What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-05-15 compared with 2022-04-05 · 86 added, 128 removed, 174 unchanged (55% of the section changed)

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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.

We are an environmental services and technologies company developing and delivering patented and proprietary solutions to the global power industry, specializing in mercury emissions removal technologies.

We provide mercury capture solutions driven by our patented two-part Sorbent Enhancement Additive (“SEA”) technology.

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.

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In June 2015, the U.S.

Supreme Court held that the EPA unreasonably failed to consider costs in determining whether it is “appropriate and necessary” to regulate hazardous air pollutants, including mercury, from power plants, but left the rule in place.

On remand, following the Supreme Court’s instructions to consider costs, the EPA in April 2016 issued a final supplemental finding reaffirming the MATS rule on the ground that it is supported by the cost analysis the Supreme Court required.

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

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 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.

Supreme Court, in Michigan v.

EPA , held that the EPA unreasonably failed to consider costs in determining whether it is "appropriate and necessary" to regulate hazardous air pollutants, including mercury, from power plants, but left the rule in place.

In April 2016, the EPA issued a supplemental finding in response to the Michigan decision and found that, after a consideration of costs, it remained appropriate and necessary to regulate such emissions from coal- and oil-fired power plants.

In May 2020, the EPA, then under the Trump Administration, reversed the determination, finding that, after weighing the costs of compliance against certain benefits of the regulation, the 2016 supplemental finding was erroneous but left the MATS rule in place.

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 May 2020 "appropriate and necessary" determination, for conformity with Biden Administration environmental policy.

On February 9, 2022, the EPA proposed to revoke the May 2020 finding and reaffirm the EPA’s 2016 finding.

On February 15, 2023, the EPA reaffirmed that it remains appropriate and necessary to regulate hazardous air pollutants, including mercury, from power plants after considering cost, and revoked the May 2020 finding.

Nevertheless, legal challenges may continue in the future with respect to the MATS regulation.

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.

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As part of our overall strategy, we have a number of initiatives which we believe will be able to drive our short and long-term growth.

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.

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

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

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

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

In 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.

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

We expect additional supply business and license agreements during 2023 and thereafter, including converting certain licensees to supply customers.

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 August 2022 which was recently extended to August 2025 (see below) and eliminating quarterly principal payment requirements.

Pursuant thereto, AC Midwest was issued an unsecured note with a principal amount outstanding of $13.2 million which was issued on February 25, 2019 pursuant to an Unsecured Note Financing Agreement entered into on such date with AC Midwest, pursuant to which AC Midwest exchanged a previously issued subordinated unsecured note in the principal amount of $13.0 million, together with all accrued and unpaid interest thereon, for a new unsecured note in the principal amount of $13.2 million (the “Unsecured Note”).

The Unsecured Note, which is now scheduled to mature on August 25, 2025, bears a zero cash interest rate.

Pursuant to the Unsecured Note Financing Agreement, AC Midwest shall also be entitled to a profit participation preference (the “Profit Share”) which was equal to 1.0 times the original principal amount but has recently been adjusted (see below).

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 our intellectual property, Net Revenue Share, Adjusted Free Cash Flow and Equity Offering Net Proceeds (as such terms are defined in the Unsecured Note Financing Agreement, as amended).

In addition, there remains outstanding to AC Midwest a principal balance of approximately $272,000 due under a secured note issued on November 29, 2016, in the original principal amount of approximately $9.6 million which also has a maturity date of August 25, 2022 and recently extended to August 2025 (the “Secured Note”).

On October 28, 2022, we executed Amendment No.

1 to Unsecured Note Financing Agreement with AC Midwest pursuant to which the maturity date of the Unsecured Note was extended to August 25, 2025.

In addition, the parties agreed that the Profit Share be increased by $4,500,000 from $13,154,931 (representing 1.0 times the original principal amount) to $17,654,931.

In addition, on October 28, 2022, we executed Amendment No.

4 to the Amended and Restated Financing Agreement with AC Midwest pursuant to which the maturity date of the Secured Note was extended to August 25, 2025.

In addition, the interest rate on the remaining principal balance was reduced from 15.0% to 9.0% per annum.

In June 2021, we announced that we had entered into a Debt Repayment and Exchange Agreement (the “Debt Repayment Agreement”) with AC Midwest which was expected to repay all existing secured and unsecured debt obligations held by AC Midwest.

Pursuant to such agreement, we were to repay the existing $272,000 principal amount outstanding under the Secured Note 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.

