LiqTech International, Inc. (LIQT) Q4 2022 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the LiqTech International Reports Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. All participants will be in a listen-only mode, [Operator Instructions]. Also note, today's event is being recorded. And at this time, I'd like to turn the floor over to Robert Blum with Lytham Partners. Sir, please go ahead.

All right. Thank you very much. Good morning, everyone. And as Jamie mentioned, thanks for joining us on today's conference call to discuss LiqTech International's Fourth Quarter and Fiscal Year 2022 financial results for the period ending December 31, 2022. Joining us on today's call from the company is: Fei Chen, Chief Executive Officer; and Simon Stadil, Chief Financial Officer. Before I turn the call over to management, let me remind listeners that there will be an open Q&A session at the end of the call. Before we begin with prepared remarks, we submit for the record the following statements. This conference call may contain forward-looking statements. Although the forward-looking statements reflect the good faith and judgment of management, forward-looking statements are inherently subject to known and unknown risks and uncertainties that may cause actual results to be materially different from those discussed during the conference call. The company, therefore, urges all listeners to carefully review and consider the various disclosures made in the reports filed with the Securities and Exchange Commission, including risk factors that attempt to advise interested parties of the risks that may affect our business, financial condition, operations and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, the company's actual results may vary materially from those expected or projected. The company, therefore, encourages all listeners not to place undue reliance on these forward-looking statements, which pertain only as of this date and the date of the release and conference call. The company assumes no obligation to update any forward-looking statements to reflect any events or circumstances that may arise after the date of this release and conference call. Now I'd like to turn the call over to Fei Chen, CEO of LiqTech International. Fei, please proceed.

