Liqtech International Inc Q3 FY2024 Earnings Call

Good day, and welcome to the LiqTech International Reports Third Quarter Fiscal Year 2024 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

All right, thank you very much, Debbie. Good morning, everyone and thank you for joining us on the conference call to discuss LiqTech International's third quarter 2024 financial results for the period ending September 30, 2024. Joining us on today's call from the Company is Fei Chen, Chief Executive Officer; and Phillip Price, the Company's Interim Chief Financial Officer. Before I turn it over to management, let me remind listeners that there will be an open Q&A session at the end of the call. If you are listening through the webcast portal and would like to ask a question, you can submit your question through the Ask a Question feature in the webcast player and we'll do our best to get to as many questions as possible. Before we begin with prepared remarks, we submit for the record the following statement. This conference call may contain forward-looking statements. Although the forward-looking statements reflect the good faith and judgment of management, forward-looking statements are inherently subject to known and unknown risks and uncertainties that may cause actual results to be materially different from those discussed during the conference call. The company, therefore, urges all listeners to carefully review and consider the various disclosures made in the reports filed with the Securities and Exchange Commission, including risk factors that attempt to advise interested parties of risks that may affect our business, financial condition, operations and cash flows. If one or more of these risks or uncertainties materialize or the underlying assumptions prove incorrect, the company's actual results may vary materially from those expected or projected. The company, therefore, encourages all listeners not to place undue reliance on these forward-looking statements, which pertain only as of this date and the date of the release and conference call. The company assumes no obligation to update any forward-looking statements to reflect any events or circumstances that may arise after the date of this release and conference call. Now I'd like to turn the call over to Fei Chen, CEO of LiqTech International. Fei, please proceed.

