LiqTech International, Inc. (LIQT) Q1 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to LiqTech International First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’ll now turn the conference over to your host Mr. Donald Weinberger. Thank you. You may begin.

Thank you, Matt and welcome to all of you today’s conference call to discuss financial results for the first quarter ended March 31, 2017 and recent business developments. Aldo Petersen, Chairman and Sune Mathiesen, CEO, will begin their formal remarks shortly. But before I turn the call over to them, let me remind listeners that following the conference call, there will be an open Q&A session. You should also note that a replay of this call will be available starting today at 3 PM and ending on June 5, 2017. To access the replay, please dial 877-660-6853 and enter the conference ID number 13662373. To access the number for the reply for international callers, please dial 201-612-7415 and enter the same ID 13662373. In order for all the listeners to have an opportunity to ask questions, please limit your question initially to one question and one follow-up question. After all individuals have the opportunity to ask their questions, you’re welcome to ask additional questions. Now please bear with me for a minute as I read the forward-looking statements. The press release and conference call contains 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 the press release and conference call. We therefore urge 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 advice interested parties of these risks that may affect our business, financial condition and sales of operations and cash flows. 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 all listeners not to place undue reliance on these forward-looking statements, which speak only as of this date and the date of the release and the conference call. 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 conference call. Having dispensed with that, it is now my pleasure to ask Aldo Petersen begin the conference call with his introductory remarks. Aldo, please proceed.

Thank you, Don, and very welcome to ladies and gentlemen from the U.S. and from Europe to this conference call. As you have seen a number of issues have been released today positively enough our continuous development in the scrubber business continuing with new customers. But we’ve also released information about the two financial issues that we have been discussing for a number of conference calls being the investment from China. Our latest news is that, we have been in touch with our potential investor Yonker and they have constantly been discussing with the government agencies about when they look at finalizing this, no final decision have come out on date. But again as we have disclosed earlier there has been no discussions around changes or doubts or changes in working relationship between Yonker and LiqTech. Secondly, we have also announced, that we have been raising capital with a number of our long-term investors, having raised about $1.5 million from long oil investors, we are very grateful for that. As U.S. investors have seen, we have been running the company on a very tight cash flow and now starting to see business coming from the scrubber water business. We are in a situation, where we as a company are better prepared for the order flow and the systems that we are starting to have in production. So that it is necessary for us to strengthened our balance sheet. We are of course very grateful for the investors, who have supported the company and have added through their already significant positions in our company. With those remarks, I would like to hand over the conference to our CEO, Sune Mathiesen to discuss the business developments of LiqTech. Sune please.

