# Birchtech Corp.: Form 10-Q for the period ended Jun 30, 2016

- Company: [Birchtech Corp.](/companies/bcht.md) (CIK 728385)
- Form: 10-Q
- Filed: 2016-08-08
- Accepted by EDGAR: Aug 8, 2016, 07:46 ET
- Period: 2016-06-30
- Accession: 0001477932-16-011658
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/728385/000147793216011658/meec_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/728385/000147793216011658/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-04-01 to 2016-06-30 | $9.4m | us-gaap:Revenues |
| Revenue | 6 months, 2016-01-01 to 2016-06-30 | $12.8m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-04-01 to 2016-06-30 | $7.3m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2016-01-01 to 2016-06-30 | $9.8m | us-gaap:CostOfGoodsSold |
| Selling, general and administrative | 3 months, 2016-04-01 to 2016-06-30 | $1.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2016-01-01 to 2016-06-30 | $2.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-04-01 to 2016-06-30 | $420.2k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2016-01-01 to 2016-06-30 | $135.7k | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | −$8.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-01-01 to 2016-06-30 | −$7.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-04-01 to 2016-06-30 | −$0.17 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2016-01-01 to 2016-06-30 | −$0.15 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2016-01-01 to 2016-06-30 | $456.5k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2016-06-30 | $619.1k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-06-30 | $5.7m | us-gaap:AssetsCurrent |
| Total assets | at 2016-06-30 | $8.7m | us-gaap:Assets |
| Current liabilities | at 2016-06-30 | $9.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-06-30 | $28.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-06-30 | −$19.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 28,645 characters.

### Background

Midwest Energy Emissions Corp. (the "Company", "we", "us" and "our") develops and deploys patented, proprietary technologies to remove mercury emissions from coal-fired power plants. The U.S. EPA MATS (Mercury and Air Toxics Standards) rule requires that all coal and oil-fired power plants in the U.S., larger than 25MWs, must limit mercury in its emissions to below certain specified levels, according to the type of coal burned. Power plants were required to begin complying with MATS on April 16, 2015, unless they were granted a one-year extension to begin to comply. MATS, along with many state and provincial regulations, form the basis for mercury emission capture at coal fired plants across North America. Under the MATS regulation, Electric Generating Units ("EGUs") are required to remove about 90% of the mercury from their emissions. We believe that we continue to meet the requirements of the industry as a whole and our technologies have been shown to achieve mercury removal levels compliant with all state, provincial and federal regulations at a lower cost and with less plant impact than our competition.

As is typical in this market, we are paid by the EGU based on how much of our material is injected to achieve the needed level of mercury removal. Our current clients pay us as material is delivered to their facility. Clients will use our material whenever their EGUs operate, although EGUs are not always in operation. EGUs typically may not be in operation due to maintenance reasons or when the price of power in the market is less than their cost to produce power. Thus, our revenues from EGU clients will not typically be a consistent stream but will fluctuate, especially seasonally as the market demand for power fluctuates.

The MATS regulation has been subject to legal challenge, and in June 2015, the U.S. Supreme Court held that the EPA unreasonably failed to consider costs in determining whether to regulate hazardous air pollutants, including mercury, from power plants and remanded the case back to the U.S. Court of Appeals for the District of Columbia Circuit for further proceedings, but left the rule in place. In December 2015, the D.C. Circuit remanded the rule to the EPA for further consideration, without vacatur, allowing MATS to remain in effect until the EPA issues a final finding. On March 18, 2016, 20 states filed a petition for certiorari with the U.S. Supreme Court to review the D.C. Circuit's decision to remand without vacatur the MATS rule to the EPA which petition for certiorari was denied by the U.S. Supreme Court on June 13, 2016. In the meantime, on April 14, 2016, the EPA issued a final supplemental finding upholding the rule and concluding that a cost analysis supports the MATS rule. While the Company expects that the issuance by the EPA of its final finding will keep MATS in effect going forward, the Company is unable to predict with certainty the outcome of any such further proceedings.

