Midwest Energy Emissions Corp.
Q2 2021 Earnings Call Transcript

Published: 16 Aug 2021

[Operator:]

Good day and welcome to the ME2C Environmental Second Quarter 2021 Earnings Call. This conference is being recorded today, August 16, 2021 and the earnings press release accompanying this conference call was issued before this call today. On the call today is Richard MacPherson, President and CEO of ME2C and Jami Satterthwaite, CFO of ME2C. Before we get started, I will read the disclaimer about forward-looking statements. The conference call may contain in addition to historical information, forward-looking statements within the meanings of the federal securities laws regarding ME2C Environmental. Forward-looking statements include statements about plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are different than historical facts. Forward-looking statements are generally identified by using 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 forward-looking statements include, among other factors, the gain or loss of a major customer, change in environmental regulations, disruption and supply of materials, capacity factor fluctuations of power plant operations and power demands, a significant change in general economic conditions in any change of the regions where our customer’s utilities may experience significant changes in electric demand, significant disruption in the supply of coal to our customer’s units, 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 current events, information or circumstances that arise after the date of this 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 periodical filings with the Securities and Exchange Commission and we would also refer you to the company’s website for more supporting industry information. At this time, I would like to turn the call over to Richard MacPherson, Chief Executive Officer of ME2C Environmental. Sir, please go ahead.

[Richard MacPherson:]

