LiqTech International, Inc.

Good day, and welcome to the Lake Tech International Reports' third quarter of fiscal year 2022 Financial Results Conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on the touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference call over to Mr. Robert Bloom of Lipton Partners. Mr. Bloom, the floor is yours, sir.

Great. Thank you so much. Good morning, everyone, and thank you for joining us on today's conference call to discuss LickTech International's third quarter 2022 financial results. Joining us on today's call from the company are Fei Chen, Chief Executive Officer, Alex Buehler, former Interim Chief Executive Officer and member of the Board of Directors, and Simon Stadel, 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 statement. This conference call may contain forward-looking statements. Although the few 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 LickTech International. Fei, please proceed.

Thank you, Robert.

Let me start out by saying, What an honor it is to be the CEO of DITEC at this important stage of the company's development and how grateful I am for the board's strong support. I have now been at DITEC for eight weeks and the response from the entire organization has been overwhelmingly warm, including from many of you, our investors. with whom I have had the opportunity to speak. I believe we all understand the tremendous opportunity that is in front of us to leverage our highly unique technological advantages, brands, competencies, and sustainability values to build a growing and profitable business in the years to come. Where I need more than eight weeks to provide you with step-by-step details on our going forward strategic plan, let me provide some high-level observations and initial thoughts on how we are accelerating our commercial and business development processes. First, it needs to be reinforced that we have tremendous technology. For those not familiar, I was the International Innovation Platform Director, responsible for establishing Grundfos Water Treatment Division. Grundfos is one of the world leaders in the development, manufacturing, and the distribution of water and liquid pumps. Where at Grundfos in 2012, I was introduced to LIFTX technology. At that time, I saw the uniqueness of VTEC's silicon carbide membrane technology and reached out to the company for a potential collaboration to accelerate the commercialization of this membrane technology. Unfortunately, VTEC rejected the idea, electing instead to go it alone. It is therefore Very interesting for me, all of these years later, to assume the responsibility to accelerate the commercialization of this membrane technology, which is even stronger today. Strategically, it's rather obvious that we are currently too reliant on large system sales to generate revenue. To balance this reliance we are moving quickly to maintain and grow our markets where we have increasing potential for recurring revenue, such as pool and spa systems, diesel particulate filters, membranes, plastics, and aftermarket. For instance, just last week, we launched our new aqua solution membrane that demonstrates notable improvements to our existing membrane solution, both in production process stability as well as final product robustness. You likely have not heard us talk much about the pool and the spa market, but from my experience, this brings an imminent opportunity for recurring revenue that we had pursued for many years with DPFs. As a point of reference, we have five tour system deliveries planned for the fourth quarter. So we are very excited about this market and intend to aggressively pursue it in the years to come. Further, our agreement in the Middle East addressing produced water treatment for oil and gas production. where we are operating in a build, own, and operate model has similar recurring revenue characteristics. The commercial taste unit for this produced water initially deployed in May 2022 has been up and running for the past three months, demonstrating tremendous results. Our 99% of the feed water passing through the system is being delivered back as clean permit for re-injection. The quality of the clean water permit is better than the performance requirements originally defined by the end user. Furthermore, the system operates with a low amount of water and chemicals. and has shown to be energy efficient. We are extremely pleased by this commercial test result as we believe they are a guiding factor to our expansion in the region. Importantly, with this result in hand, we are working intensively on go-to-market plans for produced water in Middle East region. I am excited

to disclose more on this in the near future. Another dimension of recurring revenue is membrane sales.

We have applied an intensified strategic focus on membrane sales and achieved good results in sales order. Specifically, at end of September, we closed a large order consisting of nearly 1,200 memory elements. I will provide more details in the future, but please understand that expanding our commercial activities where we can achieve more recurring business is a key strategic focus going forward.

