly lower cost and with less operational impact to coal-fired power plants than currently used methods, while maintaining and/or increasing power plant output and preserving the marketability of byproducts for beneficial use.

6 unchanged sentences

As is typical in this market, we are paid by the EGU based on how much of our material is injected to achieve the needed level of mercury removal.

Our current clients pay us as material is delivered to their facility.

Our current clients pay us as material is delivered to their facilities.

Clients will use our material whenever their EGUs operate, although EGUs are not always in operation.

6 unchanged sentences

That supplemental finding remains under review by the D.C.

In April 2017, the EPA asked the court to place that litigation in abeyance, stating that the Agency then under the Trump Administration was reviewing the supplemental finding to determine whether it should be reconsidered in whole or in part.

The court granted EPA’s abeyance request which has remained in place.

In April 2017, the EPA asked the court to place such judicial review in abeyance, stating that the Agency then under the Trump Administration was reviewing the supplemental finding to determine whether it should be reconsidered in whole or in part, which abeyance request was granted.

In April 2020, the EPA concluded that the 2016 supplemental finding was flawed in part due to its reliance on co-benefits to justify MATS and withdrew EPA’s 2016 “appropriate-and-necessary” determination as erroneous, but left the 2011 MATS rule in place pursuant to D.C.

Circuit case law holding that a source category may only be removed from the list of categories to be regulated through a rigorous delisting process that cannot currently be satisfied by EPA.

Circuit case law holding that a source category may only be removed from the list of categories to be regulated through a rigorous delisting process that cannot currently be satisfied by the EPA.

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

In February 2021, the Biden Administration requested that the judicial review of the supplemental finding withdrawal be held in abeyance which was granted by the court and remains in place.

On January 31, 2022, the EPA issued a proposal to revoke the reconsideration step made by the EPA in April 2020 and affirm that it is appropriate and necessary to regulate hazardous pollutants for coal and oil-fired EGUs.

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

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

Executive Overview

We remain focused on positioning the Company for short and long-term growth.

During 2018, we focused on execution at our customer sites and on continual operation improvement.

We remain focused on positioning the Company for short and long-term growth, including focusing on execution at our customer sites and on continual operation improvement.

We continue to make refinements to all of our key products, as we continue to focus on the customer and its operations.

1 unchanged sentence

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

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

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

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

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

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

This restructuring reflects the commitment of our financial partner in our efforts to attract new business, manage our present customers and monetize our patent portfolio.

We also seek license agreements with utilities while allowing them to use our SEA® technologies without our supply of products.

During 2021 and early 2022, we have announced various supply contract extensions, new supply business and license agreements.

We expect additional supply business and license agreements during the remainder of 2022 and thereafter, including converting certain licensees to supply customers.

In Europe, we had been working to penetrate this market through a licensing agreement entered into in 2018 with one of our suppliers which allowed them to commercialize our technology throughout Europe.

Such arrangement was terminated in 2020.

Prior to its termination, no revenues had been generated from such agreement.

We intend to continue to pursue the European market although no assurance can be made that any such efforts will be successful.

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

This restructuring reflected the commitment of our financial partner in our efforts to attract new business, manage our present customers and monetize our patent portfolio.

In June 2021, we announced that we had entered into a Debt Repayment and Exchange Agreement with AC Midwest which will repay all existing secured and unsecured debt obligations held by AC Midwest.

Pursuant to such agreement, we will repay the existing $0.3 million secured note outstanding in cash as well as the existing $13.2 million principal amount outstanding under the unsecured note held by AC Midwest through a combination of cash and stock.

AC Midwest is also entitled to a certain non-recourse profit share under the unsecured note which will be satisfied through a combination of cash and stock.

The closing is subject to various conditions including but not limited to the completion of an offering of equity securities resulting in net proceeds of at least $12.0 million by December 31, 2021, which has been extended to June 30, 2022.

From June through October 2019, we raised $2,600,000 in a private placement offering of 12.0% unsecured convertible promissory notes and warrants sold and issued to certain accredited investors.

In February 2021, $50,000 of such principal was voluntarily converted into shares of common stock, and in June 2021, the remaining principal balance of $2,550,000 was voluntarily converted by the holders thereof into shares of common stock of the Company.

In July 2019, we announced that we had initiated patent litigation against defendants in the U.S.

District Court for the District of Delaware for infringement of certain patents which relate to our two-part Sorbent Enhancement Additive (SEA ® ) process for mercury removal from coal-fired power plants.

