Midwest Energy Emissions' (MEEC) CEO Richard MacPherson on Q2 2016 Results - Earnings Call Transcript

| About: Midwest Energy (MEEC)

Midwest Energy Emissions Corp. (OTCQB:MEEC) Q2 2016 Earnings Conference Call August 8, 2016 11:30 AM ET

Executives

Richard MacPherson - President and CEO

Rich Gross - CFO

Analysts

Steven Ralston - Zacks

Jim McIlree - Chardan Capital

Dallas Salazar - Atlas Consulting

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Midwest Energy Emissions Corp. Second Quarter 2016 Earnings Conference Call. During, today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions] This conference is being recorded today, August 08, 2016, and the earnings press release accompanying this conference call was issued earlier this morning.

On the call today is ME2C’s President and CEO, Richard MacPherson; and Chief Financial Officer, Rich Gross.

Before we get started, I will read a disclaimer about forward-looking statements. This conference call may contain in addition to historical information, forward-looking statements within the meaning of the Federal Securities laws regarding Midwest Energy Emissions Corp. Forward-looking statements include statements about plans, objectives, goals, strategies, future events of performance and underlying assumptions and other statements that are different than historical facts.

Forward-looking statements are generally identified by using the words such as "anticipate," "believe," "plan," "expect," "intend," "will," and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances.

Investors are cautioned that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the statements made. Matters that may cause actual results to differ materially from those in the forward-looking statements include, among other factors, the gain or loss of a major customer, change in environmental regulations, disruption in supply of materials, capacity factor fluctuations of power plant operations and power demands, a significant change in general economic conditions in any of the regions where our customer utilities might experience significant changes in electric demand, a significant disruption in the supply of coal to our customer units, the loss of key management personnel, availability of capital and any major litigation regarding the Company.

In addition, this conference call contains time-sensitive information that reflects management’s best analysis only as of the date of this conference call. The Company does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of the conference call. Further information concerning issues that could materially affect financial performance related to forward-looking statements contained in this presentation can be found in the Company’s periodic filings with the Securities and Exchange Commission.

At this time, I would like to turn the conference over to Richard MacPherson, the Company’s President and CEO. Sir, the floor is yours.

Richard MacPherson

Thank you James. And thank you everybody for joining us today. We are very pleased with our significant progress to-date and what’s evidenced by our record revenues this last quarter of $9.4 million. In fact, our revenues for the first six months of 2016, exceeded our revenues for the full year 2015. And this record-setting quarter is not only a milestone in terms of significant revenue generation, but it also serves as the validation that our customers are choosing to utilize our technology and our team over the competition. But before going further, I would like to give you a brief overview of our Company for those of you who maybe joining us for the first time.

Midwest Energy captures mercury emissions from coal-fired power plants all across North America. This is relevant due to the EPA mandate which requires all U.S. based coal and oil-fired electric power units, generating 25 megawatts and higher to reduce the mercury emissions by approximately 90%. We help capture mercury emissions using our patented SEA technology, which is short for Sorbent Enhancement Additive technology. The SEA technology consists of a piece of low cost proprietary equipment which we install for each boiler as well as ongoing supply of our special blend of the SEA and sorbent materials.

Another important component in addition to our SEA technology is our consulting services which we provide by leveraging our team of tenured highly trained mercury control experts, which we feel are the best in the industry. So, maybe I can walk you through a typical customer engagement.

First, our team evaluates coal-fired plant to determine exactly what’s needed based on the type of boiler as well as the coal being used. This includes fuel analysis, optimizing the design of injection systems, stack emissions testing and many other things. Our technical knowhow is a significant competitive advantage for us, and we’ve retained some of the brightest coal experts in the country who can determine exactly what’s needed, based on the specific situations that comply with MATS. So, when they go in and install a piece of our patented equipment on the front-end, that has a CapEx of about $250,000 per boiler. And from there, we supply our customers with a proprietary blend of products on an ongoing basis. The equipment is a one-time fee, but the supply is ongoing, which provides an element of recurring revenue to our model, which is a standard razor-razorblade model.

