Birchtech Corp.: Form 10-Q for the period ended Mar 31, 2025

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 U.S. Private Securities Litigation Reform Act of 1995 or applicable Canadian securities laws. See “Forward-Looking Statements” in “Part I” preceding “Item 1 – Financial Statements.” 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, 2024, 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 or Canadian securities regulators.

Unless indicated otherwise, references in this discussion and analysis to the “Company,” “we,” “us,” or “our” refer collectively to Birchtech Corp. (formerly Midwest Energy Emissions Corp.) and its consolidated subsidiaries.

Overview

Business Operations

We are a provider of specialty activated carbon technologies, delivering innovative solutions for air and water purification. We provide patented and proprietary technologies for mercury emissions capture to the coal-fired utility sector, and are developing disruptive water purification technologies with a specialization on forever chemicals such as PFAS and PFOS.

Mercury Emissions

We provide mercury capture solutions for coal-fired power plants driven by our patented two-part Sorbent Enhancement Additive (SEA®) process using a powerful combination of science and engineering. 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 other used methods, while maintaining and/or increasing power plant output and preserving the marketability of byproducts for beneficial use. We design systems and materials tailored and formulated specifically to each customer’s coal-fired units. North America is currently the largest market for our emissions technologies.

The market for mercury removal from power plant emissions in the United States have largely been driven by federal regulations. The Mercury and Air Toxics Standards (MATS) rule, proposed by the U.S. Environmental Protection Agency (EPA) in May 2011 and which became effective in April 2012, is intended to reduce air emissions of heavy metals, including mercury (Hg), from all major U.S. power plants burning coal or oil, which are the leading source of non-natural mercury emissions in the U.S. Our mercury removal technologies and systems will achieve mercury removal levels which meet or exceed the MATS requirements with lower cost and plant systems impacts than typical PAC or BAC sorbent injection systems. Our products have been shown to be successful across a myriad of fuel and system types, tunable to any configuration, and environmentally friendly, allowing for the recycling of fly ash for beneficial use.

Our SEA® technology provides total mercury control with solutions that are based on a thorough scientific understanding of actual and probable interactions involved in mercury capture in coal-fired flue gas. A complete understanding of the complexity of mercury-sorbent-flue gas interactions and chemisorption mechanisms allows for optimal control strategy and product formulation, resulting in effective mercury capture. Combined with a thorough proprietary audit of the plant and its configuration and instrumentation, we believe our complete science and engineering approach for mercury-sorbent-flue gas interactions are well-understood, highly predictive, and critical to delivering total mercury control.

We believe that a significant percentage of coal-fired power plants in the United States have adopted and are infringing upon our two-part Sorbent Enhancement Additive (SEA®) process for mercury removal from coal-fired power plants.

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Beginning in 2019, we began to actively enforce our patent rights against unauthorized use of our patented technologies, and have since initiated patent litigation in various jurisdictions against multiple infringers, claiming infringement of our patents related to our two-part process for mercury removal from coal-fired power plants. We view such litigation as a last resort. Our goal and overall strategy is to convert infringers to our supply chain of sorbent products for mercury removal, or otherwise license our patents to them on a non-exclusive basis in connection with their respective coal-fired power plants.

In April 2023, the EPA issued a proposal to strengthen and update MATS. Such proposal was finalized and published in May 2024 with an effective date of July 8, 2024 which, among other things, strengthens emissions monitoring and compliance and tightens the emission standard for mercury for existing lignite-fired power plants to a level that is aligned with the mercury standard that other coal-fired power plants have been achieving under MATS.

On March 12, 2025, the newly appointed EPA administrator under the Trump Administration announced plans to roll back dozens of environmental regulations including the reconsideration of the MATS regulation. On April 8, 2025, President Trump signed a Proclamation exempting certain stationary sources, identified in Annex 1 of the Proclamation, from compliance with the 2024 updated MATS Rule. As set out in the Proclamation, the President’s exemption lasts for a period of two years beyond the updated Rule’s compliance date -- i.e., for the period beginning July 8, 2027, and concluding July 8, 2029. During the two-year period these stationary sources identified in Annex 1 are subject to the compliance obligations that they are currently subject to under MATS as the MATS Rule existed prior to the 2024 update. Annex 1 identifies 47 plant owners and over 60 power plants provided such exemption, which list includes a number of our customers.

