What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-04-16 compared with 2023-05-15 · 101 added, 102 removed, 158 unchanged (56% 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.

Business Operations

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.

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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 April 2016, the EPA issued a supplemental finding in response to the Michigan decision and found that, after 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.

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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.

On April 3, 2023, the EPA issued a proposal to strengthen and update MATS.

This proposal is currently pending.

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

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

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

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

We expect additional supply business and license agreements during 2024 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 our common stock.

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.

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 Inter Partes Review 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 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.

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

Patent Litigation

On July 17, 2019, we initiated patent litigation against certain defendants in the U.S.

District Court for the District of Delaware for infringement of certain United States patents owned by the Company.

These patents relate to our two-part Sorbent Enhancement Additive (SEA ® ) process for mercury removal from coal-fired power plants.

Between July 2020 and January 2021, we entered into agreements with each of the four major utility defendants in such action which included certain monetary arrangements and pursuant to which we have dismissed all claims brought against each of them and their affiliates, and such parties have withdrawn from petitions for Inter Partes Review with the United States 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.

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.

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.

District Court Magistrate Judge issued a report and recommendation which was approved by the District Judge in September 2021 that such litigation should be permitted to proceed against various refined coal defendants named in the action directly involved in the refined coal program and operations, and be dismissed against certain other defendants, primarily affiliated entities of the refined coal operators.

Prior to the jury trial which was scheduled for November 13, 2023, we entered into a confidential binding term sheet on November 9, 2023 with Arthur J.

Gallagher & Co., and various of its affiliated entities (collectively “AJG”), and DTE Energy Resources LLC and various of its affiliated entities (collectively “DTE”), to resolve the patent litigation against these two groups of defendants.

Pursuant to the term sheet, all claims and counterclaims asserted by the parties in such patent litigation have been dismissed with prejudice, although such term sheet does not affect any other claim brought against the remaining CERT defendants.

The financial aspects of the term sheet remain confidential pursuant to its terms.

In addition, effective November 9, 2023, Alistar Enterprises, LLC (“Alistar”), one of the remaining CERT defendants, entered into a settlement agreement with us which provided that all claims and counterclaims asserted in the action between the Company and Alistar be dismissed with prejudice.

The financial terms of such settlement remain confidential.

Effective as of December 28, 2023, and in connection with the term sheet described above, we entered into a paid license with (a) Chem-Mod LLC (“Chem-Mod”), (b) Arthur J.

Gallagher & Co.

and AJG Coal, LLC, and (c) DTE Energy Co.

and DTE Energy Resources, LLC, relating to U.S.

8,168,147, U.S.

10,343,114, U.S.

10,589,225, U.S.

10,596,517 and U.S.

10,668,430 and their foreign equivalents and related patent applications and patents, which licenses the use of refined coal or the Chem-Mod Solution in conjunction with activated carbon.

This license applies to Chem-Mod and certain of its licensees, sub-licensees, and their customers, for the remaining term of such patents.

By its terms, the license does not cover the use of activated carbon with coal that is not either refined coal or coal made by or for use with the Chem-Mod Solution in a manner authorized by the license.

The parties to the license have mutually released all claims that any past use of the Chem-Mod Solution in connection with the production or use of refined coal with activated carbon by entities other than the CERT defendants and their customers infringes the asserted patents and related intellectual property, and all claims that could have been brought challenging the validity of such patents.

The remaining CERT defendants and their customers (for activities relating to the CERT defendants) were not included within the scope of the license.

The Court rescheduled the trial as to the claims against the remaining CERT defendants to begin on February 26, 2024.

Following a five-day trial, on March 1, 2024, a federal jury in the U.S.

District Court for the District of Delaware awarded a $57.1 million patent infringement verdict in favor of the Company against the remaining group of CERT defendants.

Such group of affiliated defendants included multiple limited liability companies with refined coal industry operations, including CERT Operations II LLC, CERT Operations IV LLC, CERT Operations V LLC, and CERT Operations RCB LLC.

The jury determined that these defendants infringed our patented technologies for mercury emissions and were liable for willful infringement, along with inducing and contributory infringement.