Again, having a technical team in place superior to the competitors in conjunction with the only technology-driven solution in the mercury control market that we guarantee to get people in MATS compliance gives us a significant competitive advantage.

Now, one of the key relationships being a small firm is the one that we have with the EERC, the Energy Environment Research Center. All of our technology is protected by a robust patent portfolio, which consists of over 30 issued and pending patents that cover U.S., Canada and most of Europe and Asia. And these technologies come from the EERC, which is one of the oldest research facilities for coal in the country with over at times 300 people working in the engineering and scientific field. They’ve developed the best technologies available for mercury control today, which we have enhancement built on for many years as we started and have been fully commercial since late 2010 or late 2011.

The technology itself now has over 20 years of development and over 65 million documented dollars invested in its development. We have several core individuals such as our CTO, John Pavlish, one of the inventors, along with Ed Olson, another one of the primary inventors of the technology. And both have since joined our team on a full time basis and brought one of their predecessors [ph] Dr. Nick Lentz with them as well. So, we have a very confident group in the field in order to take our technology to the world.

In 2009, we formalized a license agreement to utilize this full patent portfolio and fully commercialize the technology. We’ve been paying $25,000 a month in royalties. However, we have the option to acquire all of the patent, all of the pending patent and the full knowhow of the EERC in this area for a one-time price of $2.5 million plus 925,000 shares. And it’s our plan to acquire this asset in the future, as we go forward from proceeds of operation.

So, moving to the market, basically the market we play in is very huge, approximately $2.5 billion in just the mercury side of the MATS program. The MATS program, which is short for the Mercury and Air Toxics Standards is an EPA mandate that requires all U.S.-based coal and oil-fired power plants, to again, as I mentioned, capture about 90% of the mercury, if they’re 25 megawatts or bigger. This went into full year effect in April of 2016 thus providing a significant tailwind for our patented mercury technology at this time. Power plants must be either meet the capture rate or derate their boiler by dialing it back to a point where they can meet the compliance rate, if there are to operate today. This is very significant to us as a technology Company, and our capacity to be able to get people be into compliance is one that we guarantee on overall market basis.

We have a global opportunity, but that’s something that we expect to grow in years to come. For the next two to three years, we’re staying focused on North America. We see that as the opportunity that’s in front of us right now. So, our current base of customers and future business relies on fact that the -- technology that we have has been demonstrated successfully and commercially operable for the last six years. For our customers, we guaranty to get any boiler under MATS compliance under reasonable conditions; and for boilers that can’t get into compliance without derating, we are able to provide a system that mostly likely will allow them to run at full capacity.

The market opportunity is approximately 800 units at this time in North America, many of which has have an expensive backend system in place. And we have the opportunity now to optimize those units and also give them at least 30% cost improvement over what they are paying now along with the optimization benefits as using much less material to get much better results.

We believe that this, our overhanging fruit, is approximately 10% to 15% of those boilers or 80 or 120 units that are ridding our sweet spot, they are experiencing difficulties or more expense than expected to be able to get into compliance. And our technology is currently being utilized at 20 units. However, we believe we will not only win new customers but be able to successfully penetrate the fleet of our current customer base for which we are currently contracted. So, what we’ve done folks is gone after the units that the fleets are having trouble with, gotten them into compliance without derating, and now are working to push forward into the optimization of the rest of those fleet. This alone represents a 60 to 90-boiler opportunity.

In the first quarter of 2016, we only had four boilers under contract, which explains our significant revenue ramp up in the second quarter, whereas up in June month we had 19 units, up and running on the contract. So, as noted, our pipeline is the most significant it’s been in our Company’s history, at this time. And we hope to announce additional contract wins as the year progresses, which will lead to long-term revenue that is essentially reoccurring in nature. And so, we feel very, very good about what we’ve spoken to with regards to the expected revenues for this year of $30 million and our ability to be able to grow beyond that through the development of further clients.