Water Treatment

In April 2024, we announced the introduction of our new division to address the potable (drinking) water market with new sorbent technologies under development. These new technologies involve less use of activated carbon and are a much more environmentally friendly approach to water treatment.

AC is a form of carbon that has been processed to have a large surface area and a high degree of porosity. This gives it the ability to adsorb a wide range of substances, making it highly effective at removing particles, toxins and impurities. GAC and similar agglomerated activated carbons (or shaped activated carbons) are a form of activated carbon that is specifically produced in a granular, coarse form, as opposed to powdered or pelletized forms. This granularity allows for better flow through filtration systems, which makes it ideal for use in applications that require a continuous flow of air, water or liquids. GAC is commonly used in water filtration systems, including municipal water treatment plants. It is particularly effective at removing chlorine, organic compounds, pesticides, heavy metals, and other contaminants. Reactivated GAC is spent GAC that has been restored for reuse, making it more sustainable and cost-effective.

Utilizing renewal raw materials allows us to develop and provide shaped activated carbon that can compete with other commercially available GAC options, and provide a superior activated carbon technology to remove contaminants (including PFAS) from potable water. While pending PFAS regulations are projected to significantly increase overall GAC demand, our products are expected to be successfully applied regardless of PFAS regulations reflecting significant competitive advantages (i.e., renewable raw material sources, low arsenic content, and overall performance) to presently available GAC products for the water market. In addition, our product(s) may provide inherent performance advantages such as lower pressure drop relative to existing carbon products in the marketplace today.

Our efforts are supported by two new state of the art laboratories which we opened in 2024, one located in Pennsylvania and the other located in North Dakota. In addition to supporting the development of new technologies, the laboratories will also offer other services such as carbon activation, thermal reactivation and regeneration, contaminant analysis, as well as carbon evaluations and recommendations. These labs will enable us to tailor and optimize products for our customers’ needs and assist water utilities in implementing strategies to lower compliance costs, as well as provide a continued path to commercialization of our technologies.

While the initial focus for our water treatment technologies will be on the potable water market, we expect that our technologies will also be valuable for industrial wastewater remediation. Industrial wastewater is the liquid waste generated by industrial activities, including manufacturing, processing, and production facilities. It often contains pollutants such as organic matter, heavy metals, chemicals, oils, and other contaminants that must be treated before being discharged into the environment or reused. We believe our water treatment technologies will be well suited to treat such industrial wastewater in an optimal and cost-effective manner.

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Other Recent Developments

On February 27, 2024, and pursuant to a Debt Restructuring Agreement entered into on such date with AC Midwest Energy LLC (“AC Midwest”), we made an approximate $9.0 million principal payment against an approximate $13.2 million unsecured note held by AC Midwest Energy LLC (“AC Midwest”) and repaid in full the remaining principal balance of approximately $272,000 due on a secured note held by AC Midwest. As part of the restructuring, we negotiated a reduction in the profit participation preference held by AC Midwest from approximately $17.7 million to $7.9 million (the “Restructured Profit Share”). Such Restructured Profit Share is “non-recourse” and shall only be paid from net litigation proceeds from claims relating to our intellectual property. In addition, pursuant to the Debt Restructuring Agreement, in March 2024, we were able to facilitate the private sale of certain shares of common stock held by AC Midwest and received a $960,000 credit toward the remaining balance due on the unsecured note. In August 2024, we repaid in full the remaining principal balance of approximately $3.2 million due on the unsecured note held by AC Midwest. As a result, the only remaining debt obligation to AC Midwest is the “non-recourse” Restructured Profit Share.

Following a five-day trial, on March 1, 2024, we were awarded a $57.1 million patent infringement verdict by a federal jury in the U.S. District Court for the District of Delaware against a remaining group of defendants in the lawsuit commenced by us in 2019. Such group of affiliated defendants included multiple limited liability companies with refined coal industry operations, including CERT Operations II LLC, CERT Operations IV LLC, CERT Operations V LLC, and CERT Operations RCB LLC. The jury determined that these defendants infringed our patented technologies for mercury emissions and were liable for willful infringement, along with inducing and contributory infringement. Following the trial, various post-trial motions and applications were made by the parties. We are awaiting rulings from the Court.

