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MEEC reports year-end results; revenues +156%, gross margin doubles

By Steven Ralston, CFA


Summary of the Year-end Report

Earlier this week, Midwest Energy Emissions (OTC:MEEC) Emissions reported results for the year ending December 31, 2016. Revenues of $32.3 million were above initial guidance of least $30 million (issued on July 12, 2016) and slightly above the mid-range of subsequently raised guidance of the $31 million to $33 million range. Thus far, revenue guidance from management has been met or exceeded.

The viability of the company’s technology for reducing Mercury emissions and management’s business model has been demonstrated by the top-line increasing from $2.79 million in 2014 to $32.3 million in 2016.

The company’s significant accomplishments in 2016 were:

- The 
number of fully-operational MATS-compliant EGUs utilizing Midwest Energy’s SEA Technology increased from 4 to 20.

- The 
gross margin improved from 14.8% to 28.8% in 2016. Further improvement is expected as management is targeting gross margin between 35% and 40% in its reoccurring revenue model.

- As a result, 
revenues increased 156% to a record $32.3 million and the company generated Adjusted EBITDA of $4.1 million compared to $1.2 million deficit in the prior year.

- In November, a debt restructuring and equity private placement improved the balance sheet.

Management previously announced its intent to acquire the company’s core IP from the Energy & Environmental Research Center (EERCF) at University of North Dakota. On March 27, 2017, management relayed the closing of the transaction should occur by April 15, 2017.

On March 27, 2017, management reiterated full year 2017 revenue guidance of between $60 million and $70 million and Adjusted EBITDA of approximately $15 million. Management expects to win new contracts throughout 2017, particularly in late spring and early summer. Over 20 new units are in various stages of the sales process; management expects to close on 10 to 12 EGUs (possibly up to 15). The company has “not experienced any slowdown in interest at the utility level.” Though the timing of the closing of new contracts is difficult to gauge, management anticipates the ramp up should start in the late spring, early summer.

Management has no plans to go to the capital markets going forward. Therefore, no further dilution is expected other than the 925,000 shares for acquiring the patent portfolio, the exercise of outstanding warrants and options and of course, stock-based compensation.

Management anticipates providing an 
update in mid-May.

Details of the Financial Report

The company reported record revenues record revenues of $32,345,540 up 156% from $12,631,919, reported in 2015. Revenue growth was driven by sorbent product deliveries (+475% to $28.9 million) as customers commenced MATS compliance activities at the 20 EGUs under contract. Demonstration & consulting services increased 9.4% to approximately $726,000 but equipment sales declined 61% to $2.7 million since only one customer project was completed in 2016 compared to nine projects in 2015.

Total operating expenses (before non-reoccurring settlement charges) increased 102% to $30.3 million versus $15.0 million in 2015, mostly attributable to the 114% increase in cost of goods sold, which was primarily driven by increased purchases of sorbent product. Cost of goods sold as % revenues declined significantly from 85.2% to 71.2% in 2016, driven primarily by economies of scale in product sales and secondarily by the decline in lower margin equipment sales. Selling, general and administrative expenses rose 72.0% from and $4.22 million to $7.26 million as salaries & wages, depreciation & amortization and stock-based compensation increased.

The company reported a net loss from continuing operations of $16,883,015 (or $0.34 per diluted share) versus a loss of $14,261,531 (or $0.32 per diluted share) in 2015. The increased net loss was primarily due to the non-cash $14,681,311 change in value of warrant liability from the company’s restructuring of convertible debt.

Adjusted EBITDA increased to $4.1 million in 2016 compared to ($1.2) million in 2015. Attaining positive Adjusted EBITDA was primarily due to the company’s significant revenue growth as well as adjusting for the noncash change in warrant liabilities. The improvement of the gross margin from 14.8% to 28.8% in 2016 contributed to the increase of Adjusted EBITDA. Further improvement is expected as management is targeting gross margin between 35% and 40% in its reoccurring revenue model.

Working capital improved from a deficit of $1.8 million to positive $5.6 million in 2016 driven by a combination of the company’s operating results and debt restructuring. Shares outstanding increased 55.8% from 47,194,118 to 73,509,663 shares primarily due the convertible debt retirement as 10,000,000 shares were issued and 11,314,968 shares were issued in a private placement, both in November. Thus far in 2017, 94,145 shares have been issued through the cashless exercise of warrants.

In addition, management reiterated full year 2017 revenue guidance of between $60 million and $70 million. Management expects to win new contracts throughout 2017, particularly in late spring and early summer. Many existing clients are testing equipment with SEA Technology additives and sorbent at EGUs that are not currently under contract as are just as many potential new customers. The company is particularly targeting approximately 60 to 90 EGUs that are experiencing significant challenges in attempting to become MATS compliant, including suffering extra cost difficulties, cycling boiler output and/or de-rating boilers in order to stay in compliance. Pricing appears to be firm and the company is not experienced any slowdown in testing at EGUs. Management anticipates that new contracts will generate an average of $3.0 million in revenues annually.

Raising Target

We continue to be optimistic about Midwest Energy Emissions. The company should experience significant increases in revenues over the next few years as the coal-fired plants adjust their mercury emissions control efforts in order to optimally comply with MATS. Our target is being raised slightly to $2.05 per share.


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