Good morning, and welcome to the LiqTech International Second Quarter Fiscal Year 2024 Financial Results Conference Call. Please note today's event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

All right. Thank you very much, Rocco. Good morning, everyone. And as Rocco indicated, thank you for joining us for today's LiqTech International Second Quarter 2024 Financial Results Conference Call for the period ended June 30, 2024. Joining us on today's call from the company is Fei Chen, the company's Chief Executive Officer; and Phillip Price, the company's Interim Chief Financial Officer. Before I turn the call over to management, let me remind listeners that there will be an open Q&A session at the end of the call. If you are listening through the webcast portal and would like to ask a question, you can submit your question through the Ask a Question feature in the webcast player, and we'll do our best to get to as many questions as possible. Before we begin with prepared remarks, we submit for the record the following statement. 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 the reports filed with the Securities and Exchange Commission, including risk factors that attempt to advise interested parties of risks that may affect our business, financial condition, operations and cash flows. If one or more of these risks or uncertainties materialize or the underlying assumptions prove incorrect, the company's actual results may vary materially from those expected or projected. The company therefore encourages all listeners not to place undue reliance on these forward-looking statements, which pertain only as of this date and the date of the release and conference call. The company assumes no obligation to update any forward-looking statements to reflect any events or circumstances that may arise after the date of this release and conference call. Now I'd like to turn the call over to Fei Chen, CEO of LiqTech International. Fei, please proceed.

Thank you, Robert, and good day to everyone on the call. I'm excited to once again get a chance to speak with you all today and provide an update on the progress we are making. Let me start by diving right into the announcement we made earlier this week where we announced the reciprocity of an order from one of the world's leading integrated energy companies to deliver a pilot system for produced water treatment in the U.S. This order is key for LiqTech as it becomes the second significant produced water treatment order we have received in the U.S. in just the past few months following the order we received in March 2024 from Razorback Direct, highlighting the capability our systems provide to the most challenging purification applications. The new pilot system is scheduled to be delivered to the customer in the third quarter of 2024, and will mark the third consecutive quarter in which we have received and delivered a produced water filtration system for the oil and gas industry. The U.S. oil and gas industry is increasingly understanding the importance of utilizing produced water to offset fresh water demand, both inside and outside the oil field. Our solution can be key to reducing operational expenditures for our customers and meeting their desire to drive sustainability going forward. Each of these three orders are considered pilot orders, whereby the initial objective is to demonstrate and document the efficiency of our unique silicon carbon ceramic ultrafiltration technology in treating produced water to facilitate reinjection and the beneficial reuse while meeting current regulatory requirements. The Razorback system is currently on-site with the oil and gas customer, and to date, it has been running stably for more than 2 months with preliminary data highlighting that all requirements are being met. Assuming we are successful upon full testing with the new pilot unit, which we estimate would be approximately 3 to 4 months, we believe two things will come out of it: First, each of the customers currently utilizing the systems will deploy new systems widely across their operations with significantly larger treatment capacity. Second, as these customers deploy them in their operations, we will have strong commercial proof points to convince other companies to adopt our technology for their full commercial systems. When I took over as CEO about 2 years ago, I stated that the oil and gas market would be a tremendous long-term opportunity for LiqTech, but it would take some time to develop. With the progress made over the past three quarters, I firmly believe that we are on the cusp of something significant within this key target market. Another key initiative I laid out when I became CEO was to align ourselves with partners that can open up key markets for our solutions. It is a strategy that worked well during my time with Topsoe and Grundfos, and one that I thought would work well with LiqTech given our unique diversification in filtration systems. Over the past year, we have signed distribution agreements that have driven system sales, which I will detail shortly. The market for swimming pool systems offers a recurring revenue opportunity, and we successfully delivered five swimming pool systems during the second quarter. However, we had anticipated eight swimming pool systems for delivery, and three systems were delayed due to government funding in the U.K. and Australia, causing us to fall short by about $500,000 from our outlook. Nonetheless, with the receipt of NSF certification for our systems in the U.S., we are excited to begin approaching potential partners in the U.S. market with the goal to have new agreements in place by year-end. While we are disappointed with the delays, the pool market remains strong for us and will be a key contributor to our recurring revenue going forward. During the second quarter, we reported $1.3 million in system sales, which is an increase from $1.2 million in the previous year's second quarter. We also noted that DPF sales increased by 23% year-over-year. We are pleased with the growth in our DPF solutions, which have become a solid contributor for us. We are seeing growth areas in system sales, DPF sales, but there were pullbacks in aftermarket solutions, ceramic membrane sales, and plastic components, which we aim to improve upon. As our outlook suggests, we expect to see revenue of about $4 million to $5 million in the third quarter. The groundwork we have set should contribute to this growth, and with that said, let me turn the call over to Phillip to review the financial results in more detail.

