LiqTech International, Inc. (LIQT) Q3 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to LiqTech International call to discuss the Third Quarter Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Donald Weinberger. Thank you, Mr. Weinberger, you may now begin.

Thank you, Rob. Aldo Petersen, 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 question-and-answer session. You should note that a replay of the conference call will be available starting at 3 PM Eastern Standard Time today ending on December 5, 2016. To access the replay, please dial 877-660-6853 or 201-612-7415 and enter conference ID number 113649849. If you do not have today’s release, please call my office at 212-370-4500 and we will be pleased to forward the details 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 question. After all individuals have had an opportunity to ask their questions, you’re welcome to ask further questions. Now please bear with me for a minute as I read the forward-looking statements. The press release and conference call 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 in these forward-looking statements. Readers are urged 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, results of operation and cash flows. 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. Readers and listeners are urged not to place undue reliance on these forward-looking statements, which speak only the date of this release. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this release and earnings call. Having dispensed with that, it is my pleasure to turn the call over to Sune Mathiesen. Sune, please proceed.

Thank you very much, Don. First of all good morning to all participants from the U.S. and good afternoon to all participants from Europe. Thank you very much for dialing in for the LiqTech International conference call to discuss the third quarter results and the outlook for our business. The net sales and results for the first quarter – third quarter was a result of the earlier discussed expected volatility in order inflows and revenue recognition for water treatment products. We are, however, pleased to see that the accumulated net sales for the year continues to improve. Following the acquisition of Provital Solutions, two years ago, we revised our business strategy and we decided to transform our business from a supplier of components into a supplier of complete water treatment systems. Our learning curve has been very steep, and we have developed several standardized systems based on our ceramic silicon carbide membranes and even developed chemical pre-treatment Reverse Osmosis systems and other related technologies. We still have a big task ahead of us to increase the general awareness of our technology and to communicate the advantages we are for our more traditional technologies. But we are experiencing still more acceptance from the market. Over the past two years, we have invested significant resources in the development of our systems and in getting a number of large-scale multimillion dollar references. We have successfully secured orders for large scale systems, for the oil and gas industry, for drinking water applications, and for heavy metal removal from the mining industry. The successful installation of these large scale systems has generated great interest from these industries and we believe that we are now well-positioned for further acceleration of our business in these markets. As announced in the earlier press releases, LiqTech has also been working hard to develop the maritime scrubber business, and I would like to take this opportunity to give you some background to this interesting market. In October this year, the International Maritime Organization, IMO, an agency under the United Nations voted to implement a new lower global cap on sulphur emissions from international shipping. The current global limit for sulphur content of ships fuel oil is 3.5%. The new global cap will be 7.5% and will apply after January 1, 2020. These strengths and requirements were, in fact, already decided in 2008. And following this decision, the IMO commissioned a view of the availability of low sulphur fuel oil for use by ships, so help the member states decide whether the lower cap on sulphur emissions from international shipping should come into effect from 2020, or from 2025. With the vote last month, we now know that the new regulations will come into force by 2020. The new regulations leaves the ship owners with two alternatives. However, to use the significantly more expensive flow sulphur fuel oil or to install a scrubber system to clean the exhaust gas. Calculations from players in the industry suggests that the return on investment for scrubber system could be as low as 6 to 18 months. Market analysts expect that ship owners will be motivated to install scrubber systems due to the quick return on investment and also because they do not want to rely on the availability of low sulphur fuel oil. More than two years ago, LiqTech first came into contact with the maritime scrubber industry. Since then, we have received orders for seven systems to clean the wastewater from marine scrubbers. Five of these systems have already been delivered and four have been commissioned. LiqTech technology is very well suited for the use in these applications. We offer a very durable material that is capable of handling the challenging wastewater and due to the hydrophilic properties of our membranes we’re able to build very complex systems, which is required for installation on ships. Over the past two years, we have demonstrated that our technology works, and following the IMO vote in October, we have experienced a strong interest from the players in this industry. . : The maritime scrubber industry is a great example of the typical market development for our technology. We have invested significant resources in the development of systems. We have large scale and long-term proof of technology and now tightening the deflation opens up a very large market opportunity. We have made similar investments into treatment of water in the oil and gas industry into the drinking water industry and into removal of heavy metals from the mining industry. We believe that also these investments will lead to new markets opening up for our technology. As earlier discussed, we have invested significant resources into developing the Chinese market. Earlier this year, we announced the letter of intent to establish a joint venture company for the production and sales of diesel particulate filters in China to deliver Kailong High Technology Company. And last week, we announced an agreement to establish a joint venture company for the sales of our water treatment systems together with Hunan Yonker Water Company. We believe that these agreements changes the outlook for our business, both for our DPF products and for our water treatment products. Both Kailong and Yonker are market leaders within their industries and we believe that our focus into the Chinese market will prove successful. Yonker and LiqTech have also entered into an agreement pursuant to which Yonker will purchase 4 million shares common stock of LiqTech at $1 per share. With the aforementioned large scale references, the unique opportunity in the marine scrubber industry, the two joint ventures in China for our DPF products and water treatment systems and the capitalization of our company from the investment mentioned earlier, we believe that our investments over the past years will now finally payoff and will see acceleration of our business. Having said this, I would like to turn the conference over to our Chairman, Aldo Petersen, who will elaborate further onto China and its opportunities. Please, Aldo?