In April 2024, the EPA issued the first-ever national, enforceable drinking water standard to protect communities from exposure to harmful per-and polyfluoroalkyl substances (“PFAS”), also known as “forever chemicals”. The Rule sets limits for five individual PFAS: PFOA, PFOS, PFNA, PFHxS, and HFPO-DA (known as GenX Chemicals). The Rule also sets a hazard index level for two or more of four PFAS as a mixture: PFNA, PFHxS, HFPO-DA, and PFBS. Under the Rule, public water systems must monitor these PFAS and will have three years to complete initial monitoring (by 2027), followed by ongoing compliance monitoring. Water systems must also provide the public with information on the levels of these PFAS in their drinking water beginning in 2027.

In May 2024, we announced the appointment of David Mazyck to head our new division to address the potable (drinking) water market with new sorbent technologies under development.

In addition, in May 2024, we announced the appointment of Dennis Baranik as Director of National Sales. Mr. Baranik will oversee product sales and IP licensing in the Company’s core business for mercury emissions capture as well as support both product and business development for the water market.

In July 2024, we commenced three patent infringement lawsuits against 14 defendants, including coal-fired power utilities, in three separate U.S. District Courts in Arizona, Iowa and Missouri. In January 2025, we commenced another patent infringement lawsuit against four defendants in the U.S. District Court for the Western District of Missouri. Such lawsuit claims infringement of the Company’s patent rights related to the Company’s mercury emissions reduction technologies. The United States Judicial Panel on Multidistrict Litigation has ordered that such patent infringement lawsuits be consolidated and centralized in the Southern District of Iowa.

Effective as of October 8, 2024, we entered into agreement with one of the utilities and an affiliated entity named as defendants in the patent infringement lawsuit commenced by the Company in July 2024 in Arizona. Such agreement provides such parties and their affiliates with a non-exclusive license to certain Company patents for use in connection with a certain designated coal-fired power plant operated by such utility. The agreement includes a one-time license fee and provides the Company with a right of first refusal for certain of such utility’s product supply for mercury emissions capture at such designated power plant.

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Effective as of January 7, 2025, we entered into agreement with another one of the utilities named as a defendant in the Arizona action. Such agreement provides such party and its affiliates with a non-exclusive license to certain Company patents for use in connection with a certain designated coal-fired power plant operated by such utility. The agreement includes a one-time license fee and provides the Company with the right to be included in such party’s bidding process for certain product supply for mercury emissions capture at such party’s designated power plant.

In January 2025, we commenced another patent infringement lawsuit against four defendants in the U.S. District Court for the Western District of Missouri. Such lawsuit claims infringement of the Company’s patent rights related to the Company’s mercury emissions reduction technologies. Named as defendants in the action are Evergy, Inc., Evergy Metro Inc., Evergy Missouri West, Inc. and Evergy Kansas Central, Inc. In the lawsuit, we request a trial by jury against the defendants and seek damages, costs, and legal expenses, along with a finding of willful infringement by the defendants, and an injunction prohibiting the defendants from further acts of infringement. In February 2025, such lawsuit was consolidated with and transferred to the Southern District of Iowa.

Effective on October 17, 2024, as part of our rebranding, we changed our corporate name from Midwest Energy Emissions Corp. to Birchtech Corp. pursuant to a certificate of amendment to our certificate of incorporation filed with the State of Delaware, and on October 17, 2024 our common stock commenced trading under the ticker symbol “BCHT”.

On October 9, 2024, we received conditional approval to list our shares of common stock on the Toronto Stock Exchange (“TSX”) and graduate from the TSX Venture Exchange (“TSXV”) to the TSX. On November 12, 2024, our shares commenced trading on the TSX under the ticker symbol “BCHT”.

Effective as of January 1, 2025, Birchtech Corp. entered into an investor relations consulting agreement with MZHCI, LLC.

