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MEEC > SEC Filings for MEEC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for MIDWEST ENERGY EMISSIONS CORP.

Form 10-Q for MIDWEST ENERGY EMISSIONS CORP.


13-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion sets forth, for the periods indicated, information derived from our Unaudited Condensed Consolidated Financial Statements and should be read in conjunction with those financial statements.

Background

We are a Development Stage Company that develops and employs patented and proprietary technologies to remove mercury from coal-fired power plants. The recently finalized United States Environmental Protection Agency Mercury and Air Toxics Standards ("MATS") requires that all coal and oil-fired power plants in the U.S., larger than 25 Megawatts (Electric Generating Units or "EGU"), must limit mercury in its emissions to below certain specified levels, according to the type of coal burned and the plant design. In general, MATS requires EGUs to remove about 90% of the mercury from their emissions. Our technology has been shown to be able to achieve mercury removal levels compliant with MATS and at a lower cost and plant impact than the most widely used approach of powdered activated carbon or brominated powdered activated carbon injection. As is typical in this market, we are paid by the EGU based on how much of our material is injected to achieve the needed level of mercury removal. Our current client pays and we expect future clients will pay us periodically (monthly or as material is delivered) based on their actual use of our injected material. Clients will use our material whenever their EGUs operate, but they do not operate all the time. EGU's typically are not operated due to maintenance reasons or when the price of power in the market is less than their cost to produce that power. Thus, our revenues from EGU clients will not typically be a consistent, steady stream but will fluctuate, especially seasonally as the market demand for power fluctuates.

Results of Operations

Dissolution of subsidiaries

Pursuant to the terms of the Merger Agreement, the Company is in the process of dissolving the following entities that remained in existence after the Merger of Midwest and China Youth Media, Inc.:

Youth Media (BVI) Ltd.

Youth Media (Hong Kong) Limited

Youth Media (Beijing) Limited

Rebel Crew Films, Inc.

The operations and cash flows of these subsidiaries have been eliminated from the accounts of the Company's ongoing operations and major classes of assets and liabilities related thereto have been segregated. The losses from discontinued operations, including the impairment of certain assets of discontinued operations, have been reflected in the condensed consolidated financial statements of this report. The Company does not expect to derive any revenues from the discontinued entities in the future and does not expect to incur any significant ongoing operating expenses.


Revenues

Sales - We generated revenues of $271,000 and $266,000 for the quarter ended September 30, 2012 and 2011, respectively and $356,000 and $266,000 for the nine months ended September 30, 2012 and 2011, respectively. The Company generated revenue for the nine months ended September 30, 2012 by delivering product to its first commercial customer for use in the operations of the two systems there, and by performing demonstrations of our system at potential customers. The Company generated revenue for the three and nine months ended September 30, 2011 by delivering product to its first commercial customer for use in the commissioning process of the systems in preparation for their launch in 2012.

Cost and Expenses

Costs and expenses were $1,363,000 and $957,000 during the quarter ended September 30, 2012 and 2011, respectively and were $3,296,000 and $5,438,000 during the nine months ended September 30, 2012 and 2011, respectively. The increase in costs and expenses for the quarter ended September 30, 2012 from the same period in the prior year is attributable to marketing and development expenses, professional fees and general and administrative expenses associated with our recent efforts to commercialize our mercury emissions control technologies for coal-fired boilers in the U.S. and Canada. The decrease in costs and expenses for the nine month period is attributable to the impairment of goodwill discussed above and is offset by expenses associated with our efforts to commercialize our mercury emissions control technologies for coal-fired boilers in the U.S. and Canada.

Cost of goods sold was $105,000 and $319,000 during the quarter ended September 30, 2012 and 2011, respectively and was $172,000 and $319,000 during the nine months ended September 30, 2012 and 2011, respectively. The decrease in cost is attributable to the mix of products delivered during the periods and negotiating improved pricing from suppliers.

Operating expenses were $97,000 and $166,000 during the quarter ended September 30, 2012 and 2011, respectively and were $137,000 and $221,000 for the nine months ended September 30, 2012 and 2011, respectively. These expenses are related to the Company's first commercial customer. The decrease during 2012 is primarily attributable the higher costs incurred during the system installation during 2011.

License Maintenance Fees were $50,000 and $37,500 for the quarter ended September 30, 2012 and 2011, respectively and were $150,000 and $113,000 for the nine months ended September 30, 2012 and 2011, respectively. The expenses relate to the amortization of the annual maintenance fee for the respective periods.