Thank you, Sune. And as you, our investors have been seeing over the last couple of months, you can see that we have had a significant activity in China, and this is an opportunity to elaborate about our strategy and the outlook of the Chinese business. So for the first JV that we entered into in August of 2016 with Kailong High Technology for our DPF market, it revitalized our DPF market. And as you can follow, we have done about $2.8 million of orders for the DPF in China for the last three months of business in China. We’re right now in the midst of setting up our joint venture with Kailong. We have done together with Kailong engineers and our engineers the structure and the set up of the materials and investments that are needed to establish production facility in China. We have been delivering a number of new products to the Chinese market needed for China 6 and the Kailong have over the last couple months been selling into their market and into their customers the new products into the market. So that we are ready to have significant sales when we have our joint venture up and running in China. DPF has given us a market knowledge about China and it is a good place to comment on the year anticipated investment from Kailong. What we learned from the investment schedule in China that we have used as our investment schedule for the Yonker deal is that, the Chinese government takes long to approve investments in China. We think that the mistake we made or the short timeframe that we gave Kailong to make their investment was not applicable to the rules and regulations of China. We have learned that it takes approximately 45 business days to get approval from Chinese government to make foreign investments. And it can take even longer if you had not done foreign investments before which Kailong didn’t have. This was the reason why we changed the corporation. It gave us the advantage of a higher payment for our technology in China and it also will give us a better opportunity to have a high income from the royalties that we’re expecting from our corporation in the DPF market in China. When we announced the joint venture with Kailong, it immediately spurred interest from other Chinese companies. And one of the companies that we started discussing water treatment was Yonker, which is a significant larger company than Kailong. It’s one of China’s largest environmental companies. It is listed on the Exchange in China. It has a market cap of about $2 billion, and is a significant operator in the environment and water treatment. We have had meetings with them in China. We have meeting with them in Copenhagen. And as Sune described last week, we managed to finalize a JV investment agreement with them, where they’re indicating a significant use of our technology with their existing water treatment services that they have. They see the silicon carbide membrane as an important add-on to their existing portfolio. They see our technology has improving some of the water treatment systems that they have already in operation for the Chinese market. But first and foremost, they see a very extensive use of silicon carbide in difficult water treatment operations in China. They have been very much looking into our success in mining. They have been looking into our success in scrubber water. And we believe that Yonker is the absolute right partner for LiqTech in China. We have managed in a short while to set up two significant partnerships in China. And our knowledge and our study of the Chinese market makes it very, very important that you have partners in the Chinese market for Western companies to succeed. We have now managed to find we believe the right DPF partner. We have found the right water treatment partner, and it also gives us an access into letting the investment environment of China knows about our company. This has given us the opportunity to discuss LiqTech with a number of very large financial investors in China. And we believe that once we start producing significant results in the Chinese market, we will also be able to attract financial investors into – to LiqTech. When we set up the agreement with Kailong, we announced that we were looking to get a 7.5 million share offering at a $1 into the market. We have done an agreement with Yonker that they have subscribed to 4 million of those shares, and we’re very comparable that we can get additional Chinese investors into LiqTech that will broaden the investor interest into into LiqTech. So with China now being fulfilled in a strategy that gives us both a water opportunity and a DPF opportunity, as well as the very significant agreement in the maritime business, we think that we now have the ongoing business that can secure that we have a steady growth of system sales into what we have already proven to be our core technologies, and for that that, we are fairly confident about the future. And with those remarks, I would like to turn the conference over to questions. So please.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Eric Stine with Craig-Hallum. Please proceed with your question.

