LiqTech International's (LIQT) CEO Sune Mathiesen on Q2 2014 Results - Earnings Call Transcript

Aug.12.14 | About: LiqTech International, (LIQT)

LiqTech International Inc. (NYSEMKT:LIQT)

Q2 2014 Earnings Conference Call

August 12, 2014 11:00 AM ET

Executives

Don Weinberger – IR

Aldo Petersen – Chairman

Sune Mathiesen – CEO

Analysts

Gary Zwetchkenbaum – Plum Tree Consulting

Walter Schenker – MAZ Partners

Joe Gomes – William Smith & Company

Roger Liddell – Clear Harbor Asset Management

Fred Milligan – Wunderlich Securities

Dennis Lavalle – Lantern Investments

Bill Smith – William Smith & Company

Presentation

Operator

Greetings, and welcome to the LiqTech International Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief and question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Don Weinberger, Managing Member of Wolfe Axelrod Weinberger. Thank you, sir. You may begin.

Don Weinberger

Thank you, Christine. Mr. Aldo Petersen, Chairman; and Sune Mathiesen, CEO will begin their formal remarks shortly.

Before I turn the call over to them, let me remind our listeners that following the conference call, there will be an open Q&A session. You should also note that a replay of the conference will be available starting at 3:00 PM Eastern Time today ending on August 26, 2014. To access the replay, please dial (877) 660-6853(877) 660-6853 and enter the conference ID number 13588822. The access number for the replay for international callers is (201) 612-7415(201) 612-7415 with the conference ID number 13588822.

If you do not have the access to the release, please contact my office at (212) 370-4500(212) 370-4500 and we will be pleased to relate the details of the replay either by voice, email or fax to you immediately. In order to all listeners the opportunity to ask a question, please limit your question participation initially to one question and one follow-up. After all the questionnaires have had the opportunity to ask their question, you are welcome to ask further questions. Please bear with me for a minute as I read the forward-looking statements.

Forward-looking statements. The press release contains forward-looking statements. Although the forward-looking statements in this reflect a 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 than those discussed in these forward-looking statements.

We therefore urge to careful review and consider the various disclosures made by us in the reports filed with the Securities and Exchange Commission, including the Risk Factors that attempt to advice interested parties of the risks that may affect our business, financial condition and sales of operations and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.

We therefore urge not to place undue reliance on these forward-looking statements, which speaks only as of the date of this release and conference call. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this release and call.

Having discussed with that, it is my pleasure to introduce, Aldo Petersen, Chairman of LiqTech International. Aldo, please proceed.

Aldo Petersen

Thank you very much, Don. And good morning, and good afternoon, ladies and gentlemen, to this conference call, presenting and discussing LiqTech second quarter results.

The quarter have seen significant growth in our revenue and gross margin, and we believe that we start to see the validation of our silicon carbide technology. Our gross margin improved from 10% to 21% due to improvement in production and higher revenue. Revenue was up 42% compared to same quarter last year.

Our membrane sales continue to grow and the fact that this quarter sales presents revenue from the range of small and medium-sized customers is a sign that our focus on a wider distribution of our membranes starts to have an impact.

As stated in our release, the larger orders and the validation from large customers in the oil and gas industry, in fracking, in big water treatments, in coal-firing plants has taken much longer than we anticipated.

Second quarter and the start of the third quarter have seen continued development in testing and system integration, within our relationships, in fracking, in water treatment in Saudi Arabia, water treatment in South America and brackish water treatment in coal-firing plants.

In early July, we saw the first order for coal-firing plants in Germany and the interest from other countries are significant in this business area.

Growth in DPF has been 33% in this quarter, and I am personally very happy that we finally start to see improvement in this business area, since it has been a huge disappointment for LiqTech for the last two years.

New business in the U.K., China, and finally orders for carp in California starts to impact our revenue line. A renewed focus on environmental issues seems to generate new business, not only in the truck and bus industry, but also in new business areas like luxury boats and industrial applications.

The often asked question is, can LiqTech return to the business level of 2007 or 2011, where we did $17 million against $7 million in 2011. We believe that we have now flattened our revenue and will start to see improvement from existing market, but the potential in luxury boats and industrial applications is significant, and new markets, especially the Chinese market can drive revenue. This summer has impacted the potential of LiqTech very significantly.

The acquisition of Provital, that brings a much needed expertise to our business offering, and the increase of our capital. To get companies to commit to a new technology of silicon carbide membrane has proven more difficult than we expected. In a market where system integrators have been used to very establish technologies like polymer and ceramic membranes are have been challenged with the fact of creating solutions to new and difficult water treatment challenges like fracking has proven difficult.

The validation of silicon carbide membranes and especially the fact that it has a much longer lifetime than other technologies is time consuming. We are in our fourth year of that process and we instill companies testing our products to make sure, it delivers what we promised.

Our former customer and now fully-owned subsidiary, Provital, spent three years in designing solutions to the large swimming pool market and have had significant growth in 2012 and 2013. That growth that the management of Provital and our new CEO, Sune Mathiesen is convinced will continue. So much to the fact, that he has linked the majority of the payment for Provital to the fact of dramatic growth in 2014 and 2015 and beyond.

I am very proud to see that the integration of the two companies is well underway. And I will turn over the conference to our new CEO, Sune Mathiesen, to discuss the expectations of the new LiqTech. Sune, please?

Sune Mathiesen

Thank you very much, Aldo, and good morning, ladies and gentlemen. First of all, I will say that I am very, very proud and delighted to be part of the development of the new LiqTech. In the short-time since I joined LiqTech and the acquisition of Provital, I spent my time meeting the LiqTech staff and analyzing the business structure.