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

Between July 2020 and January 2021, we entered into agreements with each of the four major utility defendants in the patent litigation commenced in 2019 which agreements included certain monetary arrangements and pursuant to which we have dismissed all claims brought against each of them and their affiliates, and such parties have withdrawn from petitions for IPR with the U.S.

Patent and Trademark Office.

Such agreements entered into with such parties provide each of them and their affiliates with a non-exclusive license to certain Company patents (related to the Company’s two-part Sorbent Enhancement Additive (SEA ® ) process) for use in connection with such parties’ coal-fired power plants.

Such agreements entered into with such parties provide each of them and their affiliates with a non-exclusive license to certain Company patents (related to our two-part Sorbent Enhancement Additive (SEA ® ) process) for use in connection with such parties’ coal-fired power plants.

One of the agreements has facilitated an ongoing business relationship with that party.

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

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

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

The above described proceedings are continuing with respect to the other parties involved.

In May 2021, a U.S.

District Court Magistrate Judge issued a report and recommendation that such litigation should be permitted to proceed against 16 refined coal defendants named in the action directly involved in the refined coal program and operations, and be dismissed against 12 other defendants, primarily affiliated entities of the refined coal operators.

In September 2021, such report and recommendation was approved by the District Judge for the United States District Court for the District of Delaware which will allow us to proceed against certain refined coal entities named in the lawsuit.

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

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

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

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

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

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

In October 2021, we announced that we had completed phase 1 testing of our REE technology with Pennsylvania State University’s College of Earth and Mineral Sciences confirming 80-90% efficiency rate in extracting select REEs.

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

We have not established a timeline for the introduction of our methane gas emissions control technology.

In addition to the $2.6 million in convertible notes which were converted into shares of common stock in the first and second quarters as described above, during the first quarter of 2021, we eliminated $1,830,000 of other convertible notes originally issued in 2013 and 2018 through conversions to shares of common stock.

During the third quarter of 2021, we issued 20,000 shares of common stock to a certain holder of notes issued in 2013 for the conversion of outstanding principal in the amount of $10,000 and prepaid the outstanding principal balance of another of such notes issued in 2013 in the principal amount of $10,000.

As a result, there are no convertible notes outstanding as of December 31, 2021, compared to $4,450,000 in convertible notes outstanding as of December 31, 2020.

In November 2021, we filed a registration statement on Form S-1 with the SEC for a proposed offering of common stock.

Such registration statement has not yet become effective, and no assurance can be given that such offering will be completed.

In addition, we have applied to list our common stock on the Nasdaq Capital Market.

No assurance can be given that such application will be approved.

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

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

Effects of the COVID-19 Pandemic

It should be noted that the coronavirus (COVID-19) pandemic has impacted various businesses throughout the world since early 2020, including travel restrictions and the extended shutdown of certain businesses in impacted geographic regions.

During this time, we have continued to conduct our operations while responding to the pandemic with actions to mitigate adverse consequences to our employees, business, supply chain and customers.

Nevertheless, the duration and scope of the COVID-19 pandemic continues to be uncertain.

If the coronavirus situation does not improve during 2022 or should worsen, we may experience disruptions to our business including, but not limited to, the availability of raw materials, equipment, to our workforce, or to our business relationships with other third parties.

Restatement of Previously Issued Financial Statements (Unaudited)

On April 13, 2020, our board of directors of the Company (which currently acts as our audit committee) concluded, after consultation with management and the Company’s recently retained financial consulting firm, that our previously issued unaudited financial statements for the periods ended March 31, 2019, June 30, 2019 and September 30, 2019, included in the Company’s Quarterly Reports of Form 10-Q for the periods ended March 31, 2019, June 30, 2019 and September 30, 2019, respectively, should no longer be relied upon as a result of the change in accounting for a certain debt restructuring.

Specifically, on February 25, 2019, the Company entered into an Unsecured Note Financing Agreement with AC Midwest Energy LLC (“AC Midwest”), pursuant to which AC Midwest exchanged a previously issued subordinated unsecured note in the principal amount of $13,000,000, together with all accrued and unpaid interest thereon, for a new unsecured note in the principal amount of $13,154,931 (the “New AC Midwest Unsecured Note”).

We recorded a gain of $3,412,402 on this exchange which is primarily related to the difference in fair value of the notes on the date of the exchange, which we recently concluded should have been recorded as an equity transaction capital contribution.