So, with regards to initiatives, our key initiative ongoing now is that will be with this base of 20 plants across the country, having them operate flawlessly as they are is the key to us to be able to develop us as a younger Company into this industry of utility market. Because as we prove ourselves day in, day out as to being dependable, so goes our ability to be able to back up the results that we generate and spreads road to fleet in the optimization of the boilers within the fleets that we are already now in. Any units that have a challenge to get to MATS compliance, experience extra costs, difficulties or derating of the boiler, sustaining compliance can use our technologies to accomplish the goals and maintain compliance at peak performance. This is hugely important to the utility industry, and it’s one that we are proud that we feel very comfortable take into each and every opportunity.

So, I guess our main challenge at this point is just adding enough of the qualified people that we need in the field to be able to carry out the demonstrations and show these utilities that we can fix the problems. So, that’s what we are doing now, adding the people and the equipment at a rapid clip in order to be able to stay ahead of the demand that we are now satisfying through our pipeline.

We’re also continuing to carry out research and development efforts, both with the EERC, but most importantly in-field in-situ as we work with our clientele and encounter new and different challenges and opportunities. We have the technical ability and knowhow to be able to augment our solutions, so that they meet any challenges that are put forth. This has been a huge advantage of ours over the traditional chemical companies that take a off the shelf branded approach to trying to satisfy the problems the clients are running into and our gains are coming at the competitors’ expense, because of this ability be able to flex and create new products on the fly as we go. We’ll be speaking more to that as we go further with announcements down the road, once we specifically identify these to the marketplace. But for now, suffice to say, our technical capacity is giving us a step up on everybody else in satisfying the challenges that a significant part of the industry’s facing, now that they’ve just had to come into compliance.

Another initiative, as I touched on earlier, is that we would like to acquire the full patent portfolio from the EERC and that will add nicely to our asset base as a firm. We have another initiative that we would like to accomplish in a not too distant future, which is to uplift to a major exchange. And we think that that will help the shareholders in general be able to realize the value of their investments.

So, at this points folks, what I’d like to do is turn the call over to my CFO, Rich Gross, to go through some of the financial details for the quarter before I wrap up the call, and then we can get open the call up for some Q&A. Rich?

Rich Gross

Thanks Rick. As we’ve mentioned before, we generate our revenues from three primary sources, the first is demonstration and consulting services when we go out into the field, both to new potential customers as well as the once we have under contract; the second area, our equipment sales, depending on what we’re going to sell to the customer to get -- to use for the processes that we’re selling to them; and the third, the primary is the product sales, which are typically recurring in nature and recognized as we provide an ongoing supply of the proprietary material for their use in the mercury capture.

For the second quarter of 2016, total revenues increased 248% to $9.4 million, compared to $2.7 million in the same year ago quarter. For this quarter, 73% of the revenues came from product sales, 25% were from equipment installations and 2% were from other services we provided. This compared to 29% from product sales, 67% in equipment installations and 4% for other services in Q2 2015. Going forward, most of the sales will be from product sales. Sequentially, this represents an increase of 178% when compared to the $3.4 million in the first quarter of 2016. The growth is primarily due to having now 20 fully operational MATS complaint generating units utilizing ME2C’s technologies as of the end of the quarter, compared to only four fully operationally EGUs in the first quarter of this year.

Total revenues for the six months ended June 30, 2016, were $12.8 million, an increase of 334% when compared to the $2.9 million for the first half of 2015. Costs and expenses were $8.9 million and $3.4 million for the three months ended June 30, 2016 and 2015 respectively. The increase in costs is primarily associated with the significant increase in costs as a result of the aforementioned revenue growth.

Operating income for the second quarter of 2016 was $0.4 million, compared to an operating loss of $0.7 million in the second quarter of 2015. Operating income for the six months ended June 30, 2016, was $0.1 million, compared to an operating loss of $1.9 million in the first half of 2015. The increase in revenues helped produce operating income for the first time in the Company’s history in the second quarter of 2016.

We track adjusted EBITDA which we define in our fillings and in the second quarter of 2016, it totaled $1 million, compared to $0.4 million loss in the same year-ago quarter. This increase was primarily due to the increase in revenues and improved gross margin, decreased interest expenses, mostly non-cash from the period before.

