Description

Introduction

Midwest Energy Emissions Corp (“MEEC”) is an OTC and TSXV listed microcap that I believe provides a compelling risk/reward with the near-term resolution of outstanding litigation where a jury has already awarded significant damages to MEEC, the plaintiff, With the successful resolution of the outstanding litigation in the next several weeks, MEEC will have its market cap in cash with upside optionality of further licensing of its coal technology and the development of a PFAS water purification business. I believe at current trading prices, equity downside is limited, and there’s 60% upside in a base case and 200% upside in an upside case.

Background

Coal has long been one of the most pollutive and maligned energy sources in the world. In 2022, for instance, coal-fired plants generated 20% of US electricity and 55% of total CO2 emissions related to electric power. Coal not only generates an outsized portion of electricity-related CO2 emissions but also emits pollutants such as sulfur dioxide, nitrogen oxide, mercury and other heavy metals, and various other ashes and particulates. As such, developing clean coal technologies to reduce the potpourri of coal-related pollutants has been a political priority to appease environmentalists while preserving coal-related jobs in West Virginia, Ohio, and Pennsylvania. On December 21, 2011 the Obama administration made good on campaign promises, and the EPA issued the Mercury and Air Toxics Standards (“MATS”) for coal-burning power plants. The MATS rule mandated that coal-fired plants reduce their mercury emissions by 90% by April 16, 2016.

With each type of coal (Bituminous/Sub-bituminous/Lignite) having a different pollution profile and each coal-fired plant uniquely designed, there isn’t a single solution for all coal-fired plants to achieve the 90% mercury control requirement. For some, scrubbers will do the trick, but most require a multi-pronged approach with bromine additives being an essential ingredient. In fact, bromine additives have proven to be the most cost-effective method for removing mercury from coal-fired plant emissions.

Beginning in 2005, MEEC’s research partner, the University of North Dakota’s Energy and Environmental Research Center, filed for patents related to the removal of mercury from coal-fired power plants using bromine and activated carbon. The inventor of the technology is the CTO of MEEC, and, as such, MEEC signed an exclusive license to the patent portfolio in 2009 and in 2017 purchased all rights to the patents.

Lastly, not only do EPA rules require compliance with the mercury reduction regulations, the American Jobs Act also provides incentive for mercury emission reduction in the award of tax credits “for each ton ($/ton) of refined coal sold to a power plant that results in a 40% reduction in mercury emissions and a 20% reduction in NOx emissions.”

Litigation

With the implementation of the MATS rules beginning in 2015, MEEC saw rapid revenue growth with revenue growing from $2.8mm in 2014 to $12.6mm in 2015 to $32.3mm in 2016. However, due to a combination of closing coal-fired plants and patent infringers, revenue slumped to $11.4mm in 2019 when MEEC filed suit against 30+ different patent infringers.

The final complaint can be found here: https://storage.courtlistener.com/recap/gov.uscourts.ded.69474/gov.uscourts.ded.69474.406.0.pdf

After 5 years of litigation, MEEC settled with AJ Gallagher in a confidential settlement and, on March 1st, was awarded $57.1 million by a jury from the other patent infringers. The jury found that the patent infringers willfully infringed on MEEC’s patents, and thus treble damages are applicable in this circumstance, potentially multiplying the final award by up to 3x. Lastly, MEEC can apply to have interest applied to the award from the commencement of legal proceedings at 8.5% and can also seek the recoupment of legal fees.

The defendants have requested a one-day bench trial to argue that the jury had improper instructions and that they held an implied license. I believe their arguments lack merit, and the judge will rule in MEEC’s favor. Following the bench trial scheduled for 5/30, the judge can finalize the judgment for this case and award treble damages and interest as he sees fit, like in mid-June.

Coal Supply and Licensing

With the litigation mostly resolved, MEEC can use the ruling as a precedent to pursue long-term supply agreements of treated coal to other patent infringers not named in the current litigation. Given MEEC’s technology is believed to be in use by 40% of the market and MEEC has 20% of market share currently, there is an opportunity to grow the business to $40 million + of revenue. Management has a list of 30 known patent infringer with whom they are actively pursuing supply and licensing agreements. Additionally, MEEC has patents in Europe, Canada, and China which can be monetized going forward. 

Management has guided that this business is likely a 30-40% EBITDA margin on supply agreements and 80% EBITDA margin on licensing agreements. On $40 million of revenue, that equates to $12-16 million of EBITDA on a business likely worth 4-5x given the decline of coal-fired power in the US.  

PFAS Removal

MEEC sees an opportunity to apply many of the same mercury removal principles that they developed for coal-fired plants to water filtration and specifically to the removal of PFAS forever chemicals from the water supply. This business is nascent and the technology isn’t fully fleshed out, but it’s a similar setup to what happened with coal. The EPA has released new guidance (https://www.epa.gov/sdwa/and-polyfluoroalkyl-substances-pfas) that municipalities will need to implement. Specifically, monitoring of PFAS levels needs to be implemented by 2027 and PFAS reduction solutions must be implemented by 2029. MEEC has made two key hires for this business. It’s hard to ascribe any value currently to PFAS removal, but I view this as upside optionality. 

Capital Structure

MEEC has a unitranche credit facility with Alterna (AC Midwest) with a balance of  $3.15 million. It’s a funky security because AC Midwest owns 9.3 million shares of MEEC and MEEC has the exclusive right to sell AC Midwest’s shareholdings and apply the proceeds to the balance of their outstanding debt. Additionally, AC Midwest has a profit share of the legal proceeds up to $7.9 million and the sale of shares can be used to offset that liability as well. 

In addition to facilitating the private sale to third parties as described above, AC Midwest has granted the Company the exclusive right until December 31, 2024 to facilitate the sale of all or a portion of the remaining balance of the shares of common stock of the Company held by AC Midwest, which proceeds above a certain amount will be applied as a credit against the Restructured Profit Share dollar for dollar.

At current market prices, MEEC could sell Alterna’s shares for $7.6 million and repay the entire credit facility as well as $4.5 million of the profit share. 

MEEC has cash of $11.2 million which more than covers the outstanding liabilities.

SOTP

Catalyst

Final award from judge in mid to late June.