Thank you, Fei, and good morning, everyone. Let me briefly comment on the financial highlights for the quarter. Revenue came in at $4.5 million compared to $5.2 million in the same quarter last year, representing a decrease of 10%. Broken down by verticals, sales were as follows: System sales and related aftermarket services of $1.9 million compared to $2.1 million in the same period last year. DPF and ceramic membrane sales were $1.7 million compared to $1.8 million in the same period last year. Finally, plastic revenue was $0.9 million compared to $1.1 million last year. The key revenue driver this quarter was the delivery of an oil and gas produced water pilot as part of our distribution agreement with NESR, along with the delivery of five pool filtration systems and stable contribution from DPF sales. Our aftermarket services decreased due to elevated remediation work in the same period in 2023, while the decline in plastics revenue relates to a large one-off sale that was recorded in 2023 without recurrence in the current year. In terms of forward guidance, we expect the revenue for Q3 of 2024 to be between $4.0 million and $5.0 million. We remain committed to growing our business over the coming quarters as we work to penetrate the global oil and gas, chemicals, and pool system markets with our proven solutions. We reported $0.7 million in gross profit for the quarter, with an implied gross profit margin of approximately 16%, compared to $1.2 million and 23.3% in the second quarter of the prior year. The unfavorable change is largely the result of the revenue mix for this quarter. Despite this, one key metric we focus on is our contribution margin, which ended at approximately 46%. Total operating expenses for the quarter were $2.8 million, similar to the same quarter last year, with a slight increase of $38,000 or approximately 1.4%. We remain focused on running a lean business by monitoring costs. The net loss was $2.1 million for the quarter compared to $1.6 million in the same period in 2023, primarily driven by lower revenue and margins. We ended the quarter with $5.5 million in cash, down $2.2 million compared to Q1, explained by cash used in operating activities and increased net working capital related to increased activity levels. To summarize, balancing our cash flow is a key KPI for our business as we are committed to preserving cash to maintain strategic flexibility. We acknowledge the need to increase throughput of our facilities to accelerate growth and ultimately achieve a balanced business from both net income and cash flow perspectives. Thanks, everyone, for your support, and now back over to you, Fei.

Thank you, Phillip. As I mentioned, we have experienced growth within our system sales and DPF businesses year-over-year and sequentially. The change in revenue from the year-ago quarter is primarily due to deliveries of plastic products, ceramic membranes, and aftermarket sales. We recognize the top and bottom line numbers are what people will focus on; however, we are making progress within our core growth initiatives. My biggest excitement right now is the progress we are making within the produced water treatment for the oil and gas industry. Q3 will be our third consecutive quarter with a new produced water system being delivered. We are optimistic that successful execution of this pilot unit will lead to significant opportunities for LiqTech in the quarters to come. One final comment before I turn it over to your questions: I will be participating in the H.C. Wainwright Conference and conducting one-on-one meetings with investors in New York on September 9. If you happen to be attending and would like to connect, please reach out to Robert Blum to coordinate. Further, I will be conducting virtual one-on-one meetings at Lytham Partners' 2024 Investor Conference on October 1, again, reach out to Robert to coordinate. With that, operator, we would be happy to take any questions.

Today's first question comes from Rob Brown at Lake Street Capital Markets.

First question on the produced water market and the pilot, what's the timeline for that pilot evaluation and what next steps or opportunity does this customer represent?

The pilot is going to be delivered in Q3. We're looking at 3 to 4 months for testing, and after that, we expect to see some progress.

Okay. Great. Could you remind us on what you're looking for or what the customer is evaluating in these pilot programs?

What they really like about our system is its high mobility, reliability, and automation. Our system allows for remote monitoring and control automation, with the membrane demonstrating stable quality. The pilot with Razorback has been running for over 2 months, and the results are promising. Essentially, they are evaluating reliability, mobility, and automation.

Okay. Great. Could you provide insights on the U.S. pool market and what the NSF certification means for your ability to sell into this market?

We are very excited to receive this NSF certification as it enables us to start entering the U.S. market. We have been preparing, and we're looking to establish partnerships by the end of this year.

Do you expect those delayed systems in the U.K. and Australia to ship in Q3 or Q4, or are they on hold?

They are delayed due to government funding, and the timeline is uncertain as the government does not provide updates. We're attempting to find other opportunities in the meantime.

Can you comment on the partnerships you developed in the Korean ship market?

We believe there is a significant opportunity in the marine scrubber segment, especially for dual-fuel engine ships. Between 2024 and 2027, we expect 400 new ships in this segment, and our solution is designed to cater to this market. We are actively building partnerships to tap into this growing segment.

Our next question comes from Lucas Ward at Ascendiant Capital Markets.

Regarding the full year outlook, do you have a target for the full year you can share at this point?

We expect a similar revenue run rate for Q3, but we do not want to disclose specifics for Q4 just yet. It will definitely be a better quarter than the first three quarters, though.

What about gross margins? How do you see those trending?

Gross margin is connected with revenue. The lower revenue compared to last year affects our gross profit margin. However, our contribution margin is still about 45%.

What is driving the softness in aftermarket solution sales?

Our aftermarket service primarily relates to marine scrubbers. We've missed some opportunities previously but are focused on enhancing our aftersales service with partners like Dan Marine Group. We believe aftermarket sales will improve as we have new service concepts in development.

Can you comment on the geopolitical situation and its impact on your oil and gas prospects?

Yes, the geopolitical situation remains a concern, which is one reason we've shifted focus to the U.S. market. The U.S. market is showing traction for produced water treatment, and we are pleased with this strategic change.

Could you comment on the growth outlook for the ceramic membrane business?

We're working on systematically improving the sales process for our ceramic membranes. Currently, we're identifying the best strategies and partners for entering the market, especially for special applications. The MoU with Haisum is aimed at developing this segment. I hope to present results soon.

Thank you. We're showing no further questions at this time, so I'd like to turn the conference back over to management for any closing remarks.

Thank you all very much for being with us today. We look forward to communicating with you again in the next quarter. Thank you.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.