Birchtech Corp. (BCHT) Earnings Call Transcript

Good day and welcome to the ME2C Environmental Second Quarter 2021 Earnings Call. [Operator Instructions] This conference is being recorded today, August 16, 2021, and the earnings press release accompanying this conference call was issued before this call today. On the call today is Richard MacPherson, President and CEO of ME2C; and Jami Satterthwaite, CFO of ME2C. Before we get started, I will read the disclaimer about forward-looking statements. The conference call may contain, in addition to historical 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 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 demand, a significant change in general economic conditions in any of the regions where our customers, utilities may experience significant changes in electric demand, significant disruption in its supply of coal to our customers, units, loss of key management personnel, availability of capital and any major litigation regarding to 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 would like to turn the call over to Richard MacPherson, Chief Executive Officer of ME2C Environmental. Sir, please go ahead.

Thank you, Danielle, and thank you to everyone for joining us on today's call. 2021 is shaping up to be a breakout year for ME2C Environmental as we continue to experience momentum with our monetization of the patented experiment -- environmental technologies. We worked diligently in the second quarter to make advancements across our operational and strategic priorities. Over the years, our emissions control technologies have provided a significant amount of value to the U.S. power industry by improving plant efficiencies and diminishing toxic emissions. Our solutions are being increasingly recognized as the best in the industry for these operational benefits as well as the significant cost efficiencies they provide. Most importantly, as a leading clean tech enterprise, we're pleased to play an important role in addressing the critical climate-related issues that we are facing as a global community. I'll begin with an update on our multipronged litigation strategy, which progressed meaningfully in the second quarter. Before I discuss the progress with this strategy that we have achieved to date, allow me to provide a brief background on why it was necessary to take this approach for those that are new to our story. So our patented Sorbent-Enhancing Additives, or SEA, technologies were created in the early 2000s as a revolutionary innovation for mercury emissions control. The industry had an incredible response to our proprietary process. In fact, we believe that currently, about 44% of the coal-fired plants across the U.S. have adopted these technologies, making our SEA technology package one of the most widely adopted emissions capture systems at work today in North America to improve our environment. However, we were largely removed from the commercial process of adoption and found ourselves competing against the very technologies that we invented with the utilities and suppliers of the materials that were used in these technologies. So with a robust patent portfolio, we pivoted our business strategy in late 2017 to initiate a litigation approach in order to defend the value of our intellectual property for our shareholders. And so we initiated a lawsuit in 2019 against 4 major utilities, also including a number of key defendants, in the refined coal program. Refined coal is coal that has been treated with a chemical solution prior to being applied to the boiler, and many utilities across the country use refined coal and it's our belief that, that refined coal would not exist without our patented technologies. In May, the U.S. District Court in Delaware issued a report and recommendation that this pending litigation should indeed be allowed to go forward and proceed against certain refined coal entities that we named in our 2019 lawsuit. So the court's recommendation significantly increases the upside potential for realizing the true value of our patented technologies, which have had a considerable impact on the annual $1 billion refined coal tax program. And we're working with exceptional legal counsel, the firm of Caldwell Cassady & Curry, a team with extensive experience in patent litigation. Under their legal guidance, we've taken a business-first approach to our engagements with infringing parties, which means they're focused on securing supply side agreements with the utility customers rather than pursuing just long-term litigation efforts. Our existing production facilities are able to handle in excess of $100 million in annual revenue of products. And we believe that this approach that we're following will allow us to scale up our production over the next few years. Over the last year, we successfully signed agreements with 4 major coal-fired utilities to provide license agreements that would allow these utilities to continue using our patented process for mercury emissions capture. Our goal is to convert these and the many more utilities that we're in contact with to supply-side customers. To that end, we recently secured a multiyear supply contract with one of those settled major utilities and entered -- that had entered into a license agreement with us last year. And we believe we'll continue to grow our supply business with other licensees in the coming months. Let me speak about our new technologies efforts. Our core mercury emissions capture business continues to be the foundation of our business. However, we have evaluated and pursuing other verticals that we believe ME2C Environmental can provide substantial value due to our skill set in these areas. Earlier in the year, we announced our work with Dr. Scott Drummond, focused on the development of new technologies to improve the processing of rare earth elements available from both coal mining and the coal-fired power industry in North America. This $13 billion annual global market for rare earth elements is a hypergrowth segment that the private and public sectors of the U.S. have not yet capitalized on. In the U.S., rare earth elements, or RREs, (sic) [ REEs ] are used in many industries including high demand applications such as electric vehicles, among others. Notably, all of the rare earth elements consumed in the U.S. are imported from other countries, 80% coming from China, which has hindered the U.S.' potential for economic growth. Our country is rich in RREs, (sic) [ REEs ], critical minerals that are found in mines, but also present in coal ash ponds surrounding many coal-fired plants, both active and abandoned. In some cases, the coal ash can leach into the soil and water runoff, which is then called wastewater. There are more than 1,100 coal ash ponds in over 37 states across the U.S., and 200 sites are believed to have contaminated water. Under President Biden, the new EPA Director, Michael Regan, recently announced stricter regulations that will be forthcoming to address wastewater remediation. And we believe that the coal ash cleanup is one of the largest environment concerns currently facing the U.S. and the energy sector. We started in years ago on our new technologies, and we will support the processing of rare minerals and earth, either mined or extracted from coal ash, while removing these harmful contaminants from wastewater. Presently, the mining of RREs -- of REEs in the U.S. is very challenging both from an economic and environmental perspective, with the administration leaning on importing the raw materials rather than developing the mining stock and materials because of those challenges. We aim to help in reversing that decision with our new technologies. Now to aid in the advances of these technologies, we've retained Penn State University, a notable leader in this field, to perform confirmation testing of our results to date as we seek to commercialize these technologies. The testing by Penn State will run through the end of September this year, after which we will advance to the infill testing stage given confirmation of our results that we've had today. Under the Biden Administration, the U.S. will have an increasing reliance and need for these critical minerals across its infrastructure. And we, ME2C, are uniquely positioned to enhance the USA's ability to compete economically on a global scale while significantly impacting the environmental efforts, should our technologies prove to be as effective as we think they will be. In collaboration with Dr. Drummond, we participated in the creation of a new technologies firm earlier this year, Eleclear Technologies. Eleclear is the vehicle for further development of these environmental technologies. This new vertical is an incredibly promising opportunity and we look forward to the next stages of development for these clean technologies. Finally, a quick update on our capital market initiatives. Our anticipated graduation to a major exchange, such as NASDAQ or the NYSE, remains on track. During the second quarter, we worked to fortify our balance sheet and simplify our capital structure ahead of this planned uplifting. We eliminated more than $4 million in convertible debt and have an agreement in place with one of our long-term partners to eliminate more than $13 million in debt. In addition, we have completed the conversion of all outstanding 2019 promissory notes. This was the last major tranche of convertible debt on our balance sheet and a key step in positioning our capital structure to the next phase of our company's growth. The goal of this uplifting is to broaden our company's exposure to institutional investors and, in doing so, generate increased liquidity while reaching a fair market valuation through strong analyst coverage. We will make further announcements on this topic as this process materializes in the relatively near term. I'd like to now introduce Jami Satterthwaite, who we recently appointed as Chief Financial Officer. Jami previously served as our Chief Accounting Officer, where she made significant contributions to the growth of our business since joining ME2C in early 2019. She will be instrumental in our anticipated uplifting, and we're excited to have her on our leadership team to oversee our company's financial strategy. I'll now turn the call over to Jami for an overview of our second quarter financials. Jami?