Marketing and development expenses were $202,000 and $67,000 for the quarter ended September 30, 2012 and 2011, respectively and were $325,000 and $262,000 for the nine months ended September 30, 2012 and 2011, respectively. The increase in marketing and development expenses during 2012 is primarily attributed to continuing near term fundraising efforts.

Selling, general and administrative expenses were $503,000 and $218,000 for the quarter ended September 30, 2012 and 2011, respectively and were $1,130,000 and $322,000 for the nine months ended September 30, 2012 and 2011 respectively. The increase in selling, general and administrative expenses during 2012 is primarily attributed to our increase in efforts to commercialize our mercury emissions control technologies and the increase in expenses associated with expanding our operations.

Depreciation and amortization expenses were $94,000 and $11,000 for the quarter ended September 30, 2012 and 2011, respectively and were $326,000 and $16,000 for the nine months ended September 30, 2012 and 2011 respectively. The increase in depreciation and amortization expenses during 2012 is primarily attributed to the depreciation recorded on the system installed at our first commercial customer and was placed in service during the 2012.


Professional fee expenses were $291,000 and $145,000 for the quarter ended September 30, 2012 and 2011, respectively and were $636,000 and $630,000 for the nine months ended September 30, 2012 and 2011 respectively. The costs incurred in the 2011 are primarily associated with the Reverse Merger. Current year expenses are associated with SEC filings made in the the current year, legal opinions of the patents we have licensed and legal assistance with becoming a Reporting Issuer in Nova Scotia, Canada.

Impairment of fixed assets were $400,000 and zero for the nine months ended September 30, 2012 and 2011, respectively. Due to the short-term idling of both power units at the Company's commercial customer, the Company recorded an impairment charge against the value of the equipment during the nine months ended September 30, 2012.

Net Loss

For the quarter ended September 30, 2012 and 2011 we had a net loss from operations of approximately $1,168,000 and $717,000, respectively and for the nine months ended September 30, 2012 and 2011 we had a net loss of approximately $3,105,000 and $5,237,000 respectively. The decreased net loss is primarily attributed the impairment of goodwill discussed above and is offset by an increase to professional fees and general and administrative expenses associated with our recent efforts to commercialize our mercury emissions control technologies for coal-fired boilers in the U.S. and Canada as well as an impairment charge on equipment of $400,000 recorded in the nine months ended September 30, 2012.

Interest Income and Other, Net

Given our financial constraints and our reliance on financing activities, interest expense related to the financing of capital was $74,000 and $24,000 during the quarter ended September 30, 2012 and 2011, respectively. Interest expense related to the financing of capital was $162,000 during the nine months ended September 30, 2012 and $42,000 during the nine months ended September 30, 2011.

Taxes

As of September 30, 2012, our deferred tax asset primarily related to accrued compensation and net operating losses. A 100% valuation allowance has been established due to the uncertainty of the utilization of these assets in future periods. As a result, the deferred tax asset was reduced to zero and no income tax benefit was recorded. The net operating loss carryforward will begin to expire in 2025.

Section 382 of the Internal Revenue Code allows post-change corporations to use pre-change net operating losses, but limit the amount of losses that may be used annually to a percentage of the entity value of the corporation at the date of the ownership change. The applicable percentage is the federal long-term tax-exempt rate for the month during which the change in ownership occurs.


Liquidity and Capital Resources

Our principal sources of liquidity are cash generated from financing activities. As of September 30, 2012 and December 31, 2011, our cash and cash equivalents were $8,000 and $100,000, respectively. We had a working capital deficit of approximately $2.9 million at September 30, 2012 and $2.4 million at December 31, 2011 and we continue to have recurring losses. Our anticipated cash needs for working capital and capital expenditures for at least the next twelve months is approximately $4 million. In the past we have primarily relied upon financing activities and loans from related parties to fund our operations. Success in our fund raising efforts is crucial. We are actively seeking sources of additional financing in order to maintain and expand our operations and to fund our debt repayment obligations. We intend to raise near term financing to fund future operations through a convertible debt-to-equity offering. We intend to raise additional equity financing to fund future operations. Due to these efforts, we could dilute current shareholders and the dilution could be significant. Our current cash flow needs for general overhead, sales and operations is approximately $250,000 per month with additional funds needed for demonstrations of our technology on potential customer units. With our expected gross margins on customer contracts, we anticipate we will be at break-even on a cash flow basis when our revenues reach approximately $12 million annually. This break-even target is subject to achieving sales at that level at our expected gross margins, no assurance can be made that we will be able to achieve this target.

