Midwest Energy Emissions Corp. (OTCQB:MEEC) Q3 2022 Earnings Conference Call November 14, 2022 5:00 PM ET
Company Participants
Richard MacPherson – CEO
Jami Satterthwaite – CFO
Conference Call Participants
Jeff Feinberg – Feinberg Investments
Operator
Good afternoon ladies and gentlemen and welcome to the Midwest Energy Emissions Corp. Third Quarter 2022 Financial Results Conference Call. All lines are in listen-only mode. Following the presentation, we’ll conduct a question-and-answer session. [Operator Instructions] This conference is being recorded on Monday, November 14th, 2022.
I would now like to turn the conference over to Mr. Richard MacPherson. Please go ahead.
Richard MacPherson
Thank you, operator and thank you all for joining us today for ME2C Environmental’s third quarter 2022 earnings call. Our third quarter has been marked as a stepping stone, leading to growth in multiple key areas of our business, which include our financial position, supply side growth, and litigation.
We’ll speak about our efforts in rare earth element technologies today as well. This quarter has seen a major shift in our financial position and created a solid foundation to support our growth this year and the growth that’s expected in 2023.
Earlier this year, we spoke about a ramp-up in revenues that would begin mid-year and continue to arc moving through early 2023, due to increases in our supply business. This gradual growth that began in the second quarter of 2022 has continued.
The third quarter is historically our highest revenue quarter due to seasonality in our supply business. This seasonal upswing caused by strong demands from coal-fired power generation has been further boosted from additional supply contracts, which we gained earlier this year.
This third quarter also marks a pivotal shift in our litigation efforts against refined coal entities led by our legal partners, Caldwell Cassady & Curry. The fact discovery process has concluded and we’re currently within one year from our trial date and feel we’re well-positioned as we prepare for trial next September, or any considerable settlements that may be reached prior to that time.
I’d like to begin today’s call emphasizing this third quarter’s reported revenues. At approximately $7.5 million, this has been the single highest revenue quarter in a number of years.
Our CFO, Jami Satterthwaite, will speak further about the actual reported figures shortly. It’s notable that our quarter increased approximately50% from last year’s third quarter. Based on this revenue growth, which we expect will continue, our current cash position in the recently announced three-year deferral of all of our major debt, management has removed the going concern, a testament to our financial stability going forward.
The revenue gains this quarter were achieved from increased demand by the coal-fired utility market and from the additional loose supply business. In conjunction with our revenue growth, we’ve also been able to navigate challenging supply issues through excellent operational management by our Kiwi [ph] Vice President and a true collaborative partnership with our utility customers.
Coal-fired generation remains a stable sector of the overall US power mix, and we feel it will for years to come. We also continue to seek and gain new business partnerships with utilities, who may be using our technologies without a license agreement at this time.
And those efforts between ourselves and Caldwell Cassady & Curry remain positive due to the market’s increasing recognition of the value of our technologies in mercury emissions capture and our patent position. We believe that our company has turned the corner and remains on track for consistent and continued growth moving into 2023 and beyond.
As mentioned, a significant recent highlight is the extended debt agreement with our principal financial partner, who is also our largest single shareholder. The only major debt that our company now holds is through this lender, which is a secured loan of $270,000 and an unsecured debt of $13.2 million.
Through careful and collaborative discussions with this financial partner, an agreement was reached that benefits our company, their lender, and our shareholders through a new financial position providing ME2C with the unfettered financial capacity to go forward with key growth strategies, which are now underway.
In addition to a three-year extension of the maturity date of these loans to August 25th, 2025, a notable element of the agreements reached allows for ME2C to buy back a significant portion of the stock held by this lender at a price of $0.50 per share at our company’s discretion.
We anticipate moving forward with the stock repurchase plan at an appropriate time. Other items include a significant increase in rate reduction for the small secured portion decreasing from 15% to 9%. And of course, the remainder debt has no debt repayment over the next three years other than a percentage of the profit of any large segments that we may derive.
So, ME2C is truly confident that this revised financial arrangement will allow our capital to work towards critical growth areas, while we gain additional revenue over these next three years.
So, we’ll now discuss the two other key areas of growth that have reached pivoting points; the ongoing litigation proceedings against certain refined call entities and our efforts in new environmental technologies. The market should know that our lawsuit remains strong and passed a significant marker with the conclusion of the lengthy fact discovery phase during this past third quarter.
We are now within one year of our trial date after over three years of process and during the next several months, our legal team and the defendants are preparing for the trial next fall.
Expert witnesses from both sides are being posed to build arguments from both sides, most of that has concluded. This period prior to trial may provide the opportunity for potential discussions with settlements in mind if they are pursued.
