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Edited Transcript of BHTG earnings conference call or presentation 15-Aug-19 1:00pm GMT

Q2 2019 BioHiTech Global Inc Earnings Call

CHESTNUT RIDGE Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of BioHiTech Global Inc earnings conference call or presentation Thursday, August 15, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian C. Essman

BioHiTech Global, Inc. - CFO

* Frank E. Celli

BioHiTech Global, Inc. - Chairman & CEO

* Richard Galterio

BioHiTech Global, Inc. - EVP

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Conference Call Participants

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* Brian Greenstein

Ardour Capital Investments, LLC - Co-founder, Managing Partner & Head of Capital Markets

* Ronald Nash;Nash Partners, Inc

* Tate H. Sullivan

Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst

* Theodore Rudd O'Neill

Ascendiant Capital Markets LLC, Research Division - Senior Research Analyst of Clean Technologies

* Vincent William LaBarbara

Network 1 Financial Group, Inc. - Director

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the BioHiTech Global Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

Before I turn the call over to the company, I want to remind listeners that during the call, management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today, and therefore, we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC.

In addition, any projections as to the company's future performance presented by management include estimates as of today, August 15, 2019, and the company assumes no obligation to update these projections in the future as market conditions change. This webcast and certain financial information provided in this call are available at www.biohitech.com on the Investor Relations page.

I would now like to turn the call over to Mr. Richard Galterio, Executive Vice President of BioHiTech. Please go ahead, Mr. Galterio.

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Richard Galterio, BioHiTech Global, Inc. - EVP [2]

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Thank you, operator, and good morning, listeners. Welcome again to the BioHiTech Global Second Quarter 2019 Financial Results Conference Call. In addition to myself, with us today are Frank E. Celli, our Chief Executive Officer; and Brian Essman, our Chief Financial Officer.

I'd like to start off by providing a brief overview of our business progress in the quarter, followed by a more detailed discussion of our financial results from Brian Essman, and then we will turn the call over to Frank, our CEO, to provide an overview of our growth strategy as we move through the remainder of 2019.

During the quarter, we achieved 15.6% revenue growth, which was driven by the early stage of commercialization at our HEBioT facility in Martinsburg, West Virginia. The Martinsburg facility is the first-of-its-kind facilities-based solution in the United States that diverts as much as 80% of municipal waste from landfills while producing a renewable solid recovered fuel or SRF. This SRF is an EPA-recognized renewable fuel that can be used as a partial replacement for coal in industrial applications.

We spent the second quarter going through the commissioning phase where we tested and optimized each phase of the plant's operations, including the receiving area, mechanical sorting, bio oxidation hall and refinement. As this is new technology toward this country, we did encounter a number of unexpected hurdles, which lengthened the process and slowed our ability to increase utilization rates as we had originally planned. After overcoming these hurdles, the facility began producing SRF later in the quarter that underwent a series of internal and independent laboratory testing to ensure it would meet specifications for use by our end customers. This testing process was also lengthy but was -- hold on, please -- this testing process was also lengthy and was successfully completed, enabling us to commence fuel delivery in July. While the whole process took several months longer than expected, we increased utilization every month since and expect significant sequential increases in revenues for the remainder of the year, which Frank will discuss later in this call.

In addition to our success in bringing the HEBioT technology to the United States for the first time, we accomplished several other important goals to position the company for future growth. First, we received an initial multi-unit product order for our new BioHiTech Sapling food waste digester from a regional grocery chain operating 19 locations in 3 northeastern states. We launched the sapling in Q1, which is a larger capacity addition to our line of Revolution Series Digesters. This model as well as other Revolution Series Digesters provide a cost-effective, regulatory-compliant solution that safely disposes of food waste on-site, eliminating the costs and CO2 emissions associated with traditional waste hauling while reducing pest-related issues typically associated with food waste storage. We have already commenced delivery of these units and are excited about the prospects of this new product addition.

Second, we raised $1.885 million in an oversubscribed offering of units during the first and second quarter of 2019. The offering consisted of Series D preferred shares and warrants to purchase stock at a fixed price of $3.50 and was led by management and a number of long-term investors in the company.