Thank you, Robert, and good day to everyone on the call. Let's jump right to the key topic during the quarter, which was the delay of a large commercial produced water treatment project in North America that was expected to be delivered in the third quarter but has now been delayed following the decision by the customer to change the physical location of the installation. This unit was said to contribute about $1.5 million in revenue to our third quarter results. This is clearly disappointing and significantly impacts our quarterly results. Fortunately, our customer has finalized their location of the installation, which has moved from the South United States to Canada with the unit set to be delivered in 2025 and will help to be a key driver of our future growth. I will touch more on this in just a moment. So that's the negative side of the quarter. Let's now turn to a few of the positives. We have more systems today at various phases of testing and piloting than at any point in our history. We have four produced water treatment pilot units for the oil and gas industry operating in the field at the moment; one with Razorback Direct in the U.S., which was shipped in quarter one and has operated satisfactorily at the customer site in the past four months; one with NESR, which was completed in quarter two for the Middle East; one with one of the world's leading integrated energy companies for produced water treatment in the U.S., which was shipped in quarter three; and a legacy system in the Middle East that has now been operational for more than three years. The success of the Razorback pilot is what led to the commercial order we initially set to ship this quarter, as the customer clearly recognized the value in our solutions. The pilot unit in the Middle East will be installed and operated in January 2025 in one of the leading producers of energy and chemicals in the region. The pilot unit will provide us with a unique opportunity to showcase the superior value proposition of our containerized UF filtration system. This will validate our technology in the Middle East region. The pilot unit for one of the world's leading integrated energy companies for produced water treatment in the U.S. is presently under commissioning. We expect that the pilot testing will lead to a commercial project with this partner in 2025. Beyond oil and gas, we recently placed a pilot unit with a U.S. petrochemical company for microplastics removal, which was shipped in quarter three. We also completed a test with a mini unit focused on lithium brine production pretreatment in the U.S., which was successful and has led to the next step, a pilot unit order which is set to deliver this month. We also recently completed a factory test of a water treatment unit for WIN DG dual-fuel engines, highlighting satisfactory results permitting us to address ships based on WIN DG dual-fuel engines. We believe this could lead to commercial sales of our water treatment units for EGR systems in 2025. Within the last year or so, we have also shipped units in key end markets, including a unit for MEG recovery for an offshore project in the Mediterranean, a pilot unit for phosphoric acid purification in China through silicon filter, multiple marine scrubber units in China through Joyo, a wastewater treatment system for the metro processing industry in Denmark, and we have shipped more than 24 pool system units over the past 20 months where we have always said the timing of large systems would be much slower and would not be linear. We feel good about the progress made in the last few quarters to put ourselves in a position to drive further adoption in a multitude of market segments. Coming back to one of our key end markets, marine water treatment. To assist in building out our adoption, we announced the establishment of a joint venture with JiTRI, Jiangsu Industrial Technology Research Institute, to expand our presence in China, a key shipbuilding market which has an approximate 80% market share. The JV will be named Nantong JiTRI LiqTech Green Energy Technology Company Limited and will be located in Nantong Haimen, Jiangsu Province. LiqTech will be the majority owner of the JV while JiTRI will be a minority owner, contributing facilities and local support, along with initial operational and commercial funding. JiTRI is a technology and research institute in Jiangsu Province with the aim of promoting innovation and technology commercialization through partnership and joint investment. JiTRI was established 10 years ago and has built up extensive collaborations with industries, universities, and research institutes in the U.S., Europe, Australia, Canada, and China. JiTRI has focused on a wide variety of areas including clean technology. This partnership will enable us to hire a sales force in China to tap into networks and customers to provide local service and spare parts support. In the medium to long-term, this partnership will provide the possibility for us to localize system assembly to achieve cost reductions. As most of you know, the marine shipping industry is moving towards cleaner fuel applications with the majority of new vessels being equipped with dual-fuel engines that require reliable water treatment for exhaust gas recirculation systems or EGR. For perspective, according to Clarkson shipping intelligence and ship engine companies' published data, in 2024 through 2027, 400 new vessels are on order with EGR solutions installed in addition to retrofit applications which are increasing for LNG powered vessels. I am pleased to have finalized this partnership and look forward to what it can do to help expand our market presence in China. Transitioning to another key market for us, swimming pools, during the quarter we delivered two swimming pool systems, one by a customer in Ireland and one by a customer in Spain. This is certainly below our expected quarterly cadence and an area of increased focus for the team. We are working intensively on building more distribution partnerships in new geographic territories. One area we touched on last quarter that we believe will help is the receipt of NSP certification for our system in the U.S. For those who are not aware, we were unable to sell our commercial swimming pool solutions in the U.S. as we worked through this approval process. With the certification now in hand, we have been in conversations with numerous potential partners that will help drive adoption in the U.S. with the goal of having new collaborations in place by the end of the year. Transitioning to other parts of our established markets, starting with DPFs and ceramic membranes. DPF and ceramic membrane sales during quarter three were about $1.1 million compared to $1.6 million in the prior year's third quarter. This performance was below our expectations, largely reflecting what we believe to be temporary market conditions as customers await potential interest rate cuts. Fortunately, year-to-date sales continue to remain above last year's level, showing continued strong market demand. Clearly, we are behind where we want to be at this point due to the delay of the large commercial oil and gas order and other delays, which have impacted our ability to ramp up sales quickly. As we look to the first quarter of 2024, we expect revenue to be between $3.3 million and $4.3 million, which would be above the most recent third quarter results compared to $3.9 million in the prior year's fourth quarter. However, our expectation was to surpass these levels and exceed those projected for 2024. As a result, we implemented a cost reduction plan aimed at lowering our breakeven target, measured on an adjusted EBITDA basis, to a quarterly revenue run rate of approximately $5.5 million. Remember, our previous breakeven target was $6.5 million to $7 million. These cost cuts will be comprehensive and will include a 10% reduction in headcount, a 10% reduction in base salaries for senior management in 2025, a 50% reduction in cash compensation for the Board of Directors in 2025, as well as other cost-saving initiatives. Positively, we ended the quarter with a solid balance sheet, holding a pro forma cash balance of more than $13 million. As a reminder, in September and subsequently in November, we closed on a private placement of $10 million with existing institutional investors. We thank them for their strong conviction regarding our company, our management team, and our future opportunities. It is our commitment to avoid seeking additional capital and to bring this business to profitability as soon as possible. Despite delays in orders, with a large number of agreements in place and a large order set to be delivered next year, coupled with the cost reduction initiatives I mentioned, I continue to believe that we are in a strong position to achieve our stated goal. With that said, let me turn the call over to Phillip to review the financial results in more detail. Phillip?