I am very pleased to see that our middle order is dedicated and highly skilled people, and I am convinced that we have the right basis to move forward and create a successful and profitable business.

We already found a number of synergy effects between the companies and a close work between the company’s sales staff and R&D departments, already resulted in our recently announced order in the salmon treatment, where in five weeks the combined companies managed to come up with the solution that resulted in a natural order.

Under normal circumstances, the system integrator would has had lot of number of issues to resolve, but giving the expertise and knowledge from Provital, we could solve this immediately.

We will now start the work to convert LiqTech into a more sales-oriented company. We will ramp-up the sales force in both, Provital and LiqTech. We will become a more value partner to our customers by focusing into specific application areas and become specialists, not only in membrane technology, but also in our customers’ application. In other words, we will focus intra application areas where we already proved our technology.

We will also become a more valuable partner to our customers by being able to assist them in creating systems around our membranes, using the knowledge that we acquired from Provital.

And finally, we will add to the LiqTech offering by offering the Provital casings, the software and other products. And this will of course generate more revenue for LiqTech, and make it easier for our customers to applying online function to our system.

We already have a very, very strong product and a very high technical level. Now we will be more focused on sales, and more importantly, we will become more valuable partner to our customers, due to our focus into specific application areas.

Having said this, I’d like to turn back to Aldo.

Aldo Petersen

Thank you very much, Sune. And again, what we in LiqTech, has been very, very impressed about is exactly as Sune was mentioning. The very quick development from initial presentation of new technology to a very, very interesting business area, being the artificial growth of fish around the world, normally what we have experienced is that if we had presented a silicon carbide offering into this market to a system integrator, this system integrator would have had to spend a long time figuring out to build a new system, figuring out how to implement the technology into an efficient system, and we really believe that with the combination of the technology that has been development LiqTech and the knowledge of using software, using the right set-up of pumps and valves and casing, that we have a much stronger business offering to small and medium-sized businesses.

We also believe that the combined offering will help some of the very large companies that we are working with in gathering expertise and knowledge on how to build systems based on silicon carbide. And this will strongly improve our business offering in the market.

If we look at the combined numbers, and we have acquired Provital with an acquisition date of July 29, so officially we will do the accounting integrating Provital from July 29, but if we look at the quarter that Provital has done in the second quarter, they have established a little more than $1.7 million in revenue. They have established an EBITDA of around $600,000 and the net income of about $450,000.

And if we simply add the numbers of Provital and LiqTech for the second quarter, we would be very close to being EBITDA positive. And we believe that with the addition and the expectations that the management is bringing in from Provital and continued growth, not only from small and medium-sized businesses, but also from our larger customers that we will start to see improvements in our revenue, in our net income. And we are very comfortable with the development of the combined companies.

We also spent the summer of increasing the working capital to LiqTech. And we know that a number of investors have been critical about the dilution and the price of the offering. And yes, we would have liked to have a higher stock price, but the quality of investors and the capital that is now available to be used in being able to build more systems for customers into a very lucrative established market within large pools in being able to build systems into a specific niche applications, like we have now seen in the salmon fish orders that we have received, we believe that the offset in a lower stock price is to be justified in the future, because the working capital that will be used in being able to build more systems in a business model, where the Provital business typically builds systems that takes three to six months to deliver before they end up receiving final payment of their systems.

And with customers, very large municipal water deliveries into large cities around the world into very large operators in the public pool market, we believe that the significant growth that will come from having ready capital to build systems on established orders, will improve the business model quite significantly.

We would of course have liked the stock price to have been higher. We saw the stock trade down during the offering, but the quality of investors that we have had investing in LiqTech, together with the potential of the combined companies, makes this an offset that the Board of LiqTech has been willing to take.

We would like to take this opportunity to thank Craig-Hallum, who did a great job for us. Who got us in front of a large number of very good investors, and we are proud that so many of the investors chose to invest in LiqTech, and we will do our at most as management of LiqTech to make LiqTech being able to grow significantly and become a very profitable company.

So with these remarks, I would like to turn over the conference to questions.

Question-and-Answer Session

Operator

Thank you. We would now be conducting a question-and-answer session. Due to time constrains we ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may re-queue and those questions will be addressed, time permitting. (Operator Instructions) One moment please while we poll for questions. Thank you. Our first question comes from the line of Gary Zwetchkenbaum with Plum Tree Consulting. Please proceed with your question.

Gary Zwetchkenbaum – Plum Tree Consulting

Good morning, Aldo and Sune. Congratulations on your revenue numbers for the second quarter.

Aldo Petersen

Thank you.

Gary Zwetchkenbaum – Plum Tree Consulting

I have a question regarding – initially regarding the acquisition of Provital. If both of you could detail the points at which the stock has received – I know that in the original release you talked about $12 million for 2014, and then $22 million for 2015. If you could go into detail and explain how that’s achieved, and it’s not an escrow, and then I want to hear about the synergies similar with the companies and the areas that hopefully a municipal award that you guys will go into?

Aldo Petersen

Thank you, Gary. Yes, the nature of the agreement struck on acquiring Provital has allowed for a relief of one-third of the shares that has been provided to the majority owner, Sune Mathiesen, upon completion on the acquisition. And those shares will have a six month lock-up.

The other one-third of the shares is now in escrow, and will be released upon reaching the revenue numbers described in our filing. So it is revenue of $12 million for 2014, and an EBITDA of 10% or it is $10 million revenue with a 20% EBITDA.

For 2015, the company needs to reach approximately $20 million in revenue with a 10% EBITDA, or a lower revenue with a higher EBITDA. So the company will need to do about $3 million in EBITDA for 2015 to have the second tranche of the shares in escrow released.