And third, we completed the sale of our 2.2% equity interest in Gold Medal back to the parent in July of 2019. This enables us to focus our financial resources on our HEBioT and digester technologies. We invested $2 million of those proceeds from the sale of the -- from the sale into our Martinsburg facility through our majority-owned HEBioT development subsidiary. This enabled us to increase our ownership interest in the Martinsburg facility to approximately 86% at the subsidiary level and give us a 52% majority interest at the corporate level. We will continue to provide Gold Medal, our partner in the HEBioT subsidiary, with management oversight of its growing waste management services business and look forward to working together with Gold Medal to forward our HEBioT development road map.

At this time, I would like to turn the call over to Brian Essman, our Chief Financial Officer, to discuss our financial results.

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Brian C. Essman, BioHiTech Global, Inc. - CFO [3]

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Thank you, Rich, and good morning to everyone. Total revenue in the second quarter of 2019 grew by 15.6% to reach $1.051 million compared to $909,000 in the second quarter of 2008 (sic) [2018]. While recurring revenue derived from rental, service and maintenance decreased 2.1% to $448,000, the decrease was a result of the improved reliability and performance of our Revolution Series Digesters requiring significantly less billing for on-site services. In fact, our core rental revenues from digesters under rental contract actually increased by 31.9% or $84,000 in the quarter due to a 31.8% increase in units under rental contract. The larger rental base and the improved efficiency led to a 43.9% decrease in expenses relating to the recurring digester business as well as lower levels of non-rental, service and parts revenues and the resulting expenses.

The contribution before depreciation from rental, service and maintenance activities increased by $90,000 or 39.2% from $230,000 in the second quarter of 2018 to $321,000 in the second quarter of 2019, resulting in a contribution margin on the related sales of 71.4% in the second quarter of 2019 as compared to 50.2% in the second quarter of 2018. Digester rental and related revenue accounted for 43% of revenue in the quarter compared to 50% in the second quarter of 2018 as we continued to diversify the base.

Our HEBioT operations contributed meaningful revenue for the first time, totaling $277,000 or 26% of total revenue. This new revenue stream reflects the initiation and commissioning of the Martinsburg facility that we acquired a controlling interest in December of 2008 (sic) 2018 . Revenue from management advisory fees related to our management service -- services contract with Gold Medal remained constant at approximately $250,000, and we expect this revenue to remain at this level for the foreseeable future. This revenue stream represented 24% of total revenue compared to 28% of total revenue in the second quarter of 2018.

We recorded $75,000 in digester equipment sales in the second quarter of 2019 compared to $200,000 in the second quarter of 2018. As we noted in our earnings release, we have recently seen an increase in direct sales interest from several large prospective customers, and while the company -- and we'll discuss this in greater detail later in the call.

Operating expenses in the second quarter of 2019 increased by 39.1% to $2.97 million compared to $2.14 million in the second quarter of 2018. The increase in expense was mainly the result of a $495,000 increase in depreciation expense and $490,000 in HEBioT expenses associated with the startup of the Martinsburg facility partially offset by a $100,000 decrease in digester rental, service and maintenance expenses previously discussed. In addition, there was a $70,000 increase in digester sales expenses. Excluding the new HEBioT-related expenses, selling, general and administrative and professional fees decreased by $267,000 or 15.8% compared to the second quarter of 2018.

We recorded an operating loss of $1.9 million in the second quarter of 2019 compared to an operating loss of $1.2 million in the second quarter of 2018. The net loss was $2.9 million in the second quarter of 2019 compared to a loss of $5.5 million in the second quarter of 2018, inclusive of $3.5 million in interest expense incurred in warrant valuation and conversions. In the second quarter of 2019, our net loss was $0.15 per share on 14.9 million weighted average shares outstanding compared to a net loss of $0.40 per share on 14.2 million weighted average shares outstanding.

