LiqTech International Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 14, 2024

Key Takeaways

  • Received a pilot order from a leading integrated energy company for U.S. produced water treatment, marking the third consecutive quarter of delivering oil & gas pilot systems and demonstrating the reliability of LiqTech’s silicone-carbon ceramic technology.
  • Signed strategic distribution agreements across key verticals—oil & gas (NASA, Risavax), marine scrubbers (Sun Marine, Fremen, Denbigh Marine), food systems, and phosphoric acid—to accelerate global market penetration.
  • Reported Q2 revenue of $4.5 million (down 10% YoY) with system sales up slightly and CPF sales up 23% YoY, while aftermarket services, ceramic membranes, and plastics declined; Q3 guidance is $4–5 million, with expectations for a stronger Q4.
  • Gross margin contracted to 16% due to low-margin pilot system deliveries, but contribution margin remained around 46%; company aims for break-even adjusted EBITDA at approximately $7 million quarterly revenue by leveraging existing capacity.
  • Ended Q2 with $5.5 million in cash and a net loss of $2.1 million; management is focused on cash preservation, increasing facility throughput, and driving recurring revenue through service and partnership initiatives.
AI Generated. May Contain Errors.
Earnings Conference Call
LiqTech International Q2 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good morning, and welcome to the LiqTech International Second Quarter Fiscal Year 20 24 Financial Results Conference Call. All participants will be in listen only mode. Please note, today's event is being recorded. I would now like to turn the conference over to Robert Blum with Whittel Partners. Please go ahead.

Speaker 1

All right. Thank you very much, Rocco. Good morning, everyone. And as Rocco indicated, thank you for joining us for today's LiqTech International Q2 2024 financial results conference call for the period ended June 30, 2024. 2024.

Speaker 1

Joining us on today's call from the company is Fay Chen, the company's Chief Executive Officer and Philip Price, the company's Interim Chief Financial Officer. Before I turn the call over to management, let me remind listeners that there will be an open Q and A session at the end of the call. If you are dialed into the call through the traditional teleconference line, as the operator indicated, please press star then 1 to ask a question. If you are listening through the webcast portal and would like to ask a question, you can submit your question through the Ask a Question feature in the webcast player and we'll do our best to get to as many questions as possible. Before we begin with prepared remarks, we submit for the record the following statement.

Speaker 1

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 risks that may affect our business, financial condition, operations and cash flows. If one or more of these risks or uncertainties materialize or 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.

Speaker 1

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.

Speaker 2

Thank you, Robert, and good day to everyone on the call. I'm excited to once again get a chance to speak with you all today and provide an update on the progress we are making. Let me start by diving right into the announcement we made earlier this week, where we announced the receipt receipt of an order from 1 of the world's leading integrated energy companies to deliver a pilot system for produced water treatment in the U. S. This order is key for LiTec as it becomes the 2nd significant produced water treatment order we have received in the U.

Speaker 2

S. In just the past few months following the order we received in March 2024 from Richelback Direct, highlighting the capability our systems provide to the most challenging purification applications. The new pilot system is scheduled to be delivered to the customer in the Q3 of 2024 and will mark the 3rd consecutive quarter in which we have received and delivered a produced water filtration system for the oil and gas industry, showing the Ritzberg order I mentioned in quarter 1 and the commercial pilot unit to NASA in quarter 2. From a high level perspective, the border oil and gas industry and the U. S, in particular, is increasingly understanding the importance to use produced water to offset freshwater demand, both inside and outside the oil field.

Speaker 2

Our solution can be key to reducing OpEx for our customers and meeting their desire set forth to drive sustainability going forward. As I have stated, each of these three orders are considered pilot orders, whereby the initial objective is to demonstrate and document the efficiency of our unique silicone carbon ceramic eutrophilization technology in treating produced water to facilitate reinjection and the beneficial reuse and meet current regulatory requirements with each customer in each specific area. The Razorback system is currently on-site with an oil and gas customer. To date, the system has been running stably for more than 2 months with preliminary data highlighting that all requirements are being met. Assuming we are successful upon full testing with the new pilot unit, which we estimate would be approximately 3 to 4 months, it's our belief that 2 things will come out of it.

