Birchtech Q3 2026 Earnings Call - BIRCHTECH CORP

Financial Performance:

• Total revenue for Q3 2026 was $5.5 million, down from $7.4 million in Q3 2025, primarily due to the absence of $2.6 million in one-time license fees recognized in the prior year.
• Product revenues grew 15.7% year-over-year to $5.5 million, driven by mercury emissions demand in the coal sector and new sales in the water treatment market.
• Sequential revenue increased approximately 45% compared to Q2 2026, aligning with typical seasonal strength in the second half of the year.
• Gross profit was $1.6 million (29.9% margin), down from $4.0 million (54.8% margin) in the prior year, reflecting the shift from high-margin licensing to product sales.
• SG&A expenses decreased 35% to $1.8 million, driven by reduced legal fees as the prior year included significant costs related to the licensing transaction.
• R&D expenses remained flat at $0.5 million.
• Net loss for the quarter was $0.3 million ($0.01 per share), compared to a net income of $0.8 million ($0.04 per share) in the prior year.
• Adjusted EBITDA showed a loss of $0.5 million, compared to a profit of $1.0 million in Q3 2025.
• Cash position totaled $10.8 million as of September 30, 2026, with zero debt.
• A $7.1 million non-recourse profit share liability remains on the balance sheet, repayable only upon litigation proceeds.

Guidance and Future Outlook:

• Q4 2026 and Q1 2027 are expected to see revenue growth as the company scales water supply agreements and converts licensed utilities to supply contracts.
• The company anticipates beginning meaningful granular activated carbon supply revenues in early 2027 from a new partner agreement.
• A carbon rejuvenation facility is projected to be online within 18 to 24 months of a decision to proceed, with a goal to announce specific site placements before year-end.
• Long-term strategy focuses on converting unlicensed users of SEA technology into recurring supply customers and expanding water treatment offerings.
• Management expects seasonally stronger quarters in the second half of the year to help fund ongoing investments.

Business Segments and Product Lines:

• Air Business: The SEA platform is used in approximately 80% of U.S. coal-fired power plants utilizing sorbents. Growth is driven by stable coal demand, grid reliability needs from AI/data centers, and seasonal mercury control requirements.
• Water Business: Focus is on scaling commercial infrastructure through design centers and the "BirdStack" platform. The SEA IX nuclear-grade ion exchange resin line (launched March) targets the $200M+ addressable market for nuclear, coal, and municipal utilities.
• Product Line Expansion: Added rosins for boron and heavy metal removal; granular activated carbon and ion exchange resins are EPA-recognized best available technologies for PFAS.
• Strategic Partnership: Replaced a failed acquisition target with a supplier agreement for granular activated carbon, enabling a CapEx-free entry into the market. Supply starts at 2,000 tons/year in Q1 2027, scaling to 10,000 tons/year.
• Carbon Rejuvenation: Proprietary thermal reactivation process demonstrates virgin-carbon-equivalent performance for PFAS removal, offering lower lifecycle costs. The first reactivation facility is under development.

Market and Competitive Landscape:

• The U.S. coal market is stable with continued federal support for plant operations, reinforcing demand for emissions control solutions.
• Electricity demand is rising due to AI and data centers, extending the operational runway for coal-fired generation.
• Regulatory pressure remains high with federal PFAS limits set at 4 parts per trillion; interim treatment measures are required for systems exceeding 12 ppt, driving urgency among smaller utilities.
• Competition is differentiated by the SEA platform's dominance in air emissions and the company's focus on cost-effective, data-driven solutions for small and rural water systems (nearly 50,000 nationwide).
• The company has successfully defended all IPR challenges against its SEA patents, with the remaining Iowa case remanded to federal court.

Risks and Challenges:

• Litigation Risk: An appeal regarding the $78 million judgment against CERT defendants is pending before the Federal Circuit; while post-judgment interest accrues, the outcome is uncertain.
• Market Dependence: The air business remains heavily dependent on the operational status of coal-fired plants, though current regulatory trends support this.
• Execution Risk: Scaling the water business relies on successful commercialization of the rejuvenation facility and conversion of pilot engagements to recurring revenue.
• Regulatory Timeline: While PFAS mandates are clear, the timeline for utility compliance varies, potentially affecting the speed of adoption for new technologies.

Management Commentary and Tone:

• Tone is confident and disciplined, emphasizing a "self-funding engine" model where the mature air business capitalizes the scaling water platform.
• Management highlighted the strategic pivot from the failed acquisition to a more capital-efficient supplier agreement, viewing it as a "very significant" and "CapEx-free" opportunity.
• CEO Richard McPherson described the quarter as "steady execution," citing revenue growth, SG&A reduction, and the initiation of share repurchases.
• CFO Michael Mioska emphasized maintaining cost discipline while investing in water platform development.
• Management expressed strong conviction in the company's debt-free balance sheet and clear roadmap for 2027.

Analyst Questions and Answers:

• Legal Process: Analyst Rob Brown (Lake Street Capital) asked about the appeal status; management confirmed the appellee brief was filed and the case will proceed to court review for a final response.
• Facility Scale: Brown inquired about the rejuvenation facility timeline; management clarified they are targeting a 2,000-to-10,000 tons/year capacity via a partner agreement starting Q1 2027, with a facility build-out timeline of 18-24 months post-decision.
• Regulatory Impact: Brown asked about customer connectivity regarding EPA rules; management noted mid-to-small utilities are proactively seeking PFAS mitigation solutions immediately, even without strict enforcement deadlines, and are engaging for regional facility placement.

Other Key Points:

• The company has commenced a $5 million share repurchase program, buying back 103,864 shares at an average price of $1.64 in Q3 2026, with all shares retired.
• Charlie Cooper was hired as Business Development Manager to leverage his experience in rural water systems and emerging contaminants.
• The company views the $37 million received in license fees and settlements over seven years as a successful enforcement program that converted relationships into supply opportunities.
• All IPR challenges to the company's patents have been dismissed or resolved, securing the commercial roadmap for the SEA technology.