Total assets were $1.2 million at September 30, 2012 versus $2.1 million at December 31, 2011. The change in total assets is primarily due to the collection of accounts receivable balances due, the depreciation on fixed assets and the impairment charge recording against fixed assets during the nine months ended September 30, 2012.

Operating activities used $1,684,000 of cash during the nine months ended September 30, 2012 compared to $1,062,000 during the nine months ended September 30, 2011. The change in cash used for operating activities resulted primarily from our recent efforts to commercialize our mercury emissions control technologies for coal-fired boilers in the U.S. and Canada and the associated increase in operating expenses.

Investing activities used no cash during the nine months ended September 30, 2012 compared to $1,144,000 during the nine months ended September 30, 2011. This change resulted from no purchases of capital assets during the nine months ended September 30, 2012 and purchase of equipment during the nine months ended September 30, 2011, primarily for use at the site of our first commercial customer.

Financing activities provided $1,592,000 during the nine months ended September 30, 2012 primarily due to proceeds from the issuance of convertible promissory notes of $1,378,000 and stock $214,000 compared to net cash provided by financing activities of $2,206,000 during the nine months ended September 30, 2011 due to related party advances of $927,000 and the issuance of stock which provided $1,129,000.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial conditions and results of operation are based upon the accompanying financial statements which have been prepared in accordance with the generally accepted accounting principles in the U.S. The preparation of the condensed 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 base these estimates on various assumptions and experience that we believe to be reasonable. The following critical accounting policies are those that are important to the presentation of our condensed consolidated financial condition and consolidated results of operations and require management's most difficult, complex, or subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

The following critical accounting policies affect our more significant estimates used in the preparation of our condensed consolidated financial statements and, in particular, our most critical accounting policy relates to recognition of revenue and the valuation of our stock based compensation.


Revenue Recognition

The Company records revenue from sales in accordance with ASC 605, Revenue Recognition ("ASC 605"). The criteria for recognition are as follows:

1. Persuasive evidence of an arrangement exists;

2. Delivery has occurred or services have been rendered;

3. The seller's price to the buyer is fixed or determinable; and

4. Collectability is reasonably assured.

Determination of criteria (3) and (4) will be based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments will be provided for in the same period the related sales are recorded.

Recoverability of Long-Lived and Intangible Assets

The Company has adopted ASC 360-10, Property, Plant and Equipment ("ASC 360-10"). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be 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. Impairment charges of $400,000 were recognized for the nine months ended September 30, 2012. Due to the short-term idling of both power plant units at the Company's commercial customer, the Company evaluated the recoverability of the carrying value of the Company's' equipment at that site. Based on a review of the discounted expected cash flows associated with the value contract with the customer, an impairment charge was recorded during the nine months ended September 30, 2012 against the value of the equipment. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

Goodwill

The Company evaluates the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate; (2) unanticipated competition, or; (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. In conjunction with our reverse merger on June 21, 2011, the Company evaluated the carrying amount of the resulting goodwill and determined that the entire amount of goodwill of $3,555,000 was impaired.


Stock-Based Compensation

We have adopted the provisions of Share-Based Payment, which requires that share-based payments be reflected as an expense based upon the grant-date fair value of those grants. Accordingly, the fair value of each option grant, non-vested stock award and shares issued under our employee stock purchase plan, were estimated on the date of grant. We estimate the fair value of these grants using a Black-Scholes model which requires us to make certain estimates in the assumptions used in this model, including the expected term the award will be held, the volatility of the underlying common stock, the discount rate, dividends and the forfeiture rate. The expected term represents the period of time that grants and awards are expected to be outstanding. Expected volatilities were based on historical volatility of our stock. The risk-free interest rate approximates the U.S. treasury rate corresponding to the expected term of the option. Dividends were assumed to be zero. Forfeiture estimates are based on historical data. These inputs are based on our assumptions, which we believe to be reasonable but that include complex and subjective variables. Other reasonable assumptions could result in different fair values for our stock-based awards. Stock-based compensation expense, as determined using a Black-Scholes option-pricing model, is recognized on a straight-line basis over the service period, net of estimated forfeitures. To the extent that actual results or revised estimates differ from the estimates used, those amounts will be recorded as a cumulative adjustment in the period that estimates are revised.

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