We remain focused on positioning the Company for short and long-term growth. In the quarter ended June 30, 2016, we commercialized a new, sorbent enhancement additive and increased our production capability to offer this product in bulk quantities. We believe this product to be a key product in our growth strategy. We continue to make refinements to all of our key products, as we continue to focus on the customer and its operations. We also hired a new regional sales manager to cover the U.S Midwest and continued to expand our employee base as we plan for future growth. As described below, we achieved substantial increases in revenues compared to the prior year. We ended the second quarter of 2016 with 20 fully operational MATS compliant EGU's utilizing our technologies. We expect revenue growth throughout the rest of 2016 and beyond.

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### Results of Operations

The second fiscal quarter of 2016 was a quarter of continued revenue growth and business plan execution. During the quarter, the Company completed the commissioning of its largest equipment project to date and saw its entire customer base begin their MATS compliance activities. During the quarter, the Company had long terms contracts on 19 EGU's and a short term compliance contract on one EGU. All of these customer EGU's are now complying with MATS as those with one year compliance extensions, saw those extensions expire in April 2016. The compliance efforts of our customer base resulted in exponential sales growth over the same period last year and positive cash flow from operations.

### Revenues

*Sales* - We generated revenues of approximately $9,392,000 and $2,697,000 for the quarters ended June 30, 2016 and 2015, respectively and $12,766,000 and $2,940,000 for the six months ended June 30, 2016 and 2015, respectively. Total sorbent product sales for the three months ended June 30, 2016 and 2015 were $6,872,000 and $609,000, respectively. Total sorbent product sales for the six months ended June 30, 2016 and 2015 were $9,710,000 and $853,000, respectively. These increases from the prior year were associated with the MATS compliance activities of our customers, which began in April 2016, with our all customers in operation by the end of the period.

Equipment sales for the three months ended June 30, 2016 and 2015 were $2,391,000 and $1,967,000, respectively. Equipment sales for the six months ended June 30, 2016 and 2015 were $2,556,000 and $1,967,000, respectively. Equipment sales during 2016 are primarily related to the commissioning of one customer project that included both a front end and back end product injection systems. In 2015, equipment sales were primarily related to three front end injection systems.

Other revenues for the three months ended June 30, 2016 and 2015 were $129,000 and $120,000, respectively. Other revenues for the six months ended June 30, 2016 and 2015 were $500,000 and $120,000, respectively. This increase is primarily associated with increased demonstration revenues in the three months ended March 31, 2016 from the same period in the prior year.

### Cost and Expenses

*Costs and expenses* were $8,972,000 and $3,387,000 during the three months ended June 30, 2016 and 2015, respectively, and were $12,630,000 and $4,876,000 for the six months ended June 30, 2016 and 2015, respectively. The increase in costs and expenses from the prior year is primarily attributable to an increase in costs of sales during the current quarter compared to the same period in the prior year. These increases are primarily associated with the significant increase in revenues in the quarter ended June 30, 2016.

*Cost of sales* during the three months ended June 30, 2016 and 2015 was $7,304,000 and $2,334,000, respectively, and were $9,792,000 and $2,841,000 for the six months ended June 30, 2016 and 2015, respectively. The increase in cost is primarily attributable to the significant increase in product sales in 2016. Direct product costs during the three months ended June 30, 2016 and 2015 was $3,877,000 and $347,000, respectively, and were $5,506,000 and $497,000 for the six months ended June 30, 2016 and 2015, respectively.

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Equipment cost of sales during the three months ended June 30, 2016 and 2015 was $2,384,000 and $1,377,000, respectively, and were $2,506,000 and $1,377,000 for the six months ended June 30, 2016 and 2015, respectively. The decrease in margin on equipment sales in 2016 is primarily attributable to the large project that was completed in the quarter ended June 30, 2016, which was subcontracted to a third party. The Company also had increases in license costs, overhead and depreciation and amortization during the three and six months ended June 30, 2016 from the same periods in 2015 due to the increase in business operations as its customers began MATS compliance activities in 2016.

*Selling, general and administrative expenses* were $1,668,000 and $1,053,000 for the quarters ended June 30, 2016 and 2015, respectively, and were $2,838,000 and $2,035,000 for the six months ended June 30, 2016 and 2015, respectively. The increase in selling, general and administrative expenses is primarily attributed increases in sales commissions and stock based compensation associated with stock options issued to officers, directors and employees.