Speaker 2

Number 1, each of the customers who are currently utilizing the systems, we are deploying new systems widely across their operations with significant larger treatment capacity. Number 2, as this bare weather customers deploy them in their operations, we will have strong commercial proven points to convince other companies to adapt our technology for their full commercial systems. When I took over as CEO about 2 years ago, I stated that oil and gas market would be a tremendous long term opportunity for Leasek. However, it would take some time to develop. With the progress made over the past 3 quarters, I formally believe that we are on the cusp of something significant within this key target market for LiTec.

Speaker 2

Another key initiative I laid out when I took our SCO was to align ourselves with partners that can open up key markets for our solutions. It is a strategy that worked extremely well during my time with Topshop and the GroundFirst and one that I thought would work well with LiTec, given the unique diversification that our filtration systems can provide. As a small company, we simply cannot have an internal sales team that is aggressively targeting the multiple industry segments that our products can address. To that end, over the past year, we have signed the following distribution agreements. For the produced water, oil and gas industry, we have signed up NASA in the Middle East and the Risavax Direct in the U.

Speaker 2

S, both of which has been key contributors to our recent progress within the industry I just touched upon. Within the commercial food systems markets, we have bought Alkazan, Total Foods, Waterco, Farm Re and the NetComm. Again, each of these partners has driven system sales for this segment, which I will go into more detail in a moment. Within the phosphoric acid market, we signed an agreement with Silicone Filter. They are in active dialogue with some food grade phosphoric acid producers in China.

Speaker 2

We continued this progress of bringing on partners that can help driving awareness and adoption of our solutions with particular progress made within the marine scrubber market. To that end, in May, we entered into a partnership agreement with Sun Marine Group to expand our presence in Chinese shipbuilding and repair market for marine scrubber water treatment as well as new exhaust gas recirculation water treatment system for dual fuel marine vessels. The agreement also includes the servicing by the Daimlerines Group of existing LiqTech Marine installations, including

Speaker 3

fast delivery of spare parts and on-site repair work.

Speaker 2

Also in May, we announced an agreement with the Fremen, a well established maritime representative to the ship industry in Greece. Fremen will bring Leitik close to the various influential ship owners through its extensive network. In July, we announced an agreement with Denbigh Marine, a South Korea based maritime representative to the shipping industry. For them to mark our marine scrubber water treatment solution, we think South Korea, the 2nd largest shipbuilding market in the world, up to China. We are starting activities to recover the customer relationships we have in the market.

Speaker 2

These 3 new partners, along with our previously signed agreements with the Youyou Fertils in China, from whom we received 2 marine scrubber water treatment system orders in the past year should Hillplus expand our presence in this important market for NITIC. One other partnership agreement I wanted to touch on was our announcement 2 weeks ago that we have entered into a MoU with China HaiSong Engineering Company to explore the application of this 6 advanced filtration system for the challenged industry water treatment in China. China is a significant market for industry water treatment with environmental protection and sustainability of increasing importance to the government and enterprises. I am excited about what this collaboration with China Hyson for live industry users will bring me sick. Partnerships and the collaborations will be a key for us going forward.

Speaker 2

They often take time to materialize, but we are beginning to see results with nearly all of them we have signed up over the past 18 months or so and believe we will see further positive impact in the years to come. As I highlighted in the press release this morning, we successfully delivered 5 swimming pool systems during the Q2. The swimming pool market is an important recurring revenue opportunity for LiTec. However, as I stated on the call last quarter, our budget and expectations we set for us for the 2nd quarter included 8 swimming pool systems for delivery. Unfortunately, 3 systems anticipated to be shifted from municipal applications in the U.

Speaker 2

K. And Australia were delayed due to government funding, causing us to force out by about $500,000 from the outlook we provided. One big deployment that will benefit the swimming pool market for us is the risk receipt of NSF certification for our systems in the U. S. For those that are not aware, we are unable to sell our commercial swimming pool solution in the U.

