MEEC: ME2C Environmental began trading on the TSX-V in July. First half revenues impacted by lower sorbent sales. Patent protection trial date set for mid-November 2023; potential for significant positive event.
OTC:MEEC
READ THE FULL MEEC RESEARCH REPORT
2022 was a transitional year for ME2C Environmental (OTC:MEEC) as annual revenues rebounded to over $20 million on increased product (sorbent) deliveries with the second quarter of 2022 being the upward inflection point. 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. Despite lower sales in first half of 2023 due to scheduled coal utility plant shutdowns and seasonal lower demand, 12-month trailing revenues remained above $20 million and the gross margin on sorbent sales continues to expand.
ME2C Environmental’s financial position improved as a consequence of the upswing in the core business (driven by management’s patent litigation strategy), along with the restructuring of debt through multiple initiatives, including the extension of maturity and reduced interest rates on both secured & unsecured debt.
2Q 2023 Financial Results
On August 17, 2023, ME2C Environmental reported 2Q financial results. Total revenues decreased 19.8% in 2022 from $5.13 million in 2Q 2022 to $4.11 million in the latest reported quarter as mercury control (sorbent) product sales declined 18.3% to approximately $3.915 million from $4.491 million in last year’s comparable quarter due to scheduled coal utility plant shutdowns coupled with seasonal lower demand.
Management continues to expect to sign additional licensees in 2023 due to ongoing patent litigation efforts, which is expect to have a significant event this fall when the trial is scheduled to begin. In the meantime, product supply revenues should increase during the second half with the third and fourth quarters traditionally being the strongest.
Total operating expenses decreased 8.5% to $2.65 million versus $4.82 million as cost of goods sold (COGS) decreased 21.2% to $2.65 million due to lower sorbent sales . With COGS decreasing mores than sorbent product sales, the sorbent product gross margin continues to expand, this time by 110 basis points to 35.5% from 34.4% in second quarter of 2022. SG&A expenses increased 20.7% to $1.76 million as legal fees from the patent litigation effort increased. Interest expense declined 32.6% to $339,444 versus $503,887, primarily due to the restructuring of an unsecured note with AC Midwest Energy, LLC.
For the second quarter of 2023, ME2C Environmental reported a loss of $764,470 (or $0.01 per diluted share) versus a reported loss from continuing operations of $356,667 (or $0.00 per diluted share) in the comparable quarter last year. Adjusted EBITDA fir 2Q 2023 was approximately $252,000. As of June 30, 2023, the company had working capital of $1.69 million. Thus far during 2023, shares outstanding have increased only 1.3% to 94,267,296 shares.
MEEC Now Trading on TSX Venture Exchange
In July 2023, ME2C Environmental received final approval to list its common shares on the TSX Venture Exchange (TSX-V). The company’s shares began trading on the TSX-V on July 10, 2023, under the ticker symbol MEEC. Independent Trading Group, Inc. was retained as a market maker. Currently, the average 30-day daily trading volume is approximately 9,000 shares.
2023 Supply Contract Announcements
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, 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 increase significantly, along with licensing revenues, driven by management’s litigation strategy.
Litigation against certain refined coal entities is progressing with the next trial date set for mid-November 2023. If management’s patent litigation strategy is successful, there is a wide range of possible outcomes, some of which could significantly change the fundamental outlook for the company, including the impetus to generate significant top-line growth from sorbent product contracts and licensing fees. Other potential successful outcomes might be compensation from a positive verdict or from a negotiated settlement, either one of which has the possibility to be transformational for the company.
Synopsis of Company’s Operating Fundamentals
Management’s Three Pillar Strategy
Management is embarked on a Three Pillar Strategy composed of
1) growing sorbent product sales and licensing fees by extending the enforcement of the company’s successful patent litigation effort against coal-fired EGUs,
2) further protecting the company’s patented technology by securing compensation from refined coal operators that allegedly have utilized SEA® Technology to generate billions of dollars in tax credits afforded by American Jobs Act of 2004 and
3) pursuing new technologies through product development, particularly the extraction of Rare Earth Elements, along with coal ash cleanup and wastewater/ash pond remediation.
Core Mercury Emissions Capture Business
ME2C Environmental tend to be 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.
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.
Furthermore, patent infringement litigation against refined coal entities is pending with a trial by jury date set for November 2023.
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 Operational 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.
Financial Initiatives
Over the last four years, management has been financially restructured. Interest expense has been reduced through 1) the elimination of all convertible debt, 2) the execution of debt repayment agreement with Alterna Capital that pushes all debt payments (on both secured & unsecured notes) out three years (through 2025) and 3) the reduction of interest rate on the secured note from 15% to 9%
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).
Valuation
Our indicated share price target is based on market-based comparative analysis that utilizes the valuation metric of Price/Sales. Utilizing a mid-first quartile industry P/S ratio of 4.68 on TTM sales, our share price target is $1.09.
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