Thank you, Aldo and good morning to all participants from the U.S and good afternoon to all participants from Europe. Thank you very much for dialing in today, to the conference call to discuss the first quarter results and also the outlook for our business. Our results for the first quarter were in line with our own expectations, and in the first quarter, we have announced orders flat sheet membranes for [indiscernible], we have announced orders for treatment of flue gas condensate in power plants. And finally we have announced orders for the treatment of waste water from marine scrubbers. Today we announced another order for our standardized systems for treatment of waste water from marine scrubbers. Following the IMO decision in October last year to implement a new lower global cap on sulphur emissions from international shipping. We have been experiencing a strong interest from this industry. We have worked in the marine scrubber industry for the past three years. We have invested significant resources in the development of our modular systems. Our technology has proven well suited for the demanding application and we offer a very competitive solution in regards to footprint, quality, CapEx and OpEx. We’re happy to see that we are continuing to form new relationships to manufacturers of marine scrubbers. We believe that we will see gradually ramp up of orders from this quarter and on and we remain very optimistic about the outlooks for our business in this industry. We have also made significant investments in the development of standardized system for the power plant industry. Over the past quarters, we have announced several orders for this application and also here we offer a competitive solution in regards to footprint, quality, CapEx and OpEx. We are very encouraged by the positive development we have seen for our products for power plant industry in Denmark and over the coming quarters, we will work hard to use the references and experience we gained in Denmark to market our products globally for the power plant industry. LiqTech has also been long-term involved in the oil and gas industry. We have proven that our technology is superior to any other membrane material for use in this tough applications. We are working with some of the largest players in the industry, like Shell, [indiscernible] and Total just to name a few of them. And our technology offers the combination of reasonable CapEx and very attractive OpEx. Over the past four to five years, we have done a large number of successful pilots in the oil industry. We have also delivered large scale systems and build an impressive pipeline for this application. Unfortunately, the investments in the oil industry has been very low over the past couple of years. Right now, we are in the process of testing our technology with one of China’s largest operators in the fracking industry. We believe that this could finally be a commercial breakthrough for our technology into Chinese oil industry. In general, we have invested significant resources in developing the Chinese market, we have entered into a letter of intent to established joint venture company for the production and sales of Diesel Particulate Filters in China together with Kailong High Technology. We have also announced an agreement to establish a joint venture company for the sales of our water treatment systems together with Hunan Yonker Water Company. As Aldo touched on LiqTech and Yonker also entered into the agreement pursuant to which Yonker would invest $4 million into LiqTech for 4 million shares at $1 per share. This transaction was scheduled to be completed before the end of February of this year. However, due to the regulatory issues that we've experienced the deadline was put forward to April 15th. On April 17, we announced that Yonker have submitted the final application for completion of the $4 million investment into LiqTech. This application was submitted to the National Development and Reform Commission NDRC. Both Yonker and LiqTech are following the approval process closely, and we do hope to receive the NDRC decision in the near future. As Aldo also touched on, we have been managing a very tight cash position over the past quarters. To bridge the gap from now, Andon Silver received the investment from Yonker or also received anticipated positive development in our business coming especially from the marines copper industry. We have decided to do the placement of 6.3 million shares at $0.25 as announced earlier today. The shares have been placed with existing long-term shareholders and made directly by LiqTech. The plan is to use the net proceeds of approximately $1.6 million to carefully accelerate our business in the marine scrubber industry. Over the coming quarters, we will continue our hard work of acceleration of our business in the marine scrubber market. The further development of our power plant business and our offshore opportunities in China. And of course not forgetting about our longer term opportunities in the drinking water industry, in mining industry and the oil and gas industry. We believe that we are in a position now where our investments over the past years will now finally payoff and we will see acceleration of our business. We do appreciate the continued support from our shareholders and we will continue our hard work to establish our technology into market and bring value to our shareholders. Having said this, I would now like to turn the conference over to the Q&A session. Thank you.

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Eric Stine from Craig-Hallum. Please go ahead.

Hi Sune, hi Aldo. Maybe we can just start with the trial you referenced in China in oil and gas. I think last quarter you might have said that was Sinopec. But just curious what - how long you anticipate the testing, maybe the size of what that application would be? And then can you just confirm is that something that's outside the Yonker joint venture?

Yes. I could touch on that. First of all on the time schedule, well we are in the process now of testing our technology, we have set out the pilot unit on an actual fracking site. And we expect to see the first results from those tests within the week from now. There is a huge potential just within Sinopec as we mentioned it is Sinopec that we are testing with. And there is a huge potential just within Sinopec they have more than 300 sites in China with fracking each potential or one of the water treatment systems that we're testing out. Average selling price for a system varies, but I would say anywhere between $500,000 or up to $1.2 million per unit. So it is a huge potential that we're looking at.

And is that - I mean, this is something is it outside the Yonker joint venture or is it something that's dependent on that moving forward?

That is something we are doing independently from the Yonker joint venture, but we will obviously include it in the joint venture if it comes to provision. So that we can have local support in China, which we believe is extremely important.

And just transitioning to Yonker, I mean, I know you’re targeting government approval here in the near-term is it something just to clarify kind of where things stand. I mean, if my understanding is correct the joint venture and the investments are kind of one and the same. So in the event that that is the hold up and I know to this point indications are that that’s not, but if that is hold up, I mean, are there additional - have you thought about what potential additional path forward would be or could be with Yonker?

