By Steven Ralston, CFA
READ THE FULL MEEC RESEARCH REPORT
Management has initiated a patent strategy in order to monetize aspects of SEA Technology that have been employed at over 100 EGUs. An IP (Intellectual Property) law firm has been retained and the company is pursuing the implementation of a licensing model that could provide significant top-line sorbent/additive sales and/or licensing revenues, both of which would enhance the company’s top and bottom lines.
Midwest Energy Emissions (MEEC) has meaningful potential in Europe beginning in 2019 as a result of mercury control standards at coal-fired EGUs being fully enforced across Europe by mid-2020 with installation of equipment & testing starting in 2019. The company has entered into a licensing agreement with Cabot Corp. which should significantly reduce the barriers to entry since Cabot (with its established relationships) will be the sales point contact.
Third quarter results are still being impacted lower sorbent sales due to a variety of factors, including the shutdown of some EGUs as a result of competitive disadvantages relative to other EGUs, the optimization efforts with the company’s existing customers and lower capacity factors at some customer sites.
Midwest Energy Emissions is pursuing a licensing model to benefit from its patented SEA™ Technology patent portfolio. As coal-fired EGUs sought to become compliant with MATS, many (the company believes over 100) have adopted aspects of the patented methods of SEA technology, particularly the enhancement of sorbent with a halide-based substance. Management has engaged Caldwell Cassady & Curry PC to analyze and validate the company’s patent portfolio. As an IP (Intellectual Property) law firm, Caldwell Cassady & Curry will lead the effort to seek fair compensation. Potential resolutions include a licensing program with Midwest Energy Emissions or a supply contract by which Midwest would become the provider of the sorbent. A relationship with Midwest Energy Emissions also would provide certain other benefits. With a sophisticated understanding of mercury interactions with flue gas constituents and the knowledge of modifying the composition of sorbent based on coal type and the plant configuration, Midwest Energy has the expertise to further improve the operational efficiencies of these coal-fired systems.
View Exhibit I
European Potential Beginning in 2019
Midwest Energy Emissions has meaningful potential in Europe beginning in 2019 as a result of mercury control standards at coal-fired EGUs being fully enforced across Europe by mid-2020 with installation of equipment & testing starting in 2019. The company entered into a multi‐year European licensing agreement with Cabot Corp. to develop and market mercury removal solutions for coal-fired EGUs in Europe. In Europe, the barriers to entry should be significantly reduced since Cabot Corp. (with its established relationships) will be the sales point contact.
On April 17, 2018, Midwest Energy Emissions announced that the company has entered into a multi‐year European licensing agreement with Cabot Corp. 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. According to Midwest Energy Emissions, Europe’s coal market includes a total of 1,384 coal‐fired EGUs with 914 of those located in Eastern Europe.
View Exhibit II
Given the opportunities in Europe for Midwest Energy’s mercury emissions control technologies, management (John Pavlish, Senior VP and Chief Technology Officer) made a presentation as a featured speaker at the 13th Annual MEC Workshop in Krakow, Poland. The launch of the Midwest Energy Emissions-Cabot licensing arrangement in the European Union was jointly introduced at this meeting of international emission control experts. Midwest Energy Emissions has begun testing with major utilities across multiple EU member nations.
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. In Europe, under the Industrial Emissions Directive (IED) of 2010, a BAT (Best Available Technique) Reference (aka BREF) document has been published (the most recent in 2017) to cover the required emission prevention activities on installations rated 50 MW or more. The standards are expected to be fully in force across Europe by mid-2020 with demonstration activity beginning in 2018, installation of equipment & testing starting in 2019 and continuing until full implementation in mid-2020.
Third Quarter 2018 Financial Results
On November 13, 2018, Midwest Energy Emissions reported results for the third quarter ending September 30, 2018. The company reported revenues of $4,209,092 down 50.2% from $8,447,967 reported in comparable quarter last year. The revenue decline was primarily driven by a 49.1% decline in product (sorbent) deliveries due to a variety of factors, including the shutdown of some EGUs as a result of competitive disadvantages relative to other EGUs, the optimization efforts with the company’s existing customers and lower capacity factors at some customer sites.
Total operating expenses decreased 41.0% to $4.37 million versus $7.42 million in the third quarter of 2017, primarily attributable to the decline in sorbent sales. Cost of goods sold decreased 45.4% to $3.0 million. The direct product gross margin declined from 31.8% to 26.8%.
The company reported a net loss of $635,962 (or $0.01 per diluted share) versus a profit of $813,221 (or $0.01 per diluted share) in the third quarter of 2017. The net loss in the third quarter of 2018 was primarily due to the decline in sorbent sales.
Adjusted EBITDA was $97,000 compared to a positive $1,572,000 in the third quarter of 2017. As of September 30, 2018, working capital was a negative $3,580,770, which improved sequentially from negative $3,869,263 on June 30, 2018. Shares outstanding remained stable at 76,246,113 shares for the last three quarters.
Despite the challenges reflected in the financial results reported for the first nine months of 2018, Midwest Energy Emissions is well positioned to benefit from the reduction of mercury emissions initiatives in the U.S, Canada and Europe. It is important to remember that:
• Midwest Energy Emissions continues to generate revenues from its operationally-effective and cost-effective mercury emissions SEA Technology.
• The company recently announced two multi-million dollar contracts
∙ A 3-year contract with its largest customer was renewed in October 2018
∙ A current customer expanded its contract to extent to two additional EGUs
• Despite recent challenges, the company has not issued any common shares.
• Midwest Energy is embarking upon a patent strategy that could enhance the company’s revenues and profitability through incremental sorbent/additive sales and/or licensing revenues.
• The company has meaningful potential in Europe beginning in 2019. The licensing agreement with Cabot Corp profoundly improves the competitiveness of the European initiative.
We are optimistic the ultimate success of Midwest Energy Emissions. The company should experience increases in revenues over the next few years as the coal-fired plants (both in North America and Europe) utilize Midwest Energy’s SEA Technology to control mercury emissions.
Comparable pollution control and value-added specialty chemical companies trade in a wide P/S valuation range between 4.21 and 0.89. Our indicated share price target is based on market-based comparative analysis that utilizes the valuation metric of Price/Sales. Utilizing a mid-second quartile industry average P/S ratio of 2.78 on TTM sales through 3Q-2018 of $14.47 million, our share price target is $0.53.
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By Steven Ralston, CFA