The non-recourse profit share under the Unsecured Note was to have been satisfied through a combination of cash and stock.

The closing was 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 was extended to June 30, 2022.

Such closing conditions were not met by June 30, 2022.

On October 28, 2022, the parties agreed to terminate the Debt Repayment Agreement with immediate effect pursuant to which none of the parties shall have any further responsibility or liability thereunder.

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.

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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 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.

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.

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

As a result of an application made by the Company to the Court in March 2022 to add additional parties to the action (all affiliated entities of the already named defendants), there are now 24 refined coal defendants named in the action.

In connection with such application, the District Court Magistrate Judge ruled in April 2022 that certain parties could be added but denied the application with respect to certain others.

The fact discovery portion of the litigation has concluded.

A jury trial date has been scheduled for November 2023.

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

Such technologies were under development in conjunction with our collaboration with an Alabama third party entity and its affiliates and pursuant to a license and development agreement entered into in October 2019.

In October 2022, such license and development agreement expired and has not been extended or renewed.

Prior to expiration, such technologies were being evaluated and tested but had not yet been commercialized.

We plan to evaluate and test other related technologies for the extracting of REEs from their solvent state which we have developed and do not involve any of the technologies subject to the expired license and development agreement.

In tandem with our efforts in REEs, we have been exploring remediation technologies for wastewater and coal ash from coal-fired power plants, as well as water treatment.

We believe the market for water treatment is large and significantly growing both in the United States and abroad.

This expansion in water treatment and wastewater remediation will allow us to support the growing needs of the energy sector, as well as provide vital technologies for considerable environmental concerns.

There can be no assurance that we will be successful in the development of these technologies.

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.

As a result, there are no convertible notes currently outstanding.

On April 20, 2023, we received conditional approval to list our shares of common stock on the TSX Venture Exchange (the "TSX-V").

The listing is subject to our fulfilling certain requirements of the TSX-V in accordance with the terms of the conditional approval letter.

Upon completion of the final listing requirements, we expect to be listed on the TSX-V as a Tier 1 Industrial, Technology, or Life Sciences Issuer under the symbol "MEEC".

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

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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.

In view of such uncertainty, disruptions to our business could still occur including, but not limited to, the availability of raw materials and equipment, and disruptions to our workforce, or to our business relationships with other third parties.

Results of Operations

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Licensing revenues were approximately $651,000 and $1,707,000 for the years ended December 31, 2022 and 2021, 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.

Such decrease was primarily due to greater licensing revenues generated in 2021 from 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, 2022 and 2021 were approximately $325,000 and 301,000, respectively.

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

This increase was primarily due to increased equipment rental revenues in 2022 compared to 2021, partially offset by a decrease in demonstrations and consulting revenue.

Costs and Expenses

Total costs and expenses were approximately $23,184,000 and $16,622,000 during the years ended December 31, 2022 and 2021, respectively.

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.

The increase in total costs and expenses from the prior year is primarily attributable to the increase in cost of sales due primarily to increased sales, offset by a decrease in interest expense and an increase in the profit share liability of approximately $802,000.

In addition, there was a gain on extinguishment of debt recognized in the year ended December 31, 2021 in the approximate amount of $600,677, for which there was not a comparable item recognized in the current year.

Cost of sales were approximately $14,599,000 and $7,939,000 for the years ended December 31, 2022 and 2021, respectively.

Such increase is primarily due to the increase in sales.

The increase in cost of sales is primarily attributable to increased sales.

Selling, general and administrative expenses were approximately $6,117,000 and $5,934,000 for the years ended December 31, 2022 and 2021, respectively.

Interest expense related to the financing of capital was approximately $1,570,000 and $2,818,000 for the years ended December 31, 2022 and 2021, 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 decrease is due to the 2021 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 as notes were converted to stock as well as the unsecured note with our primary lender reaching its original maturity of August 25, 2022.

The breakdown of interest expense for the years ended December 31, 2022 and 2021 is as follows:

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Amortization of debt issuance costs

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.

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

Loss on change in fair value of profit share liability were approximately $802,000 and $531,000 for the years ended December 31, 2022 and 2021, respectively.

The change in 2022 is primarily attributed to changes in the assumptions and an increase in the amount of the profit share (See Note 2 to the consolidated financial statements).

There was a gain on extinguishment of debt of $600,677 during the year ended December 31, 2021 of which there was not a comparable item for the year ended December 31, 2022.

Such gain relates to the loan proceeds we received in April 2020 pursuant to the Paycheck Protection Program (“PPP”) under the CARES Act.