Speaker 2

S. As we work through this approval process. With the certification now in hand, we are in conversations with partners that will help drive adoption in the U. S. With the goal to have new agreements in place by the end of the year.

Speaker 2

So, while we are disappointed with the delays from the 3 planned systems, the pool market continues to remain strong for us and will be a key contribution to our recurring revenue in the future. When you dive deep into the financial results, a few things may not be as obvious and I think it bears mentioning. All told, we are seeing incremental growth in our system sales. During the Q2, we reported $1,300,000 in system sales, which is up from $1,200,000 in the year ago 2nd quarter and $1,200,000 in Q1 of this year. Further, during the Q2, CPF sales was $1,600,000 a 23% increase compared to the year ago period and up about 4% sequentially.

Speaker 2

As I mentioned last quarter, we are seeing increased interest in our DPF solutions within the European in line transportation markets has renewed focus on flat carbon emission reduction occurs. We are also seeing strong sales for our fissures for emergency electricity generators. Similar to pool system, we are pleased with the growth coming from our DPF solutions, which in maling with WAP and afterthought for Zixig previously, but has become a solid contributor for us today. Watt and Michael are 2 revenue areas, system sales and DPF sales that are both during growth. For quarter 2 system sales and DPF sales were up more than $400,000 combined year over year and $200,000 sequentially.

Speaker 2

Offsetting this growth were pulled back during the Q2 within our system aftermarket solutions, which were down from the year ago period by about 300,000 our ceramic membrane sales, which were down about 400 from last year and our plastic components, which were down about 200,000. Where these other three areas are a bit less core to our focus, they are still contributors to our financial results, and we are focused on developing new channels and opportunities to expand these areas. Philippe will expand in more detail on this in a moment. To wrap things up, as our outlook suggests, we expect to see revenue of about $4,000,000 to $5,000,000 in the 3rd quarter. At the mid point, that would be similar to what we just reported in the Q2.

Speaker 2

The biggest variables we have pertain to timing of delivery on a few systems, particularly within the swimming pool market. It is my belief that as we achieve the expected traction within the oil and the gas market I indicated, experienced a re ramp in the marine scrubber market continue the positive overall trajectory in the swimming pool market, we will see this Q4 significantly above the levels achieved or expect in the 1st 3 quarters of this year. The groundwork we have set in terms of partnerships, collaboration and regulatory approvals should all contribute to this growth. With that said, let me turn the call over to Filip to review the financial results in more detail. Filip?

Speaker 3

Thank you, Philip, and good morning, everyone. Now let me briefly comment on the financial highlights for the quarter. Revenue came in at $4,500,000 compared to $5,200,000 in the same quarter last year, representing a decrease of 10%. Broken down by verticals, sales were as follows: System sales and related Aflionic services of $1,900,000 compared to $2,100,000 in the same period last year and up sequentially compared to the $1,500,000 in Q1. DPA and ceramic membrane sales of $1,700,000 compared to $1,800,000 in the same period last year and $1,800,000 in Q1.

Speaker 4

And

Speaker 3

finally, plastic revenue of €900,000 compared to €1,100,000 in Q1 last year and €900,000 in Q1. To be specific, the key revenue drivers for this quarter was the delivery of an oil and gas produced water pilot as part of our distribution agreement with NASA. The delivery of 5 pool filtration systems along with stable contribution from DPF sales attributed to focused sales efforts that began in that day 2023 and generated elevated activity in the current year. Our aftermarket services decreased due to elevated remediation work and associated deliveries in the same period in 2023 and the decline in plastics revenue relates solely to a large one off sale that was recorded in 2023 without recurrence in the current year. In terms of forward guidance, as Sven mentioned, we expect the revenue for the Q3 of 2024 to be between $4,000,000 $5,000,000 which will be similar to the 1st 2 quarters of 2024.