Hi, Sune, hi, Aldo.

Good morning, Eric.

Good morning. Maybe we can just start with the cash balance. I know that in 3Q, you were not necessarily expecting a great deal of improvement, but that you were in the fourth quarter. So maybe could you just give us an update on where the cash balance stands today? How timing of the mining or collection of a portion or all of that plays into it, and then also an outlook for money that you plan to receive as part of the DPF JV?

Yes, I can give you an update, Eric. First of all, we have been managing a tight cash position for all the year, as everybody knows. We have been managing that cash positions with very few problems. We have been able to operate the way we intend to operate the distance. We will continue to manage a tight cash position for the remaining part of the year, however, it is expected to improve throughout the quarter. And we see it as vital that we have now also made an agreement with Yonker to invest in LiqTech and to raise money for the further acceleration of our company. This is an important step now that we have large scale proof of technology that we have been able to get in a number of industries. The next step is to further capitalize the company for the acceleration. And we believe that we have taken the first step in doing so. But to answer you in short, we have been mentioning tight cash position and it will be slightly improving from the year.

Okay. I mean, is it –do you still expect to get, at least, partial collection from the mining order in fourth quarter? And so, are you able to give what it is today, or I mean, or should we, at least, view third quarter as the low point?

Eric, I can elaborate on…

Yes, I can elaborate on the payments from the mining order. We had confirmation last week for a partial payment of that order, and we know that the other payments will be made in the fourth quarter, as well.

Okay. I mean, you’re – it sounds like you’re confident that you can, but you’re able to bridge to the investment with Yonker?

Yes, we are.

Okay. Maybe second one for me and then I’ll turn it over. But just turning to Serbia, I mean, I know that those two projects that’s a big part of, why the cash balances, where it is it, and clearly, you made the decision, given the opportunity there. But can you just talk about funds, I know that the second project that one is in process, how you see that playing out going forward? And then can you just remind us of your ownership in that – in those projects going forward, what that means? And is this something you could replicate in other markets to accelerate adoption?

Yes, the Serbian opportunity was an exciting option for us, because it allowed us to get a large scale reference in the drinking water market. For that specific project, we also decided that we would take a large part of the scope of products and deliver not only the ceramic also filtration system, but also to develop a Reverse Osmosis system that goes into the projects. This is also why we took the decision to deviate from our normal payment terms and to allow different payment terms for this order and why we are collecting a large portion of the money towards the end of completion of the order. We are expecting further payments to come in from that project in the fourth quarter. Installation is going according to plan. And I think that the project, as a whole, is just an exciting opportunity for us, because once finished, it will be a great reference for future opportunities. There are a lot of further opportunities in Serbia and we are currently looking into those. As you also mentioned, we are taking a minority stake in the company that will be supplying – it’s in a PPP project and we are taking a minority ownership in the company that will be supplying the water to the consumers in this project. And that is definitely the strategy that we are considering for the future as well to bring in revenue stream in the future.

