Annual report pursuant to Section 13 and 15(d)

Notes Payable

v3.8.0.1
Notes Payable
12 Months Ended
Dec. 31, 2017
Notes to Financial Statements  
Note 7 - Notes Payable

The Company has the following notes payable outstanding as of December 31:

  

    2017     2016  
             
             
Secured convertible promissory notes which mature on July 31, 2018, bear interest at 10% per annum, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share.   $ 1,550,000     $ 1,575,000  
                 
Secured promissory note which matures on June 15, 2018 and bears interest at 12% per annum.     1,146,686       2,646,686  
                 
Unsecured promissory note which matures on December 15, 2020, and bears interest at LIBOR + 500 per annum.     13,000,000       13,000,000  
                 
Total convertible notes payable before discount     15,696,686       17,221,686  
                 
Less discounts     (1,841,867 )     (2,587,519 )
Less debt issuance costs     (160,041 )     (313,344 )
                 
Total notes payable     13,694,778       14,320,823  
                 
Less current portion     4,050,000       1,500,000  
                 
Notes payable, net of current portion   $ 9,644,778     $ 12,820,823  

 

As of December 31, 2017, scheduled principal payments due on convertible notes payable are as follows:

 

Twelve months ended December 31,       
2018   $ 4,050,000  
2019     3,000,000  
2020     8,646,686  
    $ 15,696,686  

 

From July 30, 2013 through December 24, 2013, the Company sold convertible notes and warrants to unaffiliated accredited investors totaling $1,902,500. The notes bear interest at 10% per annum, are secured by the company’s assets, and are convertible into one share of common stock, par value $0.001 per share, with the initial conversion ratio equal to $0.50 per share. The notes had an initial term of three years, but have been extended until July 31, 2018. For each dollar invested, the investor received two warrants to purchase one shares of common stock of the Issuer at an exercise price of $0.75 per share. The notes may be converted at any time and from time to time in whole or in part prior to the maturity date thereof. These securities were sold in reliance upon the exemption provided by Section 4(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D promulgated under the Securities Act. Interest expense for the years ended December 31, 2017 and 2016, was $155,618 and $238,315, respectively. A discount on the notes payable of $841,342 was recorded based on the value of the warrants issued using a Black-Scholes options pricing model. Amortized interest expense for the years ended December 31, 2017 and 2016 on this discount was $152,558 and $152,959, respectively. As of December 31, 2017 and 2016, total principal of $1,550,000 and $1,575,000, respectively, was outstanding on these notes.

 

On November 1, 2016, the Companies entered into an Amended and Restated Financing Agreement (the “Restated Financing Agreement”) with AC Midwest, pursuant to which AC Midwest, which held various warrants to acquire shares of the Company’s common stock (the “AC Midwest Warrants”), will exercise on a cashless basis a portion of the AC Midwest Warrants for 10,000,000 shares of the Company’s common stock and exchanged the AC Midwest Notes, together with all accrued and unpaid interest thereon, and the remaining unexercised portion of the AC Midwest Warrants, for (i) a new senior secured note in the principal amount of $9,646,686 (the “New AC Midwest Secured Note”), and (ii) a subordinated unsecured note in the principal amount of $13,000,000 (the “AC Midwest Subordinated Note”). The completion of the transactions contemplated by the Restated Financing Agreement were subject to various conditions including but not limited to the closing by the Company of an equity offering raising at least $10.0 million of gross proceeds prior to December 31, 2016.

 

On November 29, 2016, the Companies closed on the transactions contemplated by the Restated Financing Agreement. The Company recorded a loss of $14,105,076 on these transactions which was primarily related to the elimination of the warrant liability associated with the unexercised AC Midwest Warrants and was offset by the accelerated amortization of the discount and debt issuance costs associated with the AC Midwest Notes.

