# Birchtech Corp.: Form 10-Q for the period ended Sep 30, 2018

- Company: [Birchtech Corp.](/companies/bcht.md) (CIK 728385)
- Form: 10-Q
- Filed: 2018-11-13
- Accepted by EDGAR: Nov 13, 2018, 16:31 ET
- Period: 2018-09-30
- Accession: 0001477932-18-005448
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/728385/000147793218005448/meec_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/728385/000147793218005448/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $4.2m | us-gaap:Revenues |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $8.8m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $3.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $6.6m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2018-07-01 to 2018-09-30 | $1.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-01-01 to 2018-09-30 | $4.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | −$164.9k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | −$2.7m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | −$636.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | −$4.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | −$0.01 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | −$0.06 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | −$1.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2018-09-30 | $449.5k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $3.1m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $8.5m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $6.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $16.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2018-09-30 | −$8.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 21,107 characters.

### Background

Midwest Energy Emissions Corp. (the “Company”, “we”, “us” and “our”) develops and deploys patented, proprietary technologies to remove mercury emissions from coal-fired power plants. The U.S. EPA MATS (Mercury and Air Toxics Standards) rule requires that all coal and oil-fired power plants in the U.S., larger than 25MWs, must limit mercury in its emissions to below certain specified levels, according to the type of coal burned. Power plants were required to begin complying with MATS on April 16, 2015, unless they were granted a one-year extension to begin to comply. MATS, along with many state and provincial regulations, form the basis for mercury emission capture at coal fired plants across North America. Under the MATS regulation, Electric Generating Units (“EGUs”) are required to remove about 90% of the mercury from their emissions. We believe that we continue to meet the requirements of the industry as a whole and our technologies have been shown to achieve mercury removal levels compliant with all state, provincial and federal regulations at a lower cost and with less plant impact than our competition.

As is typical in this market, we are paid by the EGU based on how much of our material is injected to achieve the needed level of mercury removal. Our current clients pay us as material is delivered to their facility. Clients will use our material whenever their EGUs operate, although EGUs are not always in operation. EGUs typically may not be in operation due to maintenance reasons or when the price of power in the market is less than their cost to produce power. Thus, our revenues from EGU clients will not typically be a consistent stream but will fluctuate, especially seasonally as the market demand for power fluctuates.

The MATS regulation has been subject to legal challenge, and in June 2015, the U.S. Supreme Court held that the EPA unreasonably failed to consider costs in determining whether it is “appropriate and necessary” to regulate hazardous air pollutants, including mercury, from power plants. The Court remanded the case back to the U.S. Court of Appeals for the District of Columbia Circuit for further proceedings, but left the rule in place. In December 2015, the D.C. Circuit remanded the rule back to the EPA for further consideration while allowing MATS to remain in effect pending the EPA’s finding; the Supreme Court later denied a petition challenging the lower court’s decision to remand without vacating. On April 14, 2016, EPA issued a final supplemental finding reaffirming the MATS rule on the ground that it is supported by the cost analysis the Supreme Court required. That supplemental finding is under review by the D.C. Circuit, and the Company is unable to predict with certainty the outcome of these proceedings. On April 18, 2017, EPA asked the court to place that litigation in abeyance, stating that the Agency is reviewing the supplemental finding to determine whether it should be reconsidered in whole or in part. The court granted EPA’s abeyance request on April 27, 2017, and ordered EPA to file 90-day status reports starting July 26, 2017. In early October 2018, the EPA announced that it has submitted proposed changes to the MATS rule to the White House Office of Management and Budget for its review prior to the proposed rule being released and published which will then be followed by a public comment period. As of the date of the filing of this report, we do not know and are unable to predict the changes which have be proposed, or whether (and when) such proposed changes will ultimately be finalized. However, we do not believe that EPA will seek to withdraw the MATS rule. Investors should note that any changes to the MATS rule could have a negative impact on our business.

