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Midwest Energy Emissions Corp. (OTCQB:MEEC) Q1 2018 Results Earnings Conference Call May 21, 2018 5:00 PM ET

Executives

Richard MacPherson - President and CEO

Rich Gross - CFO

Analysts

Steven Ralston - Zacks

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Midwest Energy Emissions Corp. First Quarter 2018 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions] This conference is being recorded today, May 21, 2018, and the earnings press release accompanying this conference call was issued after the close of market today.

On our 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 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 and 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 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 periodic filings with the Securities and Exchange Commission.

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

Richard MacPherson

Thank you, operator, and thank you everyone for joining us today.

The beginning of 2018 was highlighted by advancements we made in our expansion outside of the United States, in March of 2018, we entered into an exclusive license arrangement in Europe with the Cabot Corporation, a multinational player in the coal industry with an extremely established footprint and immense sales network throughout Europe and Asia. This is not only a symbolic and reaffirming the strength of our technology, but it’s expected to be materially positive tailwind to our business from a financial perspective. The contract with Cabot entails the use of our proven, two-part mercury capture system, as well as our proprietary scrubber additive technology, both of which are expected to provide meaningful additions to the extensive Cabot Corporation product line in Europe.

We also continue to gain traction in the North America, as evidenced by our recent order from our previously announced Canadian customer to install our technology at another one of their large power plants in Alberta, Canada. I’ll be providing some more detail in each of these agreements later in the call. But before going any further, I would like to give a brief overview of our Company for those of you who maybe new to our story.

Midwest Energy captures mercury emissions from coal fired plants across North America and now with our licensing partnership with Cabot Corporation in Europe as well. We help capture mercury emissions using our patented SEA technology, which is short for Sorbent Enhancing Additive technology. This SEA technology enables the plants to achieve and maintain compliance with mercury emissions effectively and at a low cost.

The SEA technology consists of a piece of low cost, proprietary equipment that we install for each boiler as well as an ongoing supply of our special blend of SEA and sorbent materials. Another important component in addition to this SEA technology is the consulting services that we provide by leveraging our team of well-tenured, highly-quality mercury control experts. Having a technical team in place in conjunction with the best technology-driven solution in the market gives us a significant competitive edge.

We have a very key relationship with the Energy Environment Research Center out of North Dakota. All of our technology is protected by a robust patent portfolio, which consists of over 69 issued and pending patents, covering the U.S., Canada, most of Europe and a large part of Asia. Our technologies come from one of the oldest research facilities for coal in the country, the Energy Environment Research Center, which has over 200-person strong engineering and scientific team. The technology now has over 20 years and well over $65 million invested in its development and several of the core individuals, specifically John Pavlish, who is primarily responsible for the technology, have since joined our team on a full time basis. We as a company have invested and continue to invest significant resources and intellectual property as is what we believe to be the bedrock in the biggest future value of our Company. In fact, we have had invested just over $7 million in this IP resource to-date, large part of it in the most recent year when combining royalty, license fees, purchase and patents and legal fees paid. These resources were in part to actually acquiring all of the patents and patents pending from the EERC in this past year. To ensure that they were extremely tightly well vetted, we spent a great deal of funds over the last year to get us to a position where we would be able to move forward securely with this IP package. We can now confidently state that we own the best available mercury technology in this space which has significantly helped us secure new contracts and generate revenue through licensing agreements, both here at home and abroad.

Now, before handing the call over to Rich to review the financials, I’d like to review a few of our key progress and initiatives in the first quarter and going forward.

So, the initiatives first and foremost, any units that have a challenge to get to MATS compliance or experience extra costs or difficulties or actual de-rating of the boiler at the same compliance can use our technologies to accomplish their goals and maintain compliance and peak performance. There are still a number of EGUs throughout the U.S. that we believe would significantly benefit from our technology-driven approach for mercury capture. That said, adoption throughout North America has immensely been slower than anyone else in the previously thought, primarily due to the pricing pressures in the market between the major chemical companies among other things. We’ve also had one of our major clients shutter a number of their units late last year, into the first quarter of this year. However, we’re working very closely with them to introduce our technologies to their newly acquired fleet throughout the balance of 2018.

And as we’ve noted in the past, we’re very-focused on graphic expansion, both in North America and Europe. Strategically, we’ve been focused on this for some time now and are just now beginning to enter these target geographies such as Europe. 140 nations signed the Minamata Convention in October of 2013, a global treaty to eradicate mercury emissions from air and water. And we very much expect Europe to become a significant opportunity by 2021 with testing for compliance with these standards expected to commence this year. Europe’s coal market is substantial and it includes 1,384 coal fired EGUs. We will be addressing European market through a license agreement with Cabot which we recently announced in April. This capital-light licensing model establishes -- leverages our patented SEA and scrubber additive technologies. Our partner’s global reach and immense sales network represents a massive opportunity for our technology to see rapid, widespread global adoption. We’re actively moving forward at a number of different sites throughout Europe. We’re excited to partner with a corporate leader such as Cabot and offer our technology solutions to reduce cost and increase profits for EGUs which ultimately will contribute meaningfully to our future growth, starting in 2019 and ramping up over the long-term.

In addition to this, we’re in different stages of negotiation for similar agreements in several other key global markets such as Asia and elsewhere. And I look forward to providing further updates on these initiatives as appropriate as we become tangible.

As part of our efforts to broaden our reach in the Europe, today, we presented at the MEC 13 Workshop in Krakow, Poland which is a gathering of international emission control experts specializing in the reduction of mercury. John Pavlish, our Senior VP and Chief Technical Officer, a widely recognized mercury capture experts in the field was a featured speaker at the event, presented the application of ME2C’s proprietary mercury capture technology, especially with the low-rank coals as the Europe’s primary coal source. In addition, he will be jointly presenting the recently announced ME2C-Cabot licensing agreement in the EU with Jamie Fessenden, Cabot Corporation’s Commercial Director, tomorrow.