Net loss in the second quarter of 2016 was $8.2 million, or negative $0.17 per diluted share, compared to net income of $0.6 million, or $0.01 per diluted share in the second quarter of 2015. This decrease was primarily due to a gain on the change -- actually a loss on the change value of the warrant liability that we have in the current year and there was a gain in the change in value in the prior year.

On June 30th, we had cash and cash equivalents of $0.6 million, compared to $1.1 million at December 31, 2015, and we are reiterating our full year guidance, which was provided on July 12th. We expect revenues of at least $30 million, an increase of at least 137% compared to the revenues of $12.6 million for the full year ended December 31, 2015. This projection is based on current power demand forecasts and plant projections. Knowing this, we are projecting solid free cash flow in the second half of the year.

And with that, I’ll turn it back over to Rick.

Richard MacPherson

Rich, thank you. Folks, overall, I’m very pleased with what we achieved during the first half of 2016 as well as the progress we’ve made with regards to our future. We put ourselves in a great position. We’re certainly excited about the remainder of 2016. These challenged units that are coming to light across the country that are presently being serviced by the major chemical companies are a huge opportunity that we are getting very, very busy with and expect to be able to report success on as we go forward.

So, I’d like to open up the lines now for questions and answers. James, could you please get that started?

Question-and-Answer Session

Operator

Thank you, sir. We’ll now begin the question-and-answer session. [Operator Instructions]. And we’ll take our first quarter from Steven Ralston with Zacks.

Steven Ralston

[Technical difficulty] on your quarter, especially the milestone of achieving operating profit for the first time. Looking at the operating margin, I calculate it to be 4.5%. And now that you’re seeing these units basically operating on a full time basis, can you tell me what you are seeing and how you expect your operating margin to grow?

Richard MacPherson

Good question. Thanks so much. At this point, what you’re seeing in the last quarters is a combination in terms of revenue of equipment sales and product sales. Going forward, we very much expect 95% of the revenue to be coming from material sales, which provide us with significant gross margins. What I’ll do is turn it over to Rich to give us an exact prediction of what we see in terms of operating margins going forward. Rich?

Rich Gross

In the second quarter, as well as the revenue mix that I described before, we also did not -- the full 20 units were not all on line during the course of the entire quarter. We anticipate that being happening here in the third quarter. And those margins will cover much more of the overhead that we have in place. So, I think, going forward when we’re in the MATS world, beating the proprietary chemicals that are -- recurring the customers need, we would target operating income going towards double figures, low, probably low

Steven Ralston

Low-double-digits. Yes.

Rich Gross

Yes. Low-double-digits.

Steven Ralston

Okay. And just another question, you sort of indicated that now that we’ve gotten into the real world and we see the deficiencies in these challenged units, can you give us a little more color on the level of interest of these demonstrations? Are your teams being overwhelmed by potential prospects or -- just give me a little color on this?

Richard MacPherson

Sure. What I can say is that there is a great deal of demand that there is a significant amount of opportunity that’s opened up that we fully expected and predicted as things came into full compliance, and that we are addressing it at full capacity right now. One of the challenges as a growing company is not to grow too fast. We’re trying to keep our teams maxed, but also make sure that we operate flawlessly in the field with the results that we know we can generate. So, with the balance, I think the projections we’re making are very solid. And based on our ability to be able to execute on the demand, I very much expect the growth to be significant but controlled. And we are at this point being able to hire the people that we need to execute properly. We have the infrastructure in place or going in place to be able to meet the growing demand. And one of the huge advantages is that the majority of the hardware that’s required, which took years to get in place, is now in place. So,, we very simply can go in and optimize these systems and change the way they operate versus wholesale change out what they were doing. So, our ability to be able to optimize and improve and again that utility as a client is much more streamlined now than it would have been in the initial stages, had they not already been on a system. So, the answer is, we feel very good about executing, and we do have the people and the systems in place to do so.

Operator

Next, we will hear from Jim McIlree with Chardan Capital.

Jim McIlree

Thank you. Good morning. Can you break down the gross margin of the equipment versus products?