Thank you, Robert. Good morning or good afternoon to everyone on the call, depending on where you may be. I am excited to get the opportunity to speak with you all today. As those of you that have followed the company closely now, I took our as a CEO in mid-September, following a long career across a variety of global industry companies with emphasize on water treatment, chemicals and clean energy technologies. As I mentioned briefly last quarter, where I was at the ground first in 2012. I was introduced to LiqTech's technology, having seen the uniqueness of the company's silicon carbine membrane technologies are close and opportunity that I believe the technology enabled. Today, with six months under my belt, that feeling is only amplified. We have a tremendous opportunity ahead of us to leverage our highly unique technological advantages, brand competencies and sustainability value to build a growing and profitable business in the years to come. So the big question is, how do we get there and what is different today versus a few months ago? Following my appointment, we moved quickly to define our corporate vision and commercial strategy with a clear focus on recurring revenues and the large system opportunities. My initial actions included the hiring and appointment of a senior leadership team and the staffing of key sales personnel to accelerate revenue growth. These actions has already resulted in the expansion of recurring revenue prospects as we now, have a much larger and more reliable pipeline of swimming pool, DPF, membrane sales and plastic business opportunities. To that point, just last week, we received a large order for full commercial swimming pool water filtration systems in New Zealand, which deploys a complete filtration system solution, leveraging our enhanced Aqua Solution membrane. This project is an extension of three commercial swimming pool systems supplied to same customer in 2020. This type of repeat sale illustrates our strategy to focus on recurring business. From a membrane element standpoint, at the end of September, we closed a large order consisting of nearly 1,200 membrane elements and have since closed orders for an additional 265 membrane elements over the past few months. Membranes represent a significant opportunity for us. On the DPF side, where we don't expect tremendous growth here, our objective has been to stem the tide from the most recent few years. Last year, which show a 9.8% decrease in our DPF business. In the fourth quarter, we are expecting a 3.8% increase from the quarter 4 2022 as the sales team has reengaged with existing and the past accounts to drive incremental order flow. Finally, on the plastic side, in the first quarter, we are expecting a 70% increase from the quarter 4 2022. This is mainly driven by a large order we received at the end of last year in the area of biological-based material development. To give some perspective, last year, our products and services to swimming pool, DPF and the plastics were around $11 million in total. We will look to make strong increases on those numbers in 2023, which will improve flexibility of the business, improve our manufacturing throughput and the gross margins and ultimately reduce our breakeven point. However, we're not ignoring our systems business. In fact, our team has done an excellent job in identifying areas where our solutions can offer superior performance and add value to our customers. As evidence of this, in the last few months, we received new system orders for monoethylene glycol or MEG recovering solutions in the area and the gas industry as well as systems for wastewater treatment for the metro processing industry, two key end markets that can play a significant role in our future growth. This MEG order is the first of a 2-part order for an offshore project from a major U.S. oil company operating in Europe where we have already demonstrated the silicon carbon membrane technology performance in pilot and have verified significant performance improvements to MEG regeneration process. When compared to other membrane technologies, our MEG system has completed the Fed accent test. We expect that this improvement will be validated on site in the next coming years. For those not familiar, MEG is widely used by oil and the gas producers in wellheads and the pipelines to reduce the risk of hydrate formation in pipeline. That could cause a blockage. In deepwater offshore gas production facilities, we have exposure to lower temperatures in subsea pipelines is common, MEG is used for hydrate inhibition. The wastewater treatment system order for the metro processing industry is for application in Denmark, but worldwide represents a potentially large addressable market for the company. Diluted water influence from major processing has been a long-standing challenge for the industry. By leveraging our preparatory silicon carbon membranes that can fit heavy meters and other demanding substances and toxins. Customers can now overcome the challenges that they have historically faced. Beyond these new agreements, I think it is also important to note that our agreement in the