As we’ve previously announced, we also have several boilers under contract in Canada having secured the first customer in 2017 which was our first expansion outside of the U.S. We continue to develop that relationships and we’re pleased to announce that in April, we secured another order from the same Canadian customer to install our technology at another one of their power plants in the province of Alberta, Canada. Installation operations have already begun, and if successful, they provide us with upto an additional three EGUs at this location. We’ve worked with this Canadian customer since 2011 across multiple projects in both the U.S. and Canada. So, it’s clear they’re pleased with the work that we’ve been doing for them.

As another testament to the value we provide our customers, in the first quarter, we received the Nexus Small Business Award from one of our clients, Vistra Energy, which is presented the small business enterprises that provide excellent service, have demonstrated a strong and positive commitment to their community and support the utilization of diverse workforce and supply chain.

So, clearly, we’ve been very active in the first quarter 2018 thus far with significant progress on the international side of both, Europe and Canada as well as significant value creation in our IP portfolio.

So, for the particular financial review, I will turn it over to our CFO, Rich Gross. And he can go through financial details for the quarter before I wrap up the call with some closing statements and open it up for questions and answers. Rich?

Rich Gross

Thanks, Rick. As Rick touched on earlier, we generate revenue from three primary sources demonstration and consulting services, then equipment sales, and third, product sales, typically recurring in nature and recognized as we provide an ongoing supply of our proprietary SEA material and sorbent.

For the three months ended March 31, 2018 and 2017, 97% of our revenues were from product sales. Total revenue for the first quarter of 2018 was $2.1 million compared to $5.4 million in the same year-ago quarter. Cost and expenses, were $3.5 million and $6.5 million during the three months ended March 31, 2018 and 2017, respectively. This decrease is primarily associated with the decrease in revenue in the current year. Operating loss in the first quarter of 2018 was $1.4 million compared to operating loss of $1.1 million in the first quarter of 2017. Net loss in the first quarter of 2018 was $1.9 million, or $0.03 per diluted share, compared to net loss of $1.7 million, or $0.02 per diluted share in the first quarter of 2017. On March 31, 2018, we had cash and cash equivalents of $0.6 million compared to $2.4 million as of December 31, 2017. Adjusted EBITDA in the first quarter of 2018 was negative $0.8 million compared to a positive $0.2 million in the same year-ago quarter.

With that, I’ll turn this call back over to Rick.

Richard MacPherson

Thank you, Rich. And thank you all for joining us on the call today. I’ll conclude with sharing my general thoughts on where we stand today. Our Company clearly is in a different place today than even a year ago. I actually believe it’s in a much stronger position in spite of the reduction in recent sales. We began penetrating some of our target international markets such as Europe, which represents a significantly large opportunity for us, not to mention with the huge global partner by our side. We have a very robust and airtight IP package that provides some of these opportunities among others, as we move forward to address the many challenges inherent with mercury solution on a global basis. I expect that these efforts will extend in the not-too-distant future, and I expect that we’ll see some real value come into the Company from them over the next period of time.

So, I’d like to open it up if I could operator for questions and answers at this time.

Question-and-Answer Session

Operator

Certainly. Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And our first question will come from Steven Ralston with Zacks. Please go ahead.

Steven Ralston

Good afternoon. I monitored the deferred revenues on the balance sheet to anticipate when you’re going to install new equipment, and I noticed in the fourth quarter you had about $0.5 million dollars in deferred revenue, which is not on balance sheet as of the end of the first quarter, but I didn’t see an equipment sale. Was that rather for sorbent sales?

Rich Gross

That was for sorbent sales to a customer that we had completed agreement with over the year on a billing dispute that was solved prior to the end of the quarter and carried over between 2017 and early 2018. So, all of those dollars were recorded as revenue in the first quarter in sorbent sales.

Steven Ralston

On the new EGU contract in Canada, do you expect to have that fully installed within the second quarter, so we won’t see a deferred revenue line, or do you think it will take longer than that?

Richard MacPherson

This is Rick. I think, we’ll have that completed in the second quarter. And Rich, correct me if you see anything different, but that’s what I believe at this time.

Rich Gross

No. That I believe is the plan.

Steven Ralston

All right, excellent. And right now, the contract is for one EGU but with the potential for two more?

Richard MacPherson

Yes, correct. Yes. They wanted to set the equipment up on the first one, make sure we’ve got similar results to the previous station. And once we accomplish that, we expect move on to the other two units. So, I would think, I could speak to those at the beginning of the second half.

Steven Ralston

Great. Thank you very much.

Richard MacPherson

Thank you.

Operator

Thank you. And that will conclude our question-and-answer session for today. Mr. MacPherson, I will turn the conference back over to you for any additional or closing statements.

End of Q&A

Richard MacPherson

Folks, thank you very much for joining us and especially for our longer term investors, thank you very much, as we work our way through what has been a challenging point for the company. We’ve adjusted in a number of different key areas and are expecting that we will be able to rebound nicely from the first quarter results, especially with what we’re doing in Europe. Our guys are actually on the ground at our plants this week in a couple of different European countries, being very well received, and looking forward to reporting on that as we go forward. And the next earnings call, I’m looking forward to in terms of trying to make a notice of expected expansion on those global efforts that we’ve now got underway. Thank you very much for taking your time today.

Operator

Again, that will conclude today’s conference. Thank you all for joining, and you may now disconnect.

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