By Steven Ralston, CFA
OTC:MEEC
READ THE FULL MEEC RESEARCH REPORT
Article updated May 24, 2023
ME2C Environmental (OTC:MEEC) is positioned for significant top-line growth and is expected to achieve growing profitability as its patented mercury capture process gains market share through management’s patent litigation strategy. Management has constructed additional capacity which is capable of fulfilling the anticipated increase in sorbent demand. We expect revenues to increase by at least 35% in 2023. Current litigation against refined coal defendants could potentially result in a windfall settlement. Furthermore, ME2C is in the process of developing a REE (Rare Earth Element) extraction technology.
2022 was a transitional year for ME2C Environmental as annual revenues rebounded to $21.6 million on increased product (sorbent) deliveries. During 2022, product (sorbent) deliveries increased due to a variety of factors that resulted in higher product usage by the company’s expanding customer base. The second quarter of 2022 was the inflection point toward a significant upside trajectory in top-line growth.
ME2C Environmental’s financial position improved dramatically as a consequence of the continued upswing in the core business (driven by management’s patent strategy), along with the restructuring of debt through multiple initiatives, including the extension of maturity and reduced interest rates on both secured & unsecured debt.
In November 2018, management initiated a licensing program in an effort to capture revenues from the unauthorized use of the company’s patented SEA® technologies. Caldwell Cassady & Curry P.C. (an Intellectual Property law firm) was engaged, and over the subsequent years (since 2020), ME2C Environmental has successfully instituted a licensing program and entered into licensing partnerships with eight major utilities, three of which have expanded the relationship with ME2C Environmental to include supply contracts. We expect that the company’s core reoccurring product supply revenue base to continue to increase significantly, along with licensing revenues, driven by management’s litigation strategy.
Outlook for 2023
ME2C Environmental should show strong double-digit top-line growth in 2023 due to the continued stable-to-growing demand for electricity from domestic coal-fired EGUs, particularly within ME2C’s customer base. It is critical to remember that the company’s revenues are reoccurring in nature. New licensing agreements and new supply contracts strongly tend to layer upon the existing base business. In 2022, new licensing arrangements began at two utilities and two new supply contracts were secured. In addition, two multi-year product supply contracts were renewed. Furthermore, in April 2023, a new 3-year supply contract was signed with an existing licensee under a right-of-first-refusal (ROFR) contract. Management expects annual revenue growth of approximately 50% in 2023.
After several transitional years, Midwest Energy Emissions (aka ME2C Environmental) is emerging as a profitable, small cap pollution control company with growing revenues driven by increasing reoccurring product (sorbent) deliveries from its patented mercury capture process. The primary catalyst was and continues to be the company’s successful enforcement efforts against coal-fired EGUs (Electric Generating Units) that infringe on ME2C’s patented solutions and products. As a result, over the next couple of years, new license agreements and/or new supply contracts are expected to be announced. In addition, patent infringement litigation against refined coal entities is pending with a trial date set for November 2023. If successful, the potential compensation from a verdict or from a negotiated settlement would be transformational for the company.
Management is also targeting prospective international opportunities for its patented mercury capture process. For example, in April 2023, ME2C Environmental entered into an exclusive agency agreement with a consulting company located in Hong Kong in order to pursue licensing agreements for SEA Technologies and sorbent product supply contracts in Southeast Asia.
Additional Strategic Efforts
Management is also pursuing strategic efforts to expand into other environmental technologies, namely Rare Earth Element (REE) extraction and remediation of wastewater from coal-fired power plants. A new research effort at the University of North Dakota has provided “impressive results” in the lab for REE extraction, according to the latest conference call in April 2023. Management hopes to conduct a commercially viable field test once the laboratory work is successfully completed.
2022 Financial Results
On April 17, 2023, ME2C Environmental reported full-year financial results for 2022. Total revenues increased 66.2% in 2022 from $13.01 million in 2021 to $21.62 million, primarily driven by strong demand for mercury control (sorbent) products and services as well as from an expanded customer base. Sorbent product sales increased 87.6% to approximately $20.64 million from $11.00 million in 2021. Management reiterated expectations of 50%+ annual revenue growth in 2023.
Total operating expenses increased 49.3% to $20.72 million versus $13.87 million in 2021, primarily attributable to cost of goods sold (COGS) increasing 83.9% to $14.6 million. With COGS increasing less than sorbent product sales, the sorbent product gross margin expanded 143 basis points to 29.3% in 2022 from 27.9% in 2021. SG&A expenses increased only 3.1% to $6.12 million. Interest expense declined 44.3% to $1.57 million versus $2.82 million due to prior incentives to convert certain notes to stock as well as the restructuring of an unsecured note with AC Midwest Energy, LLC.