Now to our balance sheet. We ended the quarter -- the second quarter of 2019 with $1.7 million of unrestricted cash with shareholders' equity of $8.8 million compared to $2.4 million of unrestricted cash with shareholders' equity of $10 million as of December 31, 2018.

I will now turn the call over to Frank to discuss our growth strategy as we move through 2019.

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [4]

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Thank you, Brian. We've made significant progress in the second quarter, and I want to take some time to emphasize just how important the successful commercialization of this first HEBioT facility in the United States is to our company and its stockholders. Remember, our facility is converting household trash into a renewable fuel and diverting about 80% of that trash from landfills. Prior to the plant's operation, the vast majority of that waste would end up in a landfill.

What does that mean for the environment? Well, when we reach plant capacity, the reduction in trucking miles and landfill emissions will result in about 250,000 less metric tons of carbon dioxide released into the atmosphere each year. That's the equivalent of 28 million gallons of gasoline or 44,000 homes worth of electricity usage. That doesn't factor the additional reduction in mining and related emissions savings when you replace coal with our fuel.

Now that the plant's open and we've begun to successfully deliver fuels, the waste industry, other municipalities and many Fortune 500 companies have taken notice. In fact, the demand for our fuel has been increasing every day. In addition to our contract with Argos, we've secured a second contracted party and are having multiple discussions with other potential buyers of our fuel. At this time, we've got more fuel demand than production capacity at Martinsburg, and this sets us up very well for our road map of potential future HEBioT facilities in New York state, Pennsylvania and New Jersey.

We also have numerous additional companies interested in delivering waste to the facility to meet their sustainability goals. With this demand on both feedstock and offtake, we've got no doubt that we've got the right formula for sustainable growth for years to come.

With regard to our digester business, we're very pleased with the reliability of our Revolution digesters and the outlook that we see for future success. The underlying health of that business is evidenced by increases in the recurring rental revenue for our installed digester base and the higher contribution margins from that revenue. We've talked about the longer sales cycles for larger opportunities for a while now, and while our revenue growth trajectory has been modest at this point, our pipeline is by far the largest and strongest we've ever had. With the regulatory environment continuing to get more stringent and with the growing call for corporate America to become more environmentally responsible, we're seeing a heightened level of interest and activity from a variety of potential customers. I'd like to highlight some of those opportunities and why we're so excited about the future of the business.

I see our larger customer opportunities in this business in 2 tiers: the 20- to 50-unit range and the 100 or more. Right now when we talk about the 20- to 50-unit range, we've previously announced an order from a regional grocery chain, which we've begun to deliver and we have at least 3 other customers with 20 to 50 locations that have tested and now leased at least one unit where we're negotiating for potential larger rollouts.

In the 100-plus category, we're working with 3 potential customers, all of which have units deployed in the field, and we are in active discussions for large-scale deployments. One of these represents an opportunity that is well in excess of 500 units.

We also are working to expand our relationship with a number of our current customers to expand into the hospitality and health care markets both directly as well as our -- with our distribution partners and waste consultants.

We expect to see larger lease deployments from these efforts in the second half of 2019 and a significant increase in unit deployment in 2020. Additionally, we expect to see our equipment sales increase based upon our current pipeline and look forward to closing on these opportunities.

As we move through the remainder of the year, we expect to see significant improvement in our business as the growth from our Martinsburg facility flows through our financials and we successfully execute on the growing pipeline in our digester business. The regulatory environment, the social demand for environmental responsibility and the growing waste and plastics problem are creating a significant tailwind for us as we head into the future. We also believe that having completed the launch of a fully operational HEBioT facility that is already having a positive environmental impact will help accelerate our rollout into additional locations.

Before I turn the call over to your questions, I'd like to thank each and every one of our employees for their dedication in helping us to position the company for sustainable long-term growth. I'd also like to thank our investors for entrusting a portion of their investment dollars in our company.

Operator, this concludes our prepared remarks, and you can now open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Theodore O'Neill with Ascendiant Capital Markets.