Thank you, Danielle and thank you to everyone for joining us on today’s call. 2021 is shaping up to be a breakout year for ME2C Environmental as we continue to experience momentum with our monetization of the patented environmental technology. We worked diligently in the second quarter to make advancements across our operational and strategic priorities. Over the years, our emissions control technologies have provided a significant amount of value to the U.S. power industry by improving plant efficiencies and diminishing toxic emissions. Our solutions are being increasingly recognized as the best in the industry for these operational benefits as well as the significant cost efficiencies they provide. Most importantly, as a leading clean-tech enterprise, we are pleased to play an important role in addressing the critical climate related issues that we are facing as a global community. I will begin with an update on our multi-pronged litigation strategy, which progressed meaningfully in the second quarter. Before I discuss the progress with this strategy that we have achieved today, allow me to provide a brief background on why it was necessary to take this approach for those that are new to our story. So, our patented sorbent enhancing additive, or SEA technologies were created in the early 2000s as a revolutionary innovation for mercury emissions control. The industry had an incredible response to our proprietary process. In fact, we believe that currently about 44% of the coal-fired plants across the U.S. have adopted these technologies, making our SEA technology package, one of the most widely adopted emissions capture systems at work today in North America to improve our environment. However, we were largely removed from the commercial process of adoption and found ourselves competing against the very technologies that we invented with the utilities and suppliers of the materials that were used in these technologies. So with a robust patent portfolio, we pivoted our business strategy in late 2017 to initiate a litigation approach in order to defend the value of our intellectual property for our shareholders. And so we initiated a lawsuit in 2019 against four major utilities, also including number of key defendants in the refined coal program, refined coal is coal that has been treated with a chemical solution prior to being applied to the boiler and many sales utilities across the country use refined coal as our belief that that refined coal would not exist without our patented technology. In May, the U.S. District Court in Delaware issued a report in recommendation that this pending litigation should indeed be allowed to go forward and proceed against certain refined coal entities that we named in our 2019 lawsuit. So, the court’s recommendation significantly increases the upside potential for realizing the true value of our patented technologies, which have had a considerable impact on the annual $1 billion refined coal tax program. And we are working with exceptional legal counsel, the firm of Caldwell Cassady & Curry, a team with extensive experience in patent litigation. Under their legal guidance, we have taken a business-first approach to our engagement, with infringing parties, which means they are focused on securing supply side agreements with the utility customers, rather than pursuing just long-term litigation efforts. Our existing production facilities are able to handle in excess of $100 million in annual revenue of products and we believe that this approach that we are following will allow us to scale up our production over the next few years. Over the last year, we successfully signed agreements with 4 major coal-fired utilities to provide license agreements that would allow these utilities to continue using our patented process for mercury emissions capture. Our goal is to convert these and the many more utilities that we are in contact with to supply side customers. To that end, we recently secured a multiyear supply contract with one of those settled major utilities and entered – that had entered into a license agreement with us last year. And we believe we will continue to grow our supply business with other licensees in the coming months. Let me think about our new technologies efforts. Our core mercury emissions capture business continues to be the foundation of our business. However, we have evaluated on pursuing other verticals that we believe ME2C Environmental can provide substantial value due to our skill set in these areas. Earlier in the year, we announced our work with Dr. Scott Drummond focused on the development of new technologies to improve the processing of rare earth elements available from both coal mining and the coal-fired power industries in North America. This $13 billion annual global market for rare earth elements is a hyper growth segment that the private and public sectors of the U.S. have not yet capitalized on in EURs, EUFs, rare earth elements, or REEs are used in many industries, including high demand applications, such as electric vehicles, among others. Notably, all of the rare earth elements consumed in the U.S. are imported from other countries, 80% coming from China, which has hindered the U.S.’s potential for economic growth. Our country is rich in REEs, critical minerals that are found in mines, but also present in coal ash ponds, surrounding many coal-fired plants, both active and abandoned. In some cases, the coal ash can leach into the soil and water runoff, which is then called wastewater. There are more than 1,100 coal ash ponds in over 37 states across the U.S. and 200 sites are believed to have contaminated water. Under President Biden, the new EPA Director, Michael Regan recently announced stricter regulations that will be forthcoming to address wastewater remediation. And we believe that the coal ash cleanup is one of the largest environmental concerns currently facing the U.S. and the energy sector. We started in years ago on our new technologies and we will support the processing of rare minerals and earths either mined or extracted from coal ash, while removing these harmful contaminants from wastewater. Presently, the mining of REEs in the U.S. is very challenging, both from an economic and environmental perspective, with the administration leaning on importing the raw materials rather than developing the mining stock and materials because of those challenges. We aim to help in reversing that decision with our new technologies. Now, to aid in the advances of these technologies, we have retained Penn State University, a notable leader in this field to perform confirmation testing of our results today as we seek to commercialize these technologies. The testing by Penn State will run through the end of September this year, after which we will advance to the infield testing stage given confirmation of our results that we have had today. Under the Biden administration, the U.S. will have an increasing reliance and need for these critical minerals across its infrastructure. And we, ME2C, are uniquely positioned to enhance the USA’s ability to compete economically on a global scale, while significantly impacting the environmental efforts should our technologies prove to be as effective as we think they will be. In collaboration with Dr. Drummond, we participated in the creation of a new technologies firm earlier this year, Eleclear Technologies. Eleclear is the vehicle for further development of these environmental technologies. This new vertical is an incredibly promising opportunity and we look forward to the next stages of development for these clean tech technologies. Finally, a quick update on our capital market initiatives. Our anticipated graduation to a major exchange, such as NASDAQ or the NYSE remains on track. During the second quarter, we work to fortify our balance sheet and simplify our capital structure ahead of this plant uplisting. We eliminated more than $4 million in convertible debt and have an agreement in place with one of our long-term partners to eliminate more than $13 million in debt. In addition, we have completed the conversion of all outstanding 2019 promissory notes. This was the last major tranche of convertible debt on our balance sheet and a key step in positioning our capital structure for the next phase of our company’s growth. The goal of this uplisting is to broaden our company’s exposure to institutional investors and in doing so generate increased liquidity, while reaching a fair market valuation through strong analyst coverage. We will make further announcements on this topic as this process materializes in the relatively near-term. I’d like to now introduce Jami Satterthwaite, who we recently appointed as Chief Financial Officer. Jami previously served as our Chief Accounting Officer, where she made significant contributions to the growth of our business since joining ME2C in early 2019. She will be instrumental in our anticipated uplisting. And we are excited to have her on our leadership team to oversee our company’s financial strategy. I will now turn the call over to Jami for an overview of our second quarter financials. Jami?