### Other Expenses

Interest expenserelated to the financing of capital was $1,033,000 and $936,000 during the quarters ended June 30, 2016 and 2015, respectively, and were $3,106,000 and $4,358,000 for the six months ended June 30, 2016 and 2015, respectively. In connection with change in the conversion terms and repayment of principal during the quarter ended March 31, 2015, per the Amendment with AC Midwest Energy, LLC, the Company incurred a loss of $2,246,000 which was primarily related to accelerated amortization of the discount on convertible notes payable and is included in interest expense during that period. During the quarter ended March 31, 2016, The Company incurred a charge of $1,125,000 related to warrants issued in connection with the issuance of a letter of credit which was included in interest expense. During the quarters ended June 30, 2016 and 2015, a loss of $7,566,000 and a gain of $3,195,000, respectively, on the change in value of warrant liability was recorded. During the six months ended June 30, 2016 and 2015, a loss of $4,257,000 and a gain of $1,317,000, respectively, on the change in value of warrant liability was recorded.

### Net Income (Loss)

For the quarter ended June 30, 2016 we had a net loss of approximately $8,243,000. For the quarter ended June 30, 2015, we had net income of approximately $599,000. For the six months ended June 30, 2016 and 2015 we had a net loss of $7,335,000 and $5,968,000, respectively. The decreased income for these periods is primarily attributed to loss on the change in value of warrant liability and is offset by (i) increased operating income, and; (ii) debt conversion costs incurred in 2015.

### Taxes

As of June 30, 2016, our deferred tax assets are 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 2031.

Section 382 of the Internal 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.

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### Non-GAAP Financial Measures

#### Adjusted EBITDA

To supplement our consolidated financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we consider and are including herein Adjusted EBITDA, a Non-GAAP financial measure. We view Adjusted EBITDA as an operating performance measure and, as such, we believe that the GAAP financial measure most directly comparable to it is net income (loss). We define Adjusted EBITDA as net income adjusted for income taxes, depreciation, amortization, stock based compensation, and other non-cash income and expenses. We believe that Adjusted EBITDA provides us an important measure of operating performance because it allows management, investors, debtholders and others to evaluate and compare ongoing operating results from period to period by removing the impact of our asset base, any asset disposals or impairments, stock based compensation and other non-cash income and expense items associated with our reliance on issuing equity-linked debt securities to fund our working capital.

Our use of Adjusted EBITDA has limitations as an analytical tool, and this measure should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition. Additionally, our measure of Adjusted EBITDA may differ from other companies' measure of Adjusted EBITDA. When evaluating our performance, Adjusted EBITDA should be considered with other financial performance measures, including various cash flow metrics, net income and other GAAP results. 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.

We prepare and publicly release quarterly unaudited financial statements prepared in accordance with GAAP. The following table shows our reconciliation of Net Income to Adjusted EBITDA for the quarters and six months ended June 30, 2016 and 2015, respectively:

*(in thousands)*

*(in thousands)*

|  | Quarter Ended June 30, 2016 | 2015 | Six Months Ended June 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| **Net (loss) income** | **$(8,243)** | **$599** | **$(7,335)** | **$(5,968)** |
| **Non-GAAP adjustments:** |  |  |  |  |
| **Depreciation and amortization** | **229** | **99** | **393** | **165** |
| **Interest** | **1,033** | **936** | **3,106** | **4,358** |
| **State income taxes** | **3** | **8** | **4** | **28** |
| **Stock based compensation** | **404** | **206** | **583** | **332** |
| **Change in warrant liability** | **7,566** | **(3,195)** | **4,257** | **(1,316)** |
| **Debt conversion costs** | **-** | **962** | **-** | **962** |
| **Adjusted EBITDA** | **$992** | **$(385)** | **$1,008** | **$(1,439)** |

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We are including below our unaudited reconciliation of Net Income to Adjusted EBITDA on a quarterly basis for the quarters ended September 30, 2015, December 31, 2015, March 31, 2016 and June 30, 2016:

*(in thousands)*

|  | Quarter Ended (Unaudited) 6/30/016 | 3/31/2016 | 12/31/2015 | 9/30/2015 |
| --- | ---: | ---: | ---: | ---: |
| **Net (loss) income** | **$(8,243)** | **$908** | **$(7,138)** | **$(1,155)** |
| **Non-GAAP adjustments:** |  |  |  |  |
| **Depreciation and amortization** | **229** | **164** | **123** | **103** |
| **Interest** | **1,033** | **2,073** | **950** | **906** |
| **State income taxes** | **3** | **1** | **5** | **8** |
| **Stock based compensation** | **404** | **179** | **177** | **280** |
| **Change in warrant liability** | **7,566** | **(3,309)** | **4,655** | **(145)** |
| **Settlement charges** | **-** | **-** | **1,335** | **-** |
| **Debt conversion costs** | **-** | **-** | **-** | **161** |
| **Adjusted EBITDA** | **$992** | **$16** | **$107** | **$158** |

### Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operating activities. As of June 30, 2016, our cash and cash equivalents totaled $619,000. Although we anticipate significant revenues from the sale of products to be used in MATS compliance by customers to continue in 2016 and beyond, no assurances can be given that the Company can obtain sufficient working capital through operating activities to meet its debt obligations as they come due. We anticipate generating significant cash flows during 2016, subject to achieving our projected level of sales with our expected gross margins. No assurance can be made that we will be able to achieve the expected results..

*Total assets* were $8,711,000 at June 30, 2016 versus $7,315,000 at December 31, 2015. The change in total assets is primarily attributable to the increases in accounts receivable and property and equipment and is offset by the decrease in inventory.

*Total liabilities* were $28,304,000 at June 30, 2016 versus $20,260,000 at December 31, 2015. During the six months ended June 30, 2016, the fair value of the Company's warrant liability increased significantly. Also during this period there was an increase in current operating liabilities associated with the increased sales operations during the period.

*Operating activities* provided $457,000 of cash during the quarter ended June 30, 2016 compared to using $2,594,000 during the six months ended June 30, 2015. The change in cash used for operating activities is primarily attributable to the increase in revenues and gross margin during the six months ended June 30, 2016.

*Investing activities* used $908,000 and $660,000 during the six months ended June 30, 2016 and 2015, respectively. In 2016 and 2015, additions of property and equipment associated with the expansion of our operations in preparation for MATS compliance activities of our customers were responsible for these expenditures.

*Financing activities* used $3,000,000 during the six months ended June 30, 2015 due to the repayment of principal of convertible promissory notes. Payments on equipment notes payable used $13,000 for the six months ended June 30, 2016.

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### Off-Balance Sheet Arrangements

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

### Critical Accounting Policies and Estimates

Our discussion and analysis of our financial conditions and results of operation are based upon the accompanying consolidated financial statements which have been prepared in accordance with the generally accepted accounting principles in the U.S. 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 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 financial condition and results of operations. These policies 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 consolidated financial statements. In particular, our most critical accounting policies relate to the recognition of revenue, and the valuation of our stock-based compensation.

### Going Concern

The accompanying consolidated financial statements as of June 30, 2016 have been prepared assuming the Company will continue as a going concern. Since its inception, the Company has experienced recurring losses and has an accumulated deficit of $45,335,000. The Company has current convertible notes payments due of $4,042,000. These principal payments raise doubt about the Company's ability to continue as a going concern. Although we anticipate significant revenues and cash generation from sales of products to be used in MATS compliance activities, no assurances can be given that the Company can obtain sufficient working capital through these activities to meet its debt obligations. Due to certain covenants with our senior lender, we are not able to use current cash on hand to pay current convertible note holders as these notes mature. Success in our ongoing operations and continued negotiations with our note holders is critical. We will actively seek sources of additional financing in order to fund our debt repayment obligations if extensions cannot be negotiated with our early investors who purchased convertible debt from the Company. No assurances can be given that the Company can maintain sufficient working capital through these efforts or that the continued implementation of its business plan will generate sufficient revenues in the future to sustain ongoing operations.