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

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

Such changes, including necessary adjustments for the periods ended March 31, 2019, June 30, 2019 and September 30, 2019, have been reflected in the audited consolidated financial statements and notes included in this Annual Report on Form 10-K.

The adjustments, which are non-cash in nature, increase additional paid-in capital and increase our previously reported net loss, but has no impact on previously reported cash, working capital, total assets, total liabilities and revenues.

For further information including the impact of these adjustments, please see Notes 9 and 15 to the audited consolidated financial statements included in this Annual Report on Form 10-K.

Results of Operations

Sales - We generated revenues of approximately $8,158,000 and $11,417,000 for the years ended December 31, 2020 and 2019, respectively.

We generated revenues of approximately $13,012,000 and $8,158,000 for the years ended December 31, 2021 and 2020, respectively.

Such revenues were primarily derived from sorbent product sales which were approximately $11,004,000 and $7,420,000 for the years ended December 31, 2021 and 2020, respectively.

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

The increase in revenues from the prior year was primarily driven by increased sorbent product sales due to the increased supply demands in the coal-fired market as well as expansion of our customer base.

Licensing revenues were approximately $1,707,000 and $546,000 for the years ended December 31, 2021 and 2020, respectively.

Such increases were primarily due to the licensing revenues generated from the agreements entered into with certain of the defendants in the patent litigation commenced in 2019.

Equipment sales and other revenues for the years ended December 31, 2021 and 2020 were approximately $134,000 and $44,000, respectively.

This increase was primarily due to increased equipment rental revenues in 2021 compared to last year.

Costs and Expenses

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

The decrease is primarily attributable to decreased sales.

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

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

Total costs and expenses were approximately $16,622,000 and $14,000,000 during the years ended December 31, 2021 and 2020, respectively.

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

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

The increase in costs and expenses from the prior year is mainly attributable to the increase in cost of sales principally due to the increase in sales.

Cost of sales were approximately $7,939,000 and $5,440,000 for the years ended December 31, 2021 and 2020, respectively.

Such increase is primarily due to the increase in sales.

Selling, general and administrative expenses were approximately $5,934,000 and $5,936,000 for the years ended December 31, 2021 and 2020, respectively.

Interest expense related to the financing of capital was approximately $2,818,000 and $2,658,000 for the years ended December 31, 2021 and 2020, respectively.

The small increase is due to the stock conversion incentives provided to certain notes and accelerated interest expense upon conversion of notes, partially offset by the reduced interest on the notes payable.

The breakdown of interest expense for the years ended December 31, 2021 and 2020 is as follows:

(In thousands)

Interest expense on notes payable

Accelerated interest expense upon conversion of notes

Additional interest upon conversion of notes

Amortization of discount of notes payable

Amortization of debt issuance costs

(Gain) Loss on change in fair value of profit share liability (relating to the restructured unsecured debt obligation held by AC Midwest Energy LLC) were approximately a gain of $24,000 and a loss of $374,000 for the years ended December 31, 2020 and 2019, respectively.

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

Net Income (Loss)

Loss (gain) on change in fair value of profit share liability (relating to the restructured unsecured debt obligation held by AC Midwest Energy LLC) were approximately $531,000 and $(24,000) for the years ended December 31, 2021 and 2020, respectively.

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

There were no significant changes to the underlying model during the years ended December 31, 2021 and 2020.

Gain on forgiveness of debt of $600,677 relates to the loan proceeds we received in April 2020 and February 2021 pursuant to the Paycheck Protection Program (“PPP”) under the CARES Act.

Such loans were forgiven in January 2021 and October 2021 pursuant to the applicable PPP requirements.

For the years ended December 31, 2021 and 2020, we had a net loss of approximately $3,633,000 and $5,826,000 respectively.

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

Such change was primarily due to increased sales and improved margin on such sales as well as the gain on extinguishment of debt partially offset by the change in the fair value of the profit share liability and the change in interest expense due principally to the stock conversion incentive provided to certain note holders and related accelerated interest.

Liquidity and Capital Resources

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

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

Our accumulated deficit was $63.5 million at December 31, 2020.

Additionally, we had a net loss in the amount of approximately $5,826,000 and cash used by operating activities of approximately $1,239,000 for the year ended December 31, 2020.

During 2018, we restructured convertible notes totaling $560,000 into new loans that mature in 2023.