Another area of focus is the establishment of distribution

agreements within key market verticals. I have a long history of developing mutually beneficial relationships with distributors across the world within the water treatment market. And I will look to leverage these relationships to extend our sales reach within selected end markets. I look forward to sharing more with you in the coming quarters on this fund. We will work to expand our focus on recurring revenue opportunities and develop distributor relationships. We will maintain our current efforts to further develop system projects to our target market, including marine scrubbers, black carbon, oil and gas, acid purification, and others where we have a number of systems set to be delivered that will drive near-term revenue growth. Within Marine Squabbers, we are in the process of manufacturing four water treatment systems with delivery expected by the end of the year. We also have the planned delivery of the industry with the water system that we announced earlier this week, along with the five full systems I mentioned a moment ago for delivery in quarter four. On top of that, following the successful commissioning of our first system for the acid purification market in the U.S., we are in active with this customer. regarding a second system deployment at another site. Most likely, this project is expected to ship in the first half of next year. I realize Simon provides details on the outlook for the fourth quarter, but in general, based on our existing recurring revenue, coupled with system delivery planned for quarter four, we expect the revenue to land at the lower end of the revenue range in company guidance that was provided in September. As you saw in two separate press releases issued recently, we are making some significant organizational changes to accelerate the commercial strategies that I have mentioned. In late September, we announced the appointment of Mrs. Janet Peterson as Vice President of Sales, and Mr. Kim Hansen as Managing Director of LickTech Plastics. Kim has many years of leadership experience with international companies such as Mercuri International Group and GrandForce, and was recently Managing Director of FlexKit, Intertech, and the Boarding League, where he achieved successful turnaround and transformation. Jena has wide industry knowledge in water treatment, membrane filtration, and instrumentation, having built a successful career in sales, business development, and product management from firms such as Hagelang, Guangfos, Diatom, First Analytics and Alpha Level. Jenna joined us formally on November 1st and has provided immediate value to the organization. Additionally, this week, we announced the appointment of Tobias Vibran Mason as our new Head of Strategy and Business Intelligence. As we work on advancing LeakTech to the next stage of commercial development, it is crucial that we define our market and customer focus based on sound business intelligence and formulate our strategy accordingly to ensure fast execution. I believe Tobias will make significant contributions given his business development experience and relevant industry knowledge. While we rapidly move forward with our plans, it is clearly important to note the operating backdrop. Since summer, Europe has experienced an energy crisis, the likes of which we have not experienced in decades. Electricity spot prices in September has increased 240% compared to January. And the natural gas prices in September have increased 167% compared to January. The extraordinarily high electricity price has negatively impacted us with respect to cost and the margin. Since our production for membrane and DPFs utilized high temperature furnaces that are heated by electricity. For some of our product categories, the production cost has increased 30 to 40%. We are working intensively to communicate with our customers and elevate price to define margins. The results are mixed at this point as we try to balance customer retention and the margin we are competing in a global market. For future new sales, we will ensure the price increase are reflected in our sales price. Nevertheless, we indeed experienced some slowdown in order closure in Q3 due to the energy crisis, macroeconomic uncertainty, high inflation, and the rising interest rates. The combination of which has caused a lower second half outlook than what we expected before the summer. We communicated this to everyone on September 13th. Generally, we do expect that situation will slowly stabilize, although we might land at a higher plateau of energy price. And I will turn the call hour to Simon to review the numbers in more detail. Let me quickly summarize. Firstly, we are moving quickly to accelerate the commercial and the 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. working to overcome gating factors that have hindered certain end markets where we see opportunities for numerous large system deployments. Secondly, we will continue to drive opportunities through our traditional direct go-to-market sales pathways, but also look to create new distributor relationships to address certain end markets. I have a strong history of creating successful agreements within the water treatment industry, and I believe I can apply this to this sector. Thirdly, we have brought in highly accomplished commercial sales individuals that can help to develop end-market strategies, but more importantly, can execute on those strategies. I believe the addition of a general Kim, Tobias, and others will make significant contributions with their professional leadership skills and the rich industry knowledge. And finally, Simon will touch on this in a moment, but I want to confirm that everything we are doing will be against the backdrop of achieving profitability. The organizational transition we are undertaking is proceeding with the emphasis on utilizing our existing co-competencies within the company and calibrate with our renewed strategic focus and mass dynamics. Similar to what Alex and Simon mentioned last quarter, we remain on track to achieve break-even at around $7 to $8 million per quarter in revenue, moving more towards $7 million per quarter. With that, let me turn the call hour 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, Fay. Let me add some color on the financial highlights for the third quarter and pull the outlook. Revenue for the quarter was 3.3 million compared to 4.1 million in the same period last year, representing a 0.8 million or 20% decrease. This development reflects a quarter with stable contribution from our plastics, ceramics, and aftermarket businesses underpinned by increased share of membrane and spare part sales. However, The quarter was also impacted by a slowdown in water system