Got it. But that minority stake, I mean, right now that is, think of that as a relatively small, but obviously, something you’re looking to build as you add more projects in that structure?

Yes, correct.

Okay. Thank you.

Okay.

Our next question is from the line of Gary Zwetchkenbaum with Plum Tree Consulting. Please go ahead with your question.

Good morning, Aldo, Sune, how are you?

Good morning, Gary.

Hi, good morning, Gary.

Good morning. I wanted to focus my question. You made that announcement with Yonker and the focus on China. And I wanted to ask you what you see and any kind of timeframe going forward on the water treatment business? Meaning, how is that going to change your mix water treatment margins going forward into 2017. In addition, what is this relationship mean? You had mentioned that they were going to invest by 4 million shares at a $1, which is part of 7.5 million share of offering. Can you also mention when that comes about, how that affects in terms of cash? Where it’s going to go and it kind of a projection for water treatment going forward in the next few years?

Yes, I can say that that when we look at this third quarter and the focus and the resources that have been used on securing our relationships in China also to secure the very important maritime business opportunities that we have, of course, that has been putting a strain on the cash inflow, because as Sune was mentioning, we do have outstanding payments coming from our mining operation and from our Serbia operations. But when we look at China, it is a market that was really not there for us a year ago. We have declining DPF, because DPF in the retrofit market was growing very, very slowly around the world. For almost three years, we’ve been talking about the issue with copper in California and we have seen a decline in that business. And suddenly, by a change of government rule and regulations, we get an opportunity in China to set up our DPF market. The reason why we have done a joint venture is, because to be really successful in China is, we need to be able to be servicing the OEM market. So the new vehicle market. And in Kailong, we have found a company who are already very strong in the OEM market. So for us to operate in that market and the opportunity that we have in the DPF that is to improve DPF sales quite significantly in our joint venture. We have secured a significant royalty agreement around the product that we’re selling. We also owned 30% of the JV that will generate an income for LiqTech. So our DPF outlook for 2017 and onwards looks much better than it has done the three previous years. But there’s no change in our strategy that LiqTech really sees itself as a water treatment company. And in partnering up with Yonker, it’s not the biggest and one of the biggest water treatment companies in China that significantly states that they need our technology for the improved regulations that are in Chinese order, that opens up an opportunity to service the Chinese market at a completely different level than we have been doing before. We will be delivering our water treatment systems or part of the water treatment systems from LiqTech and thereby recognizing a significant revenue directly from LiqTech international. So we will be selling our products and our systems into the JV and into Yonker. So it will have a significant revenue recognition. In the short time, we have been discussing this with the Yonker. We have already indications on what systems that they are focusing on. It is areas that we have approved our technology in the areas that you have already seen. So it opens up very significantly for water treatment system that will be build and produced in LiqTech in Denmark and potentially also in the U.S., delivered into China and, therefore, have a very significant impact on our revenue and also on our gross margin. Gary, you know that we have a 50% gross margin on our water treatment system and about a 25% gross margin on our DPF. So we expect the growth in water treatment to be higher than the growth in our DPF sales and thereby improving the margin. While we’re looking at the cash situation, yes, as Sune described, it has been low. It is low, but we have still money coming from our water treatment in the mining and in Serbia. We also have now finalized first part of our Chinese investment. We believe it will take approximately 45 days to clear Chinese government approval, which means that around New Year that will be the time where we would get the $4 million. But our cash situation is although a small, still operational, so that we will get into no trouble even if there’s a delay in the payment from Yonker into January. But we expect to finalize the investment sometime by end of the year and that all improve our cash situation. And that cash built will be used as working capital for the systems that we expect to deliver into the Chinese market. It will also be used, as we expect, to start production of the systems for the maritime business. So it just improves our ability to build systems that then significantly will improve our revenue and our margin.

