# Birchtech Corp.: Form 10-Q for the period ended Mar 31, 2021

- Company: [Birchtech Corp.](/companies/bcht.md) (CIK 728385)
- Form: 10-Q
- Filed: 2021-05-17
- Accepted by EDGAR: May 17, 2021, 20:30 ET
- Period: 2021-03-31
- Accession: 0001477932-21-003344
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/728385/000147793221003344/meec_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/728385/000147793221003344/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-01-01 to 2021-03-31 | $3.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2021-01-01 to 2021-03-31 | $1.5m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2021-01-01 to 2021-03-31 | $1.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Interest expense | 3 months, 2021-01-01 to 2021-03-31 | $10.2k | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-01-01 to 2021-03-31 | $3.2k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-01-01 to 2021-03-31 | −$417.9k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-01-01 to 2021-03-31 | −$0.01 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2021-01-01 to 2021-03-31 | $888.2k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2021-03-31 | $2.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-03-31 | $4.0m | us-gaap:AssetsCurrent |
| Total assets | at 2021-03-31 | $8.8m | us-gaap:Assets |
| Current liabilities | at 2021-03-31 | $3.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-03-31 | $19.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2021-03-31 | −$10.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 19,197 characters.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere within this report. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Forward-Looking Statements” in “Part I” preceding “Item 1 – Financial Information.” You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2020, as well as our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission.

### Background

Midwest Energy Emissions Corp. (the “Company”, “we”, “us” and “our”) is an environmental services and technologies company developing and delivering patented and proprietary solutions to the global power industry. Our leading-edge services have been shown to achieve mercury emissions removal at a significantly lower cost and with less operational impact to coal-fired power plants than currently used methods, while maintaining and/or increasing power plant output and preserving the marketability of byproducts for beneficial use.

North America is currently the largest market for our technology. 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 since being enacted. 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, but left the rule in place. On remand, following the Supreme Court’s instructions to consider costs, the EPA in April 2016 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 remains under review by the D.C. Circuit. In April 2017, the EPA asked the court to place that litigation in abeyance, stating that the Agency then under the Trump Administration was reviewing the supplemental finding to determine whether it should be reconsidered in whole or in part. The court granted EPA’s abeyance request which has remained in place. In April 2020, the EPA concluded that the 2016 supplemental finding was flawed in part due to its reliance on co-benefits to justify MATS and withdrew EPA’s 2016 “appropriate-and-necessary” determination as erroneous, but left the 2011 MATS rule in place pursuant to D.C. Circuit case law holding that a source category may only be removed from the list of categories to be regulated through a rigorous delisting process that cannot currently be satisfied by EPA. Upon taking office, the Biden Administration in January 2021 directed the EPA to review the previous Administration’s actions on various environmental matters including the withdrawal of the “appropriate and necessary” determination, for conformity with Biden Administration environmental policy. Nevertheless, legal challenges may continue with respect to the MATS regulation which could extend uncertainty over the status of MATS for a number of years. Investors should note that any changes to the MATS rule could have a negative impact on our business.

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### Executive Overview

We remain focused on positioning the Company for short and long-term growth, including focusing 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. As part of our overall strategy, we have a number of initiatives which we believe will be able to drive our short and long-term growth.

In the United States, we continue to seek new utility customers for our technology in order for them to meet the MATS requirements as well as maintaining our contractual arrangements with our current customers. In this regard, during the first quarter of 2021, we announced that we had secured supply contract extensions with two long-term customers.

In Europe, we had been working to penetrate this market through our licensing agreement entered into in March 2018 with one of our primary suppliers. Such arrangement has been terminated effective as of December 6, 2020. We intend to continue to pursue the European market when certain new regulations are expected to take effect in 2021 and 2022 although no assurance can be made that any such efforts will be successful.

On February 25, 2019, we were able to complete the restructuring of our unsecured and secured debt obligations held by AC Midwest Energy LLC extending the maturity dates of these debts until 2022 and eliminating quarterly principal payment requirements. This restructuring reflects the commitment of our financial partner in our efforts to attract new business, manage our present customers and monetize our patent portfolio.

From June through October 2019, we raised $2,600,000 in a private placement offering of 12.0% unsecured convertible promissory notes and warrants sold and issued to certain accredited investors.

In July 2019, we announced that we had initiated patent litigation against defendants in the U.S. District Court for the District of Delaware for infringement of certain patents which relate to our two-part Sorbent Enhancement Additive (SEA®) process for mercury removal from coal-fired power plants.