This is of course a very high growth rate for a company, but we are very happy to see that already after six months, the revenue is higher than it was for all of 2013. And we can see that there is a significant backlog from Provital for the remaining part of the year. It will still take some hard work to reach these numbers, but we are very fortunate that the owners of Provital is comfortable in reaching these numbers.

And that structure is something that was very important, very critical for the valuation of Provital. We think that from a financial point of view, it brings very good value to LiqTech based on the financials, but we also are very certain that the know-how, the knowledge of Provital will not only bring more business to Provital now with a much better capital base, but it will also improve LiqTech’s ability to service customers, that are figuring how to build systems based on silicon carbide.

We can simply buy the knowledge that we have acquired from Provital, bring down the lead time on the systems that companies are building, and that will allow a much shorter lead time on our technology to have an impact in the market.

Gary Zwetchkenbaum – Plum Tree Consulting

Aldo, what happens if the stock in escrow, if these numbers are not reached? Are there penalties or what happens there?

Aldo Petersen

The short answer to that is that then the remaining shares will be cancelled.

Gary Zwetchkenbaum – Plum Tree Consulting

Thank you. And about the synergies?

Aldo Petersen

That was the second part and I would like Sune to talk about the synergies between our two companies. Remember Sune only had about two weeks in the company, but I think he has a fair view on how the two companies can benefit from working together.

Sune Mathiesen

Definitely. Yes, as Aldo said, I only had two weeks in the company, so it’s still fairly new for me. I spent my time of course analyzing and trying to figure out how to work best together. I am very pleased to say that we already had one success with this salmon job. But to give you an answer on the synergies that we will be exploring is that will bring the companies together. We’ll expand the offering of LiqTech by taking the casings, the software, the knowledge that we developed in Provital, make that available to the LiqTech customers.

We will of course also focus on selling systems into specific applications. So we will now start to focus into more specialized applications. We will not be working with 50 application areas. We will demit that to about 10 to 15 areas where we will become specialists. So become a very good department to our customers, we will be able to give them knowledge on how to build the systems. We’re able to understand that system and get some feedback and could advise how to do the inflations.

So this is how we are changing our focus in LiqTech now. Instead of focusing on the lot of applications, we will be focusing at that applications, but we already proved our technology and we become specialists. And we got higher new sales staff coming from these application areas with a specific launch.

Gary Zwetchkenbaum – Plum Tree Consulting

Is municipal water going to be included in those areas? Municipal water.

Sune Mathiesen

That’s definitely going to be included, yes.

Gary Zwetchkenbaum – Plum Tree Consulting

Thank you very much. I look forward to.

Aldo Petersen

Okay.

Operator

Our next question comes from the line of Walter Schenker with MAZ Partners. Please proceed with your questions.

Walter Schenker – MAZ Partners

Hi, whilst the call has been appropriately more oriented Provital and the cash rates. Would you sort of update us – could you update us on where the LiqTech businesses into the energy markets which are supposed to be big drivers of growth over the next 12 to 24 months?

Aldo Petersen

Yes, Walter, again if we look at the very large relationships that we have in this market FMC being the most dominant, our teams together with FMC is still finalizing the built of the first operational system, as we have said a couple of times, we had anticipated this to be done three to fou1r quarters ago. We are still comfortable in believing that we will have the first system operational before the end of this year. This is a very clear example of working in the oil and gas industry, how much longer it takes to build new application into this market.

The relationship between FMC and LiqTech is to get their technology to work together with our technology. LiqTech is a lot more resources than we are putting into the relationship it is resources that FMC has been putting into the relationship, so that that is progressing.

With other large oil companies and oil service companies, we are still in the test or the test-system phase. So to have industrial applications with some of the large operators, it takes the time. When we look at markets, we are very progressed in the South American market and have expectations that we will see the first significant business come out of that area in 2014 as well.

When we look into the water treatment, especially in the Middle East, we have already gotten orders in countries like Qatar and Dubai. We have also gone through over the last year, a very significant test of our flat sheet membranes for the Saudi Arabian market. It is a huge opportunity, because by law, the Saudi government is now prohibiting the use of polymer membrane and will change the water systems to use ceramic membrane in the future.

We have gone through the testing of our technology. We have delivered the test systems in Saudi Arabia. We have a lot of close for significant orders in that market and we believe that we will start to see the first significant amount of business in that market in 2014 as well.

When we look at the big market of China, we have delivered two of the four large national oil companies, who are developing the test systems for their operations. We have delivered a number of systems or membranes to systems in specific treatment areas like waste water and food processing in that market. So also there we have expectations.

But I think as this quarter is significantly representing is the fact that our growth in revenue is now coming from small and medium-sized businesses, and the goal of LiqTech is of course to bring that small and medium-sized business to a significant higher level and then see these very large orders be a very significant addition to our revenue stream, but time has shown and investors who have been very patient, and I know you are one of them, Walter, have seen that these larger orders takes much longer time which is why the focus on getting the system integration expertise in-house has been very important for us, and we are comfortable in seeing that the combination between Provital and LiqTech can bring the company into being able to generate higher revenue and enter into profitability without having these multimillion dollar orders from these very large operators.

So to summarize, we have worked very hard, as I noted, second quarter and the start of the third have seen the significant improvement in getting to the final system integration level. You saw early July, that one of the big business areas which is being water treatment and coal-firing plants resulted in the first order for a big coal-firing plant, we believe that there are lot more orders coming from that very large German company.

We also have seen that due to that fact, we have interest from number of coal-firing plants from other countries as well. So this is a growth area that we are very optimistic around. So I think in general, LiqTech we believe will continue to grow its membrane business. We have seen that we see growth in our DPF business now. And those two things combined with the addition of large orders from partners that we have been working with for the last two to four years, will help grow our revenues significantly.

