Steve Axelrod - Managing Member of Wolfe Axelrod Weinberger Associates Sune Mathiesen - Chief Executive Officer Aldo Petersen - Chairman.

Eric Stine - Craig-Hallum Bill Chapman - Private Investor Mathew Campbell - Laridae Capital.

Greetings, and welcome to LiqTech International First Quarter Ended March 31, 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded.

I'd now like to turn the conference over to your host Steve Axelrod, Managing Member of Wolfe Axelrod Weinberger Associates. Thank you, you may begin..

Thank you, Melissa and thank you all who are taking part in today's conference call to discuss financial results for the first quarter ended March 31, 2018 of LiqTech International as well as recent business developments. In a few minutes Aldo Petersen, will begin the formal remarks shortly.

Before I turn the call over to Aldo and Sune Mathiesen, let me remind listeners that following the conference call, there will be an open Q&A session. You should also note that a replay of this call will be available starting today at 3:00 P.M. and ending on June 5, 2018.

To access the call and the replay, please dial 877-660-6853 and enter the conference ID number, 13679717. To access the number for the replay for international callers, please dial 201-612-7415 and enter the same ID number 13679717.

In order for all the listeners to have an opportunity to ask questions, please limit your question initially to one question and one follow-up question. After all individuals have had the opportunity to ask their questions, you're welcome to ask additional questions. Now please bear with me for a minute as I read the forward-looking statements.

The press release and conference call contains forward-looking statements.

Although the forward-looking statements reflect the good faith and judgment of management, forward-looking statements are inherently subject to known and unknown risks and uncertainties that may cause actual results to be materially different from those discussed in the press release and conference call.

We therefore urge 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 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 all listeners not to place undue reliance on these forward-looking statements, which speak only as of this date and the date of the release and conference call.

We assume no obligation to update any forward-looking statements in order to reflect any events or circumstances that may arise after the date of this release and conference call. Having dispensed with that, it is now my pleasure to have Aldo Petersen begin the conference call with his remarks. Aldo, please proceed..

Thank you, Steve and good morning and good afternoon, ladies and gentlemen. Thank you for participating in this conference call. Q1 has been a quarter where the team of LiqTech has spent a lot of focus and a lot of energy in entering into three franchise agreements with our larger customers within the scrubber water industry.

We've seen Q1 being the quarter where our large customers have validated our technology and have now committed their interest in the solution that we have spent a better part of three and a half years to develop.

And it is my pleasure to leave over the conference our CEO Sune Mathiesen, who will elaborate on the development of LiqTech, so Sune, please..

Thank you very much, Aldo and first of all a warm good morning to the participants from the US and good afternoon to all participants from Europe. Thank you all for dialing into today's conference call. The results for the first quarter were below our expectations.

Some of the marine scrubber units being anticipated to deliver in the first quarter were unfortunately pushed back and are now expected to be delivered in the second and third quarters.

The marine scrubber market is still in early stages and we still expect some lumpiness in the coming quarters, but as the market matures, we'll definitely see less lumpiness and improved visibility.

In the first quarter we have experienced a significant ramp up in enquiries for our marine scrubber systems and we're obviously very motivated by this positive development. We believe that our four years of hard work has positioned us well to be one of the market leaders for water treatment systems to this industry.

We have recently entered into three significant agreements for our marine scrubber product. On March 21, we announced the framework agreement with one of the world's largest manufacturers of marine scrubbers. The agreement provides that more than 95 systems are expected to be delivered during the initial term for 2018 and 2019.

This agreement is with a very large company and it's the result of a long term relationship. We've been working with the customer for almost four years and with the general ramp up in the industry, this agreement was the next natural step in our corporation.

On April 11, we announced the framework agreement with another large manufacturer of marine scrubbers. This agreement provides that more than 35 systems are estimated to be delivered during the initial term for 2018 and 2019. This agreement is also with a very large company.

They have evaluated our technology for some time now and we're very pleased that they've chosen our technology over the alternatives. Also, on April 11, we announced a Letter of Intent with one of the world's largest manufacturers of marine scrubbers.