AC Midwest Energy

On February 27, 2024, we entered into an Unsecured Debt Restructuring Agreement (the “Debt Restructuring Agreement”) with AC Midwest Energy LLC (“AC Midwest”) which replaced and superseded the Unsecured Note Financing Agreement and Reaffirmation of Guaranty entered into with AC Midwest on February 25, 2019, as amended on October 28, 2022 (the “Unsecured Note Financing Agreement”).

Pursuant to the Unsecured Note Financing Agreement, prior to February 27, 2024, AC Midwest was the holder of an unsecured note with a principal amount outstanding of $13,154,931 which was issued on February 25, 2019 (the “Unsecured Note”).

The Unsecured Note was scheduled to mature on August 25, 2025 and bears a zero cash interest rate.

Pursuant to the Unsecured Note Financing Agreement, AC Midwest was also entitled to a “non-recourse” profit participation preference equal to $17,654,931 (the “Profit Share”).

Prior to maturity, the outstanding principal, as well as the Profit Share, were to be paid from Net Litigation Proceeds from claims relating to the Company’s 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).

Any remaining principal balance due on the Unsecured Note would be due and payable in full on the maturity date.

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

Prior to February 27, 2024, there also remained outstanding to AC Midwest a principal balance of $271,686 due under a secured noted of the Company issued on November 29, 2016 in the original principal amount of $9,646,686, which had a maturity date of August 25, 2025 (the “Secured Note”).

The Secured Note had been issued pursuant to an Amended and Restated Financing Agreement and Reaffirmation of Guaranty, dated as of November 1, 2016, as amended on June 14, 2018, September 12, 2019, February 25, 2019 and October 28, 2022 (the “Restated Financing Agreement”).

Pursuant to the Debt Restructuring Agreement, on February 27, 2024, we (i) paid AC Midwest $9,040,000 as a reduction in the outstanding principal balance of the Unsecured Note, (ii) issued to AC Midwest a new unsecured replacement note representing the remaining outstanding principal balance of the Unsecured Note in the principal amount of $4,114,931 (the “New Note”), and (iii) paid AC Midwest $275,626 representing the remaining principal balance under the Secured Note of $271,686 plus interest of $3,939.

In addition, within 30 days, we would either facilitate the private sale to third parties of certain shares of common stock of the Company held by AC Midwest for a purchase price of no less than $960,000, which amount shall be applied as a credit against the principal balance due on the New Note dollar for dollar, or pay AC Midwest $960,000 toward the principal balance due on the New Note.

The private sale of shares for the purchase price of $960,000 was completed on March 11, 2024.

Any remaining principal balance on the New Note shall be due August 27, 2024 (the “Maturity Date”), which is six months from February 27, 2024.

Until repaid in full, the New Note shall accrue interest at a rate equal to SOFR plus 2.0% per annum.

The New Note completely replaces and supersedes the Unsecured Note, which shall be of no further force and effect.

In addition, pursuant to the Debt Restructuring Agreement, AC Midwest shall be entitled to a profit participation preference equal to $7,900,000 (the “Restructured Profit Share”).

The Restructured Profit Share is “non-recourse” and shall only be paid from Net Litigation Proceeds (as defined in the Debt Restructuring Agreement) from claims relating to our intellectual property.

Following the receipt of any Net Litigation Proceeds, we shall prepay any remaining principal balance of the New Note and pay the Restructured Profit Share in an amount equal to 75.0% of such Net Litigation Proceeds until the New Note and Restructured Profit Share have been paid in full.

The Restructured Profit Share completely replaces and supersedes the terms and conditions of the Profit Share in the amount of $17,654,931 provided for in the Unsecured Note Financing Agreement, which shall be of no further force and effect.

The Restructured Profit Share, if not paid in full on or before the Maturity Date, shall remain subject to the terms of the Debt Restructuring Agreement.

In addition to facilitating the private sale to third parties as described above, AC Midwest has granted the Company the exclusive right until December 31, 2024 to facilitate the sale of all or a portion of the remaining balance of the shares of common stock of the Company held by AC Midwest, which proceeds above a certain amount will be applied as a credit against the Restructured Profit Share dollar for dollar.

