Birchtech - Q1 2024

Transcript

Operator (participant)

Good day, and welcome to ME2C Environmental First Quarter 2024 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, May 16, 2024. A press release was issued prior to today's call on May 14, 2024, which provided the conference call and webcast information for today. An earnings press release was also issued earlier today. On the call is ME2C Environmental's Chief Executive Officer, Richard MacPherson, with Mike Mioska, with De Novo Group. Before we begin, we want to note that you should read the forward-looking statements in the company's earnings press release issued earlier today. During today's call, management will make certain predictive statements that reflect its current views about future performance and financial results.

The company bases these statements on certain assumptions and expectations on future events that are subject to risks and uncertainties. The company's periodic filings with the Securities and Exchange Commission list some of the most important risk factors that could cause actual results to differ from its predictions. Please also note that this conference call may make references to Adjusted EBITDA, a non-GAAP financial measure. The company views Adjusted EBITDA as an operating performance measure, and as such, the company believes that the GAAP financial measure most directly comparable to its net income or loss. For further information, please refer to the company's periodic filings with the SEC. At this time, I would like to turn the call over to Richard MacPherson, Chief Executive Officer of ME2C Environmental. Please go ahead, sir.

Richard MacPherson (CEO)

Thank you, operator, and thank you all for joining us today for ME2C Environmental's 2024 first quarter earnings call. Today's call will cover our financials as reported in the Form 10-Q filed yesterday, May 15, 2024, as well as updates on our strategic growth efforts, which include the recent announcement of new management additions. In short, we've achieved great progress this year, starting out financially very strong. I'll turn the call over to Mike Mioska of the De Novo Group, the company's financial consultants, who assist in preparing all of our financial statements to review the financials for the quarter. Mike?

Mike Mioska (Senior Financial Reporting Analyst)

Thank you, Rick. Many of the improvements were the direct result of the company's strategic renegotiation of a debt restructure agreement with our primary lender, Alterna Capital. The debt restructure agreement included a negotiated repayment of unsecured debt totaling $9 million and the repayment of secured debt of $0.3 million. Within three months, our total liabilities decreased by nearly $20 million, from $28.3 million at December 31st, 2023, to $8.8 million at March 31st, 2024. This debt repayment also dramatically reduced amounts owing related to the profit share liability. This profit share liability decreased from $17.6 million at December 31st, 2023, to $7.9 million at March 31st, 2024.

This decrease in debt further corresponded with a $90,000 decrease in interest expense for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. The company ended this first quarter with $11.2 million of cash remaining on hand after this debt repayment. The company also had a working capital ratio of 2.5 to 1, measuring current assets to current liabilities. The remaining outstanding principal balance with our primary lender was also reduced by $960,000 from a dollar-to-dollar credit received from our facilitation of the sale of stock held by the lender. This 960,000 was due to our primary lender as part of the negotiated debt restructure.

Rather than pay the nearly $1 million due this quarter, the sale of the lender's stock to a third party of long-term ME2C shareholders allowed our company to maintain a strong cash balance while further reducing our remaining debt balance. In addition to our improved debt, the company also achieved higher product sales in our core business during this first quarter, which yielded higher revenues, profits, and profit margins compared to the three months ended March 31st, 2023. Revenues increased by 18% to $3.6 million from $3 million. Gross profit increased by 42% to $1.4 million from $1 million, and gross margin increased to 41%. Net loss for the three months ended March 31st, 2024, was $2.6 million.

Included in this net loss for the three months ended March 31st, 2024, were the following non-cash expenses totaling $1,338,000: stock-based compensation of $770,000, amortization and depreciation of $62,000, non-cash interest expense of $241,000, and loss on the change in fair values of the profit share and unsecured note of $265,000. I will now turn the call back over to Rick to continue today's call. Rick?

Richard MacPherson (CEO)

Thank you, Mike, for a thorough review and for all your assistance with our quarterly financials. Now, moving away from our financials, I'll review updates in our other areas of growth and progress in new technologies. As announced earlier this year, our foray into the new market with new technologies actively continues. We announced a new division, WE2C Environmental, focused on potable water treatment technologies that utilize less coal-based activated carbons. Our novel sorbent products will address PFAS and PFOS, and these technical solutions will be more environmentally friendly and affordable for utilities than current alternatives.

Coupled with our own unique expertise in sorbent technologies and activated carbons, we're adding new team members that will ensure our success in this new potable water market with highly innovative technologies. Announced yesterday, May 15th, Dr. David Mazyck has been appointed the Division Director of WE2C Environmental. Working closely with John Pavlish and Dr. Nicholas Lentz, as well as our Operations VP, James Trettel, we're preparing to introduce new technologies to the water market next year in support of the U.S. EPA's recently announced regulations, which require that water utilities implement an approach to reach stringent limits on PFAS and PFOS, and other contaminants.

We led the U.S. coal-fired power sector in adhering to the U.S. EPA's MATS regulations for mercury emissions and other toxins with our patented SEA technologies. We intend to do the same for these water treatment utilities by developing and introducing disruptive new technologies. We have the specific skill set and know-how to support these utilities in reaching their regulatory requirements affordably, with little impact to the plant operations. Dr. Mazyck is the right person to put at the helm of this division.

Working in academia and industry for over 20 years, Dr. Mazyck's work is supported by U.S. EPA, the Department of Energy, and NASA. Dr. Mazyck serves as the technological lead for the activated carbon, currently licensed by a soon-to-be competitor, and has developed activated carbon technologies currently commercialized by other major well-known water treatment supply corporations. Dr. Mazyck's leadership position as chairman for the American Water Works Association, or AWWA, for over 10 years, heading various committees and trustee of the research division, further establishes pedigree in this industry, from top policymakers to key industry players. Dr. Mazyck's entrepreneurial background as owner and operator of a successful activated carbon company in the Southeast will further ensure that the WE2C division will provide growth opportunities that become real operations.

Our expansion into water treatment through WE2C will also be promoted through other areas of support that we're working to finalize in the near term. In addition to Dr. Mazyck, we'll be bringing on new additions to our management team and to support our R&D efforts. Dennis Baranik has joined ME2C as our National Sales Director, supporting business development in the activated carbon market. We will feature his complete bio and information early next week in a press release. We're currently in process of establishing research laboratories for the development of our new technologies for water treatment after many months of outsourcing our lab work. Our R&D experts, along with additional lab staff, will be working collaboratively in our own labs to ensure timely success and development of new activated carbon technologies.

Our longer-term plan is to construct new production facilities for, to produce our activated carbon technologies for the potable water market. While in the early stages of development, we'll be making developmental milestone announcements as we move through the rest of 2024 and into the new year. Our move into the potable water market is the main future growth of our company. We're committed to doing for water what we've done for air, providing an environmentally friendly, highly effective, affordable, smart business solution. Now, beyond our water treatment, we continue to consider our business plan for the emerging rare earth element technologies. Through continued testing from the lab at the University of North Dakota, academic experts in rare earths, we've made some very positive progress. We continue to consider partnerships to move this important technology forward commercially.

Our movement into rare earth extraction technologies is a longer-term effort and secondary to the near-term opportunities provided by the water treatment market. We will provide updates when appropriate as we consider our focus in this area. Now, as we move into this next quarter, mid-year into 2024, we expect positive news related to our patent litigation. The bench trial with our present defendants remains scheduled for late May, and we're very confident in our position and the outcome. Following the unanimous jury verdict received in March, awarding our company $57 million from willful infringement of our patents. Our outreach to coal-fired power plants continues. Now, with a strong legal precedent backing our efforts, we'll continue to protect the value of our patents for our company and our shareholders.

In summary, we're extremely well-positioned, better than we ever have, to execute on exciting new growth opportunities and realize significant business growth. We're actively working to reshape our company into a clean, a key leader in environmental technologies, as well as a profitable, publicly traded firm. As we increase our enterprise value in the US and Canada, we plan to move on to a larger exchange, such as the NASDAQ or NYSE. In closing, I'd like to acknowledge our management team, including Senior Vice President and Chief Technical Officer, John Pavlish, as well as Dr. Nicholas Lentz, in the effort to support our chemicals technical needs, and especially our Vice President of Operations, Jim Trettel, and all of their continued contributions and commitment to our success.

The addition of our new management, partners is going to help us tremendously as we move into the water market, and our partners at Caldwell Cassady & Curry should also be recognized as their success thus far continues to move us forward in our core business and enhance our ability to bring new technologies to North America. We further applaud the commitment and support of our long-term shareholders and are excited to provide significant share value moving through this year. Thank you all for your listening today and your continued interest in our company as we continue to grow. With that, I'll turn the call back over to the operator to begin the question and answer session.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue, and for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you ask one question and one follow-up question. One moment while we pull for questions. Once again, it is star one on your telephone keypad. Our first question is from Tim Quinlisk, private investor. Please proceed.

