Birchtech Corp. (BCHT) Earnings Call Transcript & Summary

Good day, and welcome to the ME2C Environmental Third Quarter 2021 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, November 15, 2021, and the earnings press release accompanying this conference call was issued earlier today. On the call today is ME2C President and Chief Executive Officer, Richard MacPherson; as well as Chief Financial Officer, Jami Satterthwaite. Before we get started, I'll read the disclaimer about forward-looking statements. This conference call may contain, in addition to historic information, forward-looking statements within the meaning 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 the forward-looking statements include, among other factors, the gain or loss of a major customer, change in environmental regulations, disruption in 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 electrical demand, significant disruption in the supply of coal to our customers' 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 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, and we would also refer you to the company's website for more supporting industry information. At this time, I'd like to turn the call over to Richard MacPherson, Chief Executive Officer of ME2C Environmental. Sir, please go ahead.

Thank you, operator, and thank you to everybody for joining us on today's call. The third quarter of 2021 represented a key inflection point in ME2C Environmental's growth strategy as our efforts to monetize our proprietary suite of technologies translated to our highest revenue quarter in over 3 years. Our proprietary mercury emissions technologies continue to provide significant value across the U.S. coal-fired power industry due to their numerous operational and environmental benefits. We saw notably heightened demand in our growing sorbent product supply business, which continues to be driven by both our litigation successes and increased coal usage due, in part, to the rising natural gases and energy demands moving through 2021 and as are expected through 2022. As a company that is focused on providing innovative technologies to address the critical issues affecting our environment, we are motivated by our continued growth benefiting not only our customers and shareholders but the public in general. Our multipronged litigation strategy continued to advance in this past third quarter. Allow me to quickly review some key details that prompted our team to take this approach before expanding on why ME2C is now uniquely positioned to continue benefiting from our patent portfolio and the current market position of strength. Our flagship technologies, SEA, or Sorbent Enhancement Additive technologies, are the leading approach to mercury emissions capture. And that's reflected by the fact that over 40% of the coal-fired plants in the U.S. use it. This widespread adoption is due to the inherent superiority of these technologies and provide a very efficient means to capture mercury and staying compliant if you're running a coal-fired plant. So we were able to, as a company, just scale up significantly in 2014 through 2016, but we were left out of the larger expansion of commercialism that took place with our technologies as suppliers and some of the utilities out there went ahead in the installed systems utilizing our know-how without going through us. So in order to create the value that we needed in that technology adoption, we were compelled to initiate litigation to defend this property for our shareholders in order to receive the value and the recognition for this broad adoption. And that plan of action is now underway, and we're achieving results, some of which are starting to show now as it's reflected in these third quarter numbers. So we also believe that our patented technologies have enabled users of this refined coal program to benefit tremendously financially over the last 10 years. We initiated a lawsuit in 2019 against over 40 defendants, including the operators using refined coal and the owners of these operation entities. There are a few key factors in this refined coal program that are important to call out. The IRS section 45 tax credit program was introduced in 2011 to issue a tax credit to users of refined coal who achieved a certain level of efficiency in reducing harmful pollutants, including mercury. And this program generated approximately $1 billion a year in annual tax credits for the producers and the operators of this refined coal program. So in September, we received approval from the district judge of the U.S. District Court in Delaware of the adoption of the report and recommendation of the magistrate judge, which allows our lawsuit to move forward against certain refinery coal entities. With this discovery process now well underway, we're looking forward to seeing this through to resolution. Our legal counsel, Caldwell Cassady & Curry, continued to be an exceptional partner through this process, providing valuable guidance supported by the team's expertise, our experience in this field. Since the commencement of the 2019 litigation, we've successfully signed license agreements with 5 major U.S. coal-fired utilities to allow the utilities to continue using our patented process for mercury capture. And by taking our business-first approach, we aim to secure supply side agreements with utility customers rather than having to pursue long-term litigation, an approach that we believe leads to a win-win outcome for all parties. And we've demonstrated the efficacy of the approach in the third quarter as we secured significant incremental multiyear supply business with an existing technology licensing, one of the major utilities that entered into a license agreement with us last year, and we believe that we will continue to grow our supply business with the other licensees in the coming months and seek to convert many more utilities into supply side customers. And we have a number of those discussions underway as we speak. So importantly, the refined coal program will conclude at the end of 2021, at which point the power plants currently using that refined coal program will need to find a replacement to control their mercury emission. And that places us, ME2C, in a very strong position given our patented position with that process as a natural replacement of the refined coal supplies that they have been obtaining. So we estimate that approximately 75% of the nonlicensed power plants using our technology are part of that refined coal program and creates a significant potential for additional supply side business from these previous refined coal users as we move forward into 2022. To meet this expected increase in supply customers, we're now commissioning our batch plant in Texarkana, which has the capacity to support up to $100 million in annual revenue, and we have that underway as we speak. This batch plant, which is fully paid for by ME2C, will be operational in the first quarter of 2022 and enables us to scale up our production not only to meet expected demand but to be able to customize so that we can continue to outperform the competition. Now on the new technology side, we're very encouraged to see our patented monetizing efforts begin to materialize and look forward to the next stage of growth in our core product supply. But of course, this new area of technology that we're now working on is very important to us. The process has resulted in our identification of several key verticals on which we are focused. Over the last several years, we've been working to develop technologies in the processing of rare earth elements produced from either coal mining and coal-fired generation. Rare earth elements are extremely important to the applications in various industries, both in the private sector as well as at the government level. The Department of Energy has classified 5 of these elements as critical due to their core usage in national security and infrastructure needs, including, but not limited, to telecommunications, health care, heavy industrial, materials, aircraft and our national defense system. The widespread demand for rare earth elements has created a $13 billion annual local market and is growing rapidly. Now while the U.S. is rich in these minerals in coal mines and coal ash ponds from coal-fired power plant operations, the process presently used to mine these elements has proven to be costly and environmentally unacceptable. And as a result, all of the rare earth elements consumed in the U.S. are now imported from other countries with 80% of it coming from China. Importing and outsourcing has hindered the U.S.'s ability to compete economically while leaving one of the largest environmental concerns facing the energy sector unaddressed. And that is to coal ash pond. Of course, this issue extends to a global scale, as highlighted by the World Bank's prediction that key minerals for clean energy technology could grow to over 450% by 2050. So we believe our new technologies will be instrumental in addressing this issue, and we've been making significant headway in their development and advancement. In October of this year, we announced that we completed Phase 1 testing of our rare earth element technology with Penn State in their Department of Earth and Mineral Sciences. They are a leader in this field, and they've confirmed 80% to 90% efficacy rate of extracting select REEs in our testing. Based on the strong results from this phase of testing, we're moving into a second phase of testing with Penn State during this fourth quarter, setting up our planned field trial testing. So early in 2022, we expect to commence the actual infield testing, a critical step to move this promising technology to a commercial scale. And we will advise, of course, as we move into that, of the continuing results that we're having. So I'll now move to provide a brief update on our capital markets initiatives. We continue to work forward in the uplifting effort to a major exchange. And with a fortified balance sheet and simplified capital structure, we believe we're well positioned to graduate to a senior exchange which will allow us to broaden ME2C's exposure to both institutional investors and analysts and ultimately assist in the achieving of a fair market valuation. So I'll turn the call over now to Jami Satterthwaite, our CFO, for an overview of our actual third quarter financials. Jami?