Middle East addressing produced water treatment for oil and gas production where our technology and cooperation with our partners continues to provide demonstrating tremendous results. Not only does this help to drive revenue growth for our company due to the recurring component of the agreement and aftermarket activity, but also creates a tremendous case study for this market. Our team is aggressively pursuing opportunities in the Middle East and where this is a longer lead cycle solution. I believe progress is being made. Beyond direct selling efforts, another important component in our commercial strategy will be the creation of distribution partnerships. Since our call in November, we have signed three new agreements that will expand our geographic reach and access to key market verticals. First, in November, we entered an agreement with National Energy Services Reunited or NESR, a public traded international provider of integrated energy services in the Middle East and North African region. The agreement will be focused on leveraging our capabilities in produced water treatment filtration solution for reinjection. NESR has close customer relationships and a strong service organization within the Middle East and North Africa oil and gas industry. As the industry-leading provider of solutions across its drilling, evaluation and the production service segments, NESR is looking to bring new technologies into the region. Additionally, through its ESG impact segment, NESR's goal is to import and the jointly develop technologically solution, especially to help customers enhance resource, viewership and decarbonization, within which the water treatment sub-segment is a primary focus. LiqTech's Solution fits perfectly into their objectives. We both look forward to a mutual beneficial relationship going forward. In December, we entered a cooperation agreement with Ecolotron Wastewater Solution, a U.S.-based from specializing in electronic water treatment for the commercialization of a combined solution for phosphoric acid purification. A unique solution offered by both LiqTech and Ecolotron is based on a combination of electrons technology, which is an electrochemical prepetition and oxidation reduction system. And our silicon carbon ceramic petrification system for the purification of crude phosphoric acid streams. We have filed a joint patent application for this combined solution. We should have more updates throughout the year on this program. And the last month, we entered into a distribution agreement to supply membranes to Liquinex water treatment solutions for Singapore. Liquinex specialized in the design, fabrication and system integration of compact water and waste water treatment platforms using next-generation technologies such as ceramic, biometric and graphic membranes. Liquinex calibrated with Singapore Water agents as well as other public and private entities in Singapore, Malaysia, the Philippines and Indonesia. In the past, Liquinex has used our silicon carbine ceramic membranes for their cooling tower systems, industry water recycling, aquaculture and human clearing water supply applications. By entering into this distribution agreement, our two companies will expand our relationships and become more closely aligned in providing efficient technology solutions to mitigate water scarcity and effects of climate change in Southeast Asia. I believe we will see increased performance in these countries from this agreement in 2023. Where our primary focus is to further develop and commercialize our co-filtration technology to drive profitable revenue growth, we have also successfully improved cash flow having reduced both fixed costs and discretionary operating expenses during 2022. Importantly, quarter 4 2022 operating expenses continued to trend sequentially lower to $2.3 million, excluding any restructuring expenses compared to $2.4 million reported in quarter 3 2022, and we reduced annual operating expenses by 37% from the prior year period, hoping to substantially reduce our revenue breakeven point. Compared to the third quarter of 2022, our sequential quarter end cash balance are decreased by $1 million. Simon will hit on the numbers a bit more but I can confirm that we are on track to deliver a profitable business based on quarterly revenue breakeven around $7 million, which is a significant improvement from where we were a few quarters ago. Where the operating backdrop is still not ideal. With energy-related concerns still impacting us along with higher interest rates and inflation. Nevertheless, I believe we are making significant progress. As we look through the first quarter, we are expecting revenue of about $4 million, which was representing an 11% increase from the year ago first quarter and about flat with the fourth quarter. Much of the revenue is attributable to recurring components with most of the recently booked systems set for delivery later in the year. With that, let me turn the call over to Simon to review the financials in more detail, after which I will wrap up with a few comments and then open the call to your questions. Simon, please proceed.

