| Fei Chen | executive |
| Phillip Price | executive |
| Robert Brown | analyst |
| Lucas Ward | analyst |
Good day, and welcome to the LiqTech International Reports Third Quarter Fiscal Year 2024 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.
All right. Thank you very much, Debbie. Good morning, everyone, and thank you for joining us on the conference call, as the operator mentioned, to discuss LiqTech International's Third Quarter 2024 Financial Results, and this is for the period ending September 30, 2024.
Joining us on today's call from the company is Fei Chen, Chief Executive Officer; and Phillip Price, the company's Interim Chief Financial Officer.
Before I turn it over to management, let me remind listeners that there will be an open Q&A session at the end of the call. [Operator Instructions] Before we begin with prepared remarks, we submit for the record the following statement. This conference call may contain forward-looking.
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, and good day to everyone on the call.
Let's jump right to the key topic during the quarter which was the delay of a large commercial produced water treatment project in the North America, which was expected to be delivered in the third quarter, but has now been delayed following the decision by the customer to change the physical location of the installation. This unit was set to contribute about $1.5 million in revenue to our third quarter results. This is clearly disappointing and significantly impacts our quarterly results.
Fortunately, our customer has finalized their location of the installation, which has moved from the South United States to Canada with the units set to be delivered in 2025 and will help to be a key driver to our future growth. I will touch more on this in just a moment.
So, that's the negative side of the quarter.
Let's now turn to a few of the positives.
We have more systems today at various phases of testing and piloting than at any time, any point in our history.
We have four produced water treatment pilot units for the oil and gas industry operation in the field at the moment, one with Razorback Direct in the U.S., which was shipped in quarter one and operated satisfactorily at the customer site in the past 4 months. One with NESR, which was completed in quarter 2 for the Middle East. One with one of the world's leading integrated energy companies for produced water treatment in the U.S., which was shipped in quarter three and a legacy system in the Middle East, which has now been operational for more than 3 years. The success of Razorback pilot is what led to the commercial order we originally were set to ship this quarter as the customer clearly recognized the value in our solutions. The pilot unit in Middle East will be installed and operated in January 2025 in one of the leading producers of the energy and chemicals in the region. The pilot unit will provide us unique opportunity to showcase the superior value proposition of our containerized UF filtration system. This would bluestem our technology in the Middle East region. The pilot unit with one of the world's leading integrated energy companies for produced water treatment in the U.S. is presently under commissioning.
We expect that the pilot testing will lead to a commercial project with this partner in 2025.
Beyond oil and gas, recently, we have placed a pilot unit with a U.S. petrochemical company for microplastics removal, which was shipped in quarter three.
We also completed a test with a mini unit focused on lithium brand production pretreatment in the U.S., which was successful and has led to the next step, a pilot unit order, which is set to deliver this month.
We also recently completed a factory test of water treatment unit for WIN DG dual-fuel engine, highlighting satisfactory result permitting us to address ships based on WIN DG dual-fuel engines. We think this could lead to commercial sales of our water treatment units for EGR systems in 2025.
Within the last year or so, we have also shipped units in key end markets, including a unit for MEG recovery for an offshore project in Mediterranean, a pilot unit for phosphoric acid purification in China through silicon filter, multiple marine scrubber units in China through New York, a wastewater treatment system for the metal processing industry in Denmark, and we have shut more than 24 pool system units over the past 20 months.
While we have always said the timing of large systems would be much slower and it will not be linear, we feel good about the progress made the last few quarters to put ourselves in a position to drive further adoption in a multitude of market segment. Coming back to one of our key end markets, marine water treatment. To assist impugning out our adoption, they were announced the establishment of a joint venture with JiTRI, Jiangsu Industrial Technology Research Institute to expand our presence in China, a key shipbuilding market, which has an approximate 80% market share. The JV will be named Nantong JiTRI LiqTech Green Energy Technology Company Limited and will be located in Nantong Haimen, Jiangsu province. LiqTech will be the majority owner of JV, where JiTRI will be a minority owner contributing facilities and local support, along with initial operational and commercial funding. JiTRI is a technology and research institute in Jiangsu province with the aim of promoting innovation and technology commercialization through partnership and joint investment. JITRI was established 10 years ago and has built up extensive collaborations with industries, universities and research institutes in the U.S., Europe, Australia, Canada and China. JiTRI has focused on a wide variety of areas, including clean technology. This JV will make it possible for us to hire sales force in China to have access to network and customers to provide local service and spare parts support. In the medium, long term, this deal will provide the possibility for us to localize the system assembly to reach cost price reduction.