Thank you, Fei, and good morning everyone. Now let me briefly comment on the financial highlights for the quarter. Revenue came in at $2.5 million compared to $5.1 million in the same quarter last year, representing a decrease of 51%. Broken down by verticals, sales were as follows: System sales and related services of $0.7 million compared to $2.6 million in the same period last year; DPF and ceramic membrane sales of $1.1 million compared to $1.6 million in the same period last year; and finally, plastics revenues of $0.7 million equivalent to Q3 last year. As Fei mentioned, we had a large $1.5 million system set to be delivered in Q3 of this year, which has been delayed to next year. Additionally, the number of pool systems delivered this quarter fell short of our expectations. We also experienced a slowdown in our DPF and ceramic membrane business, which we believe is driven by temporary market conditions as end customers await potential interest rate cuts. Looking ahead for the fourth quarter of 2024, we expect revenue to be in the range of $3.3 million and $4.3 million compared to $3.9 million in the fourth quarter of last year. For the full year, this guidance translates to an expected revenue range of $14.5 million and $15.5 million. Turning to gross margins, the reduced revenue base for the quarter led to a negative gross loss of $0.2 million compared to a positive gross margin of $0.9 million in the same quarter last year. This decline underscores the impact of lower than expected revenue on our margin performance as fixed production costs were spread over a smaller revenue base, putting additional pressure on profitability. As we still have overhead and other fixed costs that are not fully being absorbed, one of the key metrics we look at to highlight the progress being made is our contribution margin. During the quarter, when you back out fixed costs, our contribution margin ended at approximately 43.1% compared to 43.2% in the same quarter reported last year. Turning to OpEx, total operating expenses for the quarter were $2.4 million, down from $2.6 million in Q3 of last year. In particular, selling expenses decreased by $0.4 million, mainly from a reduction in executive officers, but we also saw savings from reduced travel costs, lower investor relations expenses, and a decrease in expenses related to external sales consultancy services. G&A increased by $0.2 million, attributable to the addition of new positions in supply chain and project management, as well as increased legal expenses and insurance costs. As we have emphasized in recent quarters, we remain focused on running a lean business by monitoring costs and carefully evaluating our spend to protect our financial objectives. Concluding on the P&L, net loss for the quarter was $2.8 million compared to $1.4 million for the comparable period of 2023. As Fei mentioned, we have implemented a cost reduction plan to lower our breakeven target measured on an adjusted EBITDA basis to a quarterly revenue run rate of approximately $5.5 million. This is a significant improvement from our previous target of $6.5 million to $7 million. These cost cuts will be comprehensive, including a 10% reduction in headcount, a 10% reduction in base salaries for senior management in 2025, a 50% reduction in cash compensation for the Board of Directors in 2025, along with other cost-saving initiatives. Finally, let me briefly comment on our cash flow and balance sheet before summarizing and handing back over to Fei. We ended the quarter with $4.5 million in cash, a decrease of $1 million from the second quarter, primarily due to cash used in operating activities, partly offset by proceeds from issuing common stock. Following the quarter’s end, we completed the second tranche of the private placement earlier announced, adding an incremental $8.8 million in proceeds, bringing our pro forma cash balance to $13.3 million. To summarize, balancing cash flow is a critical KPI for us as we work to safeguard cash reserves, ensuring both strategic and financial flexibility. Our cost reduction efforts, including targeted headcount and salary cuts, are central to building a leaner operation that aligns with our long-term goals. Thank you for your continued support and now back over to you, Fei.

Thank you, Phillip. In closing, while the quarter was disappointing due to the delayed delivery, we have more systems today at various phases of testing and piloting than at any point in our history. We have incredible technology that can be applied across a number of different applications, and it is imperative that we further develop the various partnerships to put ourselves in a position to not be so dependent on one or two orders each quarter. Fortunately, we have a strong balance sheet, but I want to make it clear that we are not taking our elevated cash position for granted. We have put in place initiatives to reduce our expenses while driving revenue growth. With that, operator, we would be happy to take any questions.

We will now begin the question-and-answer session. The first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Good morning. Just wanted to get a little more color on the delay in shipping to the oil and gas market. I know you said in 2025. Any sense on when that will be shipped? And I guess, maybe some color on the change in taking that unit. And does that delay the ultimate kind of pilot effort and ability to get follow-on orders or timing on follow-on orders?

Thank you, Rob. I think in our press release you have read – we actually stated that we expect it to come in the first half of 2025.

Okay, great. And then I guess what was the sort of reasoning for the delay? I think it shifted to the location?

Yes, because when they shift to a new location and the water in a different size, they are different but they do not need to run all the testing of our system because it has been demonstrated as very robust. They really can handle different water streams. However, they have some one or two pre-steps before our treatment, and they would like to do some running tests before they implement our solution. So that was one reason for the delay in the process.

Great. And then on the lithium brine project that you had, can you give us a sense of how big that market is or what a typical system size is in that market?

We are very happy to see the results. They’re convincing. So the customer ordered the pilot unit very quickly. The max size is huge. Just for this customer alone, one size will be more than – it’s more than what we normally expect, it could be double or even five times the size. So it’s a very large potential market. Our technology has a very unique performance, and they are very excited about that. They also have a patented ion-exchange technology, which is very unique. I would like to share more information with all of you when the pilots are finished because then it will be clearer, but the market is much bigger than what we normally anticipated.

Okay. Thank you. I’ll turn it over.

The next question is from Lucas Ward with Ascendiant Capital Markets. Please go ahead.

Hello team, good afternoon. Thanks for taking the question. So, yes, I wanted to drill down a little bit more on the order pipeline. I'm interested in how you track it. Do you have a dollar figure for what your backlog is or your three-month backlog or your six-month backlog? Are you simply tracking individual pilot projects which ultimately, hopefully lead to commercial orders?

That depends on the business areas. We have our recurring business where we have order pipelines with dollar marks for all of the potential orders. But as Fei also mentioned, we have other business areas with local sales cycles where we follow each step for the pilots, beginning with testing at the customer sites. That should turn into pilot orders, and the pilot orders should eventually lead to commercial-sized orders. So it differs depending on the business areas.