On March 19, 2025, we announced that our Board of Directors authorized a share repurchase program under which the Company may purchase up to $5.0 million of its common stock. Purchases under the share repurchase program may be made from time to time, in such amounts as management deems appropriate, through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, purchases through 10b5-1 trading plans, or by any combination of such methods. The timing and amount of any repurchases pursuant to the share repurchase program will be determined based upon a variety of factors, including general market conditions, share price, corporate and regulatory requirements and limitations, corporate liquidity requirements and priorities, and other factors. We anticipate that any repurchases will not occur before the second half of 2025. The share repurchase program does not have an expiration date, does not require the Company to repurchase any specific number of shares of its common stock, if any, and may be modified, suspended or terminated at any time without notice. During the three months ended March 31, 2025, there were no repurchases made under the program.

Results of Operations

Revenues

We generated revenues of approximately $3,221,000 and $3,242,000 for the three months ended March 31, 2025 and 2024, respectively. Such revenues were primarily derived from sorbent product sales which were approximately $2,677,000 and $3,084,000 for three months ended March 31, 2025 and 2024, respectively. Revenues can be dependent on natural gas prices, extreme weather, and the maintenance and downtime requirements of customer plants. The decrease in revenues from the prior year was primarily due to the mix of plants running and products sold in the first three months of 2025 resulting in decreased product revenues for the quarter ended March 31, 2025 compared to the prior year period, offset by an increase in licensing revenues for the three months ended March 31, 2025 compared to March 31, 2024.

Licensing revenues were approximately $525,000 and $141,000 for the three months ended March 31, 2025 and 2024, respectively. Such increase was primarily due to a new licensing agreement which was entered into during the three months ended March 31, 2025 with a utility.

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Equipment sales and other revenues for the three months ended March 31, 2025 and 2024 were approximately $19,000 and $17,000, respectively. Other revenues were comparable for the periods ended March 31, 2025 and 2024.

Cost of Sales

Cost of sales were approximately $1,987,000 and $2,113,000 for the three months ended March 31, 2025 and 2024, respectively. The decrease in cost of sales of approximately $127,000 was primarily attributable to decreased product sales in the first three months of 2025 compared to the prior year period, together with a change in the mix of products sold in the first quarter of 2025 compared to the first quarter of 2024.

Gross Profit

Gross profit was approximately $1,234,000 and $1,128,000 for the three months ended March 31, 2025 and 2024, respectively. This increase in gross profit of approximately $106,000 was primarily due to higher licensing revenues in 2025 compared to 2024, which typically carry higher margins than product sales, thus contributing to the overall improvement in gross profit.

Operating Expenses

Operating expenses consisted of selling, general and administrative expenses (“SG&A”) and research and development expenses (“R&D”) in 2025 and SG&A and in 2024. SG&A expenses were approximately $2,171,000 and $3,527,000 for the three months ended March 31, 2025 and 2024, respectively. Total SG&A expenses decreased in the first three months of 2025 compared to the prior year period, as a result of variances in individual categories. Decreases in salaries and wages, and professional fees were partially offset by increases in consulting fees. The decrease in salaries and wages was primarily due to the payment of bonus compensation in the first quarter of 2024 for which there were no comparable expenses in the first quarter of 2025, along with greater stock-based compensation in the first quarter of 2024 compared to first quarter of 2025. The decrease in professional fees was primarily due to lower legal fees in the first quarter of 2025 in connection with the Company’s patent litigation compared to the prior year period which had greater legal fees due to trial preparation and the jury trial in the U.S. District Court for the District of Delaware.

Total R&D expenses were approximately $407,000 and $0 for the three months ended March 31, 2025 and 2024, respectively. R&D expenses relate to research conducted to develop water treatment products utilizing new sorbent technologies, and increased in the first three months of 2025 compared to the prior year period as the Company had not incurred any research related costs during the first three months of 2024. The Company began incurring research and development costs when the lab equipment at the Company’s labs was placed into service.

Operating Loss

Our operating loss was approximately $1,343,000 and $2,398,000 for the three months ended March 31, 2025 and 2024, respectively. Such decrease in operating loss was primarily due to our increased gross profit in 2025 compared to 2024 coupled with a decrease in total operating expenses during the current period.

Other Income (Expense)

Interest expense related to the financing of capital was approximately $54 and $246,000 for the three months ended March 31, 2025 and 2024, respectively. The approximate breakdown of interest expense for the three months ended March 31, 2025 and 2024 is as follows:

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Loss on change in fair value of profit share liability were approximately $353,000 and $265,000 for the three months ended March 31, 2025 and 2024, respectively. The change is primarily attributed to the modification of the terms of the profit share liability (see Note 7 to the consolidated financial statements).

