LiqTech International, Inc. (LIQT) Q1 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the LiqTech International Report 2015 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief and question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Axelrod, Managing Member of Wolfe Axelrod Weinberger. Thank you, sir. You may begin.

Thank you, Latania. As a reminder, the conference is being recorded and consequently your remarks would be recorded as well. Aldo Peterson, Chairman; and Sune Mathiesen, CEO will begin their formal remarks shortly. Before I turn the call over to them, let me remind our listeners that following the conference call, there will be an open Q&A session. You should also note that a replay of the conference call will be available starting at 3:00 p.m. Eastern Time today ending on May 28. To access the replay, please dial 877-660-6853 and enter the conference ID number 13609708. The access number for the replay for international callers is 201-612-7415 with the same conference ID number 13609708. If you do not have today's release, please contact my office at 212-370-4500 and we will relay the details for the call or the replay to you. In order for all listeners to have an opportunity to ask questions, please limit your question participation initially to one question and one follow-up. After all individuals have had the opportunity to ask their question, you're welcome to ask further questions. Now please bear with me for another minute as I read the forward-looking statements. The press release and conference call contains forward-looking statements. Although the forward-looking statements reflect a good faith and judgment of management, forward-looking statements are inherently subject to known and unknown risks and uncertainties that may actually result and be materially different from those that are discussed in the press release and conference call. We therefore urge all listeners to carefully review and consider the various disclosures made by us in the reports filed with the Securities and Exchange Commission, including the Risk Factors that attempt to advice interested parties of the risks that may affect our business, financial condition and sales and operations and cash flow. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected. We therefore urge all listeners not to place undue reliance on these forward-looking statements, which speak only as of the date of this release and conference call. We assume no obligation to update any forward-looking statements in order to reflect any events or circumstances that may arise after the date of this release and call. Now having dispensed with that, it is now my pleasure to have Aldo Petersen, begin the conference call with his introductory remarks. Aldo, please proceed.

Thank you, Steve, and good morning and good afternoon ladies and gentlemen, thank you for attending this conference call. In the second quarter of 2014, LiqTech took a very important decision to acquire company Provital with the focus on making sure that we could service our customers as a system integrator as well as a membrane and DPF company. This transition has taken time. We have been working very hard on that and the integration now allows the existing LiqTech business to offer systems in dedicated system applications. The Provital business has allowed us to enter into direct sales to end customers and in providing a market with a new technology as silicon carbide membranes, this is a very important decision. We have spent last two quarters on getting our sales staff into different markets we have developed new application and we now feel that we have the right application mix-up. What has been important for us as well from a strategic point is that our previous focus on having up to 80% of our business focused on the oil and gas industry as shown to be somewhat risky due to the steep decrease in oil prices in 2014 and 2015. We now have a more balanced application strategy, we can provide customers in the oil and gas industry but importantly we have an industrial offering; we have a clean water offering; we have a pool offering; and therefore we have a more balanced set-up so that we are not in risk in any one specific business. The order intake in the first quarter has been up quite significantly and we are fairly comfortable that we will now start to see the revenue go up in the coming quarters. For details about how we are going to do that and for a detailed discussion of the first quarter, I will turn over the conference to our CEO, Mr. Sune Mathiesen. Sune, please.