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

Net Income (Loss)

For the year ended December 31, 2022, we had a net loss of approximately $1,581,000 compared to a net loss $3,633,000 for the year ended December 31, 2021.

Such change was primarily due to a number of factors.

Gross profit (revenues minus cost of sales) increased by approximately $1,948,000 and interest expense decreased approximately $1,248,000 for 2022 compared to 2021.

In addition, the change in value of the profit share liability in 2022 resulted in a loss of approximately $802,000 which increased our overall costs and expenses for the year ended December 31, 2022 by such amount.

Liquidity and Capital Resource

We had approximately $1,504,000 in cash on our balance sheet at December 31, 2022 compared to approximately $1,388,000 at December 31, 2021.

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.

Total current assets were approximately $5,540,000 and total current liabilities were approximately $3,224,000 at December 31, 2022, resulting in working capital of approximately $2,316,000.

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

Our accumulated deficit was approximately $68.7 million at December 31, 2022 compared to $67.1 million at December 31, 2021.

Additionally, we had a net loss in the amount of approximately $1,581,000 and cash provided by operating activities of approximately $71,000 for the year ended December 31, 2022.

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.

The accompanying consolidated financial statements as of December 31, 2022 have been prepared assuming the Company will continue as a going concern.

As reflected in the consolidated financial statements, we had approximately $1.5 million in cash at December 31, 2022.

In addition, we had cash provided by operating activities of $0.1 million for the year ended December 31, 2022, had working capital of $2.3 million and an accumulated deficit of $68.7 million at December 31, 2022.

On October 28, 2022, our principal lender agreed to extend the maturity date of all of its existing secured and unsecured debt in the principal amount of $13.4 million from October 31, 2022 to August 25, 2025.

As a result, such liabilities have been classified as long-term liabilities in the accompanying consolidated financial statements as of December 31, 2022.

Based upon such extension of the maturity date of such secured and unsecured debt, our current cash position and our recent revenue growth, management believes substantial doubt regarding the Company’s ability to continue as a going concern has been mitigated.

We believe we will have sufficient working capital to fund operations for at least the next twelve months from the date of issuance of these financial statements.

Total assets were approximately $9,340,000 at December 31, 2022 versus approximately $8,135,000 at December 31, 2021.

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

The change in total assets is primarily attributable to an approximate $1,763,000 increase in accounts receivable, together with an increase in cash offset by decreases in inventory, right of use asset and intellectual property.

Total Liabilities

Total liabilities were approximately $16,757,000 at December 31, 2022 versus approximately $18,374,000 at December 31, 2021.

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

The decrease is primarily due to a decrease in the unsecured and secured notes payable as a result of the amendments in 2022.

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.

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

Net cash provided by operating activities was approximately $71,000 for the year ended December 31, 2022 compared to net cash provided by operating activities of approximately $206,000 for the year ended December 31, 2021.

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.

Net cash used in investing activities was approximately $11,000 for the year ended December 31, 2022 and 2021 due to the purchase of property and equipment.

Financing Activities

Net cash provided by financing activities was approximately $55,700 for the year ended December 31, 2022, compared to net cash provided by financing activities of approximately $602,000 for the year ended December 31, 2021.

During the year ended December 31, 2022, the Company received approximately $58,000 from the exercise of stock options.

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.

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The preparation of the consolidated financial statements requires that we make estimates and assumptions that affect the amounts reported in assets, liabilities, revenues, and expenses.

Management evaluates on an on-going basis our estimates with respect to the valuation allowances for accounts receivable, income taxes, accrued expenses, and equity instrument valuation, for example.

We use estimates in accounting for, among other items, profit share liability, revenue recognition, allowance for doubtful accounts, stock-based compensation, income tax provisions, excess and obsolete inventory reserve and impairment of intellectual property.

We base these estimates on various assumptions and experience that we believe to be reasonable.

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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 new lease accounting 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

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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 are no longer subject to tax examinations by tax authorities for years prior to 2018.

We may be subject to potential examination by federal, state, and city taxing authorities in the areas of income taxes.

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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;

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, 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.

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.

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.

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) .

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 our consolidated financial statements.

Effective January 1, 2020, we 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 our consolidated financial statements.

Recently Issued Accounting Standards

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

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

The following table shows our reconciliation of net loss to adjusted EBITDA for the year December 31, 2022 and 2021, respectively:

For the Year Ended

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Depreciation and amortization

Interest and letter of credit fees

Change in fair value of profit share

Gain on extinguishment of debt

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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