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We remain focused on positioning the Company for short and long-term growth. In the nine months ended September 30, 2018, we focused on execution at our customer sites and on continual operation improvement. We continue to make refinements to all of our key products, as we continue to focus on the customer and its operations. In 2017, the Company closed on the acquisition from EERCF of all patent rights, including all patents and patents pending, domestic and foreign, relating to the foregoing technology. This acquisition positions the Company to continue its growth across North America, including the licensing of our technologies in the United States and around the world.

### Results of Operations

The company saw a decrease in sales in the first nine months of 2018 as compared to 2017. The decrease in product sales is primarily due to the loss of customer EGU’s that were shut down as a result of competitive disadvantages to other EGU’s, optimization efforts with our customers, as well as lower capacity factors seen at some customer sites resulting in decreased product needed to keep our customers in MATS compliance.

### Revenues

*Sales* - We generated revenues of approximately $4,209,000 and $8,448,000 for the quarters ended September 30, 2018 and 2017, respectively and $8,782,000 and $21,807,000 for the nine months ended September 30, 2018 and 2017, respectively.

Total sorbent product sales for the three months ended September 30, 2018 and 2017 were $4,114,000 and $8,076,000, respectively. Total sorbent product sales for the nine months ended September 30, 2018 and 2017 were $8,615,000 and $20,472,000, respectively. The decrease in product sales is primarily due to decreased product needed to keep our customers in MATS compliance based on optimization efforts undertaken over the past year with our customers as well as lower capacity factors seen at some customer sites. This decrease is primarily due to the factors described above.

Equipment sales for the three months ended September 30, 2018 and 2017 were $28,000 and $3,000, respectively. Equipment sales for the nine months ended September 30, 2018 and 2017 were $37,000 and $787,000, respectively. In 2017, equipment sales were primarily related to one front end injection system sold to a customer. There were no similar projects sold in 2018.

Other revenues for the three months ended September 30, 2018 and 2017 were $67,000 and $369,000, respectively. Other revenues for the nine months ended September 30, 2018 and 2017 were $129,000 and $547,000, respectively. This decrease is primarily associated with decreased demonstration revenues in the nine months ended September 30, 2018 from the same period in the prior year.

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### Cost and Expenses

*Costs and expenses* were $4,374,000 and $7,419,000 during the three months ended September 30, 2018 and 2017, respectively, and were $11,500,000 and $21,147,000 for the nine months ended September 30, 2018 and 2017, respectively. The decrease in costs and expenses from the prior year is primarily attributable to a decrease in costs of sales in the current year. The decrease in cost of sales is primarily associated with the significant decrease in revenues over the same period 2017.

*Cost of sales* during the three months ended September 30, 2018 and 2017 was $3,010,000 and $5,509,000, respectively, and were $6,601,000 and $14,291,000 for the nine months ended September 30, 2018 and 2017, respectively. The decrease in cost is primarily attributable to the significant decrease in product sales in 2018.

*Selling, general and administrative expenses* were $1,364,000 and $1,910,000 for the quarters ended September 30, 2018 and 2017, respectively, and were $4,899,000 and $6,857,000 for the nine months ended September 30, 2018 and 2017, respectively. The decrease in selling, general and administrative expenses is primarily attributed to a decrease in stock based compensation and sales commissions over the same period of 2017.

### Other Expenses

Interest expense related to the financing of capital was $471,000 and $542,000 during the quarters ended September 30, 2018 and 2017, respectively, and were $1,501,000 and $1,627,000 for the nine months ended September 30, 2018 and 2017, respectively.

### Net (Loss) Income

For the quarter ended September 30, 2018 we had net loss of approximately $636,000. For the quarter ended September 30, 2017 we had net income of approximately $813,000. For the nine months ended September 30, 2018 we had a net loss of approximately $4,248,000. For the nine months ended September 30, 2017 we had net loss of approximately $824,000. The change in net loss is primarily due to the decreased sales.

### Taxes

As of September 30, 2018, our deferred tax assets are primarily related to accrued compensation and net operating losses. A 100% valuation allowance has been established due to the uncertainty of the utilization of these assets in future periods. As a result, the deferred tax asset was reduced to zero and no income tax benefit was recorded. The net operating loss carryforward will begin to expire in 2031.