Speaker 3

We remain committed to growing our business over the coming quarters as we work intensively to execute on our ambition to further penetrate the global oil and gas, chemicals and food system markets with our proven and industry leading solutions. Looking at our gross profit for the quarter, we reported $700,000 on flat gross profit margin of approximately 16% compared to $1,200,000 23.3% in prior year 2nd quarters. The unfavorable change first of all a result of the revenue mix for the quarter. In particular, the delivery of the containerized oil and gas pilot system impacted margins, resulting in a decreased at typical levels. This decision was strategic undertaken to showcase and validate the effectiveness of our technology.

Speaker 3

As we still have overhead and other fixed costs that are not fully being absorbed, one of the key metrics we look at to highlight the progress being made is our contribution margin. During the quarter, when you back up fixed costs, our contribution margin ended at approximately 46% compared to 52% in the same quarter we quoted last year with the unfavorable change mainly explained by revenue mix and especially the delivery of the containerized oil and gas pilot system as mentioned before. On an operational perspective, we still have excess capacity with the recently installed new kilns and revitalization of our ceramic facility. Our immediate goal is to capitalize on this positive momentum by showing delivering lead times while still maintaining the high quality of our membranes and filters. As previously stated, we still maintain our guidance that our business will be breakeven measured on an adjusted EBITDA basis, assuming a quarterly revenue of approximately $7,000,000 and potentially NOVA with the right revenue mix.

Speaker 3

Turning to OpEx, total operating expenses for the quarter was $2,800,000 which is comparable to the same quarter last year with a slight increase of $38,000 or approximately 1.4%. As stated over the last few quarters, we remain focused on running a lean business by monitoring costs and carefully evaluating our spend to ensure we do not jeopardize our financial objectives. Moving on to the next item. Net other expenses during the quarter were $39,000 compared to an income of $33,000 in Q2 of last year, with the development mainly explained by reduced interest income as well as increased debt discount amortization due to the extension of the maturity date for the senior commissioning notes. Concluding on the P and L, net loss was $2,100,000 for the quarter compared to $1,600,000 for the comparable period in 2023.

Speaker 3

This positive result was mainly driven by the decrease in revenue and lower margins. Finally, let me briefly comment on our cash flow and balance sheet before summarizing and handing back over to Dave. We ended the quarter with $5,500,000 in cash, down $2,200,000 compared to the Q1, explained by cash used in operating activities and increased net working capital mainly related to the increased activity levels and CapEx of $200,000 related to replacement of cable insulation. To summarize, balancing our cash flow remain a key KPI for our business as we are determined to preserve cash to maintain our strategic and financial flexibility. We also acknowledge that we need to increase the throughput of our existing facilities in order to accelerate growth, reduce returns and ultimately pay the way to business balance from both net income and cash flow perspective.

Speaker 3

Thanks everyone for your support. And now back over to you, Britt.

Speaker 2

Thank you, Philip. As I mentioned and Philip elaborated on, we have experienced nice growth within our system sales and BPS business year over year and sequentially. The change in revenue from the year ago quarter is entirely due to deliveries of plastic products, ceramic membranes and aftermarket sales. We recognize the top and the bottom line numbers of what people will focus on. However, I'd like to point out that we are making progress within our core growth initiatives to drive new system sales and expand our DPS operations.

Speaker 2

Importantly, we have a wide range of initiatives in place to continue this growth with new partnerships, collaborations and regulatory approval in place. However, it should be clear that my biggest excitement right now is the progress we are making within the produced water treatment for the oil and gas industries. Quarter 3 will be our 3rd consecutive quarter with a new produced water system being delivered. We are optimistic that successful execution of this pilot unit will lead to significant opportunities for this tech in the quarters to come. One final comment before I turn it over to your questions.

Speaker 2

I will be participating in the HC OneWait Conference and conducting 1 on 1 meetings with investors in New York on September 9. If you happen to be attending and would like to connect, please reach out to Robert Bloom to coordinate. Further, I will be conducting virtual 1 on 1 meetings at Lytham Partners for 2024 Investor Conference on October 1, again reach out to Robert to coordinate. With that, operator, we would be happy to take any questions.

Speaker 4

Thank

Operator

Today's first question comes from Rob Brown at Lake Street Capital Markets. Please go ahead.

Speaker 5

Hi, Philip. Hi, Philip.