Walter Schenker – MAZ Partners

Thank you, Aldo.

Aldo Petersen

You’re welcome.

Operator

Our next question comes from the line of Joe Gomes with William Smith & Company. Please proceed with your question.

Joe Gomes – William Smith & Company

Good morning guys. My final stand-alone quarter for LiqTech there Aldo. Just wanted to say, I’m very pleased to hear that Sune has really put his faith in the company, a combined company by taking all stock in this transaction. That really pleases me. I just wanted to make sure, Aldo, I heard you correctly on the Provital numbers for the second quarter that they did $7 million of revenues and $600,000 of EBITDA. Did I hear that correct?

Aldo Petersen

No, that you unfortunately didn’t hear correct, $1.7 million in revenue.

Joe Gomes – William Smith & Company

Okay. I missed. [indiscernible] is it $600,000 of EBITDA?

Aldo Petersen

Yes.

Joe Gomes – William Smith & Company

Okay. Looking at the number said that’s what I heard. On the DPF...

Aldo Petersen

That would have been a huge mistake, yes.

Joe Gomes – William Smith & Company

On the DPF sales, did you – in the quarter did the entire order B account, was that accounted for?

Aldo Petersen

Not the entire order, but most of the order was accounted for.

Joe Gomes – William Smith & Company

Okay. So we actually did see some growth ex that order and that’s nice. Now are you continuing to see this momentum here in the third quarter for DPF sales, and you think you’re going to see year-over-year growth in the third quarter?

Aldo Petersen

Yes, this is what we believe we have followed of course very careful the development in California in carp and we have seen several announcements from the government bodies that us believe that there is now a very strong focus in that. So that will drive the business, but I think that’s importantly because as you have heard for the last six, seven quarters, it’s all related to what is happening in the traditional business of buses and trucks.

And now, we have seen new mark that’s in new applications come up. We have seen first orders in the luxury ship market. We have seen first orders in the industrial applications for factories. And we believe that that is again is a macroeconomic valuation that with the improvement of economies around the world, that there is a strength and focus on the environmental issues and we would of course be very happy to see the growth from buses and trucks be significant. And we believe that it will over the coming quarters, but importantly as well, also the development of new mandate in luxury boats in different harbors around the world and industrial mandates, where you have to treat and eliminate silicon particles from your factory burn will increase the ability to new markets.

So I have been very focused on DPF and unfortunately have been disappointed significantly since mid-2012. Now finally, we have seen a first growth quarter on DPF and indications from the market make us believe that we can continue to see growth in that market.

Joe Gomes – William Smith & Company

Okay, great. And one last one, on R&D expenses. In the quarter they were about 1% of sales versus 4% of sales a year ago in the first half of this year, they are down significantly from what, research and development expenses were a year ago. One, is this due to the completion of Finn’s efforts, and two; what can we expect as a more normalized run rate going forward there?

Aldo Petersen

Yes, again Finn Helmer has done a great job on improving our production line, improving the technology. And as we have stated in earlier conference call, the focus has been really on that area. That has now enabled us to have a very, very good product to the market. It has enabled us to bring down the scrap of our production quite significantly, but again in that respect, LiqTech is a company who takes most of its R&D costs over the production cost.

So you could argue that in some effect, it effects our cost of goods because it is in the factories that we true testing of membranes are taking certain R&D cost that is related to that. I would say with the combination of Provital and LiqTech, I would have our investors to expect that in the future, our R&D will go up, not significantly, but will go, up due to the development of new applications into specific markets.

So we will spend money on being able to develop new applications into specific markets, and that’s going to bring that cost issue up. But as Sune has indicated, our full focus is that we now believe that we have a very strong product offering into the market. We start seeing small and medium-sized businesses adopt this technology. And our focus will be to now aim specifically the U.S. to increase our sales and marketing efforts to get more of the large swimming pool applications into the market, to get more water treatment applications into the market, and therefore the increase will be in sales and marketing in our different operations, but specifically into the U.S. markets.

Joe Gomes – William Smith & Company

Great, thank you.

Aldo Petersen

Thank you, Joe.

Sune Mathiesen

Thanks Joe.

Operator

Our next question comes from the line of Roger Liddell with Clear Harbor. Please proceed with your question.

Roger Liddell – Clear Harbor Asset Management

Hi yes, good morning or good afternoon, Aldo and Sune.

Aldo Petersen

Good morning, Roger.

Sune Mathiesen

Good morning, Roger.

Roger Liddell – Clear Harbor Asset Management

I wanted to focus on the system integration, the whole topic of system integration. To me that’s the essence of the merger, the acquisition of Provital. And if I understand correctly, LiqTech previously was hindered at least to some degree by the need for and at the same instant the presence of a system integrator. You did not have direct contact with your end-customer who was always going through a system integrator. And the priorities of the system integrator may have varied from the priorities of LiqTech, who want the desired test or speed of execution. And perhaps you are even put at risk by poor execution by a system integrator. So help us understand the potential for Provital to act as system integrator for applications beyond the public swimming pools and resorts market. How much can the new LiqTech displace present system integrators or those that you would have had to turn to as you address these new opportunities? And what are the margin implications of that displacement?

Sune Mathiesen

First of all, Roger, we will be focusing our system offering into a limited number of application areas. One of course being the swimming pool applications, where we already have an established market. We already do have an established market also within water reclamation or irrigation purposes. For example, we have an established market within drinking water applications, and we will of course continue within those applications.

On top of that, we will be selecting a number of application areas, a limited number of application areas where we will start offering systems. For other applications, we will still be working together with oil system at cheap prices [ph], but giving the knowledge that we have from Provital, we can actually help these – you said one very important thing that was poor execution of the system integrator.