In October 2019, we entered into a license and development agreement with a nonrelated third party entity located in Alabama pursuant to which the parties have agreed to work together to develop a plan to commercialize and market certain technology owned by such entity related to the removal of mercury from air and water emissions generated by coal burning power plants.

Between July 2020 and January 2021, we entered into agreements with each of the four major utility defendants in the patent litigation commenced in 2019 which agreements included certain monetary arrangements and pursuant to which we have dismissed all claims brought against each of them and their affiliates, and such parties have withdrawn from petitions for IPR with the U.S. Patent and Trademark Office. Such agreements entered into with such parties provide each of them and their affiliates with a non-exclusive license to certain Company patents (related to the Company’s two-part Sorbent Enhancement Additive (SEA®) process) for use in connection with such parties’ coal-fired power plants. One of the agreements has facilitated an ongoing business relationship with that party.

During the first quarter of 2021, we eliminated $1,850,000 of convertible notes through conversions to shares of common stock.

During the first quarter of 2021, we announced that we are in the process of developing a proprietary methane gas emissions control technology which we believe can be adopted within the oil and gas industry. While we have not established a timeline for the introduction of our methane gas emissions control technology, we hope to be able to commercialize our efforts in 2022 and thereafter.

In addition, during the first quarter of 2021, we announced new technologies under development intended to improve the processing of rare earth elements (REEs) in North America. Our new technologies are under development in conjunction with our collaboration with the Alabama third party entity mentioned above and its affiliates. Such technologies focus on improving the cost of extracting rare earth minerals along with improving the environmental footprint of extracting those rare earth elements from their solvent state. While there is no established timeline for the introduction of these technologies after further testing is performed, we hope that if such further testing is successful, these technologies can be commercialized in 2022 and thereafter.

Although we face a host of challenges and risks, we are optimistic about our future and expect our business to grow substantially.

It should be noted that our operations may be affected by the ongoing coronavirus outbreak which began in China at the beginning of 2020 which has impacted various businesses throughout the world, including travel restrictions and the extended shutdown of certain businesses in impacted geographic regions. If the coronavirus situation does not improve during 2021 or should worsen, we may experience disruptions to our business including, but not limited to, the availability of raw materials, equipment, to our workforce, or to our business relationships with other third parties.

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### Results of Operations

### Revenues

We generated revenues of approximately $3,027,000 and $1,117,000 for the three months ended March 31, 2021 and 2020, respectively. Such revenues were primarily derived from sorbent product sales which were approximately $2,031,000 and $1,070,000 for the three months ended March 31, 2021 and 2020, respectively. The increase from prior year is primarily due to the increase in capacity factor experienced by our EGU’s.

### Costs and Expenses

Cost of sales were approximately $1,491,000 and $931,000 for the three months ended March 31, 2021 and 2020, respectively. This increase in cost of sales is primarily attributable to the increase in sorbent product sales.

Selling, general and administrative expenses were approximately $1,453,000 and $1,172,000 for the three months ended March 31, 2021 and 2020, respectively. The increase in selling, general and administrative expenses is primarily attributed to an increase in legal fees.

Total costs and expenses were approximately $3,441,000 and $2,891,000 during the three months ended March 31, 2021 and 2020, respectively. The increase in costs and expenses for the three months ended March 31, 2021 is primarily attributable to the increase in cost of sales and legal fees.

Interest expense related to the financing of capital was approximately $676,000 and $664,000 for the three months ended March 31, 2021 and 2020, respectively. The breakdown of interest expense for the three months ended March 2021 and 2020 is as follows:

*(In thousands)*

|  | Three Months Ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Interest expense on notes payable | $146 | $143 |
| Accelerated interest expense upon conversion of notes | 43 | - |
| Amortization of discount of notes payable | 457 | 491 |
| Amortization of debt issuance costs | 30 | 30 |
|  | $676 | $664 |

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Loss on change in fair value of profit share liability (relating to the restructured unsecured debt obligation held by AC Midwest Energy LLC) were approximately $121,000 and $124,000 for the three months ended March 31, 2021 and 2020, respectively. The change is primarily attributed to an increase in the fair value of the profit share liability. There were no significant changes to the underlying model during the three months ended March 31, 2021.

Gain on forgiveness of debt of $299,300 relates to the loan proceeds we received in April 2020 pursuant to the Paycheck Protection Program (“PPP”) under the CARES Act. Such loan was forgiven in January 2021 pursuant to the applicable PPP requirements.