Thank you, Rick, and hello, everyone. We continue to make significant progress with returning to the growth we experienced prior to initiating the defense of our patents. We achieved our highest quarterly revenue in over 3 years and expect to continue this growth going forward as we secure additional supply agreements. Revenue in the third quarter of 2021 was just over $5 million, a 78% increase from $2.8 million in the same quarter last year. The increase is 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. The total costs and expenses in the third quarter of 2021 were $5.2 million compared to $3.9 million in the same quarter last year. The increase in cost and expenses is mainly attributed to the increase in cost of sales, principally due to the increase in sales. The loss in the third quarter of 2021 was $207,000 or 0 per basic and diluted share compared to a net loss of $1.1 million or negative $0.01 per basic and diluted share in the same quarter last year. The decrease was primarily due to the increased sales and improved margin on those sales. Adjusted EBITDA in the third quarter of 2021 was approximately $562,000 compared to $24,000 in the same quarter last year. As of September 30, 2021, the company had a cash balance of $866,000, which was 47% higher than cash on December 31, 2020. The company has shown quarter-over-quarter growth through 2021 compared to the prior year period and expect to see continued growth moving through the fourth quarter. We remain focused on our efforts to realize the value of our patented technologies in the fourth quarter into 2022 and beyond. We continue to closely manage our operating costs to ensure that 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?