In February 2019, we completed the restructuring of our unsecured and secured debt obligations held by a principal shareholder, extending the maturity dates of these debts and the remaining convertible notes until 2022 and eliminating quarterly principal payment requirements.

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

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

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

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

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

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

As reflected in the consolidated financial statements, we had an accumulated deficit of $63.5 million and a negative working capital of $984,000 at December 31, 2020.

Additionally, we 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 our ability to continue as a going concern for the next twelve months from the issuance of this Annual Report on Form 10-K.

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

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

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

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

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

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

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

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

We had approximately $1,388,000 in cash on our balance sheet at December 31, 2021 compared to approximately $591,000 at December 31, 2020.

Total current assets were approximately $3,791,000 and total current liabilities were approximately $15,483,000 at December 31, 2021, resulting in working capital deficit of approximately $11,692,000.

This compares to total current assets of approximately $2,362,000 and total current liabilities of approximately $3,359,000 at December 31, 2020, resulting in a working capital deficit of approximately $997,000.

Our accumulated deficit was approximately $67.1 million at December 31, 2021 compared to $63.5 million at December 31, 2020.

Additionally, we had a net loss in the amount of approximately $3,633,000 and cash provided by operating activities of approximately $206,000 for the year ended December 31, 2021.

The accompanying consolidated financial statements as of December 31, 2021 have been prepared assuming we will continue as a going concern.

As reflected in the consolidated financial statements, we had $1,388,000 in cash at December 31, 2021, along with cash provided by operating activities of $206,000 for the year ended December 31, 2021.

However, we had a working capital deficit of $11,692,000 at December 31, 2021 and an accumulated deficit of $67.1 million at December 31, 2021, and we had a net loss in the amount of $3.6 million for the year ended December 31, 2021.

In addition, all existing secured and unsecured debt held by our principal lender in the principal amount of $13.4 million matures on August 25, 2022, other than the profit share liability, which is within one year from the issuance of these consolidated financial statements.

These factors raise substantial doubt about our ability to continue as a going concern for the next twelve months from the issuance of these consolidated financial statements.

We have taken steps to alleviate such doubt.

During the year ended December 31, 2021, we eliminated $4,440,000 of convertible notes through conversions to shares of common stock and repaid $10,000 of convertible notes, leaving no convertible notes outstanding as of December 31, 2021.

In addition, in June 2021, we announced that we had entered into a Debt Repayment and Exchange Agreement with our principal lender which, subject to various closing conditions, including but not limited to the completion of an offering of equity securities resulting in net proceeds of at least $12.0 million by December 31, 2021, which has been extended to June 30, 2022, will repay all existing secured and unsecured debt obligations held by such lender.

Although we anticipate continued significant revenues in our business operations and that we will be able to raise the funds necessary to complete the transaction contemplated by the Debt Repayment and Exchange Agreement, no assurances can be given that we can obtain sufficient working capital through our business operations or that we will be able to raise the funds necessary to close under the Debt Repayment Agreement by June 30, 2022, or at all, in order to sustain ongoing operations.

In November 2021, we filed a registration statement on Form S-1 with the SEC for a proposed offering of common stock.

Such registration statement has not yet become effective.

These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective.

This report shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any state or jurisdiction.

The contemplated offering of our securities will be made only by means of a prospectus.

No assurances can be given that the contemplated offering will be completed on reasonable terms or otherwise.

The accompanying consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of us to continue as a going concern.

Total assets were approximately $8,135,000 at December 31, 2021 versus approximately $7,376,000 at December 31, 2020.

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

The change in total assets is primarily attributable to an increase in cash.

Total Liabilities

Total liabilities were approximately $18,374,000 at December 31, 2021 versus approximately $20,580,000 at December 31, 2020.

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

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

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

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

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

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

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

The decrease in liabilities is primarily due to a decrease in debt.

Operating Activities

Net cash provided by operating activities consists of net loss, adjusted by certain non-cash items, and changes in operating assets and liabilities.

Net cash provided by operating activities was approximately $206,000 for the year ended December 31, 2021 compared to net cash used in operating activities of approximately $1,239,000 for the year ended December 31, 2020.

Such change of approximately $1,445,000 was primarily due to an approximate $2,193,000 decrease in net loss.

Investing Activities

Net cash used in investing activities was approximately $11,000 for the year ended December 31, 2021 compared to net cash provided by investing activities of approximately $43,000 for the year ended December 31, 2020.

The activity for 2021 related to the purchase of equipment.

The activity for 2020 related to cash received from the sale of equipment.