deliveries due to reduced auto intake and delayed shipments due to general supply chain issues and longer lead time on our core AQS membrane production. The quarter also reflects a period with unprecedented volatility in Europe. This due to political unrest related to the Ukraine-Russia conflict with a significant surge in both gas and electricity prices across Europe and also a period with increased macroeconomic uncertainty and rising inflation. For our business, the uncertainty did result in reduced order intake for our ceramic DPF and plastic products, which was partly offset by the delivery of large marine and on-road DPF orders for the Asian market secured earlier in the year. Looking closer at the numbers for each of our segments, ceramics reported $1.9 million in revenue underpinned by a couple of large membrane and DPF orders, followed by water and plastic revenue of $0.8 and $0.7 million respectively. The reduction in plastics revenue of 22% compared to the same period last year generally reflects a slow start to the quarter with lower than expected auto intake during the European summer holiday amidst the escalating energy crisis. Turning to the water systems business, the revenue of 0.8 million represented a 47% reduction compared to Q3 last year. with the lack of system deliveries explaining the reduction partly offset by increased aftermarket activities, more specifically commissioning and general spare part sales. Looking at the currency development, the US dollar appreciation against the euro did continue into the third quarter, with the year-to-date September FX rate 12% higher than the same period last year. On that note, I can confirm that approximately 70% of our year-to-date revenue has been denominated in non-US dollar currency, predominantly Euro and DKK. In terms of outlook for the fourth quarter, I echo the remarks made by Faye, indicating a Q4 and full-year outlook at the low end of the previously communicated guidance. This negatively impacted by the challenging market environment and overall delays in incoming orders and FX. Before diving further into the numbers, I'd like to highlight that we, despite the challenging market backdrop, have been working thoroughly and with clear and decisive measures to right-size our business and restore financial stability. On that note, I'm pleased to see substantial improvements in both cash flow, fixed cost, and OPEX reduction efforts. To be specific, our operating cash flow in the third quarter ended at negative 0.5 million, representing a significant improvement compared to previous quarter's run rate. Fixed cost and optics came down 19% sequentially and down more than 30% compared to the beginning of the year, which reflect our commitment to substantially reduce our breakeven point of the business measured on an adjusted EBITDA basis. In the same context, I can confirm that we are on track to deliver a profitable business based on quality revenue breakeven around $7 million, hence at the low end of the previously communicated target of $7 to $8 million. With regards to cash flow outlook, I can confirm that the company continues to benefit from reduced capex commitments and the successful refinancing of the convertible node earlier this year. The company had, as of September 30, less than $1 million of outstanding cash capex commitments and no interest payments due on the senior nodes. Furthermore, following the delivery and installation of the new production equipment in early 2023, our company will have ample capacity to significantly grow our water systems aftermarket and ceramic membrane business without further investments over the near to medium term. Now let me comment on the quarterly financials in more detail. The gross margin in the third quarter of 3% reflects low activity levels within our water systems business, but also the adverse impact from the escalating energy crisis and highly inflationary environment across Europe, this reducing our profitability across our core ceramics and plastic businesses. The quarter was further challenged by non-recurring inventory adjustments and write-downs within our ceramics business, reflecting a proactive and proven review of our ceramics inventory for dated and slow-moving products in a period with reduced activity and increased on-service. On a more positive note, we successfully secured and delivered high-margin membrane and marine DPF orders during the quarter, as well as large after-market orders, allowing for a stable sequential development in the reported gross margin, this despite the lower top line. Furthermore, our increased focus on pricing discipline is continuing to support our underlying profitability, which combined with sequential reduction in fixed cost of $0.2 million did allow for significant improvement in both gross and contribution margin when excluding the non-recurring inventory adjustments previously mentioned. Turning to OPEX, our total operating expenses for the quarter of $2.4 million represents a sequential reduction of 19% when adjusting for the second quarter restructuring costs. The continued reduction is a direct result of the planned cost reduction efforts and organizational right-sizing announced earlier this year. The cost savings represent a mix of reduced employee costs as well as increased focus on reducing run rate, travel, marketing, legal, and IT costs. Moving to the next item, net other income in the third quarter was $0.5 million compared to a net other expense of $0.3 million in the same period of 2021. with the improvement explained by reduced interest expense and amortization costs related to the new and improved capital structure. Concluding on the P&L, net loss for the period was $1.7 million compared to $2.9 million in the same period last year, indicating a vital step in the right direction with cost reductions and improved capital structure being the main drivers. Moving to our cash flow and balance sheet, we ended the quarter with $17.6 million in cash, down 2.1 million from the second quarter, with net cash used in operating and investing activities accounting for approximately 1 million and the remaining being loss and currency translation. To summarize and reaffirm, we are committed to further improve our financial performance through incremental cost reductions, which together with the improved product mix and pricing discipline will pave the way for a business imbalance over the coming quarters from both a profitability, cash flow, and capital structure perspective. We have, during the course of 2022, stabilized and right-sized our business, and it's evident that we're now well-positioned to take the next step on our commercial and strategic journey. Thanks for your continued support and interest in Leetec, and over to you, Fei.