As most of you know, the marine shipping industry is moving towards cleaner fuel applications with the majority of new vessels being equipped with dual fuel engine, which requires reliable water treatment for the exhaust gas recirculation systems or EGR.
For perspective, according to Clarkson shipping intelligence and the ship engine company's published data, in 2024 through 2027, 400 new vessels are on order with EGR solutions planted in addition to retrofit applications, which are increasing for LNG-powered vessels. I am pleased to have finalized this JV and look forward to what it can do to help expand our market presence in China. Transitioning to another key market for us, swimming pools.
During the quarter, we delivered 2 swimming pool systems, one by Poolcourt in Ireland and one by Oxidine in Spain. This is certainly below our expected quarterly cadence and an area of increased focus for the team. We work intensively in building up more distribution partnerships into new geographic territories. One area we touched on last quarter that we believe will help is the receipt of NSP certification for our system in the U.S.
For those that are not aware, we are unable to sell our commercial swimming pool solutions in the U.S. as we work through this approval process.
With the certification now in hand, we have been in conversations with numerous potential partners that will help drive adoption in the U.S. with the goal to have new collaborations in place by the end of the year. Transitioning to other parts of our established markets, starting with DPFs and ceramic membranes. DPF and ceramic membrane sales during quarter 3 were about $1.1 million compared to $1.6 million in the year ago third quarter. This is below our expectations, largely reflecting what we believe to be temporary market conditions with end customers awaiting potential interest rate cuts.
Fortunately, year-to-date, sales continue to remain above last year's level, showing the continued strong market demand. Clearly, we are behind where we want to be at this point due to the delay of the large commercial oil and gas order and other delays, which has impacted us ramping up sales quicker.
As we look to the first quarter of 2024, we expect revenue to be between $3.3 million and $4.3 million, which would be above the most recent third quarter and compared to $3.9 million in the year ago fourth quarter. But again, our expectation was to be above these levels exceeding 2024.
As a result, we implemented a cost reduction plan aimed at lowering our breakeven target measured on an adjusted EBITDA basis to a quarterly revenue run rate of approximately $5.5 million. Remember, our previous breakeven target was $6.5 million to $7 million. These cost cuts will be across the board and includes a 10% reduction in headcount, a 10% reduction in base salaries for senior management in 2025, a 50% reduction in cash compensation for the Board of Directors in 2025 as well as other cost-saving initiatives. Positively, we ended the quarter with a solid balance sheet, holding a pro forma cash balance of more than $13 million.
As a reminder, in September and subsequently in November, we closed on a private placement of $10 million with existing institutional investors. We thank them for their strong conviction with respect to our company, our management team, and our future opportunities. It is our commitment to not have to raise additional capital and bring this business to profitability as soon as possible. Despite delayed orders with a large number of agreements in place and the large orders set to be delivered next year, coupled with cost reduction initiatives I mentioned, I continue to believe that we are in a strong position to achieve this stated goal. With that said, let me turn the call over to Phillip to review the financial results in more detail. Phillip?
Thank you, Fei, and good morning, everyone.
Now, let me briefly comment on the financial highlights for the quarter. Revenue came in at $2.5 million compared to $5.1 million in the same quarter last year, representing a decrease of 51% Broken down by verticals, sales were as follows: system sales and related services of DKK 0.7 million compared to $2.6 million in the same period last year. DPF and ceramic membrane sales of $1.1 million compared to $1.6 million in the same period last year. And finally, plastics revenues of DKK 0.7 million, equivalent with Q3 last year.