Okay, cool. So it seems like it’s lumpier than I thought. Like if one order is $1.5 million, let’s say, can you give us an idea of the size of, let’s say – well, first of all, do you book revenues at the test phase or not? Because it sounds like you’re booking them at the pilot phase?

Yes, that depends on the arrangement with the customers. But with the recent pilots we've announced, it has either been as a direct sale to the customer or as a rental. So the customer rents our pilots, then we provide engineering services for them and conduct the testing together with the customer, which generates revenue for us.

Okay, cool. So let’s say a system is $1 million for the commercial part, how much would the pilot be? Is that like $100,000? What’s the difference in scale from pilot to commercial?

Yes, so if you buy it, it depends on the end market. We’re not able to specify it, but if we rent it, it depends on how long the customer wants to rent it, of course. It really varies based on the end market and what we have of a track record within that end market.

Let me come back to your question about the price comparison between the pilot and the commercial plan. It really depends on the capacity because the cost and the sales price are contingent upon the treatment capacity. So it’s not one fixed number; it really varies based on the specific project.

Okay. If we look at some of these newer markets like oil and gas produced water or potentially lithium brine extraction, is it fair to say that the system value is going up a lot relative to your previous bread and butter swimming pools?

Definitely, yes, they are increasing significantly.

Okay. With respect to the lithium project, it says in the press release that your U.S. membrane filtration can actually enhance the downstream ion exchange, which I’m not sure what that means. But it sounds like you’re becoming part of the production process as opposed to just cleaning the water that may be produced as a result. Is that a new kind of position for LiqTech?

Yes, you’re totally correct. We are indeed becoming part of their production process in lithium brine production. They are utilizing ion exchange, which requires a specific material to chemically react with lithium ions to convert them to the metals needed. To do this efficiently, the water must be pretreatment; otherwise, efficiency will be reduced. So we are here to increase their efficiency in capturing lithium ions. So you are absolutely right.

Okay, cool. And with respect to microplastic removal, is this a new market for LiqTech?

I mean, this is indeed a very good question. It is new. We had a development project in 2023 funded by a Danish government and conducted tests on microplastic removal from industrial wastewater. We were very surprised by the good results we achieved in that development project. Based on this data, we engaged with the U.S. petrochemical company that has challenges with microplastics in their wastewater. They were very excited about our results and technology, which quickly led to a pilot order. We are currently conducting the pilot at the customer site in the U.S.

Okay, thanks, Fei. Okay, last question, WIN DG dual-fuel engines. Is this a new market? I mean, what's the significance of that relative to your standard marine scrubber opportunity?

This is indeed a new application. I would say yes, this represents a new market, because the standard traditional marine scrubber is really under regulatory control; they need to treat the water before they can discharge into the ocean. In contrast, this application requires treating the exhaust gas from the engine to ensure combustion efficiency. So this isn't regulatory control; it's a requirement for the engine itself. This makes it much more interesting because, in this way, customers have to choose efficient technology and not just the cheapest option. Therefore, we believe we have a unique position here, and the demand for water treatment solutions must continue operating while the engine is running. Many existing technologies struggle to perform in this application, but we know our solution can run continuously 24 hours and needs very little time for cleaning. This is another unique feature of our solution. So it's an interesting new application area for us, definitely.

Okay, great. Thank you, Fei, Phillip, and Robert.

Thank you, Lucas.

Thank you.

Robert here. While we wait for any additional live questions, I have some that were submitted via the webcast. If you're listening on the webcast and want to ask a question, please use the Ask a Question box. Fei and Phillip, there's one part of the lithium brine question that hasn't been addressed yet, specifically about how long you expect the pilot for the brine customer to last. Do you have any estimates on the timeline for the pilot?

I expect they will be there for the next couple of months.

Next question here is can you talk about some of the reasons for the challenges within the pool system this year? Is there any one particular reason for their performance?

From the market perspective, all customers and partners are very interested in our technology. We have a strong technology with a compelling value proposition. Unfortunately, our sales management, including a VP for sales and also a salesperson for the pool system, did not perform well. This has significantly impacted our pool system sales. We have made corrective actions; we have changed the VP for sales and hired a new salesperson. They are now speeding up efforts to catch up on what was previously lost. We are also building new distribution partnerships and follow up closely with our existing distributors. I truly believe that in 2025, you’re going to see the effect of the new sales team being much more efficient and professional compared to the previous one. This is purely an internal reason, nothing related to the market and customers.

Okay, great. I hope those answered the questions from the webcast. I am not showing any additional questions here through the live line. So Fei and Phillip, I will turn it back over to you for any closing remarks.

Thank you very much for being with us today. We look forward to communicating with you again soon. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.