Good day, and welcome to LiqTech International Reports its Fourth Quarter and Fiscal Year 2020 Financial Results. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

Thank you very much, Tom, and good morning, everyone. Thank you for joining us today to discuss LiqTech International's fourth quarter and fiscal year 2020 financial results. As Tom mentioned, I'm Robert Blum of Lytham Partners, and I'll be the moderator for today's call. Joining us on the call from the Company is Sune Mathiesen, the Company's Chief Executive Officer. Before I turn our call over to Sune, 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 shortly following the conclusion of the live call and that a transcript of the call will be available on the Investor Relations section of the Company's website, shortly. Before we begin with prepared remarks, we submit for the record 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 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 our reports filed with the Securities and Exchange Commission, including risk factors that attempt to advise interested parties of the risks that may affect our business, financial condition, sales of 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. Company therefore urges 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. The Company assumes no obligation to update any forward-looking statements in order to reflect any events or circumstances that may arise after the date of the release and conference call. That said, let me turn the call over to Sune Mathiesen, CEO, LiqTech International. Sune, please proceed.

Thank you very much, Robert, and good morning to all of you, and thank you for joining us today. I've been looking forward to speaking with you today. We made a couple of exciting announcements this morning, and I've been looking forward to providing some more details on those. The three primary drivers of growth we discussed during our Investor Day in January 2021: A rebound in the marine scrubber market; the launch of our water treatment solutions from our joint venture into the oil and gas market; and the black carbon reduction market, particularly within the Chinese marine industry, are all increasingly gaining traction and providing enhanced optimism that fiscal 2021 will indeed see growth and a return to profitability for LiqTech. This optimism has led us to make the decision to move forward with plans to build a new manufacturing facility in China, which we announced this morning. The manufacturing facility will service the estimated $26 billion black carbon reduction market for ocean-going and inland vessels and also function as a service center for our marine scrubber products. Tightening legislation in the marine industry has created a new opportunity for our diesel particulate filters to reduce black carbon emissions from shipping. As you may recall, for 20 years, LiqTech has been a leader in the development and production of DPF to remove particulate matter from the exhaust gas of internal combustion engines. We have now adapted this 20-year history in DPF and have developed the product specifically for black carbon reduction within the marine sector and have moved to commercialization with a very large potential pipeline. As a background, China has taken a lead in reducing black carbon emissions from inland and ocean-going vessels investments. The new mandates in China have created a $600 million opportunity for ocean-going…

We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Eric Stine with Craig-Hallum.

Just curious, if you could start with the facility in China. I mean, how important is it to signal to the market that you are bringing that on line in terms of securing orders or commitments as that market develops? And then, I'm just curious -- obviously, high level of confidence there. I mean, is there a customer or customers that give you the visibility -- maybe it's not an official contract or anything, but give you the visibility that that will be spoken for, once it comes on line?

Well, it's obviously a huge decision to make plans to build a facility in China. That is a big investment, and it's a huge decision to even do that. We have carefully evaluated the market. We have spoken with our customers and partners in the market. And yes, the answer is yes. We see orders in the market now. And yes, it is essential that we would have local manufacturing, not to secure the first orders because we can deliver those from our Danish factory. But longer term, it will be instrumental for us to be -- have local manufacturing. It is a demand from the government-owned companies that we'll be dealing with. So there's no way around it. Having said that, it also makes sense for other reasons, the manufacturing in China is low cost. It will make us even more competitive, and it will increase our margins. So, it's a combination of all these considerations that have now led us to make the decision to establish this manufacturing facility.

Got it. And then, in terms of the cost of the facility, I mean, is it pretty safe to say that the convert that that is earmarked for it? I mean, is it kind of a one-to-one investment there, or is that something that would be more supportive of some project financing and that potentially it's a bigger CapEx number?