[Jami Satterthwaite:]

Thank you, Rick and hello everyone. It’s a pleasure to address you today as Chief Financial Officer of ME2C. We are making significant progress returning to the growth we experienced prior to initiating expense of our patents. Revenue increased substantially during the second quarter and we anticipate further increases in the third and fourth quarter of this year as we secured additional supply agreements. Revenue in the second quarter of 2021 was $2.3 million, a 21% increase from $1.9 million in the same quarter last year. The increase is primarily due to the increase in capacity factor experienced by our customers’ coal-fired EGUs. Cost and expenses in the second quarter of 2021 were $4 million compared to $2.8 million in the same quarter last year. The increase in cost and expenses is mainly attributed to the increase in cost of sales driven by the increase in sales, along with an increase in interest expense due primarily to a one-time stock conversion incentives provided to certain note holders and related accelerated interest, which together totaled $521,000 and a loss on change in fair value of property share liability of $505,000. The net loss in the second quarter of 2021 was $1.7 million, or minus $0.02 per basic and diluted share compared to a net loss of $904,000 or negative $0.01 per basic and diluted share in the same quarter last year. The change was primarily due to the interest expense and change in fair value of the profit share liability, which I described. Adjusted EBITDA in the second quarter of 2021 was a loss of $312,000 compared to positive $96,000 in the same quarter last year. As of June 30, 2021, the company had a cash balance of $1.7 million, an increase from the balance of $591,000 on December 31, 2020. Also during the second quarter of 2021, the company eliminated $2.58 million of convertible debt through conversion to shares. Taking into consideration the elimination of convertible debt in the principal amount of $4.4 million this year, the previously announced debt repayment agreement entered into with our principal lender in June of 2021, the company’s current cash position and recent positive cash flow trends, management believes that the substantial doubt regarding the company’s ability to continue as a going concern has been mitigated, which is evaluated quarterly. While we are very pleased with the revenue growth and improvements, our efforts to realize the value of our patented technologies will continue in the second half of this year. As we move forward, we will continue to closely manage our operating costs to ensure we are well positioned for the next phase of growth. With that, I will hand the call back over to Rick for his concluding remarks. Rick?

[Richard MacPherson:]

Thanks, Jami. In conclusion, folks, we are well on our way to realizing the monetary value of our patented protected technologies by securing reoccurring long-term supply contracts and licenses. The value of our technologies being used across the U.S. fleet is substantial and we are working diligently toward monetizing our proprietary solutions to the farthest extent possible. Our new technologies focused on rare earth element extraction from coal ash and the wastewater remediation is an extremely promising growth vertical. I am proud of the progress we have made in our competitive position as the leading environmental technology company and we have a clear path of strategic objectives and a detailed roadmap of how to accomplish them. I look forward to providing further updates to the market in the latter half of this year as we work to create sustainable value for our shareholders, our customers and their communities over the long-term. And with that, I will turn the call over to the operator to begin the Q&A session.

[Operator:]

The first question comes from John Nobile of Taglich Brothers. Please go ahead.

[John Nobile:]

Good afternoon, Rick and Jami and thank you for the call. It’s great to get some questions thrown out in regard to the business. What I’d like to know is I know the first quarter you came off a $3 million quarter and I was expecting this quarter to be greater sequentially compared to that quarter, specifically given the litigation wins over the past year. So, I was hoping that you could talk a little about the sequential decline and specifically your expectations for the second half of this year?

[Richard MacPherson:]

Sure. Thank you, John. Good question. This is Rick. Although this quarter was left in total revenue than the last quarter, it was 21% of the previous year’s second quarter, which is in keeping with the nature of the clients that we have and the growth that they are having. The last win, for example, that we announced multimillion dollar multiyear contract has yet to kick in, we will see some of those results in this quarter that’s upcoming in terms of actual growth and the actual settlements that we have come into play more over time as we continue to go forward. So we are still somewhat at the mercy of the client base that we have got and the seasonality of those operations. I think you will see increased revenue as we go forward quarter-over-quarter. But again, it’s going to be tied to our base until that base changes substantially and the actual wins that we get turn into billable revenues. So, I see this as a positive step forward for us making announcements and continuing with growth quarter-over-quarter is what we are searching for in the short-term with the overall year-over-year numbers growing significantly as an expectation as well. The settlements that we have in place today and the supply contracts that we are working on and have announced will start to add to the fundamental significantly as we continue to grow.