Now that we have Provital and the knowledge about actually building a system and running the system, we can take this knowledge and give that to other system integrators and help them succeed, because the danger for a new product like ours, silicon carbide membranes, is always that when something goes wrong, even if it’s just poor execution by the system integrator, it comes down to the membranes, this is not good. And now we can avoid that situation.

So to answer your question, Roger, from the Provital side, yes, we will expand our focus into more application areas, but a limited number of application areas and in other applications where we will still want to system integrators.

Roger Liddell – Clear Harbor Asset Management

I think there was a margin issue, Sune?

Sune Mathiesen

Sorry, to address the margin issue, yes, we can see that Provital traditionally keeps a higher margin than LiqTech side. That means when we are selling systems, it will have a positive effect on the gross margin.

Aldo Petersen

I just wanted before that, Roger, I just wanted to elaborate. One of the things that we will very, very impressed about in the Provital business model was actually the ability to have a significant higher gross margin than the 50% that we have on our membranes. And we have come to understand that the ability to integrate advanced software to operate these systems to be able to figure out how you are using the right equipment in pumps, in casings allows you to do a combined offering to the end-market that allows you to still be very competitive on the CapEx of the system, but because of the significant reduction in OpEx, that allows you to have a higher margin on product.

And we have seen that Provital has been to commend as much as 70% margins on system offerings into the market.

Roger Liddell – Clear Harbor Asset Management

That’s very helpful. And the follow-up question on those 10 or so areas of special focus, can you help us understand what would be almost immediate market availability from a plug-and-play, or take the old membranes whatever they are from whatever provider, pull them out and slip in hours and it’s plug-and-play immediately versus cultivating the market, designing the software. Is there any way to characterize the adoption rates in the areas of particular focus.

Sune Mathiesen

Yes, basically what you – basically we’ll be picking application areas where we already had successes, application areas where LiqTech or Provital already has knowledge on how to run the systems. To build a system for a swimming pool application is not very different from building the systems for an industrial application. The different lies in how to keep them in different scheme, how to run the system. So to answer your question the application areas where we already proved our technology that could be within the power plants, that could be within drinking water, industrial waste water, water reclamation, swimming pool applications and so on.

Those application areas, is where we put our focus this year. And then from that basis, we will be expanding our focuses.

Roger Liddell – Clear Harbor Asset Management

Thank you. I will get back in the queue.

Aldo Petersen

I think it’s worth to look at what has just being applied to the market within the food – market of fish. This is a very large market around the world, where there is now what we believe is a plug-and-play system developed from Provital’s knowledge on the system using our membrane technology. This is now an area where we will focus our sales and marketing efforts around the world to get these applications into market.

Also the knowledge that we now have from working with the coal-firing plants is knowledge that we will take into different markets. When we look at the four areas of applications, that Provital has already developed, that brings us to have applications that we can provide into very specific market applications. They will bring in knowledge that will enhance our offering into the Middle East market, so the ability to use our flat sheet membrane into specific systems, that either be new systems, but more importantly now being able to provide the knowledge of how do you replace polymer membranes with a silicon carbide membrane, how do you optimize your water treatment systems in replacing one technology with another. This is where the engineers of Provital will bring very valuable market potential.

But also in the very big market that we have been focusing, and build a strong customer relation in the oil and gas sector, the ability to bring knowledge of how to do casings, what kind of software operates this optimal will bring an ability to enforce the speed where the system integrators can now finalize their test systems and bring test systems into industrial offerings.

So the combination of that knowledge that Provital brings, will not only in gain applications bring business, it will also bring business in established partners that we already have.

Roger Liddell – Clear Harbor Asset Management

Thank you.

Operator

Our next question comes from the line of Fred Milligan with Wunderlich Securities. Please proceed with your questions.

Fred Milligan – Wunderlich Securities

Thank you, and good afternoon or good morning I guess. In the Middle East, you talked about two noteworthy projects. One in the Middle East to produce water, and one Danish application for reverse osmosis. It seems to me that this is a very big potential not necessarily from these orders, but just in terms of general areas that you’re working. Could you possibly elaborate a little more on this?

Aldo Petersen

Sune, can you talk about these applications?

Sune Mathiesen

Sure. If we look into these application areas, yes, you’re correct. Its applications where we can be successful with our technology, especially the pre-RO market is a very lucrative and very big market. What we can actually do with our systems is that we can pre-treat the water, so that the polymer membranes during the RO treatment will actually last longer and perform more effectively. So this is actually one of the applications where our system goes hand-in-hand with polymer membranes.

By using a silicon carbide membrane, you actually have a longer lifetime of the RO membranes, save a lot of money, and this investment will pay for itself in a very short time. So this is one of the applications there is what we are really focused and we will be targeting a lot more in the future.

Reduced order has been a focus for long time for LiqTech. And that will continue to be one of our very big focuses and that’s especially of course and we’ve in the oil and gas industry.

Fred Milligan – Wunderlich Securities

Are the contracts in these areas being won currently that perhaps you’re missing?

Sune Mathiesen

Excuse me?

Fred Milligan – Wunderlich Securities

You said the contracts in these areas that being won by others and that you were missing?

Sune Mathiesen

I would say, we are up against all those technologies. So it’s not really that anybody is providing silicon carbide membranes for these applications, but there are several other, say technologies out there that are used for these purposes. So we are bringing in the new technology and more efficient technology to these application areas.

Fred Milligan – Wunderlich Securities

Okay, thank you.

Aldo Petersen

But I think, Fred in general, when you are asking, are you missing opportunities? Yes, our understanding and the knowledge that we have built over the last couple of years is that our ability to get new business is very much hindered by the fact that people perceive silicon carbide being a new material as a stop and go issue. When we are able to solve and show companies that we are able to effectively deliver a system that works well, then we are bringing in a significant new offering.