Yes. So, the total investment is a big investment. We have already secured local investors, as I mentioned in my prepared remarks. We are negotiating financing with, amongst others, the Danish government. So, there are a number of investors already in place, investors that we are still discussing with and financing opportunities that we are now in the process of sorting out. Yes, it's a big investment, but we did a lot of work already, and it's investment that we feel that we can handle.

Okay. But clearly bigger than -- it sounds like what you announced today in terms of the convert.

Yes, it's bigger than the convert. That is right, not necessarily our part of it though. But the total investment is bigger than the convert.

Understood, okay. And then, last one for me. You just mentioned that this black carbon opportunity, you expect the world -- potentially worldwide or regulations worldwide. Is that something that you think you would be able to supply from this facility that you're embarking on, or would that be something that would require additional facilities around the world as it develops?

No, the plan is to supply from this facility, or in other words, the long-term plan is to have this DPF facility in China, where we have the low-cost manufacturing, and then, kind of turn our Danish facility more into a dedicated membranes facility. That will provide us with a number of, let's say, advantages in terms of the manufacturing. You can have specialized equipment as the products are not the same and will be good for quality optimizations and cost optimizations. So, the plan is to supply the global black carbon reduction market out of the China facility eventually. And we are seeing a lot of developments on the black carbon reduction market. We have seen several European countries now implement regulations on inland vessels. And we think we'll see more and more new mandates throughout the world and eventually a global mandate from the IMO. A recent development is that the IMO implemented a black carbon adoption mandate in the Arctic region, and we think that will spread out globally.

The next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

On the China facility expansion, what will that facility manufacture? Will it be product assembly, or will it actually be membrane production as well? And maybe could you give us a sense of what the capital is going to go for? Is it furnaces? Is it buildings? What's the sort of facility operation going to be?

Yes. There's basically three parts of our marine products. One is the DPF itself, the diesel particulate filter itself. That will be manufactured in China. Then there is a catalytic coating, which will be manufactured in Denmark. And then, there is the canning of the filter itself, which is basically bending and welding metal, which will be done in China as well. We have no plans whatsoever to manufacture membranes in China. We are very protective of our IP, and that will continue to be work that we do in Denmark.

Okay, great. And then, on the black carbon market, what's sort of a typical selling price per ship that you can get?

It depends obviously on the size of the ship and type of the ship. If you look at the inland vessels, which is the big part of it, it's around 130,000 to 140,000 ASP per vessel. And the ocean-going vessels are somewhat more.

Okay, great. And then, just switching back to the scrubber market, how do you see that playing out this year? Have you seen orders ramp up at this point, or are you still a little bit uncertain, so over time [Technical Difficulty] but maybe let me understand the ramp rate of the scrubber market at this time.

So, following the increase in the price spread between low sulfur and bunker fuel, we have seen more interest in scrubbers. We see more and more inquiries out there. We see orders in the market. And obviously, all of this leads to eventually to increased order activity. But admittedly, the order activity still remains at a lower than pre-pandemic level. But given the inquiries we see in the market, the activity we see in the market, it leads us to believe that we see a more normalized situation in the second half of 2021.

The next question comes from Cameron Lochridge with Stephens Incorporated.

I was hoping we could start just circling back to oil and gas, it sounds like there's been -- you're seeing a little bit maybe of a delay in some of the contracts or orders through that JV that you have in the Middle East. Just going forward, how should we think about the timing of those orders for oil and gas? And does that mean that we might see some revenue that was maybe expected in '21 get pushed to '22? And then, secondarily, if you could just maybe size for us the opportunity of the potential pipeline in oil and gas, that would be helpful as well.

So first of all, yes that there has been a delay in the expected orders from oil and gas. And the delay is related to COVID and the travel restrictions and the way people have been working from home and so forth. There is no change in our revenue expectations for 2021 though. The orders that we thought we were going to deliver this year, it still looks like we can do that. And the orders that we thought we would book still looks like we're going to book. So, in other words, we always knew that we're going to book some significant orders in 2021, which we still think we will. We will see some revenue, but most of the revenue was always planned to be in 2022 and onwards. So, no changes there.