Thank you, Simon. Look into quarter four. We have a busy quarter ahead of us, as we focus on executing the various initiatives I mentioned today, and delivering a number of systems that are currently in production. In the coming weeks, we will further define the growth strategy and substantiate our sales forecast and the budget for 2023. We will translate this into guidance and communicate with everyone at the appropriate time. One final comment that I would like to make And that is to thank Alex for his leadership over the past six months. His steady hand and the guidance have helped to position the company going forward. It's never an easy task to assume the role as the interim CEO, but by all accounts, he handled it to perfection. I am extremely excited to be leading this company as I believe the best days are ahead of us. I thank you all for your time today. At this point, I would like to turn the call over to the operator to address any questions from audience. Mike, please proceed.

Yes, ma'am. Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If any time a question has been addressed, you'd like to withdraw your question, please press star, then 2. Again, it is star, then 1 to ask a question. At this time, we'll just pause momentarily to assemble our roster.

And the first question we have will come from Robert Brown of Lake Street Capital.

Please go ahead.

Good morning. Just quickly, I'm kind of wondering about the pricing environment. I know you've taken some pricing actions. How has that impacted the different pipelines in different markets? I presume it depends on the market, but how has the pricing impact been able to be flowed through?

Hey Rob, Simon here.

I'll start out and then Faye can comment further. So clearly if you focus on our products, plastics, DPFs, membranes, we haven't seen a price erosion. We have on the other side seen pricing being fairly stable in a very inflationary environment. Clearly we have worked to increase our pricing to offset the cost inflation we have seen. Obviously, that's always a balancing act, but in terms of price competition and price situation, that's not on the agenda. On the system side, there's obviously a more complex picture where we are trying to leverage the value proposition and the value we're creating for our clients to basically increase our pricing and achieve a higher contribution margin for our systems business going forward. But at this point in time, I would say it's a fairly robust picture on pricing. and no price erosion.

Yeah, I think I would like to add on top of that, the new end markets which were mentioned today, we really believe because our solution has a unique property there, so we might have much better price in the future.

Okay, thank you.

And then I just wonder if you can elaborate a little bit on your your efforts to expand the distribution channels in water. Maybe what sort of is the distribution environment there and how have you seen that kind of developed historically and what sort of the opportunity in the water market with adding a distribution relationships?

We have a different market.

I'll just give you a concrete example. For example, for the pool and the space market. definitely it's a very much distributor-driven market already beforehand. So we just need to choose the right distributor and go close to them and really get commitment from them and deliver what we need. So this is what we've already been doing today. We just want to be further strength on the distribution side. And the produce of water I mentioned today is a new area because we had a system In this region, it's up and running now. With this data in hand, we will be able to find the right partner to go into this region and really pushing out in this application. So you will hear more from us. We are looking at the different market segments and choosing the right partner and really pushing out distribution channels.