Speaker 2

Hi, Philip.

Speaker 5

First question on the produced water market and the pilot, what's the timeline for that pilot evaluation? And I guess the kind of steps or opportunity that this customer represents?

Speaker 2

The pilot we are going to I mean, we're delivering in quarter 3. We're taking about 3 to 4 months to finish the testing. And after that, we expect to see some progress in that direction.

Speaker 5

Okay, great. And then the kind of evaluation metrics that you're looking at, I guess, maybe if you could just remind us on kind of what you're looking for, what the customer is looking for and what you sort of evaluate when you do these pilot programs?

Speaker 2

So can you repeat your question? That was not very clear.

Speaker 5

Sorry about that. I just wanted to clarify the as you evaluate these pilot programs, what are the key things that you and the customer are looking for in terms of the ability of the system and what are they really evaluating on these pilots?

Speaker 2

Okay. Okay. I mean what we really like our system is our system has a very high mobility and also very reliable and also very automation. Is totally digitalized. We're able to have the remote monitoring and the control automation.

Speaker 2

And the membrane is very stable quality. So the pilot we have together with the RIZUVAC at our customer site, it has been running more than 2 months and the membrane has shown extremely stable quality and lifetime. And the water purification result is very good and stable. So this is what they're evaluating. So basically it's the reliability, it's mobility and automation.

Speaker 5

Okay, great. Thank you. And then on the U. S. Pool market, you talked about getting the NSF certification.

Speaker 5

Maybe give us some more color on what that means in terms of being able to sell into the market and your expectations or what you think the pipeline looks like in the U. S. Market?

Speaker 2

We are very excited to get this NSF certification because that means we're able to start going to the U. S. Market. But we have already behind the scene doing the go to market planning. So it's not like we just start now.

Speaker 2

So right now, we have the plans in place. So we're going to start approaching the potential partners already from now. And it is our intention, we would like to have some partners in place by the end of this year. So we're able to really start going to the U. S.

Speaker 2

Market.

Speaker 5

Okay, good. And the U. S. Sorry, the pool system order that you talked about in the UK and Australia that did not ship in the quarter, the three systems. Do you expect those to ship in, I guess, the rest sometime in the rest of the year, Q3 or Q4?

Speaker 5

Or are those sort of on hold for a while?

Speaker 2

They are delayed because of the government funding. And unfortunately, you know how the government are. They don't give you a new date, say when it's going to be coming. So for a conservative point of view, we try to make some other opportunity to replace them. And we don't know if they certainly will come to Q3, Q4 or maybe they will postpone to Q1, Q2 next year.

Speaker 2

So we try to make some other compensation from other opportunities for so because we don't get a certain date from the government say when this will come.

Speaker 5

Okay, good. Thank you. And my last question is really on the some of the partnerships you've developed in the, I guess, the Korean Ship Market Partnership in particular. How do you see that playing out in the scrubber ramp and the marine ramp?

Speaker 2

I really think we have very good opportunity for this new scrubber segment is called the EGR for dual fuel engine SiP. And those SiPs expecting 2024 to 2027 period will be 400 new SiPs coming to place in this special segment. And our solution is really very good for this segment. We actually have made some modifications. So we have a much higher capacity and the longer continue operations.

Speaker 2

And this is something very unique compared with other competitor solution in the market. So in this way, we believe we have very good opportunity able to go into this segment very strongly. So that's why we are actively building up the partnership in this area. And also we're also very actively working into the most effective way going to the market and if there's any other business model to be applied for really going intensively going to this market because the market is coming up now and for the next 4 years will be really, really interesting. So I hope I can hear something more in the next quarter and we are really strongly going back there.

Speaker 5

Okay, great. Thank you and congrats on the partner.

Operator

Thank you. The next question comes from Lucas Ward of Ascendiant Capital Markets. Please go ahead.

Speaker 4

Thanks. Hi. Good afternoon, Faye, Philip and Robert.

Speaker 2

Hi.

Speaker 3

Good afternoon.