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Theodore Rudd O'Neill, Ascendiant Capital Markets LLC, Research Division - Senior Research Analyst of Clean Technologies [2]

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Congratulations on a good quarter. So I have 3 questions. One is what sort of things have you learned as you've worked to get the HEBioT facility to meet the standards for your customer? And in regard to direct sales versus rental, is there something going on in the marketplace that makes direct sales heavier going forward? Or is it just a timing thing? And finally, can you give us some update on the application to build the HEBioT facility in Rensselaer?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [3]

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Yes. So let's start with -- so first question about, hey, what have we learned. Let me split that question in 2, maybe 2 parts. One, being obviously what have we learned in the commissioning process of the first plant in the United States. As most people know, there are multiple facilities using this technology in Europe that certainly we have visited, we did our diligence, we did our engineering reports based on, but until you actually do it, you got to figure out the ins and outs on how these facilities operate. There was always a question about is waste in the United States exactly the same as in Europe? And we felt comfortable that it might not be exactly the same, but it was reasonably close.

So I think most of what we learned in the commissioning process, which we are really happy with, was anything you would learn in commissioning any manufacturing facility that's largely dependent on automation and whatnot. So we didn't run into any major stumbling blocks from an equipment standpoint. We definitely did learn some things in the construction process and design that we'll use to become a little bit more efficient going forward. But for the most part, it was minor stuff, positioning of magnets, how much metal was actually in the waste, should we locate an eddy current here or there. I would say things that will help improve operating and construction efficiency going forward, fire suppression systems, how sensitive are they to dust and so on and so forth.

So I would say, overall, the commissioning process from a mechanical standpoint went actually relatively smooth. We expected to have minor bumps in the road, of course, and we're still tweaking things on a daily basis to where we're now trying to achieve maximum operating efficiencies. So I think it was, hey, start the plant up, operate and now try to figure out how do we become most efficient in the plant. And we definitely did learn things about design and equipment performance for the future. But I wouldn't say there was anything really earth shattering. The -- yes, it's a little time-consuming, but commissioning any manufacturing facility would be.

Second answer is what did we learn about the fuel, which we felt was much more important. There was no time where we didn't believe that the operation of the plant would go as we expected. It was always the production of the fuel that was the piece that we were unsure about in the sense that, hey, how long would it take to meet the specifications? We assumed it wouldn't come right out of the machines on the first shot and be acceptable, but what it -- how much tweaking would it take? What was the right kind of -- what we'll call kind of "recipe" to meet the standards that the regulators and our buyers would require? So I think most of the learning process has been in the actual production of the fuel and what do we need to do to make sure we meet the standards.

The other thing we learned is, hey -- and we think this first plant obviously will act as a catalyst to speed things up in the future, but this has never been done in the United States before. This is the first solid recovered fuel produced from municipal solid waste. In the U.S., we needed to understand what would it take our buyers to become comfortable with actually combusting that fuel. So remember the magnitude of what we're doing here. We're taking household trash for the first time and converting it into an EPA-approved fuel to be used as a replacement for coal. So you can imagine the users of this fuel who are operating billion-dollar facilities are going to be a little bit sensitive to, hey, are we just going to throw this stuff in there and burn it, right? They're going to want to make sure it goes through a series of tests that it meets the standard and that they don't jeopardize their own operations, which is very understandable. So the learning process there was interesting, but we've got it down. We're successfully delivering fuel. And as I mentioned, the demand for the fuel out of this facility, quite honestly, exceeds what we can produce at this point.

So that's the answer to the first question. I think your next question was direct sales on digesters. Not really sure, to be honest with you, Theodore, other than the customers we're dealing with now in our pipeline are significant potential deployment customers with big balance sheets, and their cost of capital may just be better. Not sure, quite frankly, but we have definitely seen an increase in inquiries about purchasing our equipment as opposed to leasing. We're fairly indifferent because it will generate a recurring revenue stream either way. It kind of helps our cash flow if we do get a big order that happens to be a purchase order. So not sure if it's a trend that will continue or not.