Okay, thank you. I'll turn it over. Thanks, Rob.

The next question we have will come from John Littman, investor.

Hey, good morning. Thanks for your time. Can you hear me?

Yes. Hi, John.

Hey, great. Thank you. Just a couple questions on the $7 million to $8 million to break even. Are we estimating that to get to that level, we need to get back into the marine scrubber business? Or are you in the belief that the current businesses that we're generating revenue from in this quarter are substantial enough to get to that break even point or of the membrane to get to that?

As I mentioned earlier, We have a strategy in two steps. We would like to really emphasize our recurring business. And that means the pool and the space, membrane and plastics, and also DPF areas. We want to grow there. And on top of that, we have the different end markets. We are marrying Scobar. We'll be one of the end markets. So these are two combinations. We do it together in order to achieve the $7 million to $8 million. And we believe with the reoccurring business, we give us a very solid foundation and build on top system delivery. So this is two-leg strategy we are working on. And the marine scuba will be continuing contributing, but because of the delay of the registration, we do not expect big growth in that segment. Thank you. Thank you.

And just another question. With the $17.6 or so million in cash on the balance sheet, do you think that, I mean, it's no small task for you to more than double your current sales to get to breakeven. Do you think that you have the ample liquidity to get to that breakeven level with the balance sheet you have today?

Yes, yes, we have. I think it is a bigger picture here, John. First of all, you need to look at what we have achieved this year. I think the capital structure obviously is an important vital step, getting the convertible note off our balance sheet, reducing our CapEx commitments and really using the CapEx we have spent this year to invest into the right machinery. We have significant capacity at our facilities in Denmark, so we don't need CapEx over the coming years to grow our business, even significant growth. So that gives us a lot of comfort. And finally, with the cost reductions that we have achieved so far this year, down 30% on OpEx and fixed costs since Q1. don't have we don't have a long runway to get to cash flow break even and with 17.6 million in the bank account i'm very confident we are very confident that we have enough runway to get this this company up to where it belongs that's fantastic one last question for some of the uh not so sophisticated investors including myself out there you know if you do get to break even

The incremental revenue generated, Faye, from these new applications I'm not as familiar with in the pool space and some of these other verticals. What is the incremental contribution margin from these recurring revenues or new revenue applications? I'd assume pretty high margin and high contribution once you pass that chasm of getting to break even.

Yeah, you're absolutely correct. I think one of the key mechanisms to achieve stability is obviously growing your top line or even better, also improving your contribution margin at the same time. And that's obviously a strategic focus of ours. I think a minimum of 40% we need to deliver on. We are striving higher than that. And even... into one this year and if you look into our Q3 numbers and adjust for some of the non-recurring items, we are above 40% and that's basically a focus of ours. So you can say for every million dollars of incremental revenue, we should have at least 40% fall through to EBITDA and help us achieve that cash flow stability faster than what we've guided to in the past. And as also mentioned today, we guided to seven to eight. We're now confident in saying it's more seven And if we see higher and better pricing, maybe it could go lower than that. But again, I'm very cautious about that in the environment where we have inflationary pressure on our costs. So let's see how the world looks like in early next year, and I'll provide more guidance on that.

Sounds like we've got the right team there now. Thanks a lot, folks. We'll look forward to connecting in coming quarters.

Thank you. Thank you, John.

Again, as a reminder, if you'd like to participate in today's Q&A, please press star, then 1 on the touch-tone phone. Again, either star, then 1 to ask a question. Again, we will just pause momentarily to assemble our roster. At this time, we're showing no further questions. We will go ahead and conclude today's question-and-answer session. I would now like to turn the conference back over to the management team for any closing remarks.

Thank you, Mike.

I would like to close this conference call by saying thank you all very much for being with us today. We look forward to communicating with you soon in the new year. Thank you.

And we thank you, ma'am, and to the rest of the management team for your time also today. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you, everyone. Take care and have a wonderful and blessed day.