Okay. Got it. Thank you. And then, just in terms of the size of the potential pipeline there, I think, I heard you say something about a few hundred million dollars in your prepared remarks. But, if you can just maybe clarify that, that would be really helpful.

Yes. So, we're currently in the final stages, negotiating more than a handful of projects. And the total amounts of those are several hundred million dollars. And how that breaks down into the individual years, it's a little bit difficult to say at this stage. In other words, it depends on when we actually book them this year. But it's, for us, very, very big orders, some of them multiyear projects, and I would say, transformative for the Company.

Got it. And then, just if I could squeeze one more in, in terms of 1Q, could you just maybe help us frame expectations for what you expect revenue to be, just qualitatively maybe flat up or down compared to 4Q? Anything you could offer there would be helpful.

Yes. We think that it looks pretty flat compared to the fourth quarter.

The next question comes from Liam Burke with B. Riley. Please go ahead.

Sune, can I just -- there are a couple of things that you discussed on the call. The scrubber market interest is ramping. You're looking at a second half ramp. You expect the orders in oil and gas to track pretty much as you’ve laid out in the -- on your Investor Day. Now, if I'm looking at actual revenue contribution, do you expect oil and gas to exceed the scrubber-related sales in 2021?

Yes, we do.

Okay, great. And there was a large scrubber manufacturer announced that they are developing carbon filtration to a modified scrubber system. Have you been in any discussions with them about using silicon carbon?

Yes. We know that a lot of companies are right now focused on black carbon reduction, as we are. And as we discussed in the past, there are several ways you can achieve the new limits. It can be done with diesel particular filters, it can be done with EGR systems and many other technologies. It's a huge potential, $26 billion alone in China. And we know that all of these technologies are probably going to have a place in the market. We are focused on developing our technology together with our partners in China, which we have been working for several years. We think the solution that we have will be very competitive compared to other available technologies,, and that we can demonstrate a lot of experience compared to other players in the market as well. But to answer your question, Liam, we are focused on developing our technology together with our Chinese partners that we have been working with for scrubbers for the past three years.

[Operator Instructions] The next question comes from Dennis LaValle with Lantern. Please go ahead.

I have a question concerning the Chinese facility. Are you dealing with the same people that you were dealing with, like four years ago there?

No, definitely not, Dennis. We learned a lot in China. And I think we got burned a few times in China. With the scrubber market, we kind of had a new start in China. We got new relationships with very big shipyards with big ship-owners in China. And we have now successfully had the same partners in China for three years. And in fact, China is our biggest market for marine scrubbers and has been for the last few years. We are doing this at a position of strength. So, meaning that we will be the majority owner of this facility. We will operate the facility. We already found the Managing Director for this facility. And any investors that we might invite into this, they will not have any decision power, but will be investing in the business case. But, I can sincerely promise you that we are not looking to the same people as we did four years ago.

Okay. And if I understand from your earlier commentary, all the IP and trade secrets will be kept in Copenhagen, and it will basically be a job shop, if you will, in design of the systems and have nothing to do with the silicon carbide production and manufacturing.

You are absolutely correct. The pieces we plan on manufacturing in China, they are commodities. It's bending of metal. It's welding of metal. It's the DPF filters, which are also a commodity. But again, the real IP will still be manufactured in Copenhagen and of course to protect the IP. So, you're absolutely correct. We are very aware of and very protective of our IP. So, we will take all precautions in making sure that we don't risk Chinese companies copying us on this.

Very good. I thank you. And I appreciate the fact that you understand the concerns of China, China.

Thank you very much, Dennis.

As we have no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Sune Mathiesen for any closing remarks.

Thank you very much, operator. And thanks for everyone joining us on the call today. I look forward to speaking with many of you again already next week during our virtual presentation and one-on-ones. And I hope that we can all visit face-to-face again in the near future. In the meantime, have a good day, and stay safe. Thank you very much.

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