| Note 2 - Summary of Significant Accounting Policies | Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of Rule 8-03 of Regulation S-X promulgated by the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed on May 14, 2020, from which the accompanying condensed consolidated balance sheet dated December 31, 2019 was derived. In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the financial position as of June 30, 2020, and results of operations, changes in stockholders’ deficit and cash flows for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year. Principles of Consolidation The condensed consolidated financial statements include the accounts of Midwest Energy Emissions Corp. and its wholly-owned subsidiary, MES, Inc. Intercompany balances and transactions have been eliminated in consolidation. Restatement of previously issued financial statements (unaudited) On April 13, 2020, the Company concluded that a gain on debt restructuring recognized during the first quarter of 2019 (relating to the New AC Midwest Unsecured Note) should have been accounted for as a capital transaction. Since the New AC Midwest Unsecured Note was held by a related party, the gain should have been recorded as a capital transaction under ASC 470-50-40. The profit-sharing portion also should have been bifurcated from the loan and shown separately on the consolidated balance sheets of the financial statements. For more information please review Note 14 in the Form 10-K filed on May 14, 2020 which includes the restated financial statements. Accordingly, the restated amounts are reflected in the results of operations in this Form 10-Q for the three and six months ended June 30, 2019. Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, valuation of equity issuances and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company uses estimates in accounting for, among other items, 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. Actual results could differ from those estimates. Recoverability of Long-Lived and Intangible Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of the long-lived and or intangible assets would be adjusted, based on estimates of future discounted cash flows. The Company evaluated the recoverability of the carrying value of the Company’s property and equipment, right of use asset and intellectual property. No impairment charges were recognized for both of the three and six months ended June 30, 2020 and 2019. Fair Value of Financial Instruments The fair value hierarchy has three levels based on the inputs used to determine fair value, which are as follows: ☐ Level 1 ☐ Level 2 ☐ Level 3 — The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. Cash was the only asset measured at fair value on a recurring basis by the Company at June 30, 2020 and December 31, 2019 and is considered to be Level 1. Financial instruments include cash, accounts receivable, accounts payable, customer credits and short-term debt. The carrying amounts of these financial instruments approximated fair value at June 30, 2020 and December 31, 2019 due to their short-term maturities. The fair value of the promissory notes payable at June 30, 2020 and December 31, 2019 approximated the carrying amount as the notes were issued during the six months ended June 30, 2020 and 2019 at interest rates prevailing in the market and interest rates have not significantly changed as of June 30, 2020. The fair value of the promissory notes payable was determined on a Level 2 measurement. Discounts on issued debt, as well as debt issuance costs, are amortized over the term of the individual promissory notes. The fair value of the profit share liability at June 30, 2020 and December 31, 2019 was calculated using a discounted cash flow model based on estimated future cash payments. The fair value of the profit share liability was determined on a Level 3 measurement. These values are determined using pricing models for which the assumptions utilized management’s estimates. The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. Fair Value Measurement as of June 30, 2020 Total Level 1 Level 2 Level 3 Assets: Cash 595,338 595,338 - - Total Assets $ 595,338 $ 595,338 $ - $ - Liabilities Promissory notes 13,654,735 - 13,654,735 - Profit share liability – related party 2,076,455 - - 2,076,455 Total Liabilities $ 15,731,190 $ - $ 13,654,735 $ 2,076,455 Fair Value Measurement as of December 31, 2019 Total Level 1 Level 2 Level 3 Assets: Cash 1,499,287 1,499,287 - - Total Assets $ 1,499,287 $ 1,499,287 $ - $ - Liabilities Promissory notes 12,200,411 - 12,200,411 - Profit share liability 2,328,845 - - 2,328,845 Total Liabilities $ 14,529,256 $ - $ 12,200,411 $ 2,328,845 Foreign Currency Transactions The Company’s functional currency is the United States Dollar (the “U.S. Dollar”). Transactions denominated in currencies other than the U.S. Dollar are re-measured to the U.S. Dollar at the period-end exchange rates. Any associated transactional currency re-measurement gains and losses are recognized in current operations. At both June 30, 2020 and 2019, there were no material gains or losses recognized. Revenue Recognition The Company records revenue in accordance with ASC 606, Revenue from Contracts with Customers Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. Revenue is recognized when the Company satisfies its performance obligation under the contract by transferring the promised product to its customer that obtains control of the product. A performance obligation is a promise in a contract to transfer a distinct product to a customer. Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales and other taxes are excluded from revenues. Invoiced shipping and handling costs are included in revenue. The adoption of this standard did not have a material impact on the Company’s financial statements. Disaggregation of Revenue The Company generated revenue for the three and six months ended June 30, 2020, and 2019 by (i) delivering product to its commercial customers, (ii) completing and commissioning equipment projects at commercial customer sites and (iii) performing demonstrations of its technology at customers with the intent of entering into long term supply agreements based on the performance of the Company’s products during the demonstrations. Revenue for product sales is recognized at the point of time in which the customer obtains control of the product, at the time title passes to the customer upon shipment or delivery of the product based on the applicable shipping terms. Revenue for equipment sales is recognized upon commissioning and customer acceptance of the installed equipment per the terms of the purchase contract. Revenue for demonstrations and consulting services is recognized when performance obligations contained in the contract have been completed, typically the completion of necessary field work and the delivery of any required analysis per the terms of the agreement. The following table presents sales by operating segment disaggregated based on the type of product and geographic region for the three months ended June 30, 2020, and 2019. Three months ended June 30, 2020 Three months ended June 30, 2019 United States International Total United States International Total Product revenue $ 1,809,115 $ 28,400 $ 1,837,515 $ 2,149,468 $ 170,040 $ 2,319,508 Demonstrations & Consulting revenue 39,335 - 39,335 81,832 95,543 177,375 Equipment revenue 2,895 3,757 6,652 12,866 - 12,866 $ 1,851,345 $ 32,157 $ 1,883,502 $ 2,244,166 $ 265,583 $ 2,509,749 The following table presents sales by operating segment disaggregated based on the type of product and geographic region for the six months ended June 30, 2020, and 2019. Six months ended June 30, 2020 Six months ended June 30, 2019 United States International Total United States International Total Product revenue $ 2,793,485 $ 113,600 $ 2,907,085 $ 4,864,749 $ 212,640 $ 5,077,389 Demonstrations & Consulting revenue 81,892 - 81,892 105,832 95,543 201,375 Equipment revenue 7,444 3,757 11,201 18,306 - 18,306 $ 2,882,821 $ 117,357 $ 3,000,178 $ 4,988,887 $ 308,183 $ 5,297,070 Income Taxes The Company follows the asset and liability method of accounting for income taxes under FASB ASC 740, Income Taxes FASB ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of June 30, 2020 and December 31, 2019. 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. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“ CARES Act 2017 Tax Act NOLs In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to our income tax provision. Basic and Diluted Loss Per Common Share Basic net loss per common share is computed using the weighted average number of common shares outstanding. Diluted loss per share reflects the potential dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. There were no dilutive potential common shares as of June 30, 2020 and 2019, because the Company incurred net losses and basic and diluted losses per common share are the same. The following common stock equivalents were excluded from the computation of diluted net loss per share of common stock because they were anti-dilutive. The exercise of these common stock equivalents would dilute earnings per share if the Company becomes profitable in the future. June 30, June 30, 2020 2019 Stock Options 12,447,326 12,563,326 Warrants 5,690,378 4,102,098 Convertible debt 9,414,200 6,300,000 Total common stock equivalents excluded from diluted net loss per share 27,551,904 22,965,424 Concentration of Credit Risk Financial instruments that subject the Company to credit risk consist of cash and equivalents on deposit with financial institutions and accounts receivable. The Company’s cash as of June 30, 2020 and December 31, 2019 is maintained at high-quality financial institutions and has not incurred any losses to date. Customer and Supplier Concentration For each of the six months ended June 30, 2020 and 2019, 100% of the Company’s revenue related to nine and eight customers respectively. At June 30, 2020 and 2019, 100% of the Company’s accounts receivable related to seven customers, respectively. For each of the six months ended June 30, 2020 and 2019, 83% and 91% of the Company’s purchases related to two suppliers, respectively. At June 30, 2020 and 2019, 59% and 71% of the Company’s accounts payable and accrued expenses related to two vendors, respectively. The Company believes there are numerous other suppliers that could be substituted should the supplier become unavailable or non-competitive. Contingencies Certain conditions may exist which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in which case the guarantees would be disclosed. Recently Adopted Accounting Standards Effective January 1, 2020, the Company adopted ASU No. 2018-07, Compensation — Stock Compensation (Topic 718) Effective January 1, 2020, the Company adopted ASU No. 2018-13, Fair Value Measurement (Topic 820) 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 (beginning with the quarter ended March 31, 2021 for the Company). The Company is currently evaluating the potential impact of this guidance on its condensed 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 condensed consolidated financial statements. |