For 2022, ME2C Environmental reported a loss of $1.58 million (or $0.02 per diluted share) versus a reported loss from continuing operations of $4.23 million (or $0.05 per diluted share) in 2021. Adjusted EBITDA increased to $2.036 million versus $628,000 million in 2021. As of December 31, 2022, the company had working capital of $2.3 million, a significant improvement over the 7.3 million deficit at the end of 2021. Shares outstanding increased 14.1% during 2022 to 89,115,951 shares.
New Supply Business (3-Year Contract with Existing Licensee)
On April 18, 2023, ME2C Environmental announced a new 3-year supply contract with a coal-fired power plant operated by a significant coal-powered utility in the Midwest (a licensee since late 2021). The expected value of the supply business is approximately $9.0 million over next three years. Management is working on expanding the product supply business to encompass other coal-fired power plants within the fleet of this Midwest utility.
Patent Litigation Strategy
In November 2018, ME2C Environmental announced a patent strategy/licensing program in an effort to capture revenues from the unauthorized use of the company’s patented SEA Technology. Caldwell Cassady & Curry, P.C. (an Intellectual Property law firm based in Dallas, TX) was engaged, first to analyze and validate the company’s patent portfolio and second to seek fair compensation from many coal-fired utilities, particularly those that had adopted the enhancement of sorbent with a halide-based substance. Initially, Caldwell Cassady & Curry attempted to resolve the cases of alleged patent infringement by offering the utilities the option of either entering a licensing agreement or a sorbent supply contract with ME2C Environmental.
Despite challenges from the refined coal defendants, court rulings have allowed ME2C to proceed against a certain number of significant refined coal entities (now numbering 24). These IRC Section 45 tax credits were made available by the American Jobs Creation Act of 2004. The fact discovery portion of the litigation against the refined coal entities concluded in September 2022.
The defendants have moved to dismiss multiple times. Each motion has been denied. Most recently, on January 21, 2023, the Magistrate Judge ruled that ME2C’s allegation of the “active step element of induced infringement” was sufficiently pleaded, and therefore, the motion to dismiss was denied. The trial by jury date is currently scheduled for November 2023.
The resolution of the current litigation against certain refined coal entities could result in a range of possible outcomes from the dismissal of the case to a significant award of compensatory damages by the jury. There is also a myriad of other potential results, including, but limited to, a negotiated settlement prior to trial, an adverse jury verdict for ME2C or a court victory with a de minimis award.
Management is confident that the company will prevail in claiming its rightful share of the value created through the use of the company’s SEA Technology by refined coal operators that generated IRC Section 45 tax credits. Furthermore, management has indicated that about 29 power plants with multiple refined coal-fired EGUs continue to use the company’s patented technologies without a license. As the litigation moves forward and is ultimately settled, management is hopeful that these coal-fired utilities will seek license agreements and/or sorbent supply contracts.
Conditional Approval to List on TSX Venture Exchange
On April 24, 2023, ME2C Environmental announced that it has received conditional approval to list its common shares on the TSX Venture Exchange (TSX-V). The listing is subject to fulfilling certain listing requirements. Management expects to be listed on the TSX-V under the ticker symbol: MEEC.
Conclusion
ME2C Environmental began to generate double-digit increasing revenues in 2021 and is expected to be profitable in 2023 through its patent enforcement of its mercury emissions SEA technology. Furthermore, ongoing patent litigation against refined coal entities could result in a significant financial windfall. Management is pursuing research in chemisorption technology (the company’s core competency) for applications related to Rare Earth Element (REE) extraction, coal ash cleanup and wastewater remediation.
▪ ME2C began to generate increasing revenues from its mercury emissions SEA technology as a result of management patent-litigation strategy.
▪ Management’s patent litigation strategy is generating significant top-line growth from sorbent product contracts and licensing fees, both of which are enhancing the company’s profitability.
▪ Litigation against certain refined coal entities is progressing and could result in a significant settlement for damages, if proven successful.
▪ Management has no plans to seek capital through the issuance of equity for the foreseeable future. Furthermore, management negotiated the option to buy back a significant number of shares (up to 7.5 million shares at $0.50 per share) from AC Midwest Energy LLC (an affiliate of Alterna Capital Partners).
▪ Reduction of interest expense through the
• elimination of all convertible debt.
• execution of debt repayment agreement with Alterna Capital that pushes all debt payments (on both secured & unsecured notes) out three years
• reduction of interest rate on the secured note from 15% to 9%
Our indicated share price target is based on market-based comparative analysis that utilizes the valuation metric of Price/Sales. Utilizing a first quartile industry P/S ratio of 4.78 on TTM sales, our share price target is $1.10.
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