You – when you announced the – on the Yonker transaction, you put down the date to close by February 28. Your comment just now, are you saying that there’s a possibility that you can do this raise before the end of February. And you also mentioned 7.5 million, in other words, do you expect beyond the 4 million shares purchased by Yonker, there will be additional shares purchased up to 7.5 million total from the Chinese market, or from the total market?

Again, what we announced, when we announced the Kailong High Technology announcement, we said that we would raise 7.5 million in the Chinese market. We have been very well received especially after the announcement of the Yonker deal. So we’re still optimistic around us raising up to 7.5 million. My comments is the learning process from Yonker that they expect 45 days approval from Chinese government, which brings us by the end of the year. We have announced and that is in the agreement with Yonker that it has to take place before end of February. But again, we’re managing our cash balance according to the timeframe that we have announced. And we are confident that that the money coming in from our mining and from our Serbian project together with additional project and our DPF sale will be sufficient cash to run the company.

Thank you, Aldo, and Sune, I appreciate it. Thank you.

The next question is from the line of Joe Gomes with William Smith. Please proceed with your questions.

Good morning.

Good morning, Joe.

First question, what were the incoming orders through the first nine months of this year?

We have not disclosed that in the press release, Joe, and unfortunately, we’re not in a position to do it here, as well. I’d be happy to get back to that a little later stage, but I believe that should be public information.

Okay. That’s different, I know, in the second quarter press release you noted that it was 8.5 million through the first six months, so surprised us…

Yes. And the policy of the company has been, if we mention it in the press release, which we have not done in this case.

Okay. I guess, but my follow-up question maybe it kind of a three-part question. But some of the other, you spent a good deal of time today mentioning some of the opportunities, especially with the scrubbers. But I don’t want to forget some of these other large opportunities that you had mentioned in the past and maybe we could just get a little bit of an update what is going on with the Grundfos opportunity, I know, we had talked about getting ready to go-to-market with that. And maybe a little update on the pool market, we had mentioned in the past, but you had set up in country distributors and that you’d seen some positive impact from those and also the Danish pool market coming up hard on the 2017 deadline. So I was wondering if you might give us a little bit of an update on those? Thank you.

Absolutely, Joe. I think first of all, the reason why we mentioned the scrubber systems today and why I spent quite sometime discussing that is that, it is a great example of a market maturing for us. We have been making a lot of investments over the past two years in getting a number of, or in developing a number of systems for specific industries and getting large scale orders and references. One of the industries that we have spent significant resources into is the scrubber systems, that maritime scrubber systems. And now after all of these investments, we see that the market is maturing due to new legislation that forces the ship owners to make investments. And this is the reason why I spend a lot of time talking about it. We also know that a lot of the other industries that we have spent significant resources into like the oil and gas industry, like the drinking water industry, like the heavy metal removal from the mining industry, all of these markets we have invested significant resources and money in developing system in getting large scale proof of technology and some great references. And we know that also in these industries, there will be new legislation that will lead to these markets maturing for us. So go back – to get back of – to your questions so about the pool market. After a long decline in our pool business this year, we have actually seen a good deal of improvement in the pool market. In the fourth quarter, we will deliver several systems to several of these new distributors in the UK, in Spain, In France and other countries. And these distributors are still doing a great job for us. The pool orders are typically smaller systems, but potentially, it’s a great market and a huge market, and I think that we are getting traction in some of these countries. With regards to the Grundfos project, we are still in talks with conference about how to take this product to market, and in the hope that, we’ll be able to get some feedback to the markets shortly. But it’s important for me to say that each of the industries that we’re looking into offer essentially multibillion dollar industries. And if we make it in one of these markets, this will be more than enough to satisfy our growth visions. And one of the markets that we see now that is maturing is really the maritime scrubbers. Now we have not only the proof of technology and not only have we invested in developing the standard systems, but we actually see a market that is maturing to cover ourselves the enforcement of new legislation. So we are not in the need to see 5 or 10 markets developing this way. Even just one of the markets that we look into is potentially enough to satisfy our growth wishes.