Our ability to validate the fact of how good membranes are in systems has been delayed by the fact that these system integrators either want a very long testing period or start testing themselves, and then seeing that they have certain problems, issues to solve, then they downgrade the focus on building new systems based on new technologies. I think it’s very important for LiqTech in the future to be able to provide a consultancy to these system integrators on how to optimize the use of silicon carbide, and show that a combination of not only a membrane, but also the products that Provital are using in their systems, can lead to more efficient systems, and can lead to a better product offering in the market, that faster can bring business into the system integrators, than they have been able to do today, taking the very long lead time that they have on integrating a new technology into new offerings.

Fred Milligan – Wunderlich Securities

Thank you.

Aldo Petersen

You’re welcome.

Operator

Our next question comes from the line of Dennis Lavalle with Lantern Investments. Please proceed with your question.

Dennis Lavalle – Lantern Investments

Good afternoon, Aldo. I have a question. What’s the revenue mix this last quarter and what’s for last year U.S. versus Denmark?

Aldo Petersen

Again you can say, I would say North America against the rest of the world, if you do that comparison, then about 25% of the revenue comes out of the U.S. And as I stated in my remarks, the real growth area is in North America, and especially for the Provital offering there are huge growth areas.

What we are doing is that we are utilizing our production facilities in Minnesota to a degree where we will over time now start to build systems for the U.S. markets. We will have the expertise in building and providing consultancy to system integrators in the North American market.

So our focus is really to grow the U.S. business, because it has not been performing according to the opportunities that are in that market. We believe that the mix of revenue should go up significantly in the U.S. markets and bring a comparison between rest of the world and the U.S. to more of a 40% to 60% level within the next 12 months. So very focused on the growth opportunities that are in the U.S. markets. We believe that the Provital offering in establishing production in the U.S. will benefit significantly from having a made in the U.S. label on their product, but mostly important to be able to service the U.S. market from a home base.

Dennis Lavalle – Lantern Investments

Okay. And sort of that means you’re going to put the infrastructure in Minneapolis to support that, engineers?

Aldo Petersen

Yes, we are upgrading with system engineers that will be able build Provital systems in the U.S. We will increase the sales staff in our U.S. operations, so we can attack primarily the market that Provital has developed in Europe. So both in system integration and in sales, we will significantly increase our U.S. operation.

Dennis Lavalle – Lantern Investments

Okay. And then I think at one time you said gross margins on the filtration side of the business should be around 60%? Does that still hold true?

Aldo Petersen

What we say is that currently it’s around 50% on our membrane technology, and we believe that as you have now seen in our gross margin on bringing revenue up and being able to produce larger volumes to bring down the stop and go on our furnaces will bring down the cost of products even more. So yes, it is the goal of the company to bring our liquid filtration margins to about 60%.

And from a cost perspective, that is achievable, if we get higher volume in production, so that we can build larger volume in our production, because remember, the largest cost that we have in producing our members is electricity costs. And when we have to start our furnaces, the cost related to that is quite significantly.

If we instead of producing batches of hundreds, can produce batches of thousands, that can significantly bring down the costs of our products.

Dennis Lavalle – Lantern Investments

Okay. And then you mentioned also you had a silicon carbide filter associated in the aquaculture environment?

Aldo Petersen

Yes, we have just released that. We have delivered a solution for salmon fish, $350,000. It’s a system that is based on the combined knowledge of silicon carbide membranes and the Provital system integration skills, and this is what we are very excited about in the company of being able from initial customer contract to have a system-ready within five weeks. That is something that we have never seen before from any system integrator.

Normally it would take years to build a new system based on silicon carbide. So in that specific business area of aquaculture, very interesting opportunity.

Dennis Lavalle – Lantern Investments

Can you develop to the country that one to?

Aldo Petersen

That will be in Denmark.

Dennis Lavalle – Lantern Investments

Denmark, okay. And you also mentioned reverse osmosis you got a quick payback. What is the life of that payback, because there is a just ton of reverse osmosis systems out there in the field?

Aldo Petersen

Yes, and again remember as Sune stated, reverse osmosis is done by polymer membranes, and they are still the membranes able to do the full reverse osmosis, where LiqTech is providing system integration is on add-on systems, systems that can bring down the costs of treating the first part of the reverse osmosis of being able to take the larger particles out of the water at a cheaper cost.

Dennis Lavalle – Lantern Investments

Right, the pre-treat.

Aldo Petersen

And specifically – yes, pre-treatment and that can bring down costs that will enable system integrators to recover their investment within two to three years.

Dennis Lavalle – Lantern Investments

Two to three years, okay. That’s reasonable. But when you have all these pilots or systems out there in the field, does the customer have any skin in the game. Do they get charged a monthly rate for those, or is this all basically out there free because of LiqTech?

Aldo Petersen

I would say the typical model is that a customer buys a number of membrane, so they can buy 2, 18, 16 membranes. Then they try to figure out how to build an actual system. We provide the access to our system engineers, so they can either choose to use our engineering skills, which is the case in our relationship with FMC. There we have a joint development agreement, so that we provide our technical expertise to their team and they help each other to build the right application. But normally, we simply sell a membrane to a company that, then figures out how to integrate it in a specific system.

And this is what we have learned to see takes makes longer time than we would have wanted it, because very often you start to see a lot of action from a customer and then it takes longer and longer to get into them having a test system build. And we have to realize that sometimes it just takes longer, sometimes they are downgrading the resources, because they are figuring out that there are certain issues that are difficult for them to solve.