[John Nobile:]

Okay, thank you for that. And actually, I was hoping to see if there was anything that you could add as far as anything new to report or any progress being made in regard to the recent court approval to proceed with the patent litigation claims against the refined coal processing companies. I know you that was a recent win back in May, so I just wanted to see if there was little bit of a stat if you could give us or an update as far as how that’s progressing?

[Richard MacPherson:]

Sure. Thank you, John. So we are now in discovery. And actually, today was a significant move forward in that effort. We issued 20 subpoenas today for a number of different entities 20, of course and individuals, key individuals that we think will provide significant explanation of the defendants’ position which will allow us to move forward creating a better understanding for the litigators of our claims. So, as these issued subpoenas are delivered, received and acted upon, we very much expect that the story that we expect to unfold will do so. And I think that will make a significant difference in the value proposition of our claims today. So discovery process underway, significant amount of subpoenas issued to a wide ranging number of firms today and we will be following up on those on in due course as the process continues and respond back to the public as we are permitted to prior to any discussions of settlement of course, we would like to do full due diligence in the discovery phase of things and we are actively moving that forward, John.

[John Nobile:]

That’s good to hear. And these 20 subpoenas that were actually issued today, is this the very first or were there any issued before this?

[Richard MacPherson:]

No, this is the first round. We had to wait until we got discovery papers from the defendants to see what they were providing and then govern ourselves accordingly with regards to other entities or persons that we felt had information that would be worthy enough now for us to succumb. So we are now moving forward with discovery documents in hand and having issued subpoenas in search of information that we think will be useful to the case going forward.

[John Nobile:]

That’s good to hear. And I mean that question was regarding your refined coal processing litigation. I guess I have a same question for the remaining utility companies that have yet to settle. I believe you have already settled about, so actually not what about, you’ve settled with 4 of them already. So that leaves I believe at least 36 still pending? Is there anything new to report on those remaining companies, any progress?

[Richard MacPherson:]

Sure. I can give you a general overview. A lot of those entities are actually involved in the refined coal program. So, those two things are going hand in hand. And as the discovery plays out on the refined coal program, it will impact the work that we are doing with the rest of the infringing utilities. We have contacted and are in significant negotiations with 9 major utilities at this time at various stages of discussion. We do not have any completion of those discussions to mention at this time. But as the refined coal program goes forward, then it will have a bearing on the results of those other entities as well. And we feel very good about where we are in those discussions with the most recent 9 that we have contacted and as I said, are in full discussions with. So I very much expect things will move forward over the next month or two and into the fall and we will be bringing results of those discussions public as they become material. We very much expect that we will be achieving material results with those discussions going forward. And I really can’t discuss or hypothesize any further on that at this point.

[John Nobile:]

That’s great. I just want to make sure I am clear on this. These 9 utilities right now, that’s in addition to the 4 that you have already settled with. So just that sounds like…

[Richard MacPherson:]

That’s correct.

[John Nobile:]

Okay, okay, great. Thank you. And just one final question, I know you talked the progress being made with the rare earth element processing. And on this call, I was just hoping that you might be able to talk a little about the other new environmental technologies that also include the coal ash cleanup, the wastewater remediation and the methane gas emissions that you have been working on, if you can maybe provide us with an estimate for when you believe that these might be ready for commercialization?

[Richard MacPherson:]