Thank you, Aldo, and good morning and good afternoon ladies and gentlemen. As discussed on our 2014 earnings conference call, the first quarter of 2015 has been expectedly disappointing, but we remain very confident in making progress this year. In our analysis of the first quarter's financial results, we have chosen to provide sequential comparison with the fourth quarter of 2014. As we think, this is a much more relevant in respect of current global economic activity and order trends. In addition, exchange rates were very similar between the fourth quarter 2014 and the first quarter of 2015. Net sales for the quarter was $2.10 million compared to $2.26 million for the fourth quarter. It represents a decrease of $360,000 or 14.6%. The gross profit for the quarter was a loss of $47,000 compared to a loss of $776,000 in the fourth quarter, it represents an improvement of $729,000 or 93.9%. The operating loss for the quarter was $1.79 million compared to $2.86 million in the fourth quarter. It represents an improvement of $1,070,000 or 37.4%. The net loss for the quarter was $1.17 million compared to $1.9 million in the fourth quarter of 2014. It also represents an improvement of $730,000 or 38.4%. We have seen a DPF filter market where mandates throughout the world have not been in force and consequently demand is such has been suffering. Many of our customers are reporting a very slow business condition and some competitors have chosen to even shut down the production of DPF sources. I will focus on off-road applications as to some extent compensated for the difficult market situation and our DPF filter business as therefore now leveled out at a lower level. We believe that we have seen the bottom in this market and we expect our [savings] [ph] for the rest of the year to be roughly the same level as the first quarter. The slow DPF market as also caused us to reduce our operating costs and these costs reductions will come into effect to some extent in the second quarter and into full effect in the third quarter. After the implementation of the new strategy for liquid membrane systems in the fall of 2014, we thought that we would have seen the positive impacts much earlier. Unfortunately, it has taken longer than expected to see these results and at the same time we have been hit by a global economic situation in the construction industry and oil industry where many projects have been postponed. However, since we implemented the new strategy, we have seen the continued growth in our pipeline and the value of the pipeline as now more than doubled. More importantly, the pipeline is now off a much better quality and also importantly with the limited exposure in one single market. We do feel confident that we have laid the foundation for less lumpy business in the future. We are also beginning to see the first orders from the improved pipeline beginning to materialize. The order intake in the first quarter was $0.579 million more than 129% growth from the same quarter in 2014 after adjusting last year for currency effects. The order intake for membranes and systems was $4.68 million compared to $930,000 in the same quarter last year that represents an increase of 403% and is by far the largest ever order in take for membranes and systems in a quarter. We believe that this favorable trend for the future. One of the highlights in the quarter was $2.4 million order one oil recovery system we announced in January 6. This marks the breakthrough in the South American oil industry. And we believe that this order will be the first of many. At the same time, this proves that our technology is the right solution for this demanding application. In the first quarter, we also announced a new collaboration with Grundfos. We developed a unit to clean groundwater directly in connection with the well. We are proud to work together with the leading pump manufacturer like Grundfos and this is an important part of our focus on drinking water applications. Another important opportunity for us with regards to water is the water shortage in Brazil. We have invested significant resources into this market and we feel certain that we will soon the see first orders materializing. Once successful, we will try to duplicate this in other markets with water shortage like for example California. In the first quarter, we also announced four orders for the removal of heavy metals from scrubber water systems within the power plant and marine industries. These applications are well within our new strategy and we believe that we will see further orders for these applications. We expect to recognize the revenue from these four orders in the second quarter. We are very encouraged by the record order intake in the first quarter and we will continue our hard work to further build our sales pipeline within the swimming pool industry, the border industry, heavy metal removal and oil industries. We will also continue our work to find new off-road applications for our DPFs. Having said that, I would now like to turn the conference over to Q&A session.

Thank you. At this time we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Eric Stine with Craig-Hallum. Please proceed with your question.

Good morning, everyone.

Good morning, Eric.

Good morning, Eric.

Hi. I was just wondering and I know it's been tough to call, I know that things are moving around in the project schedule, but you did mention that the four orders that you received in Q1, you expect those to be revenues. In Q2, I mean just curious how should we think about the next few quarters, I know previously, you are looking for a pretty nice step-up in Q2 and Q3, just wondering how the project schedule is shaping out?

Eric, thank you for participating. As you know following the company for quite some time, our focus has always been on having a sound financial platform of having no debt in the company. And we feel that the money that we have spend over the last couple of quarters in setting up the system application capability in different countries increasing our sales is now starting to bearing fruit. So with regards to the coming quarters what we can see for Q2 is that we will have a significant better revenue for Q2 than we had for Q1 and that we had already seen. And looking at the order pipeline that we have, we feel confident that we will continue to see a significant increase in our revenue stream in the coming quarters. So we are very confident that that Q1 marks the lowest revenue number that we are going to have. Second quarter is going to be higher and with the order pipeline that is now in place and with the depth in the order pipeline in different segments, we have somewhat eliminated what has always been our [Technical Difficulty] that we are predominantly in one industry and if those industries are delaying their orders then we didn't have a sufficient platform in other industry. Now being in clean water being in the power plant industry having oil and gas customers, having pool customers, we feel that we have a much wider pipeline and maybe soon you can elaborate on that line in different segments.

Absolutely. Well, like Aldo said, we feel very encouraged that our pipeline is building up. And more importantly we see it building up within different markets. We are not relying on any single market any more. We have the pool industry. We have the heavy removal; we have the oil industry, and we have the key motor industry. We see a continuous clause in the pipeline. We had a rate cut order intake in the first quarter and it seems like this is a trend for the future. So yes, we feel very optimistic about the coming quarters.

Got it. And then maybe just along those lines. On the balance sheet, I mean fair to say, you are looking for better results, the cost reductions in DPF, I mean I would think that would point to much better cash, cash usage or potentially maybe generate a little bit in Q2 and going forward.