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### Liquidity and Capital Resources

Our principal source of liquidity is cash generated from operating activities. As of September 30, 2018, our cash and cash equivalents totaled $450,000 versus $2,418,000 at December 31, 2017. The decrease in cash is primarily due to note principle payments, focusing on accounts payable and a decrease in sales.

*Total assets* were $8,479,000 at September 30, 2018 versus $12,056,000 at December 31, 2017. The change in total assets is primarily attributable to the decrease in cash and cash equivalents and accounts receivable.

*Total liabilities* were $16,595,000 at September 30, 2018 versus $16,481,000 at December 31, 2017. The increase in total liabilities is primarily due to an increase in accounts payable, offset by a decrease in deferred revenue.

*Operating activities* used $1,119,000 versus $1,149,000 of cash during the nine months ended September 30, 2018 and 2017 respectively. The decrease in cash used in operating activities was primarily due to cash provided by a decreases in accounts receivable and stock based compensation and increase in accounts payable and was offset by the increased net loss over the same period in 2017.

*Investing activities* used $131,000 and $3,199,000 during the nine months ended September 30, 2018 and 2017, respectively. In 2017, the Company paid $2,500,000 for the acquisition of the EERCF Patent Rights.

*Financing activities* used $719,000 during the nine months ended September 30, 2018 versus $1,040,000 during the nine months ended September 30, 2017. Financing activities during the nine months ended September 30, 2018 was due to the repayment of principal of promissory notes offset by proceeds from convertible notes payable.

### Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

### Critical Accounting Policies and Estimates

Our discussion and analysis of our financial conditions and results of operation are based upon the accompanying consolidated financial statements which have been prepared in accordance with the generally accepted accounting principles in the U.S. The preparation of the consolidated financial statements requires that we make estimates and assumptions that affect the amounts reported in assets, liabilities, revenues and expenses. Management evaluates on an on-going basis our estimates with respect to the valuation allowances for accounts receivable, income taxes, accrued expenses and equity instrument valuation, for example. We base these estimates on various assumptions and experience that we believe to be reasonable. The following critical accounting policies are those that are important to the presentation of our financial condition and results of operations. These policies require management’s most difficult, complex, or subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

The following critical accounting policies affect our more significant estimates used in the preparation of our consolidated financial statements. In particular, our most critical accounting policies relate to the recognition of revenue, and the valuation of our stock-based compensation.

### Accounts Receivable

Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.

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### Revenue Recognition

The Company records revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company’s revenues are primarily comprised of sales of products. Revenue is recognized when the Company satisfies its performance obligation under the contract by transferring the promised product to its customer that obtains control of the product. A performance obligation is a promise in a contract to transfer a distinct product to a customer. Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales and other taxes are excluded from revenues. Invoiced shipping and handling costs are included in revenue.

The Company’s revenue is primarily from products transferred to customers at a point in time. The Company recognizes revenue at the point in time in which the customer obtains control of the product, which is generally when product title passes to the customer upon shipment.

### Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s consolidated financial statements are based on a more-likely-than-not recognition threshold. The Company did not have any unrecognized tax benefits at September 30, 2018 and December 31, 2017. When necessary, the Company would accrue penalties and interest related to unrecognized tax benefits as a component of income tax expense.

The Company and its subsidiaries file a consolidated income tax return in the U.S. federal jurisdiction and three state jurisdictions. The Company is no longer subject to U.S. federal examinations for years prior to 2013 or state tax examinations for years prior to 2012.