Okay. And just real quick on Grundfos. I mean, because this has been a couple of quarters that you said that you’ve been in talk with someone how to go-to-market. Is there a hold up for – on their end for any reason that you can point to, or any idea of when a decision will be made on going to market?

Well, Grundfos is a very large organization, and unfortunately, things take time to develop and not unlike all the other markets that we are working into, it takes a long time to actually to be able to make that market strategy and be able to execute on it. We have also from our side been focused on the opportunities in China and maturing those opportunities, I think, that now we have two great deals in China; one for DPF front, and one for water treatment systems. We have the maritime scrubber business opening up. And of course, we will also be focusing into the Grundfos products and the water treatment systems we developed for them. But over the past couple of months, all of our focus has been on China, the maritime scrubber business, which we believe, where we believe we are closer to actually seeing the markets opening up in a big scale.

Okay, thanks.

Thanks, Joe.

Our next question is from the line of Roger Liddell with Clear Harbor Asset Management. Please go ahead with your question.

Yes, good morning or good afternoon. I’m leery of the International Maritime Organization 2020 deadline based on the experience in Denmark, where the swimming pool upgrades appear to be simply ignored, it doesn’t matter that the standard was put out there. So is there, and can you comfort us in terms of the actual implementation rather than setting up a deadline, which may or may not be honored just depending on circumstances?

Absolutely, Roger, and that is a very good question. For the low sulphur cap, it’s very important to remember that this was already decided in 2008. And immediately after the decision, the IMO commissioned a review of the availability of low sulphur fuel oil where used by ships to help the member states decide whether the lower cap on sulphur emissions from international shipping should come into force by 2020 or by 2025. There was a lot of activity from the shipping industry, as you can imagine, to postpone this to 2025. And despite of this activity from the shipping industry, the decision is now that it will actually come into effect by 2020. I think there’s very little chance that this will not happen as this has already been challenged by the shipping industry. But the member states have clearly said and this was a very clear vote. They have clearly said, it has to come into effect by 2020. So we feel very confident that this will actually happen.

All right. I – it was gratifying to see the receipt of NSF 50 and 61 certifications one, obviously, was a recertification, but now both are in place. Can you speak to explicit things that you are able to do now that you were not able to do before the receipt of both?

Yes. What it allows us to do one of the NSF approvals is for the swimming pool market, and that will allow us to enter into the North American market with our swimming pool products. We have already taken the first steps in identifying a number of potential distributors into North American market for our swimming pool products. And we believe that the small success we have seen in Europe for our swimming pool products this year can be copied into the North American market. The other NSF approval is for drinking water. And this really allows us to copy the success that we have in Serbia with this water treatment plants to serve 65,000 people to take that success and copy them to the North American market. And also the NSF approval is very important for us to enter into certain Middle East markets, where they also required the NSF approval. So the drinking water approval is extremely important for us, and we believe that it allows us to copy the success in Serbia and enter into new markets with our drinking water products.

All right. Thank you.

Thank you. There are no additional questions at this time. I would like to turn the floor back to management for further remarks.

Thank you very much. I would very much like everybody for – to thank everybody for dialing in today, and we look forward to executing on our strategies. We believe that we have spent last two years making a lot of investments in developing new systems for water treatment into number of industries and we have spent a lot of time and energy and money in getting a lot of large scale references in these markets. We believe that hopefully the time for investments is over. With the investments coming in from Yonker and potentially all the Chinese investors, we plan to use this money wisely for the acceleration of our business now that we have these references in place. So thank you everybody for dialing in. Have a great day.

This conclude today’s teleconference. Thank you for your participation. You may now disconnect your lines at this time.