As a result of the repayment of the remaining principal balance under the Secured Debt, we and AC Midwest executed a Satisfaction and Discharge of Secured Debt confirming the cancellation of the Secured Note and that all of the obligations under the Restated Financing Agreement have been fully satisfied and discharged.

Other Developments

We are in the process of developing and testing other business opportunities which include the extracting and processing of rare earth elements (REEs) in North America, remediation technologies for wastewater and coal ash from coal-fired power plants, as well as drinking water treatment technologies.

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

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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 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.

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.

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.

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

On July 6, 2023, the Company received final approval from the TSX-V.

The Company’s shares commenced trading on the TSX-V on July 10, 2023 under the symbol “MEEC”.

The Company is listed as a Tier 1 Industrial, Technology, or Life Sciences Issuer.

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

Results of Operations

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Such revenues were primarily derived from sorbent product sales which were approximately $17,093,000 and $20,644,000 for the years ended December 31, 2023 and 2022, respectively.

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 $651,000 and $1,707,000 for the years ended December 31, 2022 and 2021, respectively.

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.

The decrease in revenues from the prior year was primarily due to the decreased supply demands from our customer base in 2023 compared to the prior year along with the closure of one of our customer’s power plants which occurred at the end of 2022, offset by an increase in licensing revenues for 2023 compared to 2022.

Licensing revenues were approximately $703,000 and $651,000 for the years ended 2023 and 2022, respectively.

Such increase was primarily due to greater licensing revenues generated in 2023 from one of our customers compared to 2022.

Equipment sales and other revenues for the years ended December 31, 2023 and 2022 were approximately $145,000 and $325,000, respectively.

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.

This decrease was primarily due to increased equipment rental revenues in 2022 compared to 2023, partially offset by a decrease in demonstrations and consulting revenue.

Costs and Expenses

Total costs and expenses were approximately $39,171,000 and $23,184,000 during the years ended December 31, 2023 and 2022, respectively.

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.

The increase in total costs and expenses from the prior year is primarily attributable to an increase on the loss on change in fair value of the profit share and the increase general and administrative expenses primarily attributable to an increase in legal fees during 2023 in connection with the patent litigation.

This was partially offset by a decrease in cost of sales due primarily to decreased sales in 2023, and a decrease in interest expense.

Cost of sales were approximately $12,172,000 and $14,599,000 for the years ended December 31, 2023 and 2022, respectively.

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

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

Selling, general and administrative expenses were approximately $14,207,000 and $6,117,000 for the years ended December 31, 2023 and 2022, respectively.

Such increase was primarily due to increased legal fees incurred in 2023 in connection with our patent litigation including the settlement reached with various defendants in the fourth quarter of 2023.

Interest expense related to the financing of capital was approximately $1,362,000 and $1,570,000 for the years ended December 31, 2023 and 2022, respectively.

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:

(In thousands)

The approximate breakdown of interest expense for the years ended December 31, 2023 and 2022 is as follows:

Interest expense on notes payable

Accelerated interest expense upon conversion of notes

Other interest

Additional interest upon conversion of notes

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Loss on change in fair value of profit share liability were approximately $11,210,000 and $802,000 for the years ended December 31, 2023 and 2022, 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.

The change in 2023 is primarily attributed to changes in the projected timing of the repayment of the profit share (See Note 2 to the consolidated financial statements).

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.

For the year ended December 31, 2023, we had a net income of approximately $5,904,000 compared to a net loss $1,581,000 for the year ended December 31, 2022.

Such change was primarily due to income from legal claims of $27,608,000 in 2023 compared to no such similar income in 2022, offset by reduced sales in our core business operations in 2023, the increase in total costs and expenses and the loss on change in fair value of the profit share liability recognized in 2023.

Liquidity and Capital Resource

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Total current assets were approximately $24,152,000 and total current liabilities were approximately $2,183,000 at December 31, 2023, resulting in working capital of approximately $21,969,000.

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.

This compares to total current assets of approximately $5,540,000 and total current liabilities were approximately $3,225,000 at December 31, 2022, resulting in working capital of approximately $2,315,000.