And on Rensselaer. On Rensselaer, yes, we're -- as we publicly announced, we're in the state permitting process as we speak. That process has been going on for multiple months now. It's a standardized process to permit a solid waste management facility in the state of New York. We have -- here's what I can say, we have not had any significant pushback from the state regulators. They seem to be accepting of the need for the technology. And it's in technical review where they're analyzing the process and flow and whatnot. So it's a fairly boilerplate process. We don't see any speed bumps right now, but you just kind of have to wait it out and continue to answer their questions.

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Operator [4]

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Our next question comes from the line of Ronald Nash with Nash Partners.

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Ronald Nash;Nash Partners, Inc, [5]

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You mentioned in your statement that there was a delay in the fuel from the time that you put it and get it out. Is the delay because of the FDA? Or is it because of the customer base that required so much more? Can you expand on that a little bit?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [6]

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Yes, Ron. Thank you, by the way. As I mentioned this, I would say the delay was certainly not in the manufacture. We were able to manufacture the fuel as we expected. There was a rigorous process of both internal testing, their own independent testing as well as state regulator's testing. So there were 3 steps essentially in sort of what I would say the approval process to actually begin to deliver and combust the fuel. So I would say it was not real -- I don't think it was a delay. I think it was a process that ended up being multiple steps before, as I mentioned, the buyer of the fuel was comfortable in saying, hey, we're going to take your word for it, and we're going to burn something that used to be waste in our billion-dollar facility. You can imagine, they don't take those things lightly, right? So -- and I don't blame them, to be quite honest with you.

So no, we didn't hit any bumps in the road where test results didn't come back in a fashion that we didn't expect or couldn't deal with. I mean, obviously, the first batches of fuel came back and tested not compliant to what we need it to be, but that wasn't unexpected, right? That's what gave us the road map to make the modifications to the operation, which we've done and then achieved the test results we needed to achieve. So yes, I think it was just process, Ron, and it was -- and I don't blame ultimately the buyer. They're not going to burn this stuff without the state regulator saying, yes, it's a go. They're not going to jeopardize their existing business.

So the fact that we've been through the process now, however, and been approved, I think, is certainly a great indication that going forward in the future, we understand exactly what to manufacture, how quickly we can get through the process a lot quicker. So I don't expect -- I expect there will be a process in all future plants, but I don't expect it to be quite as long as what it was for West Virginia.

And remember, let's just all remember here, this is a big deal. I don't know that the company gets enough credit for what we're actually accomplishing, but remember, we're taking bags of trash off the curb and in a process that takes place over a few weeks, converting it into fuel that is now displacing coal. So the environmental benefits of that, as we mentioned in the script, are enormous. It's never been done before. And let's also remember, this is being done at no additional cost, with no subsidy or whatnot. So to be able to accomplish what we've accomplished for the first time in the United States I don't think should be taken lightly, and I don't know that we get enough credit for it right now.

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Operator [7]

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Our next question comes from the line of Tate Sullivan with Maxim Group.

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Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [8]

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Thanks for all the detail on the solid recovered fuel. And I think you mentioned securing a second contract and great comments on being out of capacity -- I mean having the demand outstrip capacity. How do the contracts work? Is it on -- I mean how do you -- is it on a customer's need on a spec basis? Or is it long-term contracts? Or how do you structure the contracts, if you can give detail there, please?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [9]

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Yes. They're slightly different. So our primary contracts is with Argos, the local cement manufacturer located in West Virginia. That contract does require that we deliver the overwhelming majority of the fuel manufactured in the West Virginia plant to their site. So that contract is a 10-year contract. It requires us to deliver a minimum of 35,000 tons a year of fuel up to 50,000 tons a year of fuel. So that's the majority, the fuel-generating capacity we have in West Virginia. They have actually expressed interest in taking more than that 50,000 tons if we had the ability to produce it. And that still kind of remains to be seen. Just to put it in perspective, out of 40% to 45% fuel yield, we were expecting to generate anywhere between 40,000 and 45,000 tons of fuel. We have a minimum commitment of 35,000.