Thank you, Rick, and hello, everyone. It's a pleasure to address you today as Chief Financial Officer of ME2C. We're making significant progress returning to the growth we experienced prior to initiating expense of our patent. Revenue increased substantially during the second quarter, and we anticipate further increases in the third and fourth quarter of this year as we secure additional supply agreements. Revenue in the second quarter of 2021 was $2.3 million, a 21% increase from $1.9 million in the same quarter last year. The increase is primarily due to the increase in capacity factor experienced by our customers' coal-fired EGUs. Costs and expenses in the second quarter of 2021 were $4 million compared to $2.8 million in the same quarter last year. The increase in cost and expenses is mainly attributed to the increase in cost of sales, driven by the increase in sales, along with an increase in interest expense due primarily to a onetime stock conversion incentive provided to certain note holders and related accelerated interest, which together totaled $521,000 and a loss on change in fair value of profit share liability of $505,000. The net loss in the second quarter of 2021 was $1.7 million or minus $0.02 per basic and diluted share compared to a net loss of $904,000 or negative $0.01 per basic and diluted share in the same quarter last year. The change was primarily due to the interest expense and change in fair value of the profit share liability, which I described. Adjusted EBITDA in the second quarter of 2021 was a loss of $312,000 compared to positive $96,000 in the same quarter last year. As of June 30, 2021, the company had a cash balance of $1.7 million, an increase from the balance of $591,000 on December 31, 2020. Also, during the second quarter of 2021, the company eliminated $2.58 million of convertible debt through conversion to shares. Taking into consideration the elimination of convertible debt in the principal amount of $4.4 million this year, the previously announced debt repayment agreement entered into with our principal lender in June of 2021, the company's current cash position and recent positive cash flow trends, management believes that the substantial doubt regarding the company's ability to continue as a going concern has been mitigated, which is evaluated quarterly. While we're very pleased with the revenue growth and improvements, our efforts to realize the value of our patented technologies will continue in the second half of this year. As we move forward, we will continue to closely manage our operating costs to ensure 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?

Thanks, Jami. In conclusion, folks, we are well on our way to realizing the monetary value of our patent-protected technologies by securing recurring long-term supply contracts and licenses. The value of our technologies being used across the U.S. fleet is substantial, and we're working diligently toward monetizing our proprietary solutions to the furthest extent possible. Our new technologies focused on rare earth element extractions from coal ash, and the wastewater remediation is an extremely promising growth vertical. I'm proud with the progress we've made in our competitive position as a leading environmental technology company, and we have a clear path of strategic objectives and a detailed road map of how to accomplish them. I look forward to providing further updates to the market in the latter half of this year 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 over to the operator to begin the Q&A session.

[Operator Instructions] The first question comes from John Nobile of Taglich Brothers.

Rick and Jami, and thank you for the call. It's great to get some questions thrown at in regard to the business. What I'd like to know is -- I know in the first quarter, you came off at $3 million a quarter, and I was expecting this quarter to be greater sequentially compared to that quarter specifically given the litigation wins over the past year. So I was hoping that you could talk a little about the sequential decline and specifically your expectations for the second half of this year.

Sure. Thank you, John. Good question. This is Rick. Although this quarter was less in total revenue than the last quarter, it was 21% of the previous year's second quarter, which is in keeping with the nature of the clients that we have and the growth that they are having. The last win, for example, that we announced, multimillion dollar, multiyear contract has yet to kick in. We will see some of those results in this quarter that's upcoming in terms of actual growth. And the actual settlements that we have come into play more over time as we continue to go forward. So we're still somewhat at the mercy of the client base that we've got and the seasonality of those operations. I think you will see increased revenue as we go forward quarter-over-quarter. But again, it's going to be tied to our base until that base changes substantially and the actual wins that we get turn into billable revenues. So I see this as a positive step forward for us. Making announcements and continuing with growth quarter-over-quarter is what we're searching for in the short term with the overall year-over-year numbers growing significantly as an expectation as well. The settlements that we have in place to date and the supply contracts that we are working on and have announced will start to add to the fundamental significantly as we continue to grow.

Okay. And actually, I was hoping to see if there was anything that you could add as far as anything new to report or any progress being made in regard to the recent quarter approval to proceed with the patent litigation claims against the refined coal processing companies. I know that was a recent win back in May. So I just wanted to see if there was a little bit of a status you could give us or an update as far as how that's progressing.

Sure. Thank you, John. So we are now in discovery. And actually today with a significant move forward in that effort, we issued 20 subpoenas today for a number of different entities, 20, of course, and individuals, key individuals, that we think will provide significant explanation of the defendant's position, which will allow us to move forward, creating a better understanding for the litigators of our claims. So as these issued subpoenas are delivered, received and acted upon, we very much expect that the story that we expect to unfold will do so. And I think that will make a significant difference in the value proposition of our claims to date. So discovery process underway, significant amount of subpoenas issued to a wide-ranging number of firms today, and we will be following up on those in due course as the process continues and respond back to the public as we're permitted to. Prior to any discussions of settlement, of course, we would like to do full due diligence in the discovery phase of things, and we're actively moving that forward, John.

That's good to hear. And are these 20 subpoenas that were actually issued today, is this the very first? Or were there any issued before this?

No, this is the first round. We had to wait until we got discovery papers from the defendants to see what they were providing and then govern ourselves accordingly with regards to other entities or persons that we felt had information that would be worthy enough note for us to second. So we are now moving forward with discovery documents in hand and having issued subpoenas in search of information that we think will be useful to the case going forward.

That's good to hear. And I mean that question was regarding your refined coal processing litigation. I guess I have the same question for the remaining utility companies that have yet to settle. I believe you've already settled about -- actually not about. You've settled with 4 of them already. So that leaves, I believe, at least 36 still pending. Is there anything new to report on those remaining companies, any progress?

Sure. I can give you a general overview. A lot of those entities are actually involved in the refined coal program. So those 2 things are going hand in hand. And as the discovery plays out on the refined coal program, it will impact the work that we're doing with the rest of the infringing utilities. We have contacted and are in significant negotiations with 9 major utilities at this time at various stages of discussion. We do not have any completion of those discussions to mention at this time. But as the refined coal program goes forward, then it will have a bearing on the results of those other entities as well. And we feel very good about where we are in those discussions with the most recent 9 that we've contacted and, as I said, are in full discussions with. So I very much expect things will move forward over the next month or 2 and into the fall, and we'll be bringing results of those discussions public as they become material. We very much expect that we will be achieving material results with those discussions going forward. And I really can't discuss or hypothesize any further on that at this point.

No, that's great. And I just want to make sure I'm clear on this. These 9 utilities right now, that's in addition to the 4 that you've already settled with? So I just -- that sounds like...

That's correct.

Okay, okay. Great. And just one final question. I know you talked to the progress being made with the rare earth element processing on this call. I was just hoping that you might be able to talk a little about the other new environmental technologies that also include the coal ash cleanup, the wastewater remediation and the methane gas emissions that you've been working on. If you can maybe provide us with an estimate for when you believe that these might be ready for commercialization.

Sure. So the methane mitigation testing, we've run into an economic challenge there that we are now readdressing. It's one thing to create a technology that works. It's another to create technology that's environmentally, economically viable. We need to do some tweaking on that in order to get it to a point where we could roll it out in an economic fashion. And so we've backed up into the research side on that one. With regards to the wastewater remediation and the rare earth element extraction processes, we are now moving forward nicely in that area, with Penn State evaluating and confirming our results to date with other research entities. So if the Penn State folks come back and say, "We agree, we think that what you've claimed is real," then we will move quickly into the next stage, which we would think would be pilot-scale testing. Should that play out as expected, then we could find ourselves in a situation where we are doing either full-scale commercial testing on a commercial site late this year or actually be in a position where we have a technology that we have ready for commercialization across a wide range of industries. And to that end, John, what's really interesting is the technologies that we're working on are really based on being able to license some of the major entities that are now involved in rare earth extraction, be they mining companies or actual companies that are trying to extract rare earth in a fashion that will allow them to extract rare earth elements in an environmentally sound fashion with much better economics. And those are the 2 things that are really needed for the Biden Administration to be able to get behind the actual mining of those minerals here from whatever source, is to be able to handle both the environmental and economic challenges of doing that. So that's what we focused our technologies on. And if we're successful with those, they'll be incredibly valuable across the entire industry. And us as a technology company would look to license those technologies to the folks that are involved in those remediation and mining efforts, and that would be our role in it. We're not looking to actually get into the REE extraction business. We're looking at providing technologies as a technology company that would allow those involved in the industry to be much more successful, environmentally sound and economically viable, that's our approach.

Great. That's good to hear. I'm looking forward to the progress that could be made maybe later this year or even into next year. Rick, Jami, thanks again for taking this call. That's all I have. Thank you.

Thank you.

The next question comes from John Mormile from Oppenheimer.

Rick, thank you very much for your time today, and I really appreciate the update on the company. My question, you actually just answered, which was the next steps for the rare earth. And whether we are looking to license it or -- and again, that is pretty much what I needed. So thank you for answering it so eloquently.

Yes. Well, John, thanks for attending the call today. And yes, as I've mentioned to John before you, what we're focused on, just to be clear, is a technology that could revolutionize the actual processing of rare earth elements here in the U.S.A. And that's really what's necessary now to generate a real position for us in that industry here. Biden's approach has been to have all of the ore mined overseas, probably in China. We don't see that as a real, secure viable approach going forward. We think that the miners here in the U.S. and especially this huge amount of raw material in the coal ash ponds and in coal itself should be given a chance to be expanded on and utilized and underpin the actual supply side here, on this side of the ocean, and our technologies are aimed at doing that. So if we're successful, I think it will be a tremendous win for everybody.

[Operator Instructions] The Next question comes from Tim Quinlisk of Colrain Capital.