Correct. We just have to react on the lower DPF sales. We have done that in the first quarter to some extent in the second quarter as well. We will see those effects in the second quarter to some extent and then third quarter we will see the full effect from the cost reductions. I also have to say that the reduced cost structure is only for the DPF we have been adding some costs for same force in the membrane and systems department instead.

Got it. Last one for me, just turning to the arrangement with Grundfos, just curious, I know you are targeting delivery of that first system in April, so curious on that, how long that evaluation period will be and how do you see that playing out and has anything changed in terms of I know you said that for that application they sell 750,000 submersible pumps per year. Just curious what your opportunity to be in that and potentially decide? Thank you.

Well, what is important to understand with the Grundfos unit is that, yes, they sold 750,000 pumps for that application every year. We will be able to sell one with every pump, no, that is never going to happen. But, there is a good part of these pumps who are potential for this add-on, which I think is fair to say it is. When we are replacing is a normal sand filter that you use to clean out the iron and manganese from the water. And we have a much smaller solution for this. And also by placing it directly in connection with the well, the customer will save the cost for building or shift, whatever should house that sand filter. We believe there is a significant potential in this collaboration, we have very high hopes for that. And we will see the first test results in August, September, so it's not something that will generate significant business before we move into the fourth quarter.

Got it. Okay. Thanks a lot guys.

Thank you.

Our next question comes from Joe Gomes with William Smith. Please proceed with your question.

Good morning guys.

Good morning, Joe.

If one of you could give us a little more detail – little more color here on how you are able to reduce the – significantly improve your gross margins in the quarter, roughly the same amount of revenue but gross margins went from a loss of three quarters of a million to a loss of 50,000. So I was just wondering, you can give me a little more color detail there?

Yes. I can give you that. Joe, well, the gross margin will always move up and down a little bit, it was especially bad in the fourth quarter so that's part of the explanation. What is more important to understand is that in the future we will see gross margins improve significantly as the volume increases because what is the problem right now is that, we have a lot of depreciation within these margins. But, it is clear that we also took some of the cost reductions already in the first quarter. So to some extent you can also see that in the numbers for Q1.

Okay. And then also, you are looking at the – some of the line items on the income statement. And there was – again, quarter sequentially a sharp decline in selling expenses after you have been kind of building up throughout 2014 and just again trying to get a little more insight into why we thought the sharp decline in selling expenses when we should be up there presumably we are out there trying to get as many – as much in sales as we can in the obvious market that we are in.

It actually comes down to the restructuring of our sales efforts before we used to relay on a lot of things sales reps, external sales reps in the U.S. and that has been quite a lot of cost in the past. What we have done this year is to reduce the number of sales reps and instead hire internal sales people to take care of this as we believe that the best reps we can have out in the market are our own. So the cost or the adoption in this amount comes actually from that.

Okay. That's good. Just two more quick ones, if I can. One, on the $2.4 million contract previously you talked about that was going to be delivered in Q2 just want to make sure that is still the feeling and then two, can you just kind of give us a little bit of color how order in take has been so far in the second quarter today?

With regards to the $2.4 million order, we did have the expectations that we will deliver it in Q2. We know now that it will be delivered probably and that – why I say probably is because of accounting rules. Final delivery will be in Q3, if we will be able to recognize some revenue in Q2, I believe we will that why as I believe is that that comes down to accounting rules and we couldn't just – we couldn't say at this stage actually. So we will have to wait and see what the accountant say my person believes that we can recognize some of the revenue in Q2 but it's uncertain how much.

Okay.

And your second question what was that Joe, sorry?

How order in take is – has gone so far here in the second quarter to-date and kind of half through the second quarter, just trying to get an idea?

It looks equally optimistic as we are about the first quarter.

Great. Thanks.

Joe, I just wanted to add with regards to the $2.4 million orders, when we are in specific markets and especially when we are in South America, we have a very conservative approach. We have contractual agreements of very large prepayment that we need to cover because we don't want to take any risk on incurring large losses. So the impacts on the $2.4 million order those are related to the fact that we have needed to receive large payments. And we will continue to do that because worst scenario for us is to get involved in million dollar plus orders and then have to experience difficulties in payments. So as a policy in company very strict on pre-payments and that will sometimes impact the [Technical Difficulty] system which it has in this case.

[Operator Instructions] Our next question comes from Lou Margolis with Select Advisors. Please proceed with your question.

Hello. I have been an investor as you know for a couple of three years, and what particularly intrigued me early on was the relationship with the – in the fracing area with FMC, I didn't hear the beginning in the call, I was on a different conference call. Could you review where that is and why it didn't work and why there is no business coming from it?