And that claim is often placed on the membrane as Sune was telling. And sometimes it could be, but we tend to see that most often it’s actually the ability to get the different parts in the systems to operate effectively, that is the reason. Now we have that ability that when we sell a membrane, we can start out telling these customers that, well, our experience is that they have to optimize their systems by potentially use certain casings, use certain software technology. And this is what we believe can now significantly improve the lead time on systems.

So in general, to disallow some companies to give up on the silicon carbide membrane or to get companies to faster get to the industrial systems, instead of continuously try and figure out how to optimize a test system. And this is the ability that we are very focused on offering to our customers.

Dennis Lavalle – Lantern Investments

Thank you.

Aldo Petersen

Thank you.

Operator

Our next question comes from the line of Bill Smith with William Smith & Company. Please proceed with your question.

Bill Smith – William Smith & Company

Hi Aldo, could you comment on the structure of your sales force and Provital? How those differ and how you are going to integrate those two. And the size of each one right now, and I think you mentioned significantly increased operations in the U.S. with your sales force. What are the numbers that you’re shooting for in terms of people on your direct or indirect sales force? How does all this come together?

Aldo Petersen

I think around the world, we currently have combined in the two companies we have about 20 sales people. We do not have enough sales people in the U.S. We have three sales people in the U.S. operation. So, for that specific area, we would like to be at least 10 sales people within the end of this year. So that’s going to take significant growth.

So very focused on the fact that the sales of the Provital solutions has been done practically from one or two people, because of their restrained in capital. Simply put, Provital has been able to only produce a limited number of systems, and those limited number of systems has been bought by companies who knows about the solutions that has been offered, so there has been very limited sales.

Now with the capital available, the Provital will be increased quite significantly, but not as a stand-alone, but will integrated in our different operations in the U.S. in Europe, in Singapore, so that we will have the ability to offer systems and membranes in a combined offering in different markets.

We would like to see the increase of sales people over the next 12 months to double the amount of sales people that we have currently in the company.

Bill Smith – William Smith & Company

And so, in the past you sold directly to the customer and Provital has sold to the systems integrator, is that right?

Aldo Petersen

No. It’s the other way around, Bill. What LiqTech has been doing is we have been selling only to the system integrators and Provital has been selling to the end-customer. We now like for us to sell to a larger amount of end-customers and have LiqTech sales force continue to sell to larger system integrators, especially in markets where a large expertise is needed.

So for example, there is no desire for LiqTech to enter into the oil and gas sector and provide systems to end user. There we will continue to work with system integrators, but we now have a better offering to these system integrators. Provital will sell its specific applications, but in a broader market. There are huge opportunities around the world and the U.S. market is very underdeveloped. We believe that there are huge opportunities for the water treatment in swimming pools and in other kinds of water treatment in the U.S. so that is a strong focus for us. But Provital is selling to the end-customer and LiqTech is selling to the system integrator.

Bill Smith – William Smith & Company

Okay. And then how many systems engineers do you have now and what’s the total number?

Aldo Petersen

In LiqTech, I think we have think we have six, seven engineers. And Sune how many engineers you have, about five engineers in Provital?

Sune Mathiesen

It’s six in Provital. So in total it’s 12 engineers.

Bill Smith – William Smith & Company

Do you see a lot of gross selling or synergy then, is that one plus one equals a lot more than two type situation here?

Sune Mathiesen

The system engineers, we’ll be bringing together as one unit, not that we will break it down, and only have [indiscernible] one LiqTech, but they will be one unit and they will have one leadership and we’ll combine the efforts and look into the right applications that we are not running around, selling to the same applications in they’ve taken in Provital. So there will be a strong coordination between those groups.

Bill Smith – William Smith & Company

And then what about on the sales side. Is there one person that’s going to be the national sales person, or is it you or how does that work?

Sune Mathiesen

Myself, I come from a strong sales background and I will be leading the sales in both companies. So the sales force will still be one LiqTech sales force and one Provital sales force.

Bill Smith – William Smith & Company

And then they both report to you?

Sune Mathiesen

Yes.

Bill Smith – William Smith & Company

Okay, thank you.

Aldo Petersen

Thanks. And I know it’s 10 path and I don’t know how many questions are in line. I think we will have two or three more questions please

Operator

Our next question comes from the line of Richard Duneley [ph] with Lone Park Partners [ph]. Please proceed with your question.

Unidentified Analyst

Good morning. A question about the reverse osmosis. In the slides, you had the silicon carbide filters were supposed to be better, faster, cheaper – well not cheaper, but economically better than the polymers and yet you say what – so the question is, why can’t your filters do the whole all the steps in RO?

Sune Mathiesen

What RO takes a very fine membrane and currently we go down to about 40 nanometers with our membranes. And 40 nanometers is not enough to do reverse osmosis, but what we can do is that we can do to pre-filtration for the polymer membranes doing the RO process. Normally an RO membrane will need to be changed every six to 12 months, because they will be destroyed by the high pressure, actually [indiscernible] 1000 feet of pressure.

And when you have large particles hitting that polymer membrane, they will be destroyed in appropriate places. So using our membranes as a pre-filtration, we can protect the polymer membranes and enhance the lifetime of them and save some money.

Unidentified Analyst

Okay, thank you. And will it be possible for you to get to engineers silicon carbide to be do finer, slower phases?

Sune Mathiesen

We have continuous developed and doing that. We get better every day, but to do an RO membrane using silicon carbide, that is still years our in the future.

Unidentified Analyst

I see, okay. Thank you.

Sune Mathiesen

Thanks.

Operator

Thank you. Our final question is a follow-up question from Roger Liddell with Clear Harbor. Please proceed with your question.