The accompanying consolidated financial statements do not include any 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 the Company to continue as a going concern.

### Accounts Receivable

Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. If the financial condition of the Company's customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management's assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.

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### 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.

### Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's consolidated financial statements are based on a more-likely-than-not recognition threshold. The Company did not have any unrecognized tax benefits at June 30, 2016 and December 31, 2015. When necessary, the Company would accrue penalties and interest related to unrecognized tax benefits as a component of income tax expense.

The Company and its subsidiaries file a consolidated income tax return in the U.S. federal jurisdiction and three state jurisdictions. The Company is no longer subject to U.S. federal examinations for years prior to 2012 or state tax examinations for years prior to 2011.

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### Stock-Based Compensation

We have adopted the provisions of *Share-Based Payments*, 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 the 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 the 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 an adjustment in the period that estimates are revised.

### Warrant Liability

On August 14, 2014, Company issued the Lender a warrant to purchase 12,500,000 shares of the Company's common stock at $1.00 per share, subject to the adjustments (see Note 13 for changes to the terms of these warrants). The Company also issued to Drexel for the transaction: (i) a 5-year warrant to purchase up to 800,000 shares of common stock at $1.00 per share; and (ii) a 5-year warrant to purchase up to 1,000,000 shares of common stock at $0.50 per share, both subject to adjustments similar to the Warrant issued to the Lender (see Note 13 for changes to the terms of these warrants).

On November 16, 2015, Company issued the Lender a contingent warrant to purchase up to 5,000,000 shares of the Company's common stock at $0.35 per share, subject to adjustments, which warrant shall be immediately exercisable for 3,600,000 shares with the balance of 1,400,000 shares exercisable proportionately to such additional Senior Convertible Notes up to $1,400,000 purchased by the Lender (see Note 13 for the terms of these warrants).

On January 28, 2016, in consideration for the issuance of the Letter of Credit, the Company has agreed to issue to Lender (i) a five year warrant to purchase 2,000,000 shares of common stock, subject to certain anti-dilution adjustment provisions at an exercise price of $0.35 per share of common stock.

On February 19, 2016, in connection to Amendment No. 2 and Amendment No. 3, the Company issued Drexel: a 5-year warrant to purchase up to 300,000 shares of common stock at $0.35 per share as compensation for services rendered.

These warrants are valued in accordance with FASB ASC 815-10 as liabilities using a Monte Carlo Simulation Model as of each reporting period date and the change in value can have a significant impact on the Company's bottom line. The significant assumptions considered by the model were the remaining term of the warrants, operational forecasts provided by the Company, the fair value per share stock price, a risk free treasury rate and an expected volatility rate at each measurement date.

### Warrants

Unless sold and issued warrants are subject to the provisions of FASB ASC 815-10, the Company utilized a Black-Scholes options pricing model to value the warrants sold and issued. This model requires the input of highly subjective assumptions such as the expected stock price volatility and the expected period until the warrants are exercised. When calculating the value of warrants issued, the Company uses a volatility factor of 74.9%, a risk free interest rate and the life of the warrant for the exercise period. When sold and issued warrants were valued in accordance with FASB ASC 815-10, the fair value was determined using a Monte Carlo Simulation Model.

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## Market risk

As filed, 163 characters.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

## Controls and procedures

As filed, 2,304 characters.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, that the Company's disclosure controls and procedures were not effective as a result of material weaknesses in our internal control over financial reporting. The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses in our internal control over financial reporting, which are common to many small companies: (i) lack of a sufficient complement of personnel commensurate with the Company's reporting requirements; and (ii) insufficient written documentation or training of our internal control policies and procedures which provide staff with guidance or framework for accounting and disclosing financial transactions.

Despite the existence of the material weaknesses above, we believe that the consolidated financial statements contained in this Form 10-Q fairly present our financial position, results of operations and cash flows as of and for the periods presented in all material respects.

### Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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## Risk factors

As filed, 163 characters.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Filed Aug 8, 2016.
Source: SEC EDGAR, the filing index for accession 0001477932-16-011658. Last ingested by Listed: Nov 13, 2026, 16:05 ET. No prices; not investment advice.