The Letter of Intent provides that the parties intend to enter into a definitive partnership agreement no later than July 1, 2018. This Letter of Intent is a very important step for us. It could lead to early deliveries of more than 100 smaller systems and potentially this relationship could be the largest in the history of our company.

All those still in early stages, we have noted that more and more ship owners are considering, have already taken the decision to install scrubbers. We believe that we're likely to see first orders from a number of ship owners ordered in this quarter and that the early adaptors are now ready to place multi system orders.

We're very pleased with our progress so far and we believe that we'll see further orders and agreements in the near future. The positive development in this industry and the performance and agreements has however raised the need for further working capital.

The agreements we have entered into are all with large multibillion dollar companies and our weak capitalization was becoming an issue. On April 12, we successfully completed a public offering, raising net proceeds of more than $6 million.

We were very pleased to note that there was a strong interest to participate in the offering and welcome the new as well as existing shareholders who participated.

The $6 million has strengthened our balance sheet and we have now eliminated that concern from our large customers and made sure that we're able to service the large contracts we have entered into. We know that lot of our shareholders have been following the marine scrubber industry very closely so are we.

We have all been holding our breath to see to which extent ship owners would adopt scrubbers.

With the positive developments I described earlier, the feedback we get from ship owners and scrubber manufacturers and a positive feedback from experts following the industry, we believe that we can now conclude that there will be a significant uptick of marine scrubbers.

As earlier discussed, we have invested significant resources into this industry and we've now been rewarded with afore mentioned contracts. With our proven technology and references, we're convinced that these contracts are the first of more to come.

As earlier discussed the majority of our resources over the past three years have been dedicated to the marine scrubber industry. It will remain a large focus for us in 2018 as well. We will however also dedicate some of our resources to the power plant industry.

We have been successful in establishing ourselves in the Danish power plant industry and in March, we saw the first large international order for our power plant products. The systems we sell for power plants are similar to the systems we sell for marine scrubbers.

This means that we also for this industry, have a proven technology and we have long term references. We will now use this for further international expansion. We're of course not forgetting about the other industries we've been developing over the past four years.

But our narrow focus has proven successful and we will maintain this narrow focus in 2018. We believe that we're well prepared for the ramp up of our business. We've set our network of sup-suppliers for our systems manufacturing.

We have an experienced and dedicated team of engineers and project managers and we have a proven product that we have continuously improved. Our progress today offers a small footprint, energy savings and CapEx and OpEx savings.

With the contracts we have in place for our marine scrubber product and our strengthened balance sheet, we believe that we have come to the end of the transformation process and that we will turn the company profitable in 2018. Having said this, I would now like to turn the conference over to Q&A session. Thank you..

Thank you. At this time we will be conducting question-and-answer session. [Operator Instructions] Our first question comes from the line of Eric Stine with Craig-Hallum. Please proceed with your question..

Hi, Sune. Hi, Aldo.

Just starting with the marine scrubber opportunity, you mentioned that your enquiries have picked noticeably, just curious, can you talk about anything you can share of the enquires in the order book of your partners, since you get percentage of those orders and then just maybe the confidence level you have in the targets or the targeted volumes that are included in each of the two agreements that you've finalized..

Yes, well, first of all what we hear from our customers is that they are experiencing this significant increase in enquiries as well, so that is what we are experiencing also. We do know that some of the ship owners have already placed orders with some of the customers we have in the industry, but how it works is that we're kind of last in line.

So what a ship owner will typically do is, first of all he will book the capacity in the ship yard then he will place an order for the marine scrubber and then finally for the water treatment associated with the scrubber.

But what we see right now is that the market is ramping up, orders are being placed, capacity has been booked in the ship yards, so we feel very confident that we will see this market development that we have been anticipating.

I think we believe that that is without doubt now and we are also very confident that we'll see a large proportion of the orders in the industry go through us.

In regards to our confidence level in the contracts we have entered into, well, the numbers we have disclosed are the minimum expectations in the contracts and at this point we do have a very good confidence level that these numbers would be met.