Certainly, I can do. [Technical Difficulty] very integrated relationship with FMC on delivering system. We had expectation of starting delivering commercial systems in 2014. But, the short supply in the gas product in 2014, FMC delayed the rollout of this technology. Their focus is on the mobile fracing operation. And in adding new services has been postponed due to the decline in oil prices. The status of the relationship is that we still believe that we will see revenue from FMC. We just don't believe or just don't see when that will happen our exclusivity with FMC was ended by December 31, 2014, and we are now in discussions with other fracing companies of utilizing our membranes technology into that segment. So to conclude, FMC is still a relationship that we believe will generate business and we have taken the knowledge and opportunity that we have learned from this relationship to start relationship with other fracing companies.

Have they deployed even one unit, are they using this your technology between the water anywhere?

No. They have not. They have not deployed an industrial unit. They have built a test unit, but they haven't deployed.

Okay. Well, we will see what happens over the next year. It's been a long battle. Okay. Thank you very much.

Thank you, Lou.

Thank you. Our next question comes from Gary Zwetchkenbaum with Plum Tree Consulting. Please proceed with your question.

Good morning, Aldo and Sune.

Good morning, Gary.

Good morning.

Good morning, Gary.

Good morning. I would like to talk to you, you mentioned in your results a gross profit of $47,000 compared to a loss of 776, which is a great reduction in the loss. Going forward, I would like to ask you in the gross margins for the company when LiqTech bought Provital last year? The margins from the pool business and the Provital business was roughly a 60% gross margin versus somewhere in the low 30s for the old LiqTech. Can we take a look at going forward this quarter, the current quarter, can we look at those margins, where are the margins this quarter versus last and the integration of the Provital business, meaning the pool business in particular we have talked about SeaWorld and Disney and things like that and other pools and I would like you to – if you would talk a little about that in the margins going forward?

What you can say is that when we sell a system whether it's for swimming pool application or if it's for industrial application, it doesn't really matter. When ever we sell systems we can keep high margins. We margin levels at about 60% to 65%. And obviously, as we grow our business as we realized the order in take that we had in Q1, we would also see a majority of this is systems, so we would see the gross margin improve significantly. What we also need for the gross margin to improve is more volume in the membrane adoption. And so as we see that go up, we will see gross margins improve.

Can I ask you in particular on the pool business, where -- you talked about gross margins are increasing, you talked about systems at 60%, 65% obviously, you are doing a lot more in the system business. Where – are we looking at a breakeven point somewhere – are we looking at a certain revenue to do that and the end of it is, you mentioned a cash position of $3.27 million at the end of the quarter based on what's coming on. Is the new LiqTech going to be looking to raise money any time in the next year. Why or why not?

Go on Aldo.

Go ahead Sune.

Okay. To take the first thing –

Gary, we have no plan –

Okay. Just going to your first question Gary, the first question was, is this some breakeven point? Yes, there is. It's not a big secret, we talked about this many, many times in the market. We believe that we should realize about $5 million of revenue in the quarter should be at that breakeven point. Obviously, with the new mix of revenue and more revenue coming from systems that number will be a bit lower because the gross margins are higher. So probably we are looking at about $4.5 million of revenue to breakeven with this mix of savings. And this of course, why we even more encouraged by the high order intake in Q1 because if we should realize revenue in a quarter like that order intake we would actually be profits or so that is what we expect for the future. To answer your second question, no, we have no plans at this moment to raise money.

So what I'm seeing is, based on what happened last quarter in the reduction and losses, are we in a position at $4.5 million roughly a quarter? Are we looking at in the second quarter, are we looking at that kind of a number for second and third quarter, is it conceivable that we can do $9 million in the next two quarters and be in that kind of position in the next two or three quarters this year? When can that happen?

We don't want to give that kind of guidance Gary. We never did that in past. And we are not going to do that either here. But, what we can say is, we feel that the order intake in Q1 is not a one-time item. We feel that we built the pipeline to be able to have that kind of order intake in the coming quarters as well. So we feel very encouraged by that. And we will continue our hard work to pool in those orders and as we realized them of course that will improve the situation of the company.

Can you just tell me what you mean by order intake when you said it was $5.79 million, what is that mean exactly?

Booked orders.

Okay. Thank you.

Thanks Gary.

At this time, there are no further questions in queue. I would like to turn the call back over to management for closing comment.

Thank you very much for that Latania. I would just like thank you everybody for attending this conference. It's been some good questions. And we hope we answered your questions right. And so thank you everybody and have a nice day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a great day.