### Net Income (Loss)

For the three months ended March 31, 2021 and 2020, we had a net loss of approximately $418,000 and $1,774,000, respectively. Such decrease was primarily due to an increase in revenues, improved profit margin and the gain on forgiveness of debt, partially offset by an increase in selling, general and administrative expenses for the three-month period.

### Liquidity and Capital Resources

We had approximately $1,982,000 in cash on our balance sheet at March 31, 2021 compared to approximately $591,000 at December 31, 2020. Total current assets were approximately $4,005,000 and total current liabilities were approximately $3,521,000 at March 31, 2021, resulting in working capital of approximately $484,000. This compares to total current assets of approximately $2,375,000 and total current liabilities of approximately $3,359,000 at December 31, 2020, resulting in a working capital deficit of approximately $984,000. Our accumulated deficit was approximately $63.9 million at March 31, 2021 compared to $63.5 million at December 31, 2020. Additionally, we had a net loss in the amount of approximately $418,000 and cash provided by operating activities of approximately $888,000 for the three months ended March 31, 2021.

During the three months ended March 31, 2021 we issued 3,700,000 shares of common stock in exchange for $1,850,000 of convertible notes.

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Total assets were approximately $8,832,000 at March 31, 2021 versus approximately $7,376,000 at December 31, 2020. The change in total assets is primarily attributable to an increase in cash.

Total liabilities were approximately $19,460,000 at March 31, 2021 versus approximately $20,580,000 at December 31, 2020. The decrease in liabilities is primarily due to the conversion of convertible notes to common stock.

Net cash provided by operating activities consists of net loss, adjusted by certain non-cash items, and changes in operating assets and liabilities.

Net cash provided by operating activities was approximately $888,000 for the three months ended March 31, 2021 compared to net cash used in operating activities of approximately $1,211,000 for the three months ended March 31, 2020. The increase in cash provided by operating activities of approximately $2,099,000 was primarily due to an approximate $1,356,000 decrease in net loss and an approximate $1,534,000 change in accounts payable and accrued liabilities.

Net cash provided by financing activities was approximately $503,000 for the three months ended March 31, 2021 compared to net cash provided by financing activities of approximately $173,000 for the three months ended March 31, 2020. During the three months ended March 31, 2021, we received $299,000 from the issuance of a note pursuant to a Second PPP Loan we received under the CARES Act and $247,000 from the exercise of warrants while during the three months ended March 31, 2020, we received $200,000 from the issuance of note pursuant to a one-year bank loan.

### 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

For detailed information regarding our critical accounting policies and estimates, see our financial statements and notes thereto included in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes to our critical accounting policies and estimates from those disclosed in our most recent Annual Report on Form 10-K.

### 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 interest and financing fees, 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.

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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.

The following table shows our reconciliation of Net loss to adjusted EBITDA for the three months ended March 31, 2021 and 2020, respectively:

*(In thousands)*

|  | For the Three Months Ended March 31, 2021 | March 31, 2020 |
| --- | ---: | ---: |
| Net loss | $(418) | $(1,774) |
| Non-GAAP adjustments: |  |  |
| Depreciation and amortization | 75 | 117 |
| Interest and letter of credit fees | 676 | 664 |
| Income taxes | 3 | - |
| Gain on forgiveness of debt | (299) | - |
| Stock based compensation | 32 | 115 |
| Adjusted EBITDA | $69 | $(878) |

## Market risk

As filed, 189 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.

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## Controls and procedures

As filed, 4,152 characters.

### Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer (who is the same person), 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

Except as discussed below, 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 except the updated business processes and internal controls made in support of the adoption of the new lease accounting standard.

Certain actions have been taken to address certain aspects of the material weaknesses disclosed above. As of January 1, 2020, we replaced our previous accounting software with a more efficient software package to manage our business activities and accounting needs. Although we no longer have a full-time CFO, during the fourth quarter of 2019 we hired a new full-time Controller at our Corsicana, Texas location, closed our Lewis Center, Ohio office and moved our corporate headquarters to our Corsicana, Texas address which has allowed us to consolidate our manufacturing and distribution activities, bookkeeping and accounting at one location. As of October 21, 2020, our Controller was appointed and promoted to Chief Accounting Officer and Principal Accounting Officer of the Company. Also, in the fourth quarter of 2019, we hired a financial consulting firm to assist us in bookkeeping and preparing financial statements for our SEC filings, assist us in evaluating our internal controls over financial reporting and assist us in other related matters. We continue to actively plan for and implement additional control procedures to improve our overall control environment and expect these efforts to continue throughout 2021 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 May 17, 2021.
Source: SEC EDGAR, the filing index for accession 0001477932-21-003344. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.