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Midwest Energy Emissions (MEEC) Reports 1st Operationally Profitable Quarter; Revenue Guidance Lowered

By Steven Ralston, CFA


Summary of Second Quarter 2017 Results

· 2Q 2017 was company’s 1st operationally profitable quarter (ex-change in value of warrant liability).
· Revenue from product (sorbent) deliveries increased 3.5% YOY.
· Operating income improved 48.0% YOY.
·  Adjusted EBITDA increased 22.8% YOY to $1.29 million versus $1.05 million.
·  Management currently does not anticipate the need for raising additional equity capital.
· Despite the pipeline of prospective customer opportunities increasing, the anticipated closing of new contracts this summer did not materialize due to an unexpected pricing response by incumbent suppliers of sorbent.
· The competitive pricing response also has impacted pricing in contract renewals.
· Due to Midwest Energy’s optimization of customer operations, the projection for SEA™ sorbent product demand for the 20 EGUs under contract was lowered by $5 million.
· As a result, management adjusted 2017 revenue guidance down to $26 million, which represents a very conservative estimate of only current business-in-hand.
Second Quarter 2017 Results
On August 21, 2017, Midwest Energy Emissions (OTC:MEEC) reported results for the second quarter ending June 30, 2017. Total revenues declined 15.6% to $7,931,168 from $8,972,024 reported in comparable quarter last year. However, revenue from product (sorbent) deliveries increased 3.5%. The increased use of sorbent was associated with many customer sites not implementing full MATS compliance until April last year. Revenue from equipment sales declined 67.5% to $776,946, primarily due to a tough comparison to the second quarter last year when a customer installed both a front-end and back-end product injection system. Revenue from demonstration & consulting services also declined 67.8% to $41,500 due to decreased demonstration activities.
Total operating expenses decreased 18.5% to $7.31 million versus $8.97 million in the second quarter of 2016, primarily attributable to cost of goods sold decreasing 31.6% to $3.79 million as equipment cost of sales decreased significantly in line with the decline in equipment sales. SG&A expenses increased 38.7% to $2.31 million versus $1.67 million, primarily attributable to increases in salary and benefit costs, along with stock-based compensation. Interest expense declined 47.2% to $544,918 versus $1,032,949 during the quarter ended June 30, 2016. The change in value of warrant liability benefited results with a gain of $655,023 versus a loss of $7,566,000 in comparable quarter last year. As of December 31, 2016, Midwest Energy had a $500,000 net operating loss carry forward.
The company reported net income of $671,473 (or $0.01 per diluted share) versus a loss of $8,242,813 (or $0.17 per diluted share) in the second quarter of 2016. The primary driver for the dramatic improvement in net income was due to the change in value of warrant liability. Without the change in value of warrant liability, the company would have reported net income of $16,450 (or $0.0002 per diluted share versus a loss of $676,813 ($0.0143 per diluted share) as operating income improved 48.0% to $622,035 compared to $420,185 in the first quarter of 2016.
Adjusted EBITDA increased 22.8% YOY to $1.293 million versus $1.053 million in the comparable quarter last year. As of June 30, 2017, working capital was $1.97 million.
2017 Revenue Guidance
Management adjusted revenue guidance for the 2017 year down to $26 million, representing conservatively only current business-in-hand. Guidance was lowered due to a slower than expected closing rate of new contracts, primarily from an unexpected competitive response from a particular large chemical company discounting the price of sorbent to its break-even point (and possibly below) in order to maintain customer relationships, to preserve accounts and potentially to create a situation whereby production capacity could be expanded. The availability of lower overall cost of sorbent product created hesitations by prospective customers to disrupting their long-term legacy contracts, which are already in place. In addition, Midwest Energy Emissions helped EGUs under secured contracts to optimize their operations such that projections for sorbent product demand were lowered by $5 million.
Despite the lower guidance for the year, Midwest Energy Emissions has maintained a sales pipeline of EGUs which are in various stages of testing, demonstration and contract negotiation. Management firmly believes that the ownership of the patent portfolio will aid in the conversion of high quality prospects to long-term, recurring revenue contracts.
Midwest Energy Emissions is well-positioned to benefit from the implementation of Mercury and Air Toxics Standards (MATS). The company holds the patents to Sorbent Enhancement Additive (SEA™) Technology for the reduction of mercury emissions by coal-fired electric generating units. The technology has been commercially deployed and provides many advantages, including low cost of operation, flexibility for optimization and preservation of fly ash marketability.
Midwest Energy is unique in that it has a singular focus (the mercury emissions control market), holds the patents to SEA Technology processes, has achieved market penetration through the commercialization of SEA Technology and is positioned to take advantage of further opportunities afforded by EGUs remaining in compliance to MATS. We continue to be optimistic about Midwest Energy Emissions. The company should experience increases in revenues over the next few years as the coal-fired plants fine-tune their mercury emissions control efforts to become/remain MATS-compliant.
Comparable pollution control and value-added specialty chemical companies trade in a wide P/S valuation range between 4.6 and 0.6. Our indicated share price target is $1.35, which is based on market-based comparative analysis that utilizes the valuation metric of Price/Sales. An upper-second quartile P/S ratio of 3.4 on projected sales through 3Q-2017 of $29.4 million indicates a share price target of $1.35.


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