Financing Activities

Net cash provided by financing activities was approximately $602,000 for the year ended December 31, 2021 compared to net cash provided by financing activities of approximately $288,000 for the year ended December 31, 2020.

During the year ended December 31, 2021, the Company received approximately $299,000 from the issuance of notes payable, $247,000 from the exercise of warrants and $126,000 from the exercise of stock options.

Critical Accounting Policies and Estimates

9 unchanged sentences

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.

In the past the Company has experienced a minimal valuation allowance on its inventory.

We estimate 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.

In the past we have experienced a minimal valuation allowance on our inventory.

Property and Equipment

4 unchanged sentences

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.

Management reviews the carrying value of our property and equipment for impairment on an annual basis.

Intellectual Property

4 unchanged sentences

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.

Long-lived assets and certain identifiable intangibles held and used by us 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.

We evaluate 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.

We evaluated the recoverability of the carrying value of our equipment.

No impairment charges were recognized for the years ended December 31, 2021 and 2020, respectively.

4 unchanged sentences

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

We have 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.

We have operating leases for a multi-purpose facility and bulk trailers used in operations which are recorded as assets and liabilities as the leases have 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.

3 unchanged sentences

Stock-Based Compensation

The Company accounts for stock-based compensation awards in accordance with the provisions of 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.

We account for stock-based compensation awards in accordance with the provisions of 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

6 unchanged sentences

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.

Our 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.

Revenue Recognition

The Company records revenue in accordance with ASC 606, Revenue from Contracts with Customers.

We record 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.

5 unchanged sentences

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.

Revenue is recognized when we satisfy our performance obligation under the contract by transferring the promised product to its customer that obtains control of the product.

A performance obligation is a promise in a contract to transfer a distinct product to a customer.

Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products.

Most of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products.

As such, revenue is recorded net of returns, allowances, customer discounts, and incentives.

1 unchanged sentence

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.

The adoption of this standard did not have a material impact on our 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.

We generated revenue for the years ended December 31, 2021 and 2020 by (i) delivering product to our commercial customers, (ii) completing and commissioning equipment projects at commercial customer sites and (iii) performing demonstrations of our technology at customers with the intent of entering into long term supply agreements based on the performance of our products during the demonstrations and (iv) licensing our technology to customers.

Revenue for product sales is recognized at the point of time in which the customer obtains control of the product, at the time title passes to the customer upon shipment or delivery of the product based on the applicable shipping terms.

1 unchanged sentence

Revenue for demonstrations and consulting services is recognized when performance obligations contained in the contract have been completed, typically the completion of necessary field work and the delivery of any required analysis per the terms of the agreement.

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.

We follow 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.

4 unchanged sentences

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.

We are currently not aware of any issues under review that could result in significant payments, accruals or material deviation from our position.

We are subject to income tax examinations by major taxing authorities since inception.

We 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.

Our management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.

We are no longer subject to tax examinations by tax authorities for years prior to 2017.

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;

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.

3 unchanged sentences

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.

As of January 1, 2019, we adopted ASU 2016-02 and have recorded a right-of-use asset and lease liability on the balance sheet for our 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.

We did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance).

We 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) , and Derivatives and Hedging (Topic 815):

(Part I) Accounting for Certain Financial Instruments with Down Round Features and (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.

5 unchanged sentences

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 its consolidated financial statements.

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

We early adopted ASU 2017-11 and changed our 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 our consolidated financial statements.

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 adoption of ASU-2019-12 did not have a material impact on our consolidated financial statements.

Effective January 1, 2020, we adopted ASU No.

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

4 unchanged sentences

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.

The adoption of ASU 2018-07 did not have a material impact on our consolidated financial statements.

Effective January 1, 2020, we adopted ASU No.

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

3 unchanged sentences

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

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

The adoption of ASU 2018-13 did not have a material impact on our 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.

9 unchanged sentences

In the future, we may disclose different non-GAAP financial measures in order to help our investors and others more meaningfully evaluate and compare our future results of operations to our previously reported results of operations.

The following table shows our reconciliation of Net Income to Adjusted EBITDA for the years ended December 31, 2020 and 2019, respectively:

The following table shows our reconciliation of net loss to adjusted EBITDA for the year ended December 31, 2021 and 2020, respectively:

For the Year Ended

(In thousands)

2 unchanged sentences

Interest and letter of credit fees

Gain on extinguishment of debt

Stock based compensation

3 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis