LiqTech International, Inc.

Hello and welcome to Lit Tech International's first quarter 2023 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist 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 your telephone keypad. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Robert Bloom with Litham Partners. Robert, please go ahead.

Great. Thank you so much, MJ. Good morning, everyone, and thank you for joining us on today's conference call to discuss LickTech International's first quarter 2023 financial results for the period ending March 31, 2023. Joining us on today's call from the company are Fei Chen, Chief Executive Officer, and Simon Stiddall, 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 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 and 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 event 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, Robo. Good morning or good afternoon to everyone on the call. I am excited to get the opportunity to speak with you all today. Following my appointment as CEO in middle September of last year, our commercial strategy is delivering the intended results with strong improvement from our recurring businesses with experienced revenue growth of 27%. sequentially with improved contribution margin. Further, we have recently signed multi-distribution agreements for key geographic and the mass segment to accelerate adoption, including recent agreements to advance phosphoric acid purification within China and water treatment solutions in Southeast Asia. Additionally, our distribution agreement with NESR is progressing nicely as our two companies are closely aligned and have established joint targets for 2023 to address the significant opportunities linked to ESG objectives in the Middle East. We believe this agreement will expand our reach into these key markets which I will touch on in more detail momentarily. Additionally, we have made significant progress implementing processes to drive improvement in our contribution margins, which have reached their higher levels in more than two years. This improvement within manufacturing as well as a 28 percent decrease in operating expenses significantly reduced our break-even point, which we currently estimate to be around $7 million in revenue. These three key initiatives, a focus on recurring revenue, creation of new partnerships and distribution agreements to expand our commercial reach, and operational efficiencies, are all moving forward according to plan. Our other key initiatives The larger system sales is advancing with a sales pipeline that continues to grow. However, proof is in the results, and we still have work to do in order to move pipeline opportunities to conform purchase orders and the venture commissioning of the projects. Again, I will touch more on this in a moment. Overall, I am pleased with the progress during the past few months to grow DTIC, but more importantly, driven the business towards profitability. Let me expand a bit more on each of the areas I just mentioned. Recurring business. As I stated last quarter, we have a tremendous opportunity ahead of us to leverage our highly unique technological advantages rent, competences, and sustainability values to build a growing and profitable business in the years to come. We moved quickly following my appointment of defining our cooperative vision and commercial strategy with a clear focus on recurring business and the large systems opportunities. We also brought on a number of important members to the team, which demonstrated ability to effectively grow businesses. As I mentioned, our recurring business, including swimming pool system, distilled particulate filters, ceramic membrane, plastic component operation, and spare parts, was up 27% of the quarter. Growth is one thing, but we are extremely pleased with the profitability metrics that come out of this component of our business, which contributed to the overall strong contribution margins. Fundamentally, being in a position where we have recurring revenue delivering these positive results is a good sign that we have finally hit a point in our business where we understand our cost base and can optimize our revenue base within our recurring business. The systems and the process that have been put in place have provided us with excellent insights into both of these areas, which should bode well for our business growing forward, especially as we drive growth in our system sales. During the quarter, we delivered two swimming pool system orders. and received a large order for four commercial swimming pool water treatment systems in New Zealand, which deployed a complete filtration system solution leveraging our enhanced aqua solution membrane. Right at the end of the quarter, we received another swimming pool system order. From a membrane element standpoint, received two membrane orders during the first quarter and have seen closed orders for an additional key membrane order for delivery in Q2 and Q3. Overall, membrane represents a significant opportunity for us. On the DPF side, we have officially seen the kind of decreases that we have seen in that business, sequential revenues up compared to Q4. We do not expect tremendous growth here, but looking persistently into new application areas to hold this business steady will go a long way towards our goal. Finally, on the plastic side, in the fourth quarter, we experienced significant sequential growth of approximately 67%. This is mainly driven by a large order we received at the end of last year in the area of biological-based material development. The future for this segment continues to look strong as our team continues to find new and exciting opportunities to deploy our capabilities. I mentioned this last quarter. But it bears repeating. Last year, our products and the service to the 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 credibility of our business, improve our manufacturing throughput and the growth margin, and ultimately reduce our break-even point. Q1 was an important first step in achieving that goal. Let us transition to our systems business. As a reminder to those who might be new to our company, this includes our large system solutions in the area of marine scrubber systems, industry water treatment, the border oil and gas filtration, and acid purification markets. This business certainly has longer lead time to do it and requires our team to identify areas where our solution can offer superior performance and add value to our customers. During the quarter, we delivered two marine scrubber systems and continued work on a new metal cooling project in Denmark. Furthermore, we continued our work on our Middle East oil and gas project. On the marine scrub market, this was once a rapidly growing market a number of years ago, but basically granted to a herd during the pandemic. We delivered two systems during the first quarter and expect to receive new orders in the coming months. Where the market is not what it was, we are seeing signs of life. On the oil and gas side, we discussed last quarter a significant MEG order received from a major US oil company operating in Europe. This was the first of a two-part order for an offshore project where we have already demonstrated the silicon carbide membrane technology performance in pilot and have verified significant performance improvement to the MEG regeneration process when compared to other membrane technologies. At the end of last week, we have signed master service agreements with the US oil companies. Our people are carrying on-site commissioning in these coming weeks. Our MEG system should be a contributor to growth in the second quarter. The wastewater treatment system order I mentioned is for the metal processing industry application in Denmark, which worldwide represents a potentially large addressable market for the company. Our proprietary silicone carbon membranes are an ideal solution that can feature heavy metals, lubricants, and other demanding substances and toxins. We will look to grow this market in the years to come. Our agreement in the Middle East addressing produced water treatment for oil and gas production, where our technology and collaboration with our partners continues to demonstrate tremendous results. 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. Finally, our acid purification system solution runs stable at our customer's site. We are in a close dialogue with the client to explore the new project opportunity. With us making nice progress in each of these markets through our direct sales force, it has been a key focus of mine to create distribution partnerships that can open the doors for us to expand our reach in new geographies and access to key market verticals. In November, we entered an agreement with the National Energy Services Reunited, or NESR, a publicly traded international provider of integrated energy services in the Middle East and the North Africa region. The agreement will be focused on leveraging our capabilities in produced water filtration solutions for reinjection. AESR has close customer relationships and a strong service organization within Middle East, North Africa oil and gas industry. Since the agreement was announced, we have succeeded in becoming closely aligned and we have established Target opportunities for 2023 address ESG applications in the Middle East. In February, we entered into a distribution agreement to supply membranes to Liquinix water treatment solution for Singapore. Liquinix specializes in design, fabrication, and system integration of compact water and wastewater treatment platforms. using next-generation technologies such as ceramic, biomimicry, and the graphene membrane. An interesting opportunity pipeline is established, and it's been closely followed up. Last month, we entered into a distribution agreement with Silicon Feature, a China-based company focused on providing technologies for chemical industry. with a focus on supplying our advanced filtration system. For phosphoric acid purification, China is a very significant market for high-grade of phosphoric acid production for food, pharmaceuticals, mining, and automobile batteries. We have demonstrated that our technology can effectively help our customers enhance their process efficiency as well as product quality. We look forward to working with the silicon feature to efficiently expand our market reach into this large and growing opportunity in China. As you can hear, we have signed agreements to focus on each of our co-system areas. Ori and the guys with NESR, wastewater treatment with Lipinix Phosphorus acid is a silicon feature, and you should look for more to come. One key distribution area we are working on is the creation of streaming food system partnerships. To this point, we have mostly gone through direct sales, which has been effective, but we want to look to accelerate the growth through distribution partnerships. Looking for strong distribution partnerships will be a focused area throughout the rest of the year. As we look to the second quarter, we are expecting revenue of about $5 million, which would represent a $1 million increase from the just recently completed first quarter, or a 25% increase. The key drivers here are continued growth in our recurring business, coupled with an increase in system sales with a major contribution coming from the commissioning of the significant MEG order we received from a major OUS oil company operating in Europe. We have expectations for continued improvement in contribution margins and efficient management of operating expenses. We are closing the gap and achieving quarterly break-even. With a strong balance sheet and the tangible progress being made, I'm optimistic about what is coming for LeakTech. With that, let me turn the call over to Simon to review the finance 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 quarter. Revenue was $4 million compared to $3.6 million in the same quarter last year, representing an increase of 10%. Broken down by vertical, sales were as follows. System sales and related services of $1.4 million compared to $0.6 million in the same period last year and $1.8 million in Q4. BPF and ceramic membrane sales of 1.4 million compared to 1.9 million in the same period last year and up sequentially compared to the 1.3 million in Q4. And finally, plastics revenue of 1.2 million compared to 1.1 million in Q1 last year and up significantly compared to the 0.7 million in Q4. As you can hear, the largest increase year-on-year was in our systems business due to increased traction with delivery of two marine scrubber systems for the Asian market, installation of pool orders in Europe, and continued progress on our important Middle Eastern and Mediterranean oil and gas efforts. As Faye mentioned, on a sequential basis, the improvement was most predominant within our plastics business due to partial delivery of a large strategic order combined with a general uptake in order intake following a challenging Q4. Looking at our gross profit for the quarter, we reported $0.4 million on implied gross profit of approximately 10% compared to $0.2 million and 7% in prior year's first quarter. The positive development is underpinned by higher activity and improved profitability, partly offset by increased costs related to maintenance and refurbishment of our high temp kilns at our Ballarat ceramics facility. As we still have overhead costs 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 out fixed costs, our contribution margin was approximately 43%, the highest in more than two years, and well above the average of 31% reported last year. Notably, The improvement is delivered despite the cost and resources tied to ongoing remediation work on legacy marine scrub installations, which we expect to conclude over the summer. Furthermore, the positive impact is a result of improved pricing discipline, more attractive product mix, but also our ability to leverage our new ERP platform where we now can access and streamline our operational setup. As we see continued growth in revenue, Contribution margin is an important metric to evaluate how quickly we can reach breakeven. As previously mentioned, we do maintain our guidance that our business will be breakeven, measured on an adjusted EBITDA basis, assuming a quarterly revenue of approximately $7 million. Turning to OPEX, total operating expenses for the quarter was $2.6 million compared to $3.6 million in Q1 of last year, a decrease of $1 million, or approximately 28%. As stated over the last quarters, we remain diligent in managing the business, reflecting our determination to defend profitability through organizational rightsizing, mix improvement, and capacity optimization. Looking at Q1 numbers in more detail, we did incur non-recurring costs due to organizational changes. However, it's important to note we have and will continue to strengthen our commercial capabilities and invest in improved business intelligence which going forward may result in slight increases in OPEX compared to the Q4 low point. But please be assured, we are investing in areas that can drive growth efficiently and are highly focused on steering the business back into breakeven without jeopardizing our financial position. Moving to the next item, net other expenses during the quarter was $0.2 million compared to $0.4 million in Q1 of last year, with the development reflecting our improved capital structure high interest income, partly offset by FX losses due to the US dollar appreciation against the Euro. Concluding on the P&L, net loss was $2.4 million for the quarter. This compared to a $3.7 million loss last year, mainly explained by revenue growth, improvement in gross profit, and a decrease in operating expenses. Our adjusted EBITDA for the quarter was negative $1.2 million, compared to a negative of 2.4 million in the first quarter of last year. Again, this metric remains a key reference point for our cash flow and financial breakeven efforts. Finally, let me briefly comment on our cash flow and balance sheet before summarizing and handing over to Fay. We ended the quarter with 14.3 million in cash, down 2.3 million compared to the fourth quarter. explained by the cash used in operating activities due to increased inventories linked to strategic sourcing for ongoing projects to cut lead times, but also reduction in prepaid expenses due to annual insurance premiums and licenses paid. Furthermore, a back-end loaded revenue in Q1 resulted in collections being pushed into the second quarter, explaining the increased AR. Finally, we also paid our penultimate installment on our Danish COVID-19 loans, with the final payment due in the second quarter. To summarize, balancing our cash flow remain a key KPI for our business, and we are determined to preserve cash to maintain our strategic and financial flexibility. We also committed to position our business for growth with upcoming deliveries of new manufacturing equipment in Denmark scheduled for late Q2. We also acknowledge that we need to increase the throughput of our existing facilities to accelerate growth, reduce lead times, and ultimately pave the way to a business imbalance from both the net income and cash flow perspective. Thanks again for your continued support, and over to you, Fei.

Thank you, Simon. Before I turn the hour to your questions, let me quickly summarize. First, we have moved quickly to accelerate the commercial and business development processes here at the company, which has begun to show tangible results. We are growing our more predictable recurring revenue opportunities, leveraging our differentiated technology. We are also focusing on opportunities where we can deploy larger systems. Importantly, the processes and the systems we have put in place allowing us to better align our costs with revenues with more accurate bidding on projects. all of which are driving nice improvement in our contribution margin. We have created new distributor relationships to address certain end markets and have made investments to the internal team to ensure an effective multi-strategic approach to commercialization. And as we keep reiterating, every time, everything we are doing is against the backdrop of achieving profitability. The organizational transition we are undertaking has proceeded with emphasis on utilizing our existing core competencies within the company and the category with our renewed strategic focus and the market dynamics. As Samuel and I both mentioned, we remain on track to deliver break-even at the $7 million in revenue and number we think is achievable in the near term. I am highly optimistic about the future and look forward to take any questions there may be. Operator?

Thank you, Fei. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Hi, Faye. Hi, Simon.

Nice progress on the quarter.

Thank you. Thank you.

So first question here is on the pipeline, you talked about the pipeline of new large projects being, you know, starting to build and I just wanted to get a sense of your view there. How is that built over the last quarter and what's the confidence level in that pipeline sort of compared to Q4?

I mean, as I mentioned in my speech, we have a very, very growing pipeline. It's growing every month. And we have increased our confidence also on the project. I think some of them will be convert to form processing order in CO2. So I mean, yes, in the near future.

Maybe just to add on that as well, Rob. So I think as you can see, going all the way back to last year, we are really focusing on fast-tracking our way to break even. And again, the recurring business, I think we just want to steer your attention to that as well because the large orders have a longer decision cycle, which Faye also alluded to. And for us, seeing the tremendous improvement in recurring business is obviously what gives us better predictability going into the next quarters. And then on top of that, the larger system orders, more strategic orders will be dicing on top of that. But as we can also see on guidance, we We feel more confident in giving guidance now, and hopefully the track record will show that also over the coming quarters.

Okay, great. Thank you. And then, yeah, I did want to ask about the Q2 guidance and outlook. I think you alluded to it there on the recurring business, but sort of what's sort of the confidence level there, and how do you have visibility, or I guess what's the visibility into sort of beyond Q2 at this point?

So we are definitely looking to continue growing our recurring business, and that's also what we're looking at right now. We're tracking it every single day. So, yes, we are confident that a portion of the growth quarter on quarter will definitely come from recurring business. So, again, continuing the same trajectory as we've seen in Q1. Again, underlining that we have better visibility. So that's definitely the key guidance here for us is that we have that visibility and stability. You can also say that the recurring business is starting to give us that predictability in our forward-looking analysis.

Okay, great. And then I think you said you shipped two marine systems in the quarter. How is the marine business at this point in terms of activity and the pipeline in the marine scrubber business?

As I mentioned, we do see there are some life signs in the marine business. So things are moving again. So we are actually focused on this area. Actually, we just hired a new salesperson. It's going to start next week because we really want to build up from the pipeline here. So we believe there will be several systems that will come to us later this year. So we do see there are some things moving.

Maybe just to add to that as well, Robert, I think on that note, please bear in mind, we acknowledge that the marine market was an important contributor to us in the past. And right now, we also want to try to cover that together with our aftermarket focus. So again, with the onboarding of a new key VP of after sales, we'll combine with a new salesperson, hopefully also help us address this large pool of installed systems and help drive our aftermarket business also in the quarters to come. So the Marine is not only selling new systems, it's also a matter of leveraging the existing number of outstanding systems that we have now operating on multiple ships across the globe.

Great. Thank you. I'll turn it over. As a reminder, to ask a question, you may please press star, then 1. Seeing no further questions, This concludes our question and answer session. I would now like to turn the call back over to management for closing remarks.

Hello, everyone. I would like to thank you all very much for being with us today. We look forward to communicating with your show again. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.