Sure. So, the methane mitigation testing, we have run into an economic challenge there that we are now readdressing. It’s one thing to create a technology that works it’s another to create a technology that’s environmentally economically viable. We need to do some tweaking on that in order to get it to a point where we could roll it out in an economic fashion. And so we are – we backed up into the research side on that one. With regards to the wastewater remediation and the rare earth element extraction processes that we are now moving forward nicely in that area, with Penn State evaluating and confirming our results to-date with other research entities. So if the Penn State folks come back and say, we agree we think that what you have claimed is real, then we will move quickly into the next stage, which we would think would be pilot scale testing. Should that play out as expected, then we could find ourselves in a situation where we are doing either full scale commercial testing on a commercial site late this year or actually be in a position where we have a technology that we have ready for commercialization across a wide range of industries. And to that end, John, what’s really interesting is the technologies that we are working on are really based on being able to license some of the major entities that are now involved in rare earths extraction, be they mining companies or actual companies that are trying to extract rare earth in a fashion that will allow them to extract rare earth elements in an environmentally sound fashion which much better economics. And those are the two things that are really needed for the Biden administration to be able to get behind the actual mining of those minerals here from whatever source is to be able to handle both the environmental and economic challenges of doing that. So, that’s where we focused our technologies on. And if we are successful with those, they will be incredibly valuable across the entire industry. And us as a technology company would look to license those technologies to the folks that are involved in those remediation and mining efforts. And that will be our role in it. We are not looking to actually get into the REE extraction business, we are looking at providing technologies as a technology company that would allow those involved in the industry to be much more successful, environmentally sound, and economically viable. That’s our approach.

[John Nobile:]

Thank you. And that’s good to hear. I am looking forward to the progress that could be made, maybe later this year, or even into next year. Rick, Jami, thanks again for taking this call. That’s all I have. Thank you.

[Richard MacPherson:]

Thank you.

[Operator:]

The next question comes from John from Oppenheimer. Please go ahead.

[Unidentified Analyst:]

Hello Rick. Thank you very much for your time today. And I really appreciate the update on the company. My question, you actually just answered, which was the next steps for the rare earth? And whether we are looking to license it or – and that was pretty much what I needed. So, thank you for answering it so finally.

[Richard MacPherson:]

Yes. So, John thanks for attending the call today. And yes, as I have mentioned to John, before you, what we are focused on, just to be clear is a technology that could revolutionize the actual processing of rare earth elements here in the USA. And that’s really what’s necessary now to generate a real position for us in that industry here. Biden’s approach has been to have all of your mind overseas, probably in China, we don’t see that as a real, secure, viable approach going forward. We think that the miners here in the U.S., and especially this huge amount of raw material in the coal ash ponds, and in coal itself, should be given a chance to be expanded on and utilized and underpin the actual supply side here on this side of the ocean. And our technologies are aimed at doing that. So, if we are successful, I think it will be a tremendous win for everybody.

[Unidentified Analyst:]

Sounds great. Thank you so much.

[Richard MacPherson:]

Thank you.

[Operator:]

The next question comes from Tim Quinlisk of Colrain Capital. Please go ahead.

[Tim Quinlisk:]

Thank you. Thank you, Rick, for taking my call. Just a quick question for you, a question you settled with for large utilities in the first part of the lawsuit. Can you give us a sense as to how far along you are in converting those RGUs specifically to those utilities to supply agreements? And how you see that progressing and impacting sort of the revenue trends through the back half of the year, into next year? Thank you.

[Richard MacPherson:]

Sure, Tim. Well, thanks for the question. Well, the first conversion that we had, we just recently announced as a multi-year multi-million dollar supply side. And that goes along, of course with the license agreement that is being paid for. So, it’s an incremental response from that settled customer. And we are also dealing with other units that are operated by settled utilities and to a guest – get give you an upside potential. There are literally millions of dollars of potential supply side that we could add to our present business through further testing at these utilities that have settled and taken a license from us. And I very much expect that we will have further settlements or I am sorry which we will have not only for their settlements, but from those that have settled for the supply agreements coming to bear in the last half of this year. I can’t say exactly how much that will add to our ongoing revenue base, but it will be significant. And I expect to be able to give further updated guidance, once I get a better feel for that. But we are active, both in settling with license agreements for folks, as well as active in the planning and operation in the field to gain supply side contracts with some of those we have already settled with. So, I very much expect the growth curve to continue to move forward positively. And as the year goes on, and the fundamentals of our reporting increase, we will be able to not only speculate, but show folks the benefits of following up on the patent strategy that we have been using.

[Tim Quinlisk:]

Okay, I just – I was just trying to get a little sense, Rick, of how early you are in that conversion process to supply agreements, are you 10% and 20% in, halfway there, or are we – can you give me a sense of where you are at on that?