Speaker 4

So regarding the full year outlook, it sounds like you're expecting a similar type of revenue run rate for Q3, although Philip gave a fairly wide band there, but a much better Q4. Do you have a target for the full year that you can share at this point?

Speaker 2

I mean, we have shared the quarter 3 prediction and we don't we do not want to tell what is the Q4 low back because it's really going to be a big, bigger quarter and we need to see something fitting to place before we have the certain number. But it's definitely going to be a much better quarter than the 1st 3 quarters. That we can say.

Speaker 4

Okay. How about gross margins? How do you see those trending? Looks like it was 16% for Q2. So they seem to be coming up relative to last year, certainly relative to late last year.

Speaker 3

Yes. So gross margin is connected with the revenue because we have fixed costs and then we have our variable costs. So whenever revenue is lower than the same quarter last year as you compare it to the gross profit margin would be lower. But as I also mentioned, we also monetizing our contribution margin, which is still above 45%. Okay.

Speaker 4

That's an internal figure, right? Like would it be possible for us to calculate that, the numbers that you report?

Speaker 3

Not at this moment, no.

Speaker 4

Okay. That's fine. And so just looking at the drivers of the revenue, it looks like the aftermarket solution sales were soft. What drives that? Like what impact I mean, if we're selling a lot of systems, why wouldn't the aftermarket solution revenues just sort of track with that?

Speaker 2

I mean, up to now, our aftermarket service primarily is the marine scrubber. And that's also one of the reasons why we signed this contract with the Marine Group. And in the past years, after we have shot the Marine scrubber, we have not been very good at the setup after sales, both the system and the sales China. And so we missed opportunity there. And what we're really now trying to see is we really believe the aftermarket for the marine will come back.

Speaker 2

And the marine the Dan Marine group will be the 1 Heal Pass with the fast delivery and also very close to the customers. And for the new marine swabber market, the EZR market, we're also working on a new service concept. So in this way, we were able to, from the beginning, already have a service package with the customer and that will also be the case with the oil and gas market. We also intend to have a service package agreement with the customer from beginning when we start saving the commercial project. So the aftermath is really under development and this is what we see, the unstable situation.

Speaker 4

Okay. Could you comment on the geopolitical situation? I know this is a problem in Q1. The war was impacting your O and

Speaker 3

G prospects

Speaker 4

in the Middle East. Is that still an issue on your radar screen?

Speaker 2

Yes. That's actually one of the big reasons why we have moved our focus primarily to the U. S. Market and onshore because we believe that the geopolitical situation is really unstable and we don't know what's really happening. So we now change to a more stable market and we also see the U.

Speaker 2

S. Market actually is coming up with a lot of tractions for the produced water treatment. So we are very happy actually to win this change and we can see the results already.

Speaker 4

Okay, got it. Could you comment in general on the ceramic membrane business? Historically, this has been a big segment. Like what is the growth outlook for it?

Speaker 2

I think what we are now investigating is we have been a manufacturer for ceramic membrane for more than 15 years. But we reselling our ceramic membrane has been a little bit ad hoc. So we don't really have very systematic knowledge about how we should selling our membrane and how supply selling and what is really the most competitive way to do our membrane selling. So this is what we are now working on, very systematically to getting the knowledge and also trying to find the right partners to bring our membrane into the market, because our membrane is in high end and it's for some special applications. So that's where the place we have been very sharp on.

Speaker 2

So this is one of the reasons why we have done this MOU with this Chinese partner called Haisong because they have some very unique applications. We are now doing the pilot testing with them. So I'm hoping a quarter or so I will be able to present some results there. This is the way we're going to do it. It's more selective and more focused and really have much more mass knowledge about what space we're selling our membrane.

Operator

Okay.

Speaker 4

Okay. I think I'm good. Thank you very much, Faye, Philip. I appreciate it.

Speaker 2

Thank you very

Speaker 5

much.

Operator

Thank you. I wish there are no further questions at this time. I'd like to turn the conference back over to management for any closing remarks.

Speaker 2

Thank you all very much for being with us today. We look very much forward to communicating with you soon again in next quarter. Thank you.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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