Jami, thank you. Folks, in conclusion, we're reaching an inflection point in our growth strategy, and we're working diligently to realize the monetary value of our patent-protected technologies for reoccurring long-term supply contracts and licenses. Our competitive position as a leading environmental technology company will enable us to develop additional commercial relationships and gain market share in our core business. We're incredibly excited by our promising technologies, focused on rare earth element extraction from coal ash and wastewater remediation. And we're proud to be a leading innovator in this vertical. I look forward to executing across our strategic objectives and furthering our operational progress in this fourth quarter and into 2022 as we work to create sustainable value for our shareholders, our customers and their communities over the long term. And with that, I'll turn the call back over to the operator to begin the question-and-answer session.

[Operator Instructions] Our first question comes from John Nobile with Taglich Brothers.

Nice to see the significant top line growth and just about breakeven on the bottom line. But I just wanted to get a couple of questions here, Rick. Last call, you had said that the company had issued about 20 subpoenas in August, and those were all related to the ongoing patent litigation. So I was curious if there was anything new to report regarding your patent infringement progress.

John, thanks for the question. The discovery process, which included the issuance of subpoenas, is moving along nicely. The Caldwell Cassady & Curry folks are very pleased with the information we've been able to uncover so far, and we're continuing with that. We expect that it will generate the information that we need to prove our claims. But I'm unable to get into any further details at this time as to the actual results of the subpoenas, but they are -- everything is moving ahead, as expected, and on track.

All right. And in regard to the third quarter revenue, which is approximately $5 million, I was curious if you could give some details as to what percentage of that actually came from supply agreements versus licensing agreements? And if you could even give us your take on where you see that breaking out maybe into 2022 with what you currently see?

So the results that we have for the third quarter were about 80% supply revenue. And at this point, that's basically the expectation going forward into 2022. As we gain more demonstration traction in the field with new licensees, I expect we're going to be able to convert more of those operations into supply chain clients as well as licensees. So I expect that, that will most likely be the approach going forward. And with our margins being solid on the supply side, we're very much looking forward to that growth.

Okay. And actually, if I could just ask you, Jami, I mean I could look in the 10-Q. What was the overall blended gross margin with this level of revenue with about 80% from supply? I mean I know I could get it from the 10-Q, but just I figured if I have you right now, just to find out what that was, the blended gross margin.

John, why don't we move on, and we'll have Jami bring that back up?

Okay. I mean that's all right. I just thought if you had it readily available. I mean I could pull that up later and get it. I just thought on this call. All right, let me just ask you one other question here. In the press release, you mentioned you completed the Phase 1 testing of the rare earth element technology. And actually, it points that you're moving into the second phase in the fourth quarter and field trial testing expected to begin in early 2022. So I was wondering if you can actually provide your best guess as to how long you believe it would be before this technology is ready for commercialization.

Again, it depends on the results. However, the normal track of events of these things is you try to get as close to real-world conditions before you go into the field so that you've made as many adjustments as possible to the technology before you're in the real world. We have identified the sites amongst our client base to carry out the testing. We've done a couple of round -- actually, 3 rounds of testing under this Phase 1. This Phase 2 testing that we're doing now, we decided to carry out rather than go directly into field because we wanted to be able to take the actual materials from the field into the lab where we could course correct with more exactness prior to going into the field. So that's what we're doing this quarter. That will lead to a highly developed sort of technologies that we take to the field, and I think that will enhance the time line significantly. So unless we hit any major bumps in the road, I would say, by the end of the first quarter, we're going to have some very good results. And then in the second quarter, into the third quarter, we would be actually working with a commercial partner in the final valuation. So commercially, I would say the latter half of next year is the most appropriate time given that most of these types of technologies, they're looking at years to get into a commercial situation. And if you did any evaluation of competing technologies, they'd be looking at trying to commercialize in the third or fourth or fifth year. This, for us, in terms of a herd testing would take place in the second to third year.

Okay. I mean that would be very encouraging to see it indeed possibly bring out to market by the second half of 2022. But I know that most of the rare earth elements are coming from China, I believe, and you had mentioned that in your prepared comments. Do you know how much of rare earth elements in this country are actually produced from the United States roughly?