[Richard MacPherson:]

Great negotiations today, Tim, but it’s almost like, there is no such thing as a little pregnant. So, we have got everything going great. And we really can’t announce something until it’s signed. I would say from a percentage basis, we have got great discussions going on. The technology will continue to work for these utilities, and our inherent knowledge of those technologies as the developers will make a significant difference in how effective they are. So, I feel very good about the fact that we are going to secure new business. But I can’t change the projection until we sign the documents. And if and when that happens, we will be brush releasing it immediately.

[Tim Quinlisk:]

Okay, great. Thank you, Rick. Appreciate it.

[Richard MacPherson:]

Thank you, Tim.

[Operator:]

Your next question comes from John Jay, Private Investor. Please go ahead.

[John Jay:]

Hi, Rick and Jami, looking for you are making some progress. But I was curious about the future capitalization. I think you have about 180 million shares at the moment, when the full conversion is done, how many will you have then? And secondly, it sounded as though you are going to try to get to a higher lifting, which requires probably a reverse split. I wondered what you would try to do there. And if you would try to do it prior to getting a black figure on the bottom line?

[Richard MacPherson:]

Well, John, thanks so much. I would have to correct you on a couple of things. Unless I heard it wrong, you thought that we had 180 million shares, is that correct?

[John Jay:]

I thought so…

[Richard MacPherson:]

I am sorry?

[John Jay:]

I thought so, is that incorrect?

[Richard MacPherson:]

Yes, no, we don’t. The outstanding share count now, correct me if I am wrong, Jami. But I believe it would be in the 85 million range.

[Jami Satterthwaite:]

89 million, yes it’s 89 million.

[Richard MacPherson:]

Yes. 89 million, that’s okay John. And with regards to the mention of the reverse, our objective is to continue adding value to the company through settlements and new supply contracts, so that we are able to avoid reverse. The company’s year-to-date, if you look at the press release that we just issued the cash for the first half of the year, we have a good balance at the end of the second half of $1.7 million, and an increase in cash of just under $600,000. So, we are in good shape as a company. We don’t need capital. We are moving forward in a positive way, with quarter-over-quarter, year-over-year growth. We are announcing new businesses and we are expecting more new business. So, I think as things move forward, especially if we are successful on the discovery side, and the refined coal program, that we will be able to increase the enterprise value of the company to a point where we won’t need a reverse in order to uplift. My preference would be to uplift when we are able to do so without a reverse. And to that end, we are going to keep our head down and keep focusing on the things that we need to do to increase the enterprise value organically. We have eliminated a pile of debt. And we are increasing our new business. So, I think it’s just a matter of time, before we are in position, with all of the boxes checked, in order to be able to effect that uplifting.

[John Jay:]

Really good. That’s good to hear. Thanks, Rick. I appreciate your progress.

[Richard MacPherson:]

Thank you.

[Operator:]

At this time, this concludes our question and answer session. I would like to turn the call back over to Mr. Richard MacPherson for closing remarks.

[Richard MacPherson:]

Folks, thanks again, for joining us today. We have had a solid month and last quarter of growth, what’s happening, and as soon as it becomes material, we will be bringing it to the market. The numbers include about a $1 million of non-cash items, much of which will be dealt with as part of the structured settlement with Alterna without impacting the cash of the company. So, I think we are in really good shape entering this third quarter, I think this will be a very significant quarter for us. I very much expect a culmination of the last three, four months of discussions with the nine outstanding utilities that we have been working with. And I think the refined coal approach that we have will also make significant strides in this coming quarter – coming few months, so that the market will have a much better understanding who we are and where we are going. And on top of all of that, I think a real game changer is our effort in this rare earth element field. I think if Penn State confirms our findings today, and we are able to move forward to commercial pilot testing, that we could be sitting on something that’s incredibly valuable to both shareholders and the industry alike. So with that, I would like to thank everybody again, for their time today. And operator, thank you so much for overseeing the call. Cheers.

[Operator:]

Thank you. This concludes today’s call. Thank you for your participation.