Rich Gross

Sure, this is Rich Gross. The large revenue item for equipment sales in the second quarter was at no margin that was subcontracted out to get accomplished; it was $2.4 million project. So, all of the margin in effect in the current quarter was from the product sales. Going forward,, on a -- we are not going to give -- it would be hard for you to do a project similar to the one that was completed in the second quarter. We would target a 10% to 15% margin on the equipment project that will be forward and that will be mostly significantly smaller in nature. For the second quarter, our margin on product on a direct basis for the delivered product buying and getting it there was over 35% and for the second our overhead allocation to that margin on the product was 11%.

Jim McIlree

Okay, great. And then, do you have -- I am sure you do have a projection of how many units you think you will be operating by the end of this year and end of the next. Can you either share that or give some indication about how much you think the number of units can grow by year-end and also by the end of next year?

Richard MacPherson

We have yet to speak to market about that plan to do so as we go forward. The revenue projection that we have made this year of $30 million, I think is sound. The number of units that we use to get there may vary from what we expect today and what we end up with. It really comes down to the difference between new clients and converted clients from the fleets of the present clientele that we have. So, it’s difficult to speak to the actual number of units. However, we do still feel very strongly about the $30 million number and the ability to be able to double that in the next year with regards to sales. The number of units per se, may vary significantly, depending on the fleets that we get to. Some fleets have several 500-megawatt units whereas you can find other fleets with a number of 100-megawatt units. So, the number of units per se will vary. So what we try to stay focused on is the topline of revenue. So, I guess I would just want to leave it up that with regards to that projection.

Jim McIlree

And you talked towards the number of units that you are serving. Can you also -- to the amount of megawatts that you are serving or the average or the medium size of these units that are serviced right now?

Richard MacPherson

Sure. I think what I’ll -- I’d rather, again, address it in terms of average size. There is some sensitivities in the industry with regards to naming, which boilers are using which technology from the utility side. So, typically our size of boiler would be about 200-megawatt boiler. But we do have boilers from 750 megawatts down to 75 megawatts in the mix. But typically, it would be -- the typical boiler that we would run into in the field is a couple of hundred. We are trending higher in that on average right now, but I would expect that to reduce as we go forward.

Operator

[Operator Instructions] We’ll now hear from Dallas Salazar with Atlas Consulting.

Dallas Salazar

Hi guys, congrats again. I was on the -- I think you guys had a preliminary demonstration that I was on, so a lot of the stuff with -- it’s good to hear a reiteration. I just had a few questions regarding R&D in general, which it seems like that’s getting mentioned more and more in press releases. Can you elaborate how that ranks when it comes to capital allocation? And then, also, I guess, is R&D something that it [ph] wants to be in the ramp or to just maintain sort of regardless of the pace of the potential technology deployment here? I guess, just maybe another way, if it [ph] could ramp growth at the expense of R&D, I mean is that something that management would recommend?

Richard MacPherson

Great questions, thanks so much Dallas. And it really get back to the core of our Company and where are positioned in this industry. As the lead technology Company amidst a few chemical giants, what we’re able to do is take the expertise that we have in the field and utilize that in the field. And what we do is we work closely with the client base that we’ve got to be able to try to work in options that we think will work on an ongoing basis 24x7 with the clientele that we’ve developed. So that what we do is develop our new products and approaches in the field in-situ as part of our ongoing business. And that does a couple of things, one, it’s real world data, real world solutions that are immediately commercialized. And secondly, it reduces the cost a little or nothing, because we’re in the field, we have just material costs at that point in order to execute on a hypothesis or a test that we think could work. And we get real data back in real time. So, this approach has allowed us due to our technology advantage over the others to be able to move forward quickly, decisively with real world solutions as we go forward. And so, yes is the answer. R&D is very core to our development and our success, but it’s not a huge capital cost to us, because we’ve integrated that as part of our philosophy as a Company.

Dallas Salazar

I appreciate that, and actually that sort of natural segues into the follow-up question I had on R&D, which was -- and that was something I think you mentioned prior sort as of tailoring the R&D to be most effective for the markets you are in. The question I would have is directionally speaking, is any of the R&D spend being allocated to anything that maybe is to address future markets or markets that you are not in or is any of it, sort of directionally, without getting specific -- I realize you have to be competitive -- but for comparative reasons you have to kind of keep things discreet, but is anything directionally focused on markets that you are not in currently?