The second contract is a bit more strategic in the sense that it's with an entity that's got multiple facilities located throughout the United States. We already knew we had all of the fuel that we can manufacture or sold locally, but this really sets us up for having an ongoing relationship with a buyer for future plant. So this is a bit more strategic. There's not a minimum delivery requirement with the second contract. It's sort of negotiated as per their need and as per what we actually have available to send to them. So it's a little bit more open-ended. It's not a put-or-pay or a take-or-pay, but it's a good arm's length contract at market rates, and it allows us to expand our relationships with buyers of the fuel going forward. So it was -- we entered into that deal a bit more strategically to set ourselves up for the future.

And we've got multiple other parties who are also requesting that we start to deliver fuel out of Martinsburg. So right now great problems to have, but quite honestly, we don't have the production capacity in Martinsburg to fill the demand for all of those interested parties. I'll take that problem all day long, and again, I think it positions us very well for, hey, this is why we need to locate a plant in upstate New York or in Pennsylvania or in New Jersey. There is a demand for this fuel.

Let's remember, we're not solving one problem here. While we emphasize keeping waste out of landfills, and that's our primary objective, sustainable disposal solutions, the emissions reductions associated with replacing some coal is not insignificant to the users of this fuel. So the trend appears to be very positive, and there will be ongoing and continued demand for clean-burning alternative fuels. And the fact that we can produce it cost effectively and make a margin on that while also keeping waste out of landfills, I think, again, is another thing. I don't believe the market has yet fully understood the magnitude of what we're doing here, but we feel like we're positioned really well, not only for West Virginia but for plants in the future.

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Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [10]

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Okay. And then just to clarify, post after the end of 2Q is when you delivered the fuel and has it started being burned in furnaces yet? Or will that be a potential follow-on announcement of Argos? Or is that already happening?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [11]

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No. That fuel is being burnt in furnaces as we speak.

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Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [12]

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Okay. Okay. And then did I -- my last one. Did I hear that rolling out more of HEBioT facilities helps your digester business as well? Or was that -- did I misinterpret that link?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [13]

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There's no -- I think what -- no, what we -- and I understand how it can be a bit confusing. What we like to promote is the fact that our 2 technologies are complementary to each other. So just a quick example. We have customers that generate food waste that can use our on-site digesters for the disposal of the food waste portion of their waste and then could contract with us as well to take all of their residual and remaining materials to our HEBioT facilities, which essentially provides them sort of with a turnkey one-stop shop zero-waste provider. Not every customer qualifies for that, but certainly hotels, grocery stores, retail facilities that potentially generate food waste on-site could use a combination of our technologies. And in fact, we're in discussions with multiple parties that will be using a combination of our technologies. But that's not the model in every case. Sometimes, it could be used together. Sometimes, they're just used independently.

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Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [14]

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Okay. Sorry, one more for me, please. You mentioned market rates for the SRF. What -- how do -- what do they fluctuate with? Do they fluctuate with the coal prices that customers currently use? Or what is the other benchmark maybe that we can look at?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [15]

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I think unfortunately -- and I don't think this is what the future bears, but I think currently, I think we'll benchmark to coal, right? We're just going to be thought of as an alternative to coal. I do believe, however, that the increased regulations on emissions and sustainability should result in a market that allows us to sell our material not at a discount to coal and maybe who knows, someday at a potential premium to coal.

There's a lot of work we need to do on carbon credit opportunities and whatnot. So until we got the first plant up and running, we haven't had the opportunity yet to figure out, okay, are there other incentives and benefits to using our product that may, in fact, allow us to command a premium to coal? I don't know the answer to that yet, and we're certainly not projecting that. I think for the short term, we need to be thought of as benchmarking to coal.

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Operator [16]

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Our next question comes from the line of Brian Greenstein with Ardour Capital.