We continue to remain confident about our legal position. We’ve also reached a turning point in our technology efforts focused on rare earth elements with consistent results from academic labs, our results in developing assortment technology to be used — to process or remove the extraction of REEs from solution has not been conclusive due to a large part through a lack of the technology that we have discovered in the field itself.
In order to process the rare earths out of solution, it is critical that these elements be captured from either coal ash or asset-mined range and put in a solution that will allow the elements to be further separated and processed. Our work in that area continues and we look forward to bringing more updated information to the market as we get into the test results that we expect to receive later this year.
These key areas of growth, our lawsuit, the new environmental technologies are expected to be funded internally. The extension of our sole major debt for the three-year period allows our finances to focus on these areas of growth. We remain committed and confident in achieving further patent recognition across the coal-fire market and in developing new sorbent technologies addressing critical environmental concerns.
And so with that, I’ll turn the call over to Jami Satterthwaite, our CFO, for an overview of the strong third quarter results. Jami?
Jami Satterthwaite
Thank you, Rick. Hello, everyone. In the third quarter, the company’s financial position continued to improve as we experienced the strongest quarter since 2017. Third quarter 2022 revenue increased to $7.5 million from $5 million in the third quarter of2021, an increase of approximately 50%.
The increase in revenue was primarily driven by increased sorbent product sales due to increased supply/demand in the coal-fired market as well as expansion of the company’s customer base.
Total costs and expenses in the third quarter of 2022 were $6.9 million compared to $5.2 million in the same quarter last year. The increase in total costs and expenses is primarily due to the increase in cost of sales resulting from increased sales, offset by a decrease in interest expense.
The company had net income of $0.6 million in the third quarter of 2022 or $0.01 per basic and diluted share compared to a net loss of $0.2 million or zero per basic and diluted share for the prior year period.
Adjusted EBITDA in the third quarter of 2022 was $1.2 million compared to $0.7 million in the third quarter of 2021, an increase of approximately $0.5 million. As of September 30th, 2022, the company had approximately $1.3 million in cash, working capital of $2.2 million, and $3.3 million in accounts receivable.
Taking into consideration the deferral of all major debt, the company’s current cash position and recent revenue growth, management believes that a substantial doubt regarding the company’s ability to continue the going concern has been mitigated.
With that, I will hand the call back over to Rick for his concluding remarks. Rick?
Richard MacPherson
Jami, thank you, and thank you to our management team and to our business partners. We’re excited that we’ve been able to turn the corner with a solid financial position heading into the new year. Our developments in the litigation and rare earth technologies are on track with near-term progress anticipated.
On behalf of our ME2C management team, we’d like to thank our shareholders for their long-term commitment, and to all of you listening today for your continued interest in our firm.
With that, I’ll turn the call back over to the operator to begin the question-and-answer session.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we’ll now conduct our question-and-answer session. [Operator Instructions]
Okay. So, your first question comes from Eric [Indiscernible] from Investor. Please go ahead.
Unidentified Analyst
Hi Rick. First of all, congratulations on the solid quarter. I’ve got two questions for you. You mentioned on this morning’s presentation that there — you will have — an expert give you guys some sort of guidance on potential settlements. When do you anticipate that would be?
Richard MacPherson
Well, Eric, thanks for joining the call. So, that is a legal procedural matter, which is part of the whole process of getting to trial. Each party hires a expert witness. In this case, we have hired an expert damages witness who has already made his report to the court.
We are not privy to that court — to that report, but it has been made after full evaluation and consideration of all of the information provided by our company to him. So, that has not been made public nor am I privy to it. But based on the information that was provided, we expect that it would be a reasonable, interesting number that the court would appreciate and believe.
Unidentified Analyst
Got it. And then second question, can you speak to the growth that you expect and what your numbers may look like in 2023?
Richard MacPherson
We have yet to give guidance for 2023. I can reiterate that the $20 million that we expected in 2022 is solid, and that we expect to continue growing at the pace we’re now growing at, approximately 50% growth if you consider what — where we’ve come year-over-year.
And one thing I can mention is the business that we’re doing this year is just a partial amount of actual billings on the contracted business that’s booked. These contracts that we have are recurring annual revenue contracts and the $20 million is derived due to the time that the contracts took place, but would effectively repeat annually on approximately $25 million to $26 million worth of contracted business. So we have a strong position going into 2023.
I will give guidance sometime in the near future. I would like to see the end of this year come through and see exactly where that ends up. There are other things that we’re working on. So we most likely give guidance — firm guidance early in 2023 for the year, but I do expect a very strong year next year, just even on the core business alone.
Unidentified Analyst
Wonderful. I appreciate it, Rick. Thank so much.