Tim Quinlisk (Founder)

Hey, good afternoon, Rick. I had a question for you. Obviously, the cash balance Q4 into Q1 improved as a result of the settlement with A.J. Gallagher and DTE. Can you speak to the other element of the consideration of the settlement there in terms of ongoing kind of business opportunities with those existing and underlying utilities in that group, in terms of them ultimately signing long-term contracts? And if that's part of that consideration, when would you expect to see that materialize in terms of as we go forward through the balance of 2024 in terms of quarterly revenue growth? I have a follow-up on that question as well. Thank you.

Richard MacPherson (CEO)

Sure. Thank you, Tim. Good question. So we have been active since the last trial, and before that, actually, in dealing with the power plants that are still using our technology and need to keep using it. So we're in the middle of negotiations with a number of power plants at this time. I do expect that we'll see tangible results this quarter, which I would expect to see starting to show up in actual revenue increases in the third quarter of this year. And I think that will be a growing situation through the rest of this year. I do expect that it may move into 2025 in terms of actual completion of contracts, but we'll start to show new revenues in Q3, and that will build through Q4 and continue to build through 2025.

Tim Quinlisk (Founder)

Okay, and then the follow-up question is, the utilities underlying the defendants that you're still litigating against, as well as sort of non-lawsuit utilities that are using your technology, that negotiation process is sort of, is it fair to say that that's on hold pending resolution of the bench trial here, in terms of your ability to sort of force these infringing utilities to enter into long-term contracts?

Richard MacPherson (CEO)

No, there's nothing on hold. Nothing needs to be on hold. We are trying to find business based solutions to the outstanding use of our technologies that aren't under license, and we'll continue to do that. And so there are no litigation considerations at this time, just continued business negotiations, and none of that is tied up in any litigation parameters at this time, nor do we see it in the future.

Tim Quinlisk (Founder)

Okay. All right, and then just briefly, and I'll, I'll get back in the queue. On your website, under the WE2C page, it looks like you've put something out there suggesting that you're, you're gonna advance plans to construct a manufacturer facility to produce the, the required materials. Can you give us a sense of kind of the magnitude of, A, the capital, the magnitude of the size you're talking about here, and as well as just, if you could, give us some context to understand what the, what the potable market opportunity is and, and how you'd go, how you'd go about attacking it, because it's a little bit unclear to me. Thank you.

Richard MacPherson (CEO)

Yeah, sure. So talking high level, once the EPA regulations go into effect, they will have established a multi-billion dollar annual business. It will, it will, generate a terrific amount of growth in the industry, and we aim to be up and running and producing and selling material into that market, which comes to fruition in 2027. But as we saw with the MATS program, a lot of people will try to get ahead of the curve, are actually doing it now. So anytime from 25 onward, that market will start to grow significantly, and hit its peak in 2027. We expect to be operating and producing material most likely in 2026, but we may also be able to enter the market sooner with some other strategic business decisions that we're now contemplating.

You know, and so without you know talking too much in detail about it, I think we will see revenue in 2025 from this business. I think our game plan is such that we'll be a very strong long-term participant in the industry. We will start with our continued and completing our research and development side for disruptive technologies. Once we have that in place, then we will move forward on the actual plant itself and start selling directly into market through that.

Tim Quinlisk (Founder)

Okay. All right, great. Thank you.

Operator (participant)

As a reminder, to star one on your telephone keypad, if you would like to ask a question. We will pause for a brief moment for final questions. I would now like to hand the conference back over to Mr. MacPherson for closing remarks.

Richard MacPherson (CEO)

Folks, thanks very much for listening in today. With what's happening at this point in time, in particular, the end of the month, on the 31st with the bench trial, it's difficult for me to give financial projections for the year until we pass that milestone. But I do very much expect that we will see significant growth this year over last year. I think the first quarter is very representative of the growth curve that we expect quarter-over-quarter as we go through the year. And I will be able to give a much more definite expectation of that number once we get to the next quarter's review, with the bench trial and the $57 million win certified one way or another by the court.

So, I'll leave it at that for now. I look forward to bringing news in our development. Our resources and our cash are at an all-time high. We've got great new additions to the company, and we are moving forward into the water business, as well as continuing to build on our core business. Look forward to bringing those numbers to you after this next quarter. I expect they will be significantly improved, much as the first quarter has been. Thank you very much for joining us today.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.