LiqTech International - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good day, and welcome to the LiqTech International Reports First Quarter 2025 Financial Results 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 remarks, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your 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 over to Robert Blum with Lithium Partners. Please go ahead.

Robert Blum (Managing Partner)

All right. Thank you very much, Jason, and good morning, everyone. Thank you all for joining us today to discuss LiqTech International's First Quarter 2025 Financial Results for the period ended March 31, 2025. Joining us on today's call from the company are Fei Chen, Chief Executive Officer, and David Kowalczyk, the company's Chief Financial and Chief Operating 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. If you dialed into the call through the traditional teleconference line, as the operator indicated, please press Star then one 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.

Before we begin with prepared remarks, we submit for the record the following statements. This conference call may contain forward-looking statements. Although the forward-looking statements reflect the good faith and judgment of management, forward-looking statements are inherently subject to known and unknown risks and uncertainties that may cause future results, 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 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.

Fei Chen (President, Director, and CEO)

Thank you, Robert, and good day to everyone on the call. At a high level, the results of the first quarter came in line with expectations we provided the previous quarter, with revenue growing 36% sequentially to $4.6 million, led primarily by the successful delivery of a record commercial order of our PureFlow mobile units to the oil and gas industry. This order was a key milestone for LiqTech that further validates how our highly specialized filtration solutions can benefit the global energy industry. Beyond oil and gas segment, we have also made progress on a number of other initiatives we have set forth these past few quarters, including our joint venture in China, which officially had its grand opening in April.

Following the grand opening, we received our first new marine scrubber orders in more than one and a half years and entered into a new framework agreement for after-sales support, which has already gained traction. It is great to see the immediate progress made in China. The other key high-level comment I will make is that we are seeing nice progress made with key pilot units currently deployed in a variety of addressable end markets, including one for lithium brine extraction pretreatment in the US and a unit with one of the world's leading integrated energy companies for oil and gas water treatment. Both rental-based agreements have recently been extended with expanded scopes.

The progress I just mentioned cooperates with relative strength across a variety of our key products and the market verticals, such as a ramp-up in DPF order intakes, increase in swimming pool systems orders, and the growth in our plastics division are all expected to drive revenue growth. As you can see from our upload, revenue for the second quarter is expected to show continued sequential growth from Q1 estimated to be within the range of $4.8 million-$5.2 million. Beyond the revenue growth, however, our focus is on bottom-line profitability, with better manufacturing utilization that should drive improved gross margins and the full effect of our recent cost-saving initiatives implemented during the past few months. We are expected to further improve our profitability metrics in Q2 as well. So the high-level summary, improved sequential revenue growth in Q1 of 36%, led by the record commercial oil and gas delivery.

Real progress made in China from our joint venture, which we think will continue to expand. Improved order flow from DPFs, swimming pools, and the plastics. Implementations of cost-saving initiatives aimed at lowering our break-even rate and Q2 guidance of $4.8 million-$5.2 million. Transitioning back to the record oil and the gas order, this truly was a milestone order and delivery for us. It started about a year ago when we signed a distribution agreement in February 2024 with Rizobac Direct and sequentially secured an order for a containerized pilot system for produced water treatment, which was promptly delivered and performed successfully at the customer's site throughout the second half of 2024. The success of this pilot program paved the way for a record-breaking commercial order. The order shifted during Q1, which is when we recognized revenue.

The units are expected to be installed at the customer's site in the U.S. in the June or July timeframe for produced water treatment. Once we got the commercial-grade system up and running, it will help serve as an additional reference for prospective customers, where some customers might still choose to have their own pilot programs. This commercial-scale operational unit should help shorten the path to future orders. To that end, we continue to make progress with multiple pilot projects on the way that leverage our preparatory technology to address some of the most demanding environments. As the history of progress with Rizobac Direct within the U.S. oil and the gas industry highlighted, the first steps to new application success with our filtration systems often start with a pilot-level program.

Currently, we have multiple systems at the various phases of testing and piloting, including a pilot unit from a leading technology company, the lithium brine production in the U.S. We announced it in November. It has recently been extended once again with an expanded scope to get data for a commercial-level design. The customer is very satisfied with the performance to date, and we look forward to potential next steps with this customer. We also have a pilot unit with one of the world's leading integrated energy companies for produced water treatment in the U.S., which was shipped in Q3 of last year. Similar to the lithium brine system, the unit has demonstrated superior performance, and the customer has extended the rental period to collect additional performance data.

Very recently, Rizobac Direct has rented a pilot unit to explore various applications for our UF filtration system since they have experienced strong interest from customers. We look forward to the continued execution on our multiple pilots and of the opportunities it could lead to for us in the future. Let's transition for a moment to our China GAW, where there is a number of activities happening, which included our official grand opening ceremony in Shanghai in April. Taking a step back, we initially established the GAW in November of last year. We are the majority owner of the GAW, contributing our pioneering marine water treatment solutions, where Geotree is the minority owner and is contributing facilities, local support, and with the initial operational and the commercial funding. In February, we achieved an important operational stop steps when we received supplier approval for our water treatment system for the WinGD ISO technology.

For those not familiar, WinGD is one of the market leaders in marine engine manufacturing, with a focus on advancing the decarbonization of marine transportation. This supplier approval allows us to seamlessly deliver systems to WinGD, its licensees, and authorized service partners. We commenced a pilot test for our marine water treatment solution for the WinGD ISO system, which was successfully carried out in China in March. We are now in close dialogue with the relevant stakeholders for commercial projects integrating into the WinGD ISO system. Separately, in China, we received an order for two marine scrubber water treatment units at the Shanghai Qiyao Environmental Technology Company. The units are scheduled to be delivered in November 2025 and February 2026. It's a small initial step, but certainly nice to see the orders coming in after one and a half years' empty period for the marine scrubber market.

In connection with the grand opening ceremony, we also entered into a new framework agreement for after-sales support for the marine scrubber market, which has already gained traction. Service of our existing units in the field and the maintenance revenue associated with it has always been a key initiatives for us, and this is another step in further capturing this profit opportunity. In summary, we see a lot of positive progress in China, with 80% of the global shipping building market and the numerous retrofits applications taking place to move towards cleaner fuel applications. China is expected to be a strong growth market for our marine water treatment solutions in the years to come. Before I turn it over to David, let me quickly touch on a few other key markets with a brief update. First, we see the swimming pool market.

We shipped two systems during Q1 and have another three systems set to ship here in Q2. Recently, we also signed a distribution agreement with NAF Aquatics in New Jersey for the sales and distribution of the LiqTech pool systems in the U.S. NAF Aquatics holds a strong market position in the U.S., particularly in the Northeast, with decades of experience and a broad network of local experts, which should lead to them being an ideal partner for us as we expand in the U.S. Certainly, swimming pools will remain a key contributor, and I look forward to more progress made here.

Transitioning to other parts of our established markets, starting with DPFs and ceramic membranes, where sales during Q1 was about $1 million, which was similar to what they were in Q4 of 2024, but down quite a bit from the year-ago period when we had a few large orders. We are seeing a nice uptick in orders here in the second quarter. Within plastics, we saw a nice uptick during Q1 with revenue of almost $1 million, which was up year-over-year and sequentially. The plastics team continues to do a great job differentiating itself and is generally outperforming our expectation. As we look at the second quarter, our expectation is for revenue of $4.8 million-$5.2 million. The revenue breakdown will be a little more diversified than it was during Q1, which benefited from the large commercial oil and gas order.

We expect to see growth in revenue from the pilot unit rentals, growth in swimming pool, growth in DPFs and ceramic membranes, growth in plastics, and increased contribution from our after-market sales. We are less dependent in Q2 on any one or two large orders to achieve our stated objectives. With nice rebounds across our various product lines, it should serve as a nice potential springboard as new large systems come on board. Let me now turn the call over to David to review the financials in more detail. I will then make a few closing comments and then look to open the call for your questions.

David Kowalczyk (CFO and COO)

Thank you, Fei, and good day, everyone. Let me take some time diving into the financial results in a bit more detail and add some color to what was in the press release. Let's start with revenue.

Revenue for the quarter came in at $4.6 million, up from $4.2 million in the year-ago first quarter and up from $3.4 million in the sequential fourth quarter. Broken down by verticals, sales for the first quarter were as follows: water system sales and related services of $2.7 million compared to $1.5 million in the same period last year and up from $1.4 million in Q4. DPF and ceramic membrane sales were $1 million, down from $1.8 million in Q1 last year and down slightly compared to $1.1 million in Q4. Finally, the plastics revenue came in at $1 million compared to $0.9 million in Q1 last year and $0.9 million in Q4. Key takeaways for the quarter include strong sequential and year-over-year improvements in water systems driven by our record commercial oil and gas order and multiple ongoing pilot programs.

Continued growth in plastics and stabilization of DPF and ceramic membrane sequentially, but well off the year-ago quarter, which included a few larger deliveries. Looking ahead to Q2 of 2025, and as Fei mentioned, we anticipate revenue to be between $4.8 million and $5.2 million, which would equate to a 4%-13% sequential increase from Q1 2025 and a 7%-16% increase year-over-year. Turning to gross margin, as we continue to be below our optimal revenue level, we continue to have fixed production costs that are not fully absorbed and those lower than normalized gross margin. For the first quarter, gross margin was 2.7% compared to 6.4% in the year-ago period. Remember that gross margins were negative during the sequential fourth quarter. We have previously reported on a contribution margin basis, which excludes the impact from our fixed overhead. This margin for the quarter was significantly higher.

We expect through 2025 to see the gap between gross margin and contribution margin to narrow during by cost improvements and volume growth. For our delivered PureFlow system in Q4, we realized a fair margin in light of this being our first full-scale commercial order. Going forward, we expect significant improvements as one-time startup costs and design costs will be much lower. Turning to OpEx, total operating expenses for the quarter were $2.3 million compared to $2.3 million in Q1 of last year and compared to $2.2 million in Q4 of 2024. A couple of items to note here: general and administrative expenses was down about $180,000, while SG&A was up about $200,000. The increase in SG&A was partly attributable to costs associated with a newly formed joint venture in China and reversal of bonus accruals in first quarter 2024, lowering costs last year.

We incurred about $60,000 in expenses pertaining to startup and running of the pilot in China. We believe this will be recouped given the orders we have already come come from here. In Q1 2025, we also incurred costs in relation to resizing the organization and building competencies to secure future growth. Also, as you will note on the balance sheet, our joint venture partner put $1.2 million of cash into the joint venture, which is then recognized on our consolidated balance sheet. The increase in cash is then associated with a corresponding loan from a related party of $1.2 million. This loan can be repaid in cash or equity when or if the joint venture will need future equity financing. The option to choose is the choice of LiqTech. As we look to the future, we have now fully implemented the comprehensive cost reduction strategy aimed at lowering our break-even.

Our break-even target measured on an adjusted EBITDA basis. This is now a quarterly revenue level of $5.5 million-$6 million, a significant improvement from the previous target of $6.5 million-$7 million. Concluding on the P&L, net loss was $2.4 million for the quarter compared to $2.4 million for the comparable period of 2024. Finally, from a cash flow perspective, we ended the quarter with $10.5 million in cash, which compares to $10.9 million at the end of December. We touched already on the cash infusion from the joint venture, but one other item I thought I would call out on the balance sheet was the increase in our accounts receivables. With a large order and oil and gas system shipped out in late Q1, that caused an increase in our accounts receivable from $2.4 million in December to $3.4 million in March.

This amount will be collected in the coming months. Everything else was pretty much in line with our normal operating procedures from a balance sheet perspective. With revenue growth expected in Q2 and throughout 2025 as a whole, which should drive improved operating leverage, given our largely fixed production cost base and supported by the cost reductions we have implemented, we expect to see a significant improvement in cash utilization in 2025, with our ultimate goal to surpass the $5.5 million-$6 million quarterly revenue break-even amount. With that, let me turn it back to Fei.

Fei Chen (President, Director, and CEO)

Thank you, David. To close things out before I turn it over to the questions, let me just recap a few key points. First, we are gaining traction within key end markets, particularly oil and gas.

The record commercial order we received in the U.S., coupled with an ongoing pilot program with one of the world's leading integrated energy companies, highlights just that. Energy operations often face significant challenges in managing water quality due to the highly variable nature of water sources, harsh harsh environmental conditions, and the remote locations of mining sites. These factors demand solutions that are both robust and flexible. Our PureFlow mobile units are purpose-built to address these challenges. They are fully containerized and completely automated, requiring minimal daily manpower, as they are monitored and controlled remotely. Their mobility and compact design make them ideal for deployment in remote areas where their weatherized construction ensures reliable operation across a wide range of climates, from the frozen temperatures of Alaska to the scorching heat of Texas.

Beyond oil and gas, our silicon carbide membrane technology provides unmatched durability and performance, making it an excellent choice for industry applications that demand reliability and efficiency. With pilots and recent orders in a wide variety of applications, including lithium brine, MEG recovery, metal processing, marine scrubbers, and microplastics, we are gaining traction. Financially, Q1 showed nice progress, and Q2 is expected to show further growth. With improved manufacturing utilization that should drive improved gross margins and the full effect of our recent cost-cutting initiatives implemented, we are expected to further improve our profitability metrics. As I emphasized this last quarter, we remain fully aware of the importance of preserving our cash balance. We drive the business with a strong focus on sustainable cash flow generation and long-term value creation. We understand the expectations of our investors and are highly committed to delivering on this objective.

Again, thank everyone for your support of LiqTech. With that, operator, we would be happy to take any questions.

Operator (participant)

Thank you. We will now begin the Q&A session. To ask a question, you may press Star, then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Lucas Ward from Ascendion Capital Markets. Please go ahead.

Hi, this is Rufei from Lucas Ward of Ascendion Capital Markets. Can you talk about your order pipeline? Is it improved, deteriorated, or it stayed the same since your last call on March 28?

Fei Chen (President, Director, and CEO)

Hi, Lucas. It's nice to talk with you again. And as you can as you can hear, you can hear our guidance for quarter two.

We continue to grow. So so have continued hypergrowth. So definitely, our order pipeline is improving continuously. David, do you want to say anything there more?

David Kowalczyk (CFO and COO)

Only to add that I think it's broad-based. We see improvement both in marine. We see it in pool and, you can say, water energy. We are building momentum. That's, yeah, just what I want to add.

Great. And can you talk about which segments? You said it's broad-based. So can we how do you see sales trending sequentially in Q3 and Q4 of this year?

Fei Chen (President, Director, and CEO)

I mean, as we mentioned, in Q2, we'll be kind of spreading out. Basically, all the segments is going to are going to contribute to the growth. And this is the picture we are going to see in Q3 and Q4. And it will be nice on top of that, as one or two big projects also come in.

And and basically, we see kind of growth across all the segments. Plus, we have some big projects coming.

Great. Thank you.

Thank you.

Operator (participant)

Again, if you have a question, please press Star, then 1one

Robert Blum (Managing Partner)

Jason, this is Robert Blum here. While we wait to see if there are additional questions through the live dial-in, we have some questions here through the webcast. Again, I want to remind everyone on the webcast player, if you'd like to ask a question, you can type your question into the ask a question feature there on the webcast player. Fei, David, first question here. You've always had some competition in silicon carbide technology, but at least in the past, it was from a few Japanese companies whose target markets were very narrowly defined. Is that still the case? In your target markets, do you find more competition from others also using silicon carbide?

If not, why not? Is the market too small, or are they behind LiqTech technologically? So I know I I probably had a few questions in there, but maybe talk about the market in general for silicon carbide technology and the and the competition you see out there.

Fei Chen (President, Director, and CEO)

That is a long question, Robert. Answer it very shortly. Definitely, there are competitions in the market. So we are not the only one in the market. And we don't actually see Japanese very active in the market. But we do see there are some competitors coming from France, Germany, and China. You know so we have different competitors in different segments. So we are not alone. And if I take the oil and the gas segment as an example, our competitors have been there before us, but they failed. So their membrane could not live up to what they promised for.

So we actually come in and was able to show our membrane have a much better, stable, and superior performance compared to competition. So so that was the case we have experienced. And for the swimming pool area, there is also competition going on, but we are at least at the same level as our competitors. And in the marine scrubber areas, ours is also better. So so we do experience the competition in all different application areas, but we are actually able to show we are superior in those areas which we are really aimed at to achieve.

Robert Blum (Managing Partner)

Okay. Great. Again, to ask a question, either in the ask a question feature or online, or if you are dialed, then you can press Star, then one. A couple more questions here for you, Fei and David. Will all the cost savings initiatives be in full effect in the second quarter?

And what is the run rate for operating expense expected to be?

David Kowalczyk (CFO and COO)

Yeah, they will be. You can say running operating expenses is, of course, always a balance between things being added and things being taken out. But we showed $2.1 million in in Q1 and then expect to be a little lower, but it's not significantly lower than that level in, yeah, we expect for the coming quarters.

Robert Blum (Managing Partner)

Okay. Great. Our next question here is, how much more performance data is needed for the lithium brine pilot? And the same goes for the oil and gas unit that is under a pilot as well.

Fei Chen (President, Director, and CEO)

Yeah. I mean, these two cases are different, right?

Because the lithium brine production, we had a pre-treatment there, and the customers were very impressed because they have tried many different pre-treatment technologies, and we are the only one able to actually deliver the water qualities as they expected. So so right now, the reason we extended the pilot is to gather more data in order to be able to go into the next phase for the commercial project, use the data for the design and the feasibility. So so we we are moving ahead and very positive there. And for the for the oil and gas areas, and we are close to the finalizing of the pilot with these world-leading energy integrated companies. We also have a very positive expectation and that will lead to next phase discussion. So so they they both actually are very satisfied with our performance, and we believe very soon we will gather the data which is needed for the next phase.

Robert Blum (Managing Partner)

Okay. Fantastic. Final reminder here to everyone, if you're dialed in through the traditional teleconference line, star, then one, to ask a question. If you're dialed if you're listening through the webcast portal, you can type your question into the ask a question feature here. Maybe one last question here at the moment, Fei and David. For the framework aftermarket agreement that you have here in China, is this servicing only your own systems or competitor systems as well?

Fei Chen (President, Director, and CEO)

I mean, our focus now is to get the after-sales service agreement with our you know the collaboration partners for all the 170 systems which we supplied before. So this is our first step. And then we see if we want to go further, because if you want to take a competitor system, it's more complicated. You need to understand more about their design and so on.

Our ambition definitely is we should focus on what we have delivered because there is a lot of potential to get profitable revenue. This is what we focus on right now.

Robert Blum (Managing Partner)

All right. Fantastic. Fei, David, I am showing no further questions, either dialed in or through the webcast portal. So at this point, I will turn it back over to you for closing remarks.

Fei Chen (President, Director, and CEO)

Yes. Thank you, Robert. I just want to say thank you all very much for being with us today. We look forward to communicating with you soon again. Thank you.

Operator (participant)

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