As Fei mentioned, we had a large 1.5 million system set to be delivered in Q3 of this year, which has been delayed to next year.
Additionally, the number of pool systems delivered this quarter fell short of our expectations.
We also experienced a slowdown in our DPF and ceramic membrane business, which we believe is driven by temporary market conditions as end customers are waiting on potential interest rate cuts.
Looking ahead for the fourth quarter of 2024, we expect revenue to be in the range of $3.3 million and $4.3 million compared to $3.9 million in the fourth quarter of last year.
For the full year, this guidance translates to an expected revenue range of $14.5 million and $15.5 million.
Turning to gross margins. The reduced revenue base for the quarter led to a negative gross loss of $0.2 million compared to a positive gross margin of $0.9 million in the same quarter last year. This decline underscores the impact of lower-than-expected revenue on our margin performance as fixed production costs were spread over a smaller revenue base, putting additional pressure on profitability.
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 out fixed cost, our contribution margin ended at approximately 43.1% compared to 43.2% in the same quarter reported last year.
Turning to OpEx. Total operating expenses for the quarter were $2.4 million, down from $2.6 million in Q3 of last year. In particular, selling expenses decreased $0.4 million, mainly from a reduction in executive officers, but we also saw savings from reduced travel costs, lower Investor Relations expenses, and a decrease in expenses related to external sales consultancy services. G&A increased DKK 0.2 million attributable to the addition of new positions in supply chain and project management as well as increased legal expenses and insurance costs.
As we have emphasized in recent quarters, we remain focused on running a lean business by monitoring costs and carefully evaluating our spend to protect our financial objectives. Concluding on the P&L, net loss for the quarter was DKK 2.8 million compared to DKK 1.4 million for the comparable period of 2023.
As Fei mentioned, we have implemented a cost reduction plan to lower our breakeven target measured on an adjusted EBITDA basis to a quarterly revenue run rate of approximately DKK 5.5 million. This is a significant improvement from our previous target of DKK 6.5 million to DKK 7.0. These cost costs will be comprehensive, including a 10% reduction in headcount, a 10% reduction in base salaries for senior management in 2025, a 50% reduction in cash compensation for the Board of Directors in 2025, along with other cost-saving initiatives.
Finally, let me briefly comment on our cash flow and balance sheet before summarizing and handing back over to Fei. We ended the quarter with $4.5 million in cash, a decrease of $1 million from the second quarter, primarily due to cash used in operating activities, partly offset by proceeds from issuing common stock.
Following the quarter's end, we completed the second tranche of the private placement earlier announced, adding an incremental $8.8 million in proceeds, bringing our pro forma cash balance to $13.3 million. To summarize, balancing cash flow is a critical KPI for us as we work to safeguard cash reserves, ensuring both strategic and financial flexibility.
Our cost reduction efforts, including targeted headcount and salary cuts are central to building a lean operation that aligns with our long-term goals. Thank you for your continued support. And now back over to you, Fei.
Thank you, Philip. In closing, where the quarter was disappointing due to the delayed delivery, we have more systems today at various phases of testing and piloting than at any point in our history.
We have incredible technology that can be applied across a number of different applications, and it is imperative on us to further develop the various partnerships to put ourselves in a position to not be so dependent on 1 or 2 orders each quarter.
Fortunately, we have a strong balance sheet, but I want to make it clear that we are not taking our elevated cash position for granted.
We have put in place initiatives to reduce our expenses; we are driving revenue growth. With that, operator, we would be happy to take any questions.
[Operator Instructions] The first question comes from Rob Brown with Lake Street Capital Markets.
Just wanted to get a little more color on the delay in shipping to the oil and gas market. I know you said in '25. Any sense on when that will be shipped? And I guess, maybe some color on the change in taking that unit and does that delay the ultimate kind of pilot effort and ability to get follow-on orders or timing of follow-on orders?
Thank you, Rob.
I think in our press release, we have actually written we expect it coming in the first half of 2025.
And then I guess, what was the sort of reasoning for the delay? I think it shifted to the location, but was that --
Yes. Because when they shift to a new location and the water in the different sites, they are different, but they do not need to run all the testing of our system because it has been demonstrated very robust and it really can handle different water streams but they have some 1 or 2 steps before our treatment. And there, they would like to do some running testing before they put us in place.
So, that was one reason delayed the process.
And then on the lithium brine project that you had, can you give us a sense of how big that market is or what a typical system size is in that market and there?
I mean, we are very, very happy to see the results. It's so convincing.
So, the customer are very fast to order the pilot unit.
So, the market size is huge.
Just for this customer alone in one site, it's more than what we normally it will be like a double size or even 5x the size what we normally expect.
So, it's very big, but it will come in steps. I don't think they will come all together at once, but they will come in stepwise.
So, it's a very, very huge potential market. And it turned out our technology has a very, very unique performance, and they are very excited about that.
So, they also have a patent ion exchange technology is very unique.
So, I would like to be able to excite to share more information with all of you when the pilots are finished because then it's clearer, but the market is much bigger. It's much bigger than what we normally expected.
The next question is from Lucas Ward with Ascendiant Capital Markets.
I wanted to drill down a little bit more on the order pipeline. Like I'm interested in how you track it. Do you have like a dollar figure for what your backlog is or your 3-month backlog or your 6-month backlog? Or are you simply tracking individual pilot projects, which ultimately hopefully lead to commercial orders?
So, that depends on the business areas.
We have our recurring business where we have order pipelines with dollar markets for all of the potential orders. But as Fei also mentioned, we have other business areas with longer sales cycles where we follow each step for the pilots, beginning with testing at the customer sites, and that should turn into pilot orders and the pilot orders should turn into commercial sized orders.
So, it differs, depends on the business areas.
So, it seems like it's lumpier than I thought. Like if one order is 1.5 million, let's say, can you give us an idea of the size of, let's say, well, first of all, do you book revenues at the test phase or not? Because it sounds like you're booking them at the pilot phase.
Yes.
So, that depends on the arrangement with the customers. But with the recent pilots we've announced, it's either been as a direct sale to the customer or as a rental.
So, the customer rents our pilots and then we provide service engineering for them, and we do the testing together with the customer. And that gives us revenue.
So, let's say a system is $1 million, the commercial part, how much would the pilot be? Is that like $100,000? What's the difference in scale from pilot to commercial? I mean if you buy it, obviously, if you rent it, it's different if they buy it.
Yes.
So, if you buy it, it depends on the end market. We're not able to say. But if we win it, it depends on how long time the customer wants to end, obviously.
So, it really depends on the end market and what we have of a track record within that end market.
Coming back to your question, the price compared to the pilot with a commercial plan, it depends on the capacity because the cost and the sales price depends on the treatment capacity.
So, it's not a one number. It's really kind of depends on the exact project.
So, it can be varied.
If we look at some of these newer markets like oil and gas, produced water or potentially lithium brine extraction, is it fair to say that the system value is going up a lot relative to, let's say, marine scrubbers or your previous bread and butter, swimming pools, obviously, would be.
Definitely. Yes. They are going up very much so, yes.
With respect to the lithium project, it says in the press release that your UF membrane filtration can actually enhance the downstream ion exchange, which I'm not sure what that means. But it sounds like you're becoming part of the production process as opposed to just cleaning the water that maybe is produced as a result. Is that a new kind of position for LiqTech?
Yes, you're totally correct.
We are going to be a part of their production process in the lithium brine production.
So, they are using the ion exchange. That means they have a special material, as the ion exchange material, to really kind of have a chemical reaction with the lithium ion to convert that to the metals they need to use. And in order to do this very efficiently, they do need to have the water being pretreated.
So, in this way, only the lithium ion will react on the media. Otherwise, the efficiency will be reduced.
So, we are ready to here of them to increase their efficiency of capture lithium ion.