Richard MacPherson
Thank you for your questions.
Operator
Your next question comes from Tim [Indiscernible], a private investor. Tim, please go ahead.
Unidentified Analyst
Hey, Rick, congratulations on a strong quarter. I’d just like to ask a little bit more about the visibility of the growth. You sort of alluded to kind of $25 million, $26 million of embedded contracts. The $7.5 million, you’ve got a fair amount of visibility built in such that to get to a sort of a continued 50% growth rate into 2023 doesn’t require any new or any materially new wins. This is all sort of embedded business? Is that how I should be thinking about it?
Richard MacPherson
Well, the $26 million, Tim, is embedded, so that would be the — that’s the worst case, but we very much expect to have growth on top of that, of course, given that we are constantly in negotiations with folks that continue to use our process, but have yet to be licensed. The other part of that is a lot of the wins that we’ve announced for licenses have supply contract options, which we are working on. So indeed, we do expect to have a significant amount of growth.
But again, the base we bring up for recurring business into 2023 is that $25 million, $26 million. But I would like to give some added guidance to that, sometime in the near future once we see how that last quarter is finishing up, but looking very much forward to putting the numbers out there for next year.
Unidentified Analyst
Okay. And just so I’m clear, Rick. I know the ongoing legal lawsuit has a number of refined coal, I mean, refined coal utilities that are operating outside of or using technology that you’re not getting paid for. Those are not included in any of the numbers or your projection for 2023 and/or any settlements either? This is just strictly a business that’s sort of even outside of that legal proceeding?
Richard MacPherson
Correct. We’re only presenting numbers, which are the core base operating numbers that we have in hand now. There are approximately, for example, Tim, about 29 different power plants with multiple units that are still using the technology without licensing just under the refined coal umbrella. So as that litigation proceeds, it will be very interesting to see how those plants react to the results of this litigation.
They have a huge potential for us as new business, representing probably as much or more than the current business in hand. So as that process continues and our discussions with a number of utilities besides those that are underway continue, we expect to be bringing more news to the market. And all-in-all, all things considered, we expect to have a very strong year in 2023.
Unidentified Analyst
Okay. And then just if you could provide some context here, Rick. I’m just trying to understand the domestic coal generation business is operating at base loads that are near multiyear highs right now. How much of that strength is helping — how much does that strength or utilization rates help your underlying business? And you…
Richard MacPherson
Sorry, go ahead, Tim.
Unidentified Analyst
I was just going to ask you, like normally, you go into Q4, it’d be seasonally weaker than Q3. Do you still expect demand, I mean, obviously, some seasonality into Q4, but should it still be directly stronger as a result of the higher loads?
Richard MacPherson
Yes. So to answer your question, first part of it, the industry is strong and we expect it to stay strong over the next two, three years in particular. People can’t get enough coal to drive the amount of demand that’s out there. So — and people are ramping up with supply, so I expect it’s actually going to continue or bump up a bit more.
We are a direct relationship to that growth. We have clients who are feeding at maximum capacity to stay in compliance. And our cost as a percentage of the increased value to their firms is miniscule.
So we expect a solid uptick in our business as this continues, and we expect the results quarter-over-quarter year-over-year to continue at the same rate that we’re now showing. So we expect a strong fourth quarter, strong enough to generate increases that will drive that projected revenue for 2022 and possibly more.
But also as we move into 2023, we expect that it will continue to move forward. We put supply chains in place, renegotiated all of our supply contracts and put the availability of product that we can get in place, keeping in mind we have that massive infrastructure paid for in Texas to be able to ramp up.
But as things go and develop through 2023, we’ll be extremely well positioned to be able to take over a much wider swath of the supply side business as this thing moves forward and settles out even more.
Unidentified Analyst
Okay. All right. Great. And then just two final questions. First, just briefly, you are running extra cost from a legal perspective that you must be flown through quarterly, that’s impacting your profitability even though you were able to post almost slightly better than the $0.01 of earnings in the quarter. At some point, obviously, that goes away. Is that number of material in terms of those costs that are one-offs that are kind of impeding your profitability a little bit here in the quarter?
Richard MacPherson
So what we’ve been able to do, which is interesting for a small company, is we’ve not only been able to come back from a huge kick in the pants back in 2017, 2018 and 2019, but we’ve been able to maintain and carry most of the financial load of the litigation against these multinationals.
So, when we get — if we get a settlement of significance that money will flow directly back to reduce our overall debt and be shared with the shareholders through an increase in enterprise value.
So, we feel very good about the position that we’re in. The majority of the legal costs have been paid for out of pocket. We expect that it will continue at the rate that it is for the rest of the period leading up to trial. And that’s something that, we’ve got factored in that we know we can manage, the market should not see any more increased cost than what we’ve been managing and showing for example, over this past quarter.