I don't have an exact number for you, John. One of the problems that we've got is the Biden administration is moving forward with the continued processing of material abroad and having it brought to the U.S. for finishing. We propose that our technology will provide the opportunity because of its economic and environmental capacities to generate raw material production here at a very competitive pace. And so I can't answer your question exactly. But what we're focused on is the problem that the country has in outsourcing all of its rare earth materials. And so our technologies are focused on the actual processing extraction from an economic and environmental point of view. And we feel we can make a big dent in it that way.

Okay. And you had mentioned about the market size in this country previously. Could you just rehash what that market size potential is?

Yes. So the thing is with 80% of it coming from China, what we've got is a huge opportunity if we can create a processing system here in the U.S., which will allow us to develop the materials here and process them right through to the finished product here. So it's a $13 billion annual market at this point. And as expected, the World Bank prediction is that it's going to be growing by over 450% over the next number of years by 2050. So it's definitely an area that we need to pay attention to. And what we're trying to do is twofold: clean up this ash pond problem, which is probably the biggest climate toxic problem the country has got right now, clean that up, but do it in a fashion that puts a value-add into that cleanup, which allows for the underwriting of it to be done because right now, over 1,100 of these coal ash ponds that need to be cleaned up, can't because there's nobody to pay for them. If we can build in a value system that allows a byproduct value, we figure we can underwrite that cleanup and fix the rare earth problem that the country has. And John, I think with that, we'll move on and see if we have any other questions from other folks.

[Operator Instructions] Our next question is from Jeff Kobylarz with Diamond Bridge Capital.

I'm just curious if you can give a range of the annual run rate of revenue going forward. Just given the client wins you've had so far, is there a high and a low for normal weather or electricity demand and natural gas prices? Is there any kind of range you could give us for total revenue?

So Jeff, as we go forward, and John previously mentioned it, which is one of the things that we are continuing to sort out, we expect to remain profitable in the foreseeable future. And that's where we sit right now. Whether or not when a utility decides to take a license from us, that license is the only source of revenue or whether that utility decides to give us the supply side of their business as well makes a significant amount of difference in the top line revenue. It does affect the bottom line but, most importantly, the top line revenue. So we've been hesitant to give the top line revenue projections until we get more settlements under our belt, which we expect over the next quarter and beyond. And then we'll have a look-back review of what the percentages and the expectations going forward are and be able to make some very valid longer-term revenue projections. With this refined coal program ending and the majority of the outstanding infringers are part of it, we're going to be in a very significant growth potential period over the next 90 to 120 days which is because of the fact that all of those refined coal operators that have been utilizing our technology process are going to need to replace their supply chain. So we've been in touch with all of those folks, talking about our patented position and that we'd like to acquire the supply side of their business as a way to mediate our way through this process of licensing. And so the next 90 to 120 days will be very significant in us being able to get to a point where we can give some real hard expectations of revenue going forward. At this point, we are reporting what these growth numbers are and making the statements that you've heard with regards to our profitable position as we go forward in the months that we can see ahead of us.

Sure. That makes sense, Rick. Can you say how much volume was purchased by these refined coal customers?

Sure. Again, this would be a guesstimate, but the refined coal customers going forward after the program would probably represent somewhere in the $65 million to $80 million a year in supply side revenue.

Okay. Good. All right. And then lastly, in answering one of John's questions, you said that you were demonstrating your SEA products in the field with a number of customers. Can you say how many of those demonstrations you're going through now?

The problem I have with answering that is there are a number of different utilities that we are in negotiations with, with regards to licensing, really do not want us to talk publicly about the work that we're doing with them. And if you look close enough at our filings and whatnot, it would be obvious as to who they are. So I think I'll just pass on that. Suffice to say, we're being kept busy. And I do expect that we'll be reporting results on a fairly regular basis as we go forward.

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

Well, folks, thanks so much for joining with us today. The numbers are strong. They're staying strong. We continue to see growth and expect to continue to see growth. I'm limited on the amount of detail I'm allowed to add at this point in time as we are under review, of course, as part of our announced uplifting efforts with the S-1 filed with the SEC but very much look forward to bringing more specific information to the market once that process is concluded. Thank you again for listening in. We look forward to talking with you in the not-too-distant future.

This concludes today's call. We thank you for your participation. You may now disconnect your lines. Thank you.