First of all, we believe Yonker is a great partner. They have very large customer base in China, they have long-term experience it’s a solid and large company. So we would be very happy to work with Yonker in China. But you’re absolutely right the investment was part of the joint venture agreement meaning that the investment into LiqTech was way of tying our companies closer together. Should they not be able to make the investment due to government issues we would have to reiterate where we stand, but I still believe that Yonker is a great potential partner for LiqTech. They could certainly bring a lot to the table, they have a lot of customer contacts. But in the event that they would not be able to complete the investment we would have to reevaluate where we stand. But right now we still believe that we receive the investment, we have no indications that we will not. So for now it is just speculation.

Right. And you’d have to reevaluate it, but I mean, I guess the fact that they have moved forward with it they filed, they’re looking for the approval it would seem to me that if they want to go forward that that’s something that there would be a pretty decent likelihood that you could find - you would reevaluate and maybe renegotiate something with them. Since they’re looking at your product going forward.

Yes we would have to evaluate in that situation, but for now we still believe that they would be able to invest, we know that they’re following the process very closely. We are in contact with Yonker several times every week following up, we know that they’re following up with the NDRC on the approval process. So for now we remain optimistic that they will be a good invest and should they not of course we will reevaluate the spend. But we still produce that Yonker is potentially a good partner, but obviously we would have to - we would be facing a new situation and we would have to evaluate that if it should come to that.

Got it, okay. Maybe last one from me just the new marine scrubber customer, maybe just some discussion of the size of that customer relative to the customers you currently have?

Yes we’re working with a handful of customers in marine scrubber business and we are constantly forming new relationships to new customers. The size of the customer is quite equal, they are all large companies who has seen the potential in this new emerging industry and all very solid customers. We believe that there is a great potential in the marine scrubber business, we believe it will materialize everything all feedback we get from our customers, all the feedback that we’re getting from analysts that are following the industry indicate that that we will see the anticipated ramp up in the scrubber market. We have been in the industry for three years now. We have made a lot of investments into our systems, we have created a standardized system we have been able to reduce our costs on producing the system, which means that we are extremely competitive against alternative solutions. We are second to none when it comes to footprint and to OpEx. So we believe that we have very good outlooks in this industry.

Got it, thank you.

Thanks, Eric.

Our next question is from Joe Gomes from William Smith. Please go ahead.

Good morning, guys. Just sticking with rubber business for a second, you touched about it briefly just now, but last call you talked about that your major - the marines copper customers where in negotiations to close orders for several hundred of the systems. And I was wondering if you could kind of update that quote that you gave us how much further along how many of these have they closed orders on have they given you anymore indication or look into their order books and where they stand?

Yes, that is a very good question Joe. What we know is that the handful of customers we have in the marines scrubber business, they are anticipating or foreseeing 500 to 600 systems all together five-six customers all together foreseeing 500 to 600 systems for delivery this year and next year. We know that they are in the process of firming up their orders with their customers. But we also know that the orders that we are seeing now and also the orders that we have announced today is more like just orders from the end users. The end users in some cases have 100 vessels, 200 vessels to 500 vessels that they would need to retrofit with the scrubber system. And we believe that what they doing right now is testing out their suppliers, which has been our customers and this is why we're seeing orders for one, two, three systems at a time. But we also know from our customers that they are in the process of firming up the large orders and that is something we expect to see in the very near future.

Okay. And on the Kailong joint venture, part of that deal as you were going to have to invest some funds in the joint venture I think partly to help the build the facilities and some other things. I was wondering if you could just refresh what the timeline was for that and what the amounts were that you were going to need to put into Kailong?