But we also know that the numbers would be back loaded, so this is the beginning and it is early stages, so it would be a continuous ramp up..

Okay, good to hear. And just - and I know a lot of the opportunity now are the way people are thinking about is, is more on the retrofit.

When you look at the kind of the indications from the new ship build front there and then these framework agreements, are they - I mean do they get you into that new build market or do you need other partnerships to get into that area?.

It's the same relationships that will get us into that market. Earlier we have indicated that we believe there will be 20% uptick in scrubbers for retrofit. That is still a good number. All we see from the industry and all the information we get from experts following the industry confirms that number, so 20% uptick for retrofit is a good number.

What we've seen until now is that the uptick in scrubbers is higher on new builds that has been until now approximately between 30% and 40% of the new builds that are fitted with a scrubber.

And the route to market is smallest to say, so it goes through the scrubber manufacturer, but we also as earlier discussed, we are also in close contact with large ship owners and making sure that they're specifying product towards shipyards and scrubber manufacturers..

Got it, okay and then last one for me. On the for the first quarter and the handful of system delays, I mean just to clarify, I mean that's more based on the timing of the specific installation rather than any issues that you had in your supply chain or at LiqTech..

Yes, it's completely for reasons beyond our control, its delays in the projects themselves, so it has nothing to do with LiqTech really..

Okay, thank you..

Thank you. [Operator Instructions] Our next question comes from the line of Bill Chapman, private investor. Please proceed with your question..

Yes, good morning guys.

Of your top eight scrubber manufacturers, do you hope to get maybe five or six of them eventually to work on an arrangement with you guys?.

Good morning, Bill. Yeah, we are working with several scrubber manufacturers. I would say there are approximately 10 larger scrubber manufacturers in the world at this time. We are working with five, six of them already and would hope to close off frame agreements with all of them eventually..

Okay, good.

Let me ask you, your capacity for filter manufacturing is about 250 units and I know that's looking ahead, but how long would it take you to expand your manufacturing capabilities?.

Yes, you're absolutely correct. We have a current capacity of manufacturing the membranes for 250 systems a year, which is far from where we're now. To ramp up that capacity takes us four to six months to get new furnaces and investment is approximately $3 million to double that capacity.

But for now we have more than sufficient capacity and is not a huge investment to even double that..

Okay, good and what are the curious occurring with the high sulfur oil is - it's just supply demand, I mean the spread we have now around 46% to the low sulfur fuel, it just seems highly probable this is going to widen dramatically with the low sulfur demand dropping and then the prices dropping and I'm surprised the industry is reticent to adopt something you could have a tremendous cost advantage over competitors and is there still a little bit of hope that the IMO is going to extend the Jan 1of '20 deadline?.

You never Bill, everything can happen. Up until this point yeah, IMO seems to be very, very firm on the 2020 date. They have recently implemented a carriage ban, which means that you will be fined if you carry heavy fuel and have no scrubber system installed.

So to me that proves that they are serious about this and they plan to enforce this and that they are firm on the date, but you never know. But all the indications we have today is that the 2020 date is firm..

Okay, that's what I read too, but I just wondered if there's some skater bird going on with the shippers still. It looks like they have come to the point of accepting it's going to happen and that's why you're seeing the increase in activity. And the European members are not going to get in and that's what's helping I think keeping this firm.

Is that correct, is that one of the big factors here, the European members do not want to get into this?.

Yes, definitely the European members seem unlikely to get into this. I would say, even China, the US have been supporting this and there is no change in that. So we have a high confidence level that the 2020 is a firm date and that it will happen.

And it seems like ship owners are coming to the same conclusion with significant increase in enquiries, so I think the general assumption in the market is this is happening and the 2020 date is firm..

Sune, I think maybe you could mention what is going on in Denmark with our large shipping company which has been reluctant for a long time, but where there are now changes in attitude..

Yeah, Aldo, you're exactly correct. We have this large Danish container ship company, Misc and they were very, very firm two, three years ago that message was we're never going to install a scrubber. The message now is we're starting to look into it.