Thank you, Fei, and good morning, everyone. Let me add some color on the financial highlights for the fourth quarter and full year. For the full year, revenue was $16 million compared to $18.3 million in 2021, representing a decrease of 13%. Breakdown by vertical sales were as follows, system sales and related services was $5.3 million compared to $7.2 million last year, a decline of 26%. EPS and ceramic membrane sales were $6.8 million versus $7.2 million in 2021, a decline of 5%. And finally, plastic revenues of $3.5 million compared to $3.6 million, a year-on-year decline of 2%. As you can hear, the largest decline was in our Systems business, primarily due to a reduction in sales of water treatment systems to the global marine scrubber industry as well as lower commissioning activity. This partly offset by increased activity pertaining to our successful oil and gas commissioning in the Middle East and the start-up of the next project in the Mediterranean. The more modest decline in our Plastics and ceramics businesses reflect increased underlying activity, offset by currency headwinds due to the euro and DKK denominated revenue streams converted to U.S. dollar at a less favorable rate compared to prior year. Looking more specifically at the fourth quarter. You see that the revenue was $4 million compared to $3.3 million in the sequential third quarter, an increase of 22%. So as Fei alluded to, we are seeing a bit of a positive trend going into the New Year. In terms of outlook for the first quarter, I also echo the remarks made by Fei indicating a Q1 revenue of approximately $4 million, an improvement of about 11% compared to Q1 last year and flat compared to the fourth quarter of 2022. Looking at our gross profit for the full year. We reported $0.6 million on implied gross profit margin of 3.5% compared to $1.6 million and 8.6% in the prior year. The decrease was predominantly explained by the overall reduction in revenue, coupled with the lower relative share of system sales, which typically command a higher average gross margin compared to our legacy ETF and plastic businesses. Gross profit was further impacted by the European energy crisis, rising input cost inflation, and finally, increased provision for inventory obsolescence. During the year, we continued to adjust capacity, cut cost and implement power price surcharges to defend profitability, which we expect to benefit from going into 2023. Turning to OpEx. Total operating expenses for the year was $13.1 million compared to $12.3 million in 2021, with the year-on-year increase explained by the restructuring cost of $1.9 million as well as non-recurring costs related to the CEO transition and China closure. Adjusting for this, the OpEx was down 16% year-on-year despite the elevated OpEx levels recorded in the early part of 2022. As Fei mentioned, fourth quarter OpEx came in at $2.3 million, excluding restructuring expenses, this compared to $3.7 million in the fourth quarter of 2021, i.e., a reduction of 37% evidencing the benefits of our cost reduction efforts. Again, we remain diligent in managing the business, reflecting our determination to defend profitability through organizational rightsizing, mix improvements and capacity optimization. Looking into 2023, we have strengthened our commercial capabilities and invested in improved business intelligence resources, which combined with the recent depreciation of the dollar against our euro-denominated cost base is likely to increase our OpEx run rate compared to Q4. However, we maintain our commitment to deliver a quarterly breakeven at around $7 million measured on an adjusted EBITDA basis. Moving to the next item. Net other expenses during the year was $1.9 million compared to $0.5 million in 2021. This due to lower gain on currency transactions and more importantly, the repayment of the convertible note in the second quarter with $1.8 million in early repayment premium and additional amortization costs. Conversely, other income benefited from the decrease in interest expenses due to the improved capital structure. Receipt of COVID-19 in the Danish entities and finally, a gain on lease termination due to the closure in China. Concluding on the P&L, net loss was $14.2 million for the year compared to a loss of $11.1 million in 2021, with increase explained by the non-recurring restructuring costs, China closure, early repayment of convertible note and the CEO transition. For the fourth quarter, net loss was $2.2 million compared to a loss of $2.7 million in the fourth quarter of 2021, hence, a meaningful improvement despite lower revenue and a review of our inventories conducted during the quarter. Finally, let me briefly comment on our cash flow and balance sheet before summarizing and handing over to Fei. We ended the year with $16.6 million in cash, down $1 million compared to the third quarter evidencing a significantly lower cash burn compared to the same period last year. Development in Q4 represents net cash used in operating activities of $0.6 million. Cash flow from investing activities of $0.9 million offset by new lease financing secured for debinding kilns in Ballerup, anger and gain on currency translation. Balancing our cash flow remain a key KPI for our business as we determined to preserve cash to maintain our strategic and financial flexibility in what clearly is a very volatile and uncertain market environment. Furthermore, we continue to benefit from excess capacity across our Danish manufacturing site. Thus near to medium-term CapEx will be confined to maintenance CapEx and select strategic investments in machinery that can help us improve quality and operational efficiencies. Furthermore, our capital structure remains robust, note debt servicing in 2023, except ordinary lease payments. In summary, 2022 was a difficult year for LiqTech, however, we have together stabilized our business, sold up our balance sheet and with new leadership to find a new strategic direction for our company with immediate focus on defending profitability, and more importantly, creating a sustainable and credible path to profitable growth step by step. Thanks again for your continued support and interest in LiqTech and over to you, Fei.