Yes this is Aldo, Joe. And we have been in constant discussions with them. Amending the regulation that we're doing. Maybe you remember as to the last conference call that we have had payment issues from the Chinese government locking up payments for abroad, which has delayed the development. We have had meetings with Kailong just recently here in Europe where they will be sitting large customers and our relationship is back on track. We also structuring a relationship where we are paid the fee for the technology that we're transferring into the JV that is the only money that is going to be used from LiqTech to start the production in China currently. As you also know from the Letter of Agenda that we have with Kailong. There is a royalty part of the agreement that is linked to producing a number of filters in China. LiqTech will be paid approximately $2.25 per liter of production and a filters in general 6 to 8 liters of the current size. So you could say we make around $15 per filter that is produced in China. And that revenue will be used for building up the capacity that are needed according to the business plans of Kailong in China. So in general we're very careful with the use of the fund. We are in a situation where we can expand the capacity within the payment that we have for our technology. And the ramp up in production capacity in China. We’ll see that the business will past 1 million leaders of capacity in China before the next part of investment will need to be paid for in China.

Okay, thanks for that Aldo. Just real quick, if you can touch based on again last quarter we talked about you had a fair amount of potential receivables coming in, when you handed over the Serbia water business and then the and finishing handover the mining contract. Where are we on those, have we collected any funds, how much funds are still to be collected, when do we think we’re going to collect those funds? And then just on the side of Serbia, I know that they had - you had talked about that, once that operation was up and running there were some additional business that could be had, where do we stand on that?

The status Joe is that we hope to handover the Serbian project in the beginning of June and we will hand over the mining project in July, that has been one month delayed, not from our side, but from the customer side, because they have another project going on. So that is the status of that.

Okay. And on the additional Serbian business?

Well that is the same story, as soon as we handover the project, the municipality are ready to proceed with three additional projects. Each of the projects are of a smaller size than the one that we have just completed, but the three together is similar in size to this current project.

Okay. And one last one, if I may. On the deal here that you announced this morning, I was wondering couple of things. Who approached who, did the investors come to you, or did you have to go out to the investors, did management participate at all and if so to what extent? Thanks guys.

Well that’s very easy. We with the deal we announced today, we think that it has come to a stage where we needed to do something. We still believe that the money from China will come in, we are still following that very closely, we have no indication whatsoever that it will not. But unfortunately we also as a responsible management had to react because we were managing this very tight cash position and this is why we took the decision to raise the additional capital. Participants well we - the placement has the order shares has been placed with existing long-term shareholders and we are very happy for the support that we have seen from those. And we are happy to see that they continue to share our belief in the future of LiqTech. Management did not participate because of the fact that we raised money below market price and we were advised not to participate with internal management.

Fair enough. Thanks, guys.

Thanks Joe.

[Operator Instructions]. Our next question comes from Jerry Cowen [ph] from JM Cohen and Company. Please go ahead.

Yes, most of my questions have been answered. Except, with this new cash, you have gotten in because what your cash burn is about what $1 million a quarter give or take, depending on your working capital needs. So it gives you another quarter and half worth of cash actually investment from China?

Well, what we know is that the capital that we have raised now will bridge the gap from now answer until towards the end of the year. Our cash flow needs is a little bit lower than what you are indicating here. But the important thing for us has been to make sure that we raise additional capital or to get the company towards the end of the year where we believe we will see the scrubber business started to materialize. The indications we have now how is that will see a gradual ramp up in orders from the scrubber market from now from this quarter and on. And we believe that it will bring sufficient business to the company so that we stop the cash burn from the end of this year. So, that has been the goal to raise the enough capital to bridge that gap we believe that we have raised enough capital. So I hope that answers your question.

Enough capital from what you did independent of China? That's what I was just curious.

In depended of China, should the money from China come in, it would be very nice that would further capitalize the company and we can use that capital to further acceleration of our business. But independent of that should it not come in for any reason, we believe that we have raised enough capital to bridge the gap from now. And so when we can expect to actually turn profitable from the scrubber business.

Okay, alright. Thank you very much.

Thank you.

Thank you. This concludes the question-and-answer session. I’d like to turn the floor back over to management for any closing comments.

I would like all of the participants today to thank you very much for dialing into this conference call. I do promise you that we will continue our hard work to see the marine scrubber business materialize. We believe that we are on the right path, we believe that we have formed a number of very worth full relationships in that industry and we will continue our work to find further relationships and of course also to see the market counter provision the way we anticipate. So thank you very much for dialing in today. And have a great day.

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