But what it’s going to allow is it’s going to allow us to as I mentioned, pass-through to the — the company will recognize any wins financially without an unreasonable amount of any wins going to outside sources and that’s not usual for a small firm to be able to accomplish, but the management team and our financial managers have been able to operate in a way that has allowed us to get to this point and now that things have turned around and the business is coming back strong, we stand to gain nicely from the work that’s been done over the past five years in particular.
Unidentified Analyst
Okay. All right. And then just one last question relating to your debt refinancing and extension, you did — just a comment. First, you did a great job extending that out, gave yourself some flexibility. But I was very intrigued by the option, share repurchase option that you’re able to negotiate with your largest shareholder. I think it was 11.7 million shares.
Can you talk about how important that was for you to get that in place? And is that option subject to proceeds from settlements or is there some flexibility that you may have that you’d care to discuss? Thank you.
Richard MacPherson
Yes, thank you for that final question, Tim. What I can say about that is, first of all, we’re very pleased with that. The folks that have been behind this from a lending point of view have been nothing but professional first class folks to deal with. So in keeping with our efforts to increase the enterprise value of the company and move forward on to a major exchange, we discussed with them the ability to be able to reduce that overhead of that stock and have the option to take that off the table for the benefit of all shareholders.
And so we were able to negotiate what I think is a very fair price at $0.50 a share, given what we expect the stock to go to and we will work with them, there’s a few conditions, nothing undue for us to be able to acquire that stock. And of course, we would use any proceeds coming from any settlement to acquire that, and they’re very open-minded as to when and how we can make that work. So, we very much see that as an opportunity to reduce the dilution significantly going forward.
Unidentified Analyst
Okay. Great. Thank you very much, Rick. Appreciate it. Congrats.
Richard MacPherson
Thank you.
Operator
Your next question comes from Jeff Feinberg from Feinberg Investments. Jeff, please go ahead.
Jeff Feinberg
Thank you very much. Great job, Rick, congratulations. Just a follow-up on a couple of questions out of here, what is the duration that you have, the call option on these shares at $0.50 a share is number one? And number two, can you just walk us through, to refresh memory, just the business model here, sensitivity analysis. I’d say $30 million or $40 million in revenue run rate, can you help us understand what the EBITDA potential of the company is at those hypothetical, illustrative levels, please? Thank you so much.
Richard MacPherson
Jeff, thanks for the questions. The term of option for acquiring the stock is over the extended period of the debt, so we have another three years to make that decision. And I very much expect that, that would be a positive decision for us to make as we move forward.
With regards to the second question and the projected EBITDA over the next period of time, I would expect that our EBITDA numbers will improve with volume. I have yet to do the extraction on that to calculate, what it would mean in 2023 and beyond, but you can expect that our EBITDA will improve significantly on the core business.
And as I mentioned, the legal costs on any one-time wins that may occur are substantially looked after to date so that we should be able to realize significant portions of any wins at the company, which would dramatically affect the overall EBITDA.
If you look at the general discussion we’ve had so far, without giving full guidance that we are starting in on a $26 million base next year. You can look at the EBITDA that have presented so far on this past quarter, for example and maybe enhance that by 5%, as you calculate what the core bottom line value of next year’s business is.
Jeff, I’d like to go into further detail in a management call that we will put together towards the end of the year once we see exactly where the year is finishing up, and be able to project some specific revenue and EBITDA number at that time for 2023.
Jeff Feinberg
Sounds wonderful. Thank you very much.
Richard MacPherson
Thank you, Jeff.
Operator
That’s all the time we have for questions today. I’ll turn it back to Richard for closing remarks.
Richard MacPherson
Well, folks, thanks again. We told you earlier in the year that things were going well and that we were working our way through a number of different areas of development. They are on track. We are growing substantially. There’s a lot in development that we’ve not discussed today with regards to negotiations with folks that still are unlicensed using the technology and we feel very good about our position on the litigation front. Our team continues to meet the demands in the market that are growing quarter-over-quarter. I expect we’ll have a very solid fourth quarter.
Look forward to bringing the next round of results to you and prior to the actual year-end call, which would be well into 2023. We will have a management session call and update the market with projections for 2023, so that everybody can keep in touch with the growth as it happens. Anything happens with regards to new licensing and supply contracts, which we expect we will be announcing those as well.
Keep in mind, an announcement of a license agreement is only part of the win. As you can see, it generates additional follow-on business in a lot of the cases, which just helps to build the core value of the company.
So with that, I’ll say thank you very much again for your time, and we look forward to continuing our growth over the next couple of months. Cheers.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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