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Brian Greenstein, Ardour Capital Investments, LLC - Co-founder, Managing Partner & Head of Capital Markets [17]

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Congrats on the quarter. Frank, you guys mentioned margin improvement in the digester business. Can you just give us a little more color?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [18]

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Yes. Absolutely. I mean we've talked for a while about the launch of our Revolution digesters. We developed that product line for a reason. We listened to the demand of our customers who said, hey, we want a cost-effective, reliable, low-maintenance product, and we executed on that. As you know, Brian, we went into development a while back on essentially replacing our legacy old Eco-Safe digester line that were a bit more primitive and clumsy and whatnot. We completely expected that we would achieve margin improvement in the sense that when we engineered this product, it was engineered to be a no-touch product that we weren't going to have to do a whole lot of truck rolls at and our customers would be able to rely on it day after day 24/7, and we've accomplished exactly that.

We think and believe that, that accomplishment and that the success that we've had with the rollout of those Revolution digesters, not just from our own improved financial performance but from the improved reliability and performance at our customers' locations, we believe that's part of the catalyst to sort of the growth in our pipeline and the larger unit deployment. So again, some of the things that don't really get noticed, I think, are, hey, we've been innovative, right? We answered the call to what our customers were asking for. It's improved our own financial performance from a margin perspective probably equally, if not more important, right? It's been one of the key factors, I think, in getting this increased interest on larger deployments and rollouts from our customer base.

So it's not a surprise to us. I mean we planned it. We engineered it that way, and we executed on it. So we expect that to continue to improve as we get smarter, as our technology continues to be even enhanced more and certainly as we achieve more economies of scale. So when we're -- instead of putting one unit out at a time, one unit grew to 5-unit orders, 5 units are growing to 20-unit orders, 20-unit orders seem to be moving towards 100-unit orders and hopefully 100-unit orders end up resulting in 500-unit orders. So with those economies of scale, we'd expect we get even more improvement down the line. But it's not a surprise to us, right? I mean we planned we were going to do something. We told the market we're going to do something and we went and did it, right? And we're going to continue to do that.

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Operator [19]

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(Operator Instructions) Our next question comes from the line of Vincent LaBarbara with Network 1 Financial.

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Vincent William LaBarbara, Network 1 Financial Group, Inc. - Director [20]

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I'll give you credit because I was at the West Virginia facility before you even -- it was operating, and I saw and I know the magnitude of it. So congratulations on producing SRF. I give you guys a lot of credit for that. But I do have another question. You mentioned something earlier in your presentation about more stringent regulation or environmental regulations from, I guess, states or local or federal governments. Are any of those governments offering any types of incentives or subsidiaries to -- or subsidies to companies to become more compliant or efficient?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [21]

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That's a great question, Vincent. We get that question a lot. Historically, we've been asked by customers as well as investors often, hey, are there any tax benefits or subsidies or whatnot? Because it certainly feels like there should be, right? Historically, there haven't been many. I mean we've had increased regulation, which we're happy to have, kind of moving us in the right direction on bans, on food waste into landfills, on sustainability objectives and whatnot.

Finally and more recently, New York state just introduced a program called The New York State Food Waste Reduction and Diversion Reimbursement Program, right? It's the first example that we've seen of a state, city, municipality offering some type of economic benefit to customers who utilize a food waste diversion technology. It's not specific to our product, of course, right? But it's the first example we've seen, and in fact, we've actually had -- we've had -- and that became -- just to paraphrase, essentially any equipment purchased after June of last year that's used to divert food waste from landfills can qualify for up to 44% reimbursement of the costs of that equipment, which is pretty substantial. We -- one of the caveats, however, is that you need to actually be able to document the benefits of that piece of equipment, which we feel fits perfectly with our model because, as you know, we've been the ones out there pounding our chests about being the only smart disposal device on the market and can actually quantify that. So we've had one customer so far successfully be approved for the reimbursement. We've got 4 more that are in the application process right now that we believe will be approved.

So I think this is indicative of what other areas of the country will and should do. I do want to remember, emphasize, we've always prided ourselves on the fact that our products were cost effective without subsidies and grants. So if you kind of read between the lines and you say, hey, we've got regulatory movement and regulations saying you've got to do something with food waste, you've got to be more sustainable. We've got a cost-effective product, and now we've got potentially money out there available to certain customers to utilize our product. I'd like to think that it's certainly a very good opportunity for us to achieve some more scale at least in New York state for right now. So -- but I think New York state starts it, and I think it could potentially spread throughout the country. We think it's a huge catalyst for additional growth. I mean 44% of an already cost-effective product is a big deal.