Net Loss

For the three months ended March 31, 2025 we had a net loss of approximately $1,679,000 compared to net loss of approximately $2,855,000 for the three months ended March 31, 2024. Such change was primarily due an increase in gross profit in 2025 compared to 2024, and a decrease in SG&A.

Liquidity and Capital Resource

We had approximately $3,188,000 in cash on our balance sheet at March 31, 2025 compared to approximately $3,456,000 at December 31, 2024. Total current assets were approximately $5,198,000 and total current liabilities were approximately $9,477,000 at March 31, 2025, resulting in a working capital deficiency of approximately $4,279,000. This compares to total current assets of approximately $6,099,000 and total current liabilities of approximately $8,806,000 at December 31, 2024, resulting in a working capital deficiency of approximately $2,707,000. Our accumulated deficit was approximately $74.4 million at March 31, 2025 compared to $72.8 million at December 31, 2024. Additionally, we had a net loss in the amount of approximately $1,679,000 and cash used in operating activities of approximately $254,000 for the three months ended March 31, 2025.

Based on the Company’s current cash levels and burn rate, discussed above, the Company believes its cash and financial resources may be insufficient to meet the Company’s anticipated needs for the twelve months following the date of issuance of the financial statements for the three months ended March 31, 2025, included elsewhere in this Form 10-Q, which raises substantial doubt about the Company’s ability to continue as a going concern within one year from the issuance date of the financial statements.

In addition to maintaining the revenue stream from our legacy mercury emissions control business, our plans and expectations over the next twelve months to mitigate such financial condition include receiving additional cash inflows from the judgment expected in connection with the $57.1 million jury verdict awarded to us in March 2024, additional licensing revenues and product sales from the other patent litigation recently commenced, and revenues from our entry into the water treatment business. During 2024, we opened two new state of the art laboratories and have added personnel to support our entry into the water business which we believe will lead to a vibrant new revenue stream. In addition, management is exploring additional financing opportunities. While management believes these plans will alleviate substantial doubt, there is no assurance that they will be successfully realized or implemented.

Total Assets

Total assets were approximately $9,302,000 at March 31, 2025 versus approximately $10,261,000 at December 31, 2024. The change in total assets is primarily attributable to an approximate $268,000 decrease in cash and an approximate $545,000 decrease in accounts receivable.

Total Liabilities

Total liabilities were approximately $9,729,000 at March 31, 2025 versus approximately $9,069,000 at December 31, 2024. The increase is primarily attributable to an increase in accounts payable and accrued liabilities and an increase in the fair value of the non-recourse profit share liability.

Operating Activities

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

Net cash used in operating activities was approximately $254,000 for the three months ended March 31, 2025 compared to net cash used in operating activities of approximately $439,000 for the three months ended March 31, 2024. The decrease in net cash provided by operating activities was primarily due to the following: (i) a net loss of $1.7 million for the three months ended March 31, 2025 compared to net loss of $2.9 million for the three months ended March 31, 2024; and (ii) certain other changes in operating assets and liabilities including accounts receivable, inventory, prepaid expenses and other assets, accrued salaries, and accounts payable and accrued liabilities.

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Investing Activities

The Company had net cash used in investing activities of approximately $14,000 for the three months ended March 31, 2025 for the purchase of lab equipment compared to no cash used in investing activities for the three months ended March 31, 2024.

Financing Activities

Net cash used in financing activities was approximately $0 for the three months ended March 31, 2025 compared to approximately $9,312,000 used in financing activities for the three months ended March 31, 2024. During the three months ended March 31, 2024, we repaid the remaining principal of approximately $272,000 on the AC Midwest secured note and approximately $9,040,000 of the principal remaining on the AC Midwest unsecured note.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimated are discussed in our Annual Report on Form 10-K for the year ended December 31, 2024, and there have been no material changes to such policies or estimates during the three months ended March 31, 2025.

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.

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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The following table shows our reconciliation of net income (loss) to adjusted EBITDA for the three months ended March 31, 2025 and 2024, respectively:

(In thousands)

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.

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, 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: (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.

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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.