So, it is totally right, Lucas.
We are in the production process.
And with respect to microplastic removal, is this a new market for LiqTech?
I mean, this is a very, very good question. It is new. We actually had a development project in 2023, found by Danish government and really doing testing of microplastic removal from industry wastewater. And we were very surprised to see the good results we got in that development project.
So, with that data in hand, we start to have a communication with this U.S. petrochemical company because we realized they have a challenge with the microplastic in their wastewater. And they got very excited about our results and our technology.
So, we very fast to get the pilot order. And right now, we're actually conducting the pilot at the customer site in U.S.
Last question, WinDG dual fuel engines, is this a new market? I mean what's the significance of that relative to your standard marine scrubber opportunity?
This is a new application.
So, I would say, yes, this is a new market because the standard traditional marine scrubber market is really regulatory control. They need to trade water before they can discharge into the ocean. And this one is really the engine to be traded, the exhausted gas from the engine has to be cleaned and traded in order to have the combustion efficiency of their engine.
So, this is not a regulatory control. It's really the requirement for the engine.
So, that's why it's much more interesting because in this way, they have to choose efficient technology, not only by the cheapest, not choosing the cheapest.
So, that's why we think we have a unique position here. And also, the demand the water treatment solution has to be continued operating when the engine is running. And that makes many of the cheap and other competitive technology cannot really perform in this application. And we know our solution is able to run continuously 24 hours and only need very short time for the cleaning. And this is also unique of our solution.
So, it's a very interesting new application area for us, definitely.
[Operator Instructions]
This is Robert here. I guess while we wait to see if there are additional questions submitted live here, I've got a few webcasts submitted questions. Fei and Philip, there is one component, I think, of the lithium brine question that you did not already get asked, and it was how long do you expect the pilot to be for the brine customer? Do you have any estimates on the time line for the pilot?
I expect they will be there until the next couple of months. They will be there.
Next few months, it will take.
Okay.
Next question here is, can you talk about some of the reasons for the challenges within the pool system this year? Is there any one particular reason there?
I mean, from the market perspective, all the customers and the partners are very, very interested in our technology.
So, we have a very, very good technology with a very strong value proposition. And unfortunately, we had a sales management, VP for sales and also a salesperson for the pool system did not perform well, and that actually caused our sales really going down in the pool system side.
So, we have made correct actions.
We have changed the VP for sales and also, we have hired a new salesperson.
So, they are now in the whole speed, intensive work to catch up what have been left out. And we are really building up new distribution partnerships and also, we follow up closely with our existing distributors. And I really believe, 2025, you're going to see the effect of a new sales team, it will be much more efficient and really professional compared with the old ones.
So, it's purely our internal reason, nothing about the market and the customer.
[Operator Instructions] It looks like I might have one additional question here, and it's relating to the JV in China for the marine scrubber. Can you just expand on that a little bit further? What are some of the main goals and some of the various processes that yourself and the partners will be undertaking?
Yes. It's a joint venture with a state-owned Technology Research Institute, JITRI, in Jiangsu. And Jiangsu province is just next to Shanghai.
So, majority of the China keeping build industry actually is in that region. Actually, this location because Nantong there is there's a deep-sea water harbor. And that's why there's a lot of build industry exactly in that place. And we are going to work through these partners, and they actually have a marine sector, has a very strong stakeholder relationship and network that will be very good for us. And they actually invest also in this joint venture. And we already start looking at hiring the people in China locally and also build up spare parts and service in the short term. And long term, we will also look at the localization of our system assembly. And it's really, really crucial.
We have to have the people on the ground in China in order to following up all those C building industries and the design institute really to get us close to them. And that really will make us very strong presence in China and make it happen. This, I really think will help our marine scrubber for the EGR solution to be sold in China.
Okay. Great. I hope those answered the questions there from the webcast. I am not showing any additional questions here through the live line.
So, Fei and Philip, I will turn it back over to you for any closing remarks.
Thank you very much for being with us today. We look forward to communicating with you soon again. Thank you.
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.