Richard MacPherson

Good question. All I can say is we have such an opportunity in front of us at this point in the mercury market that we have our head down and are focused on maximizing the results in that area. But at the same time, I can tell you, we have two clients at this point that we sell products to for reasons totally other than capturing mercury. And we continue to be able to see opportunities and expand our offerings as we go forward without interrupting our main goal of capturing mercury better than anybody else. But, yes, we are expanding but we are staying focused, so we are not making a lot of noise about those successes that we are having. And we will continue to do that.

Dallas Salazar

Sure, and I can appreciate that. Just the last question here, and this I -- I realize, I am sure, it’s going to be quite a bit unusual. But, I am reviewing the enterprise here; I’ve talked to few people in the field that the technology. And so, my question is I guess to have you play the other side if the table, why would have customer not take your technology. I guess what I am trying to figure out is within your you -- you guys refer to it as a sweet spot, so within that sweet spot, I am trying to look out 12 months, 18 months ahead and not be overly bullish or sensational as, in my own analysis of the enterprise here,, but I am just looking at it. And I am trying to come a reason why somebody would not select your technology. Is it a cost issue, could be an installation issue, is there a logistical structure that you guys don’t work well with because I know these plants are our uniform? Can you walk us through that in any way you can? And if you are saying hey, we haven’t really run into that, then I’d appreciate that as well, but I’ll take the answer, I’ll hop back in the queue, but that’s something that I sort of would like to hear on because frankly I mean the technology looks like it’s good to go and just about all situation. So, thank you guys for taking the question.

Richard MacPherson

Thank you for posing it. Yes, it is a good question. I am sure it’s on everybody’s mind. The bottom line is our technology works we think better than anybody else’s in all situations, not just these 80 to 120 boilers that we are focused on. And the reality is folks, the law just basically came into full operation in April of this year, and this is August. And in utility world, that’s just a very, very short period of time. So, you have to look at it in terms of all of these boilers have installed, the huge system, multimillion dollar system that they’ve taken perhaps years to get in place. And when they have been called on to operate, perhaps one out of a series of a half dozen is not meeting the grades. That’s not cause for them to throw it all out, it’s cause for them to seek new solutions, and the first place they would go would be back to the supplier or the major chemical that installed and try to work out the problems. But in the meantime, they are having to derate those boilers or paying a higher expense to operate them, if not having to derate in order to find the solution. So it’s like they give up on their situation immediately, it takes months and moths and moths for them to realize they can’t find a solution with the chemical provider they have and then to reach out and try find options to solve that problem. And that’s where come into play. So, a lot of the boilers that we’ve tested on that we know we can do better and we’ve tested on 50, those kind of situations are coming back to us, where we knew they were going to have a situation that they didn’t expect. And just getting out there to the market as a whole to be able to indicate that we have a solution to these problems that they’re running into takes time.

So, I expect over the next 18 months for us to be able to reach tangibly and speak with and perhaps demonstrate how we can improve their situation and make the changes of those boilers to our system over that time. It will take time. But, we are extremely buys in that effort right now and see it continuing as we go forward. There is no reason they are not doing business with us other than that we just haven’t gotten to them with the demonstrable option yet.

Operator

Mr. Salazar, do you have anything further?

Dallas Salazar

No, that’s my final question. I appreciate the answer, guys. Thank you.

Operator

That will conclude our question-and-answer session. I will now turn the call over to management for any additional or closing remarks.

Richard MacPherson

Well, folks, thanks again, very much appreciate the following, as it’s grown over these last few months, as we’ve brought the Midwest story to the market. We’re very excited about our future growth over the next 18 months in particular, expecting to be able to bring some great news to the market over these next six months and hope that you’ll continue to follow us as you have. Thank you very much for your time today. Thank you, James.

Operator

Thank you. And that does conclude today’s conference call. Thank you for your participation. You may now disconnect.

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