And I do want to remind everyone, the key here is the user to be approved does have to quantify and prove with real data that they are diverting that food waste and how they're doing it. We do hold a patent for accumulating and producing that type of data from a food waste disposal device. So I'm not going to say we own the market, but it certainly gives us a leg up on all of our competitors.

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Vincent William LaBarbara, Network 1 Financial Group, Inc. - Director [22]

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Great. And Frank, can you please repeat the name of that program?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [23]

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Yes. It's the -- it's called New York State's Food Waste Reduction and Diversion Reimbursement Program. We can send you a little -- Vincent, we can send you a little marketing flyer we did on it so you can have access to it. It explains the program in a pretty simple way, but basically, New York state businesses that generate at least 1 ton, which is 2,000 pounds of food a week, can qualify for up to 44% reimbursement on an eligible product, of which we've been deemed eligible and have had success already. So it doesn't sound like a big deal, but imagine how many businesses in New York City alone generate at least 1 ton of food waste a week. I don't know the number, Vincent, but it's a big number. I can tell you that.

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Vincent William LaBarbara, Network 1 Financial Group, Inc. - Director [24]

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That is why I was asking for the name of the report because I'm sure it is a big number. But is there any other state other than New York that you know about?

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [25]

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There's not any that I am aware of right now. There may be some stuff in the works, but this is the first real example that we've seen of it. We do think, though, it's going to be a trend that will continue because, listen, if these regulators want to keep food waste out of landfills, you can't use the stick all the time. You've got to use the carrot sometimes. I think the carrot works better, and this is a great opportunity. This is a great opportunity for regulators to use the carrot to achieve their ultimate goals. I think it resembles solar many years back, Vincent.

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Operator [26]

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Our next question comes from the line of [Brad Bullock] with Pioneer Capital.

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Unidentified Analyst, [27]

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I'm just wondering if the more traditional disposal companies have started to take notice of what you're doing.

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [28]

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That's a great question. The answer is absolutely yes. We -- I can't say exactly who, but I will tell you that at our Martinsburg facility, we have begun receiving wastes from a national publicly traded waste -- traditional waste company because their customer -- it actually started with their customer. Their customer heard about our facility and wanted to utilize it to achieve their own sustainability goals, and that led to a relationship between us and that national hauler to where they're not only delivering the waste from that specific customer but other customers as well. So we've got, at a minimum, one publicly traded company as a customer utilizing our facility. We've got a couple of other, what I'd call, municipal haulers. So not in the private sector but towns that collect their own wastes, that have delivered wastes to our facility.

And on the digester side, I don't know if we announced it or not but -- we did announce it actually. We recently entered into a distribution agreement with another nationally publicly traded waste disposal company to potentially distribute our digester product. So yes, they are becoming aware. I can tell you from past experience, those traditional waste haulers, particularly the big publicly traded ones, they are very slow to acknowledge, recognize and utilize sort of technology solutions, but I think the writing is on the wall, I can safely say to you that at the Martinsburg plant, we will successfully divert 100,000 plus tons a year, which, to put that in kind of people terms, is 200 million pounds a year of waste from landfills owned by publicly traded waste companies in the region. And that, I can assure you, gets their attention because at a 60% to 70% EBITDA margin on every ton of waste that comes into those landfills, that's a material impact on their cash flow, and they have to pay attention. It just takes a little time to get them to really realize, hey, this is starting to make a difference. So they've begun to recognize us. They have started to become customers of ours, and I expect those relationships to grow in the future.

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Operator [29]

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Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Frank Celli for closing remarks.

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Frank E. Celli, BioHiTech Global, Inc. - Chairman & CEO [30]

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Thank you, operator. I'd just like to close in thanking everyone who participated on the call today, and I look forward to speaking with you again on the next quarter's results.

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Richard Galterio, BioHiTech Global, Inc. - EVP [31]

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Thank you.

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Operator [32]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.