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MEEC: Reports 2017 Results & Announces the Pursuit of Opportunities in Europe through Licensing Agreement with Cabot Corp

By Steven Ralston, CFA



2017 Achievements:
• As demand for electricity from coal-fired EGUs seasonally increases during the warmer months, Midwest Energy Emissions (OTC:MEEC) operates profitably during the 2nd and 3rd quarters. The coal-fired fleet still provides about 30% of domestic power production.
• The company’s largest customer renewed a 3-year contract in August 2017.
     ◦ Vistra Energy (NYSE:VST) awarded its Nexus Small Business Award
     ◦ Midwest Energy Emissions estimates that the use of SEA Technology has saved Vistra almost $15 million in operating costs over the past three years.
     ◦ Vistra Energy’s merger with Dynegy (NYSE: DYN) is expected to close in early 2018.
          ∙ The merger will add 13 coal-fired plants to Vistra’s portfolio.
          ∙ Despite retiring three (3) coal-fired plants, Vistra’s coal-fired capacity increases from 28% to 32% of its total portfolio after the merger.
          ∙ The current contract covers only 9 of the Vistra’s prospective coal-fired 25 EGUs. For the last three years, Midwest Energy Emissions has been the sole source of mercury capture technology for Vistra Energy.
• In October 10, 2013, 140 nations (including the US, Canada, China, Germany, Netherland and the U.K.) signed the Minamata Convention on mercury, an international treaty that recognized mercury is a chemical of global concern and addresses the reduction of emissions of mercury and mercury compounds.
     ◦ Midwest Energy Emissions expanded into Canada. An initial purchase order for $700,000 of product was secured for use in supplying the front-end of four EGUs at one of the Canadian customer’s plants beginning in early 2018. If proven successful, management expects to enter into a contract for an additional three EGUs at another of the customer’s plants.
     ◦ The company has entered into a licensing agreement with Cabot Corp. for the development of mercury removal solutions for coal-fired EGUs in Europe.
          ∙ The European market 50% larger than in the U.S. (1,384 coal-fired EGUs versus 914 in the U.S.) Poland alone has 538 EGUs with 30 additional coal plants in the planning stage.
          ∙ Cabot has a strong franchise in Europe, which should provide enhanced opportunities for contract wins.
          ∙ Full compliance is due in mid-2020.
               ◦ Midwest Energy Emissions should benefit from an increase in demonstration revenue with initial demonstrations scheduled for the summer of 2018.
               ◦ Decisions for the method of capture, installation of equipment and compliance testing should begin in 2019.
• By acquiring EERCF’s SEA Technology patent portfolio in April 2017, the company is expected to save at least $1.0 million in licensing fees and royalty payments annually.
• Management does not anticipate the raising equity capital at this time, preferring non-equity options if required.

• 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 impacted pricing in contract renewals.
• Revenue from product (sorbent) deliveries decreased 9.9% in 2017.
     ◦ Company-initiated optimization efforts at each EGU have improved operating efficiencies resulting in less-than-expected product (sorbent) usage.
     ◦ In addition, some customers lowered capacity factors, reducing the amount of product needed to achieve MATS compliance.

Despite the challenges of 2017, particularly price competition by chemical companies desperate to retain sorbent sales, Midwest Energy Emissions is well positioned to benefit from the reduction of mercury emissions initiatives in the U.S, Canada and Europe.

2017 Financial Results

On April 17, 2018, Midwest Energy Emissions reported results for the fourth quarter and full year ending December 31, 2017. Total revenues declined 15.0% to $27,499,080 from $32,345,540 reported in 2016 as revenue from product (sorbent) deliveries decreased 9.9%. Sorbent sales declined primarily from the company s optimization efforts, allowing customers to enjoy improved operating efficiencies (less sorbent usage). Also, some customers lowered capacity factors, reducing the amount of product needed to achieve MATS compliance. By acquiring the patent portfolio from EERCF in April 2017, the amount paid in royalty fees decreased by $1.022 million. We estimate that the gross margin on sorbent sales was relatively flat at 29.2% versus 29.4% in 2016.

Revenue from equipment sales declined 70.6% to $794,206, primarily due to a tough comparison to 2016 when a customer (who had been granted a one-year extension to comply with MATS) installed both front-end and back-end product injection system. However, the gross margin on equipment sales improved from 2.7% in 2016 to 27.6% in 2017 as the industry has reached a maturity point where equipment sales have an economical margin. Revenue from demonstration & consulting services decreased 9.9% to $654,842.

Deferred revenues, which represent unrecognized advance payments, have appeared again on the balance sheet, reflecting the prospective delivery and commissioning of equipment in Canada during 2018. At year end, deferred revenues were $517,060, which will be recognized eventually as revenues on the income statement.

Total operating expenses decreased 9.2% to $27.49 million versus $30.29 million in 2016, primarily attributable to cost of goods sold decreasing 17.4% to $19.0 million, which is associated with the decrease in revenues during the year. SG&A expenses increased 16.7% to $8.47 million versus $7.26 million, primarily due to increases in salaries and wages, fringe benefits, stock based compensation, investor relations and professional fees. Interest expense declined 43.6% to $2.15 million versus $3.82, primarily due to the decrease in amortization of debt issuance costs and discount on notes payable.

The company reported a loss of $2.90 million (or $0.04 per diluted share) versus a reported loss of $15.62 million (or $0.31 per diluted share) in 2016. Removing the non-reoccurring debt restructuring charge of $14.1 million that was retroactively restated into 2016 financial results (which incidentally replaced the volatile change in value of warrant liability line item), the comparable 2016 operating loss is $1.51 million (or $0.04 per diluted share). The company s net operating loss carry forward is approximately $3.84 million.

Adjusted EBITDA decreased 29.8% YOY to $2.897 million versus $4.129 million in 2016. As of December 31, 2017, the company had negative working capital of $359,963.

European Licensing Agreement with Cabot Corporation

On April 17, 2018, Midwest Energy Emissions announced that the company has entered into a multi‐year European licensing agreement with Cabot Corp. (NYSE:CBT). Under the agreement, Cabot has exclusive access to Midwest Energy's patented SEA™ Technologies for the development of mercury removal solutions for coal-fired EGUs in Europe. Cabot will market and sell Midwest Energy's proven two‐part mercury capture technology and proprietary scrubber additive technology under the licensing agreement. Cabot has a strong presence in Europe and is expected to be a major player in the implementation of mercury emissions solutions that are required to achieve the European standards set forth by the Best Available Techniques (BAT) Reference Document (BREF) under the Industrial Emissions Directive.

Midwest Energy is unique in that it has a singular focus (the mercury emissions control market), holds the patents to SEA Technology processes. Dozens of domestic EGUs continue to be highly prospective, and Midwest Energy Emissions has expanded into Canada supplying sorbent to four EGUs. Now, Europe is also a significant prospect through a Licensing Agreement with Cabot Corp. Under the Industrial Emissions Directive (IED), almost 1,400 coal fired EGUs in Europe will be required to achieve new mercury emission compliance standards by 2020.

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 in the U.S. and as mercury emissions initiatives in Canada and Europe are implemented.

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 based on market-based comparative analysis that utilizes the valuation metric of Price/Sales. An industry average P/S ratio of 3.34 on TTM sales through 4Q-2017 indicates a share price target of $1.20


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