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### Stock-Based Compensation

We have adopted the provisions of *Share-Based Payments*, which requires that share-based payments be reflected as an expense based upon the grant-date fair value of those grants. Accordingly, the fair value of each option grant, non-vested stock award and shares issued under our employee stock purchase plan, were estimated on the date of grant. We estimate the fair value of these grants using the Black-Scholes model which requires us to make certain estimates in the assumptions used in this model, including the expected term the award will be held, the volatility of the underlying common stock, the discount rate, dividends and the forfeiture rate. The expected term represents the period of time that grants and awards are expected to be outstanding. Expected volatilities were based on historical volatility of our stock. The risk-free interest rate approximates the U.S. treasury rate corresponding to the expected term of the option. Dividends were assumed to be zero. Forfeiture estimates are based on historical data. These inputs are based on our assumptions, which we believe to be reasonable but that include complex and subjective variables. Other reasonable assumptions could result in different fair values for our stock-based awards. Stock-based compensation expense, as determined using the Black-Scholes option-pricing model, is recognized on a straight-line basis over the service period, net of estimated forfeitures. To the extent that actual results or revised estimates differ from the estimates used, those amounts will be recorded as an adjustment in the period that estimates are revised.

### Non-GAAP Financial Measures

#### Adjusted EBITDA

To supplement our consolidated financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we consider and are including herein Adjusted EBITDA, a Non-GAAP financial measure. We view Adjusted EBITDA as an operating performance measure and, as such, we believe that the GAAP financial measure most directly comparable to it is net income (loss). We define Adjusted EBITDA as net income adjusted for income taxes, depreciation, amortization, stock based compensation, and other non-cash income and expenses. We believe that Adjusted EBITDA provides us an important measure of operating performance because it allows management, investors, debtholders and others to evaluate and compare ongoing operating results from period to period by removing the impact of our asset base, any asset disposals or impairments, stock based compensation and other non-cash income and expense items associated with our reliance on issuing equity-linked debt securities to fund our working capital.

Our use of Adjusted EBITDA has limitations as an analytical tool, and this measure should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition. Additionally, our measure of Adjusted EBITDA may differ from other companies’ measure of Adjusted EBITDA. When evaluating our performance, Adjusted EBITDA should be considered with other financial performance measures, including various cash flow metrics, net income and other GAAP results. In the future, we may disclose different non-GAAP financial measures in order to help our investors and others more meaningfully evaluate and compare our future results of operations to our previously reported results of operations.

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We prepare and publicly release quarterly unaudited financial statements prepared in accordance with GAAP. The following table shows our reconciliation of Net Income to Adjusted EBITDA for the quarters and nine months ended September 30, 2018 and 2017, respectively:

*(In thousands)*

*(In thousands)*

|  | Quarter Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $(636) | $813 | $(4,248) | $(824) |
| Non-GAAP adjustments: |  |  |  |  |
| Depreciation and amortization | 205 | 327 | 602 | 951 |
| Interest and letter of credit fees | 471 | 595 | 1,530 | 1,801 |
| Income taxes | 4 | 15 | 12 | 21 |
| Stock based compensation | 53 | 201 | 438 | 1,438 |
| Settlement gains and losses | - | (379) | 44 | (318) |
| Adjusted EBITDA | $97 | $1,572 | $(1,622) | $3,069 |

## Market risk

As filed, 163 characters.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

## Controls and procedures

As filed, 2,962 characters.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were not effective as a result of material weaknesses in our internal control over financial reporting. The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses in our internal control over financial reporting, which are common to many small companies: (i) lack of a sufficient complement of personnel commensurate with the Company’s reporting requirements; and (ii) insufficient written documentation or training of our internal control policies and procedures which provide staff with guidance or framework for accounting and disclosing financial transactions.

Despite the existence of the material weaknesses above, we believe that the consolidated financial statements contained in this Form 10-Q fairly present our financial position, results of operations and cash flows as of and for the periods presented in all material respects.

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Certain actions have been taken to address certain aspects of the material weaknesses disclosed above. We continue to actively plan for and implement additional control procedures to improve our overall control environment and expect these efforts to continue throughout 2018 and beyond. Due to the nature of the remediation process, the need to have sufficient resources (cash or otherwise) to devote to such efforts, and the need to allow adequate time after implementation to evaluate and test the effectiveness of the controls, no assurance can be given as to the timing of achievement of remediation.

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## Risk factors

As filed, 163 characters.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Filed Nov 13, 2018.
Source: SEC EDGAR, the filing index for accession 0001477932-18-005448. Last ingested by Listed: Nov 13, 2026, 16:05 ET. No prices; not investment advice.