Roger Liddell – Clear Harbor Asset Management

I wanted to zero in on three or four press releases or disclosures that were in the offering circular, and you made me constrained by non-disclosure agreements or you may prefer not to draw attention to something, because of the marketing or the time required for proof of rather than just the installation, so you can easily say it’s premature for that discussion. And then I’ll go to another question, but the names that popped up recently, SeaWorld buy a Disney resort. The Ritz-Carlton, I think that’s the hotel chain. And then the announcement of a zero emerging portable water system back on May 22. Is it possible for you to comment – to give some texture behind those developments?

Sune Mathiesen

Yes, I can answer on the first three. SeaWorld, Disney and Ritz-Carlton. Those are all Provital relationships. Together with SeaWorld and Disney, we are currently testing our systems. In SeaWorld, we’ve been testing the systems on the animal tools and we now move into testing on the people tools [ph].

The testings until now has been very successful, and we expect to be competing for major orders in a short time.

Also with Disney, we are testing our middle duty life, and we also describe in the offering, but it’s a bit premature made him to go into specific details about that. So Ritz-Carlton is an establishment relationship with Provital. We supplied filters for two Ritz-Carlton’s and those installations were successful and of course for the future to supply more to them.

And the last one, I don’t know if you can comment on that, Aldo?

Aldo Petersen

Can you just repeat what was the order that you were mentioning, Roger?

Roger Liddell – Clear Harbor Asset Management

Yes, It was May 22 and the time to do with the successful development of a portable water system required zero energy input, and had fill for zero replacement park requirement, and can be operated by hardly skilled people and requires only rough terms a two-meter gravitational drop to drive contaminated, water through the LiqTech membranes.

As I look the language in that May 22 press release, I was stunned at the implications of it for addressing a major one of the few most important suicidal challenges facing several billion of the world’s population. So can you give any texture?

Aldo Petersen

I actually can. I just wanted to make certain because I spent two days last week in Munich, with both, our German engineer and with Sebastian Andreassen who is the head of our flat sheet membrane. Again of course not to tell the name of the company, but they are very large water treatment company that operate not only in Germany but also in the Middle East, have come up with solutions that – and you know that I am not an engineer or technical person, but who are actually utilizing the use of the ability of a flat sheet membrane to separate water because of the efficiency in the porosity of the material, but it can actually take all the particles that are generated from surface water, from rain water. And as you were mentioning with the gravital drop of just having gravity to drive the water tube or the membrane set up and these are racks of membrane, where you typically install between 40 and 100 membranes in a rack, so that water simply falls through a structure and therefore needs no electricity.

This company is very strongly based in Egypt. They have a large sales force. They have many engineers, and it was very interesting to listening to the potential of growth in specifically the Egyptian market. I did now know that the population of Egypt has nearly grown five-fold over the last 50 years, and the expectations of what that will continue to do.

So this company has been looking at a number of different technologies. They are very committed to this. And we had a very high level meeting in Munich last week, and we are very optimistic and I am sure that we in a short while will come back with further news on that, but again I’m not allowed to mention the name of the company as of yet, but yes, you’re absolutely right. This is something that Sebastian Andreassen has been working very diligently on with our Dr. Keith Meyer in Germany, and it looks like this is going to be the first opportunity for us.

Roger Liddell – Clear Harbor Asset Management

And clarify one point made earlier in Saudi Arabia for surface water filtration or treatment. Ceramics are now required. I take it that therefore there are many ceramic substances that could be aluminum oxide or silicon carbide on a non-silicon carbide substrate. So LiqTech has not expect by the sally government, I believe LiqTech has the most attractive technology for that application, but by no means sole source. Can you clarify that point?

Aldo Petersen

Yes, and you’re right, yes we had gone through as other ceramic membrane gone through the testing period, again and maybe you can add in on the technology, Sune, but it all comes down to the hardness and the time that these membranes are lasting. And again comparison between ceramics and silicon carbide, very strongly comes out to the benefit of silicon carbide but yes, the market in Saudi Arabia is believed to be about $160 million opportunity, and unfortunately LiqTech is not going to own that market. There are going to be a number of ceramic membrane offerings into the market, which again we think is good, because one of the things that we need on a worldwide basis is that there has to be a lot more focus on what ceramic and silicon carbide can do in comparison with the polymer membrane, but I think, Sune the question is, why is silicon carbide the best of the ceramic membrane technologies that are out there?

Sune Mathiesen

Yes, that’s correct. We’re not alone with this opportunity, it’s a huge opportunity, but with our technology, with our silicon carbide membrane, we can have a higher fluctuation than any other products in the marketplace. We can build smaller systems more effective systems and since we have this higher fluctuates, we made need smaller pumps, we made few of analysts and so on.

So if you look to the systems, our membranes will actually be cheaper solution available in the marketplace, and this is why we have good opportunity to get a large portion of this huge market opportunity, but yes, we will be competing against other membrane manufacturers. We will be competing against aluminum oxide, but given the nature of the our maintenance, we will be able to compete against anybody in the market and being very instructive one or surprise ones.

Roger Liddell – Clear Harbor Asset Management

Thank you, gentlemen. I find this call to have been extremely helpful, and the texture that you’re providing is essential for the financial community to understand the potential for this now combined company.

Aldo Petersen

Thank you, Roger.

Sune Mathiesen

Thank you very much.

Aldo Petersen

And with this last question, I would like to take the opportunity to thank everyone. It’s been I hope a thorough conference call. It’s been a long one, but I hope that most of you had time to listen in. I am very happy about the many great questions, and the support and interest from our investors. So thank you very much. Have a great day in the U.S. and a great evening in Europe. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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LiqTech International (NYSEMKT:LIQT): Q2 EPS of -$0.03 Revenue of $3.97M (+41.3% Y/Y)