 

New AC Midwest Secured Note

 

The New AC Midwest Secured Note, which will mature on December 15, 2018 and is guaranteed by MES, is non-convertible and bears interest at a rate of 12.0% per annum, payable quarterly in arrears on or before the last day of each fiscal quarter beginning December 31, 2016. Commencing on June 15, 2017 and continuing on each September 15, December 15, March 15 and June 15 thereafter, the Company pays principal on the New AC Midwest Secured Note in equal installments of (i) $500,000 per quarter for the 2017 the calendar year, (ii) $625,000 per quarter for the 2018 calendar year, and (iii) thereafter $750,000 per quarter, with a final payment of all outstanding principal together with such other amounts as shall then be due and owing from the Company to AC Midwest under the New AC Midwest Secured Note on the maturity date. The New AC Midwest Secured Note is secured by all of the assets of the Companies. Interest expense for the years ended December 31, 2017 and 2016 was $267,847 and $35,411, respectively. As of December 31, 2017 and 2016, total principal of $1,146,686 and $2,646,686, respectively, was outstanding on this note. As of April 17, 2018, the Company was not in compliance with certain financial covenants of the Restated Financing Agreement with AC Midwest Energy. Per the terms of the Restated Financing Agreement, AC Midwest has the right to accelerate any outstanding balance of the New Midwest Secured Note.

 

AC Midwest Subordinated Note

 

The AC Midwest Subordinated Note, which will mature on December 15, 2020 and is guaranteed by MES, is non-convertible and bears interest equal to the three-month LIBOR rate plus 5.0% per annum, payable quarterly on or before the last day of each fiscal quarter beginning December 31, 2016. The interest rate shall be subject to adjustment each quarter based on the then current LIBOR rate. Commencing on June 15, 2017 and continuing on each September 15, December 15, March 15 and June 15 thereafter, the Company pays principal on the AC Midwest Subordinated Note in equal installments of (i) $500,000 per quarter for the 2017 calendar year, (ii) $625,000 per quarter for the 2018 calendar year, and (iii) thereafter $750,000 per quarter, with a final payment of all outstanding principal together with such other amounts as shall then be due and owing from the Company to AC Midwest on the maturity date. Notwithstanding the foregoing, until the New AC Midwest Secured Note and LC Note are paid in full, AC Midwest will not be entitled to receive any payment on account of the AC Midwest Subordinated Note (other than regularly scheduled interest payments). Interest expense for the years ended December 31, 2017 and 2016 was $818,357 and $71,058, respectively. As of December 31, 2017 and 2016, total principal of $13,000,000 and $13,000,000 respectively, was outstanding on this note. The Company determined that the rate of interest on the AC Midwest Subordinated Note was a below market rate of interest and determined that a discount of $2,400,000 should be recorded. This discount is based on an applicable market rate for unsecured debt for the Company of 15% and will be amortized as interested expense over the life of the loan. Amortized discount recorded as interest expense for the years ended December 31, 2017 and 2016 was $593,094 and $53,622 respectively.

 

On January 28, 2016, the Companies entered into Amendment No. 3 to Financing Agreement and Reaffirmation of Guaranty (the “Third Amended Financing Agreement”) with AC Midwest Energy LLC (the “Lender”), pursuant to which Lender agreed to cause its bank to arrange for the issuance to a certain customer of the Company a standby letter of credit in the amount of $2,000,000 (the “Letter of Credit”) to permit the Company to enter into a contract for mercury capture program with such customer. The Letter of Credit is to guarantee the Company’s performance under its contract with such customer. Under the Third Amended Financing Agreement, and in consideration for the issuance of the Letter of Credit for the benefit of the Company, the Company shall pay AC Midwest a fee equal to 12.0% per annum of the amount available to be drawn under the Letter of Credit payable on the last day of each calendar month. No amounts were received on this letter of credit as of December 31, 2017. Fee expense for the years ended December 31, 2017 and 2016 was $219,333 and $226,000, respectively.