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By Steven Ralston, CFA OTC:MEEC

This week, on March 30th, Midwest Energy Emissions (MEEC) reported results for the year ending December 31, 2015. The company reported record revenues of $12,631,919 up 352% from $2,794,206, reported in 2014, and well above our expectations of $8.18 million. Revenue growth was driven by equipment sales at multiple customer sites ($6.9 million), product deliveries (+249% to $5.0 million) and demonstration & consulting services (+93.6% to $0.66 million). Over 80% of demonstration & consulting services revenues ($544,005) was generated during the fourth quarter when demand for demonstrations increased significantly. The increase in product sales was driven primarily by products used during product deliveries the commissioning of new equipment at six customer sites in addition to ongoing sales to two EGUs in the Pacific Northwest. Deferred revenues on the balance sheet, which represent unrecognized advance payments, declined 61% (or $3.5 million) reflecting the delivery and commissioning of equipment during 2015. At year end, deferred revenues were $2,281,760, which will be recognized eventually as revenues on the income statement. Total operating expenses increased 75.8% to $16.3 million versus $9.28 million in 2014, primarily due increases in cost of goods sold and settlement charges. Cost of goods sold increased 482% to $8.63 million, which is associated with both the cost of equipment sold to customers and increased purchases of product. Cost of goods sold as % revenues up-ticked from 60.5% to 68.2%, which appears to indicate the margin on product sales is higher than on equipment sales. Operating expenses increased 100% to $1.8 million as the company incurred increased staffing and overhead costs while assisting its customers test and commission new equipment in preparation for compliance with MATS. However, operating expenses as a % of revenues declined significantly from 32.4% to 14.3%, demonstrating the positive effects of economies of scale. Interest expense increased 128% to $3.19 million versus $2.72 million during 2014, which is primarily attributable to the issuance of convertible notes. The company reported a net loss from continuing operations of $14,261,531 (or $0.32 per diluted share) versus a loss of $5,007,557 (or $0.13 per diluted share) in 2014. The increased loss is primarily due to restructuring the company’s debt which resulted in a $3.19 million negative change in value of warrant liability and a $1.33 million settlement charge. The MATS regulation is being legally challenged with the U.S. Supreme Court remanding the case back to the U.S. Court of Appeals (District of Columbia Circuit). In December 2015, the Court of Appeals allowed MATS regulations to remain in place while the EPA responds to the Supreme Court’s ruling. The EPA is expected to issue a final finding by April 15, 2016. Management expects that MATS will remain in effect although legal challenges are expected to continue. The company’s current cash flow needs for operations is approximately $300,000 per month; additional funds (approximately $2.5 million) will be needed for the upcoming maturities of convertible debt along with principal payments due long term convertible notes in the second half of 2016. It is critical that management negotiate extensions on the convertible debt and/or secure additional funding. Midwest Energy Emissions is well-positioned to benefit from the implementation of Mercury and Air Toxics Standards (MATS). The company has exclusive rights to Sorbent Enhancement Additive (SEA™) Technology for the reduction of mercury emissions by coal-fired electric generating units. The technology has been commercially deployed and provides many advantages, including low cost of operation, flexibility for optimization and preservation of fly ash marketability. Despite one year MATS compliance waivers being granted on eleven of the 15 EGUs under contract, the company’s top-line is poised to accelerate significantly over the next two years. Product revenues of approximately $16 million annually are estimated to be the company’s break-even point on a cash flow basis, which management anticipates achieving during 2016. Midwest Energy is unique in that it has a singular focus (the mercury emissions control market), holds exclusive rights to patented processes, has achieved market penetration through the commercialization of SEA Technology and is positioned to take advantage of further growth opportunities afforded by the implementation of MATS. Comparable pollution control and value-added specialty chemical companies trade in a P/S valuation range between 3.1 and 0.6. Utilizing the mid-second quarter P/S ratio of 1.8 on projected 2016 sales of $34.9 million, our share price target remains $1.55. We are optimistic about Midwest Energy Emissions. The company should experience a dramatic increase in revenues over the next few years as the coal-fired plants (which have contracted for Midwest Energy’s SEA Technology) ramp up their mercury emissions control efforts to become MATS-compliant.SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR and to view our disclaimer.