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LiqTech International, Inc. (LIQT)

Q3 2016 Earnings Call· Mon, Nov 14, 2016

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Transcript

Operator

Operator

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.

Donald Weinberger

Analyst

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.

Sune Mathiesen

Analyst · Craig-Hallum. Please proceed with your question

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…

Aldo Michael Noes Petersen

Analyst · Craig-Hallum. Please proceed with your question

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…

Operator

Operator

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.

Eric Stine

Analyst · Craig-Hallum. Please proceed with your question

Hi, Sune, hi, Aldo.

Sune Mathiesen

Analyst · Craig-Hallum. Please proceed with your question

Good morning, Eric.

Eric Stine

Analyst · Craig-Hallum. Please proceed with your question

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?

Aldo Michael Noes Petersen

Analyst · Craig-Hallum. Please proceed with your question

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.

Eric Stine

Analyst · Craig-Hallum. Please proceed with your question

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?

Sune Mathiesen

Analyst · Craig-Hallum. Please proceed with your question

Eric, I can elaborate on…

Aldo Michael Noes Petersen

Analyst · Craig-Hallum. Please proceed with your question

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.

Eric Stine

Analyst · Craig-Hallum. Please proceed with your question

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?

Aldo Michael Noes Petersen

Analyst · Craig-Hallum. Please proceed with your question

Yes, we are.

Eric Stine

Analyst · Craig-Hallum. Please proceed with your question

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?

Aldo Michael Noes Petersen

Analyst · Craig-Hallum. Please proceed with your question

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.

Eric Stine

Analyst · Craig-Hallum. Please proceed with your question

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?

Aldo Michael Noes Petersen

Analyst · Craig-Hallum. Please proceed with your question

Yes, correct.

Eric Stine

Analyst · Craig-Hallum. Please proceed with your question

Okay. Thank you.

Aldo Michael Noes Petersen

Analyst · Craig-Hallum. Please proceed with your question

Okay.

Operator

Operator

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

Gary Zwetchkenbaum

Analyst · Gary Zwetchkenbaum with Plum Tree Consulting. Please go ahead with your question

Good morning, Aldo, Sune, how are you?

Aldo Michael Noes Petersen

Analyst · Gary Zwetchkenbaum with Plum Tree Consulting. Please go ahead with your question

Good morning, Gary.

Sune Mathiesen

Analyst · Gary Zwetchkenbaum with Plum Tree Consulting. Please go ahead with your question

Hi, good morning, Gary.

Gary Zwetchkenbaum

Analyst · Gary Zwetchkenbaum with Plum Tree Consulting. Please go ahead with your question

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?

Aldo Michael Noes Petersen

Analyst · Gary Zwetchkenbaum with Plum Tree Consulting. Please go ahead with your question

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…

Gary Zwetchkenbaum

Analyst · Gary Zwetchkenbaum with Plum Tree Consulting. Please go ahead with your question

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?

Aldo Michael Noes Petersen

Analyst · Gary Zwetchkenbaum with Plum Tree Consulting. Please go ahead with your question

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.

Gary Zwetchkenbaum

Analyst · Gary Zwetchkenbaum with Plum Tree Consulting. Please go ahead with your question

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

Operator

Operator

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

Joe Gomes

Analyst · Joe Gomes with William Smith. Please proceed with your questions

Good morning.

Aldo Michael Noes Petersen

Analyst · Joe Gomes with William Smith. Please proceed with your questions

Good morning, Joe.

Joe Gomes

Analyst · Joe Gomes with William Smith. Please proceed with your questions

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

Aldo Michael Noes Petersen

Analyst · Joe Gomes with William Smith. Please proceed with your questions

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.

Joe Gomes

Analyst · Joe Gomes with William Smith. Please proceed with your questions

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…

Aldo Michael Noes Petersen

Analyst · Joe Gomes with William Smith. Please proceed with your questions

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.

Joe Gomes

Analyst · Joe Gomes with William Smith. Please proceed with your questions

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.

Aldo Michael Noes Petersen

Analyst · Joe Gomes with William Smith. Please proceed with your questions

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.

Joe Gomes

Analyst · Joe Gomes with William Smith. Please proceed with your questions

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?

Aldo Michael Noes Petersen

Analyst · Joe Gomes with William Smith. Please proceed with your questions

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.

Joe Gomes

Analyst · Joe Gomes with William Smith. Please proceed with your questions

Okay, thanks.

Aldo Michael Noes Petersen

Analyst · Joe Gomes with William Smith. Please proceed with your questions

Thanks, Joe.

Operator

Operator

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

Roger Liddell

Analyst · 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?

Aldo Michael Noes Petersen

Analyst · Roger Liddell with Clear Harbor Asset Management. Please go ahead with your question

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.

Roger Liddell

Analyst · Roger Liddell with Clear Harbor Asset Management. Please go ahead with your question

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?

Aldo Michael Noes Petersen

Analyst · Roger Liddell with Clear Harbor Asset Management. Please go ahead with your question

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.

Roger Liddell

Analyst · Roger Liddell with Clear Harbor Asset Management. Please go ahead with your question

All right. Thank you.

Operator

Operator

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

Aldo Michael Noes Petersen

Analyst · Craig-Hallum. Please proceed with your question

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.

Operator

Operator

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