So I think a lot of ship owners are starting to realize this is happening and if they want to stay competitive, there is no way around installing the scrubber because the current price cap - with the current price cap between the low sulfur fuel and the heavy fuel that they use today, you have a return on investment of approximately two years.

That is a very low return on investment, that cap could even go up because as we see the demand for low sulfur fuel increase and with the heavy fuel being a byproduct from that manufacturing, we think that that price cap is likely to go up.

But even with the price cap you have today, it is a very, very healthy investment to install a scrubber system..

Okay, good.

One last question on - I've been modeling in, once you get to breakeven around 17 million, I've been modeling in incremental revenue, additional revenue will - about 40% will show at the bottom line and are there any extraordinary increases in your SG&A and R&D cost at some level in the future as you need to invest money into, so my models have to adjust a bit?.

Not for this industry. No, we've been investing a significant amount of time, money and energy into developing a standardized system for this application. So as far as the R&D, that has already been taken, so what we sell today is a fully standardized system.

Of course we will continue to improve that system, but the majority of the costs have already been taken..

Okay, thank you very much..

Thanks Bill..

Thank you. [Operator Instructions] Thank you. Our next question comes from the line of Mathew Campbell with Laridae Capital. Please proceed with your question..

Hi, good morning.

How are you Sune?.

Good morning, Matt.

Doing well, how are you?.

Good, so it sounds to me that one of the biggest gating factor is having the ships being able to basically book, schedule a place where they can partnership so they can have space in the yard to work on implementing the scrubbers.

Is that the case and are you now seeing that starting to take place to give you a little bit more of confidence and visibility?.

Yes, we're already starting to see now that the shipyard capacity is being booked and this is kind of the first step that ship owners are taking. The next step for them is to purchase the scrubber itself and the third step would be to purchase the water treatment associated with that scrubber.

But we are very happy to see that ship yard capacity is being booked at the moment and that is s limiting factor, which is why when we talk about scrubber adoption, we talk about 2025 because there will be a continuous ramp up from now on and until 2025, 2030 even because of this limiting factor.

So there is a market now and there will be a market for retrofit of moving scrubbers for many, many years ahead of us and that market will be growing on a yearly basis from now on..

Got it and you guys mentioned that the power plant business, I mean should we think about that as something that's going to add to revenue going forward as well with the multi tool?.

Absolutely..

Got it, okay. Good, good, well, it sounds like -.

Absolutely, it's still early stages for us Matt, in the power plant business, but as I mentioned, we are selling exactly the same system for power plant application, so we have a very well proven product. We have proved that the technology works.

We have already been successful in establishing also in the Danish market and now we're taking that internationally. So yes, we should expect to see growing revenue from the power plant, still early stages, but definitely something for the future..

And one last question, in China you've had a business with the diesel particulate filter business, I was wondering what's going on in that market for you?.

Still ongoing, we have very stable revenue of our DPF products. In the recent years we have seen a development in the Chinese market. They are taking this seriously and that market opportunity is growing. We have tried different routes to the Chinese market and we have recently realized that we have to rely on some large partnership.

So we have a couple of long term relationships where we have been testing our DPF product and approving our DPF product together with our customers and we expect to see revenue come out of that this year and in the years to come..

Great, well, it sounds like - I mean you have so much charm, so much opportunity just in the next couple of years.

Just one last question, are you having to expand your sales force or these partnerships would be key players allowing to see some real synergies there?.

Well, the reason why we're setting up these partnership agreements both on our DPF product but also in the marine scrubber business is that these customers are actually our sales force in the market.

We will be adding project managers to handle the projects and we will of course also add some sales people, but the majority of the sales work is actually being handled by our customers and this is why it's so important for us to set up these partnership agreements..

Great, well, thanks for all the answers and good luck..

Thanks a lot Matt..

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any final comments..

Thank you. Well, I would like to take the opportunity to thank you all for dialing into today's conference call. We do really appreciate the continued support from both our new and long term shareholders and we will continue our hard work to establish our technology in the market and bring value back to you shareholders.

Thank you so much for dialing in and thank you the support..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..