Our accumulated deficit was approximately $62.8 million at December 31, 2023 compared to $68.7 million at December 31, 2022.

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, 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.

Additionally, we had a net income in the amount of approximately $5,904,000 and cash provided by operating activities of approximately $19,226,000 for the year ended December 31, 2023.

Total assets were approximately $27,468,000 at December 31, 2023 versus approximately $9,340,000 at December 31, 2022.

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.

The change in total assets is primarily attributable to an approximate $19,436,000 increase in cash.

This was offset by decreases in accounts receivable, inventory, right of use asset, property and equipment and intellectual property.

Total Liabilities

Total liabilities were approximately $28,250,000 at December 31, 2023 versus approximately $16,757,000 at December 31, 2022.

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

The increase is primarily due to an increase in the value of the unsecured note and profit share liability offset by a decrease in accounts payable and accrued expenses.

Operating Activities

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Net cash provided by operating activities was approximately $19,226,000 for the year ended December 31, 2023 compared to net cash provided by operating activities of approximately $71,000 for the year ended December 31, 2022.

The increase in net cash provided by operating activities was primarily due to the following:

(i) net income of $5.9 million in 2023 compared to a $1.6 million loss in 2022;

(ii) loss on change in fair value of profit share of $11.2 million in 2023 compared to $802,000 in 2022;

and (iii) certain other changes in operating assets and liabilities including accounts receivable, accounts payable and accrued liabilities, accrued salaries and operating lease liability.

Investing Activities

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.

The Company had no investing activities for the year ended December 31, 2023.

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

Financing Activities

Net cash provided by financing activities was approximately $210,000 for the year ended December 31, 2023, compared to net cash provided by financing activities of approximately $56,000 for the year ended December 31, 2022.

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.

During the year ended December 31, 2023, the Company received approximately $210,000 from the exercise of stock options compared to approximately $58,000 received from the exercise of stock options during the year ended December 31, 2022.

Critical Accounting Policies and Estimates

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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.

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 use estimates in accounting for, among other items, profit share liability, revenue recognition, allowance for credit losses, 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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In particular, our most critical accounting policies relate to the recognition of revenue, and the valuation of our stock-based compensation.

Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value.

Inventories are stated at the lower of cost or net realizable value.

Inventories are periodically evaluated to identify obsolete or otherwise impaired products and are written off when management determines usage is not probable.

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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.

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

No impairment charges were recognized for the years ended December 31, 2022 and 2021, respectively.

In February 2016, the FASB issued new guidance which requires lessees to recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term.

The accounting standard, effective January 1, 2019, requires virtually all leases to be recognized on the Balance Sheet.

Effective January 1, 2019, we adopted the standard using the modified retrospective method, under which we elected the package of practical expedients and transition provisions allowing us to bring our existing operating leases onto the Consolidated Balance Sheet without adjusting comparative periods but recognizing a cumulative-effect adjustment to the opening balance of accumulated deficit on January 1, 2019.

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

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

We have operating leases for 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.

Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rate.

Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

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 undiscounted cash flows.

We have evaluated the recoverability of the carrying value of the Company’s property and equipment, right of use asset and intellectual property.

After completing the assessment of property and equipment for impairment as of December 31, 2023, the Company recorded an impairment expense related to property and equipment of $219,707 which is included in Impairment loss in the Company’s consolidated statements of operations and comprehensive income (loss).

The expense was primarily related to the impairment of construction in process costs where management determined that the undiscounted future cash flows were not sufficient to recover the carrying value of these assets over the estimated useful life.

No impairment charges were recognized for the year ended December 31, 2022.

Stock-Based Compensation

25 unchanged sentences

Invoiced shipping and handling costs are included in revenue.

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

Disaggregation of Revenue

9 unchanged sentences

For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.

There were no unrecognized tax benefits as of December 31, 2022.

There were no unrecognized tax benefits as of December 31, 2023 and 2022.

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

18 unchanged sentences

(In thousands)

Net income (loss)

Non-GAAP adjustments:

1 unchanged sentence

Change in fair value of profit share

Gain on extinguishment of debt

Impairment of property and equipment

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