Thank you, Simon. Before I turn it over to your questions, let me quickly summarize. First, we are moving quickly to accelerate the commercial and business development processes here at the company. We are simultaneously working to develop markets where we can create more predictable recurring revenue opportunities, leveraging our differentiated technology. We're also focusing on opportunities where we can deploy larger systems. We made nice progress on both fronts over the past few months. Second, we will continue to drive opportunities through our traditional direct go-to-market sales pathway, but also look to create new distributor relationships to address certain end markets. We have signed three new agreements since our last call and we expect to leverage my industry relationships to bring more agreements to fruition. Third, we have brought in highly accomplished commercial sales individuals that can help to develop and the market strategies, but more importantly, can exceed on those strategies. I believe we have a great team in place now. And finally, everything we are doing is set against the backdrop of achieving profitability. The organizational transition we are undertaking has proceeded with emphasis on utilizing our existing core competencies. We've seen the company and calibrated with our renewed strategic focus and the market dynamics. As Simon and I both mentioned, we remain on track to deliver breakeven at the $7 million in revenue, a number we think is achievable in the near term. I am extremely optimistic about future and I look forward to take any questions there might be. Operator?

[Operator Instructions] Our first question today comes from Rob Brown from Lake Street Capital Markets. Please go ahead, with your question.

Hi, Simon, hi, Fei. Just first question is on the kind of time to maturity of these distribution agreements that you put in place, how long do they typically take to mature? And how do you see them sort of ramping in the next year or so?

The distribution agreement we have signed I mean, if we take each of them, Liquinex has already working with us for some years. So this is actually accelerating what they've already done. So we definitely think it's a very mature relationship we just get more professional and more focused. So we have a high expectation on that. And the agreement with the NESR is really progressing also because we have close the dialogue and also close activity together with them. So we also would hope we can very soon get some results on that, even the oil, gas industry is a longer recycled time, as I mentioned and you also understand that. And the third one with eFlux [ph] technology, which is something we're already working on. So we just need to really scaling up the commercialization. So you can see all distribution agreement we signed is really with expectation has the effect already in the near term. It's not for long term. It's really near term, and this is very clear for us.

Okay. Thank you. Then in the systems market, can you just give an update on the pipeline in the major markets. How are those -- how is that pipeline developing? And how does it look at this point, I guess? And then maybe also an update on the marine market as well.

Yes. I mean, according to our commercial strategy, we actually did is we have two different pipelines, one is for the recurring business. And another one is for the larger system because the larger system has much longer recycle time. So the larger system, we have a quite strong pipeline actually. And we do expect we will have some projects this year but it takes longer time. So that's why it's not like a swimming pools coming very fast. But we are quite confident we have a very reliable and strong pipeline, and we expect to deliver something this year, definitely.

Okay. And if you get -- I guess, how long does it take to get revenue following orders in that business? And should you see revenue starting to ramp in that business in Q3 and Q4?

So Rob, Simon here. So first of all, I think the key thing here is to focus on what we have been trying to achieve over the last six months after they arrive and other seems to be the stronger and more predictable business. Again, with our pool marine scrubbers, aftermarket, EPS plastics and in membrane business. So again, that's what we call the recurrent business. And that is showing very solid progress. And you'll also see that when we disclose all the details on our Q1 basically, 45 days. So I think going -- and looking forward, and that's basically what you're asking for here. For us, it's a matter of creating this predictability, improving our recurring business. So we can basically have a more sustainable business with shorter, you can say, shorter decision cycle on the recurring business, but more importantly, revenue to pay for our fixed cost and OpEx. Now the more lumpier sizable growth projects, we still have some uncertainty with regards to the timing and hence, we will not guide on specific quarters. But as Fei alluded to, I think the commercial efforts both with strengthening of our internal sales team and distribution agreements give us a higher comfort that we'll deliver on these large growth projects later this year. So again, we can't specifically comment on the timing of those larger projects, but we can comment that we have increased confidence in our ability to deliver and secure those orders this year.

Last question is on kind of pricing actions you've taken. Have those start yet? Or are those more 2023 impact?

So I guess the key thing is to -- if you look at the Q4 numbers, and I guess, 2022 few as a whole has a lot of non-recurring items into it. But what I can confirm is definitely that we are reaping the benefits of both our cost reductions, but certainly also our profitability improvement measures on the pricing side. One thing that is also worth mentioning is that we in the latter part of the year really benefited from having our ERP system fully up and running. So we basically have full visibility on our individual orders on a cost basis. So again, our pricing has become sharper, but we have also been better at evaluating where we make money and where we want to put our focus. So long story short, we do expect to see significant improvements going into this year, both due to the fact that we don't have the non-recurring items, but certainly also because of our pricing and cost reductions combined delivers a significant impact to our business in a positive context.

Thank you. I’ll turn it over.

[Operator Instructions] And ladies and gentlemen, at this time, I'm showing no additional questions, I'd like to turn the floor back over to the management team for any closing remarks.

Thank you. I would just like to say thank you all very much for being with us today. We look forward to communicating with you very soon again. Thank you.

And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.