Hello and welcome to the LiqTech International Fourth Quarter and Fiscal Year 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the call to Robert Blum with Lytham Partners. Please go ahead.

All right. Thank you so much, M.J. Good morning, everyone and thank you all for joining us today on the conference call to discuss LiqTech International's fourth quarter and fiscal year 2023 financial results for the period ending December 31, 2023. Joining us on today's call from the company is Fei Chen, Chief Executive Officer; and Phillip Price. For those not familiar, Phillip has recently assumed the role as 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. M.J provided the instructions on how to queue up at the beginning there. 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 the risks that may affect the company's business, financial condition, operations and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, the company's actual results may vary materially from those expected or projected. The company, therefore, encourages all listeners not to place undue reliance on these forward-looking statements, which pertain only as of 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 am excited to have this opportunity to speak with you and hear an update on the solid progress we’ve made during the last year. During 2023, we successfully executed a number of strategic initiatives to drive revenue growth, improve our manufacturing and operational efficiencies and the strength of our balance sheet. We grew our revenue by 13% and increased our gross margin by 12 percentage points. Meanwhile, we reduced our operating expenses with $2.5 million and improved the bottom line with $5.6 million. After taking over as the CEO in late 2022, I have introduced a new commercial strategy that has initially focused on stabilizing and growing our established business areas, which are core in terms of our ability to generate revenue. This effort includes reducing the length of the sales cycle we have in market segments such as our commercial pool systems. And it also means [technical difficulty] new types of [technical difficulty] customer needs in areas where we have an extensive customer base. This includes, for example, diesel particulate filters marine scrubbers and other areas where we have recurring revenue opportunities, such as general aftermarket sales and plastics. This established business markets provide a strong and stable base of revenue for LiqTech and allowed us to gain manufacturing efficiencies by leveraging our existing production capacity. The 2023 financial results clearly shows that our new strategic focus is working. I will dive into more details on how we intend to continue focusing and improving each of our established areas in a moment. Before doing so, however, let's talk about what we refer to as our target market. Where we have stabilized the business, and brought about operational efficiencies, we are also setting the stage for growth in…

Thank you, Fei, and good morning, everyone. Now let me add some color on the financial highlights for the full year 2023. The reported revenue of $18 million represents an increase of 13% or $2 million compared to the $16 million reported for the full year of 2022 which underlines a robust result in a transition year for LiqTech with a new leadership team and revised strategy. We are pleased with the progress on both top and bottom line. As Fei mentioned, we did experience delays in order delivery due to the escalating geopolitical unrest in Israel, Gaza, which did postpone project deliveries and client commitments in our oil & gas projects in the region. Broken down by verticals, sales were as follows. Systems sales and related services of $7.7 million, an increase of more than 45% compared to the $5.3 million reported in 2022 due to a significant increase in pool system deliveries as well as the increased focus on our aftermarket activities. Looking at our ceramics business. DPF and membrane sales ended at $6.2 million, down 9% compared to $6.8 million last year, reflecting a dedicated focus on improving profitability by carefully managing our revenue mix. And finally, Plastics revenue and externally funded R&D projects of $4.1 million, up 6% compared to $3.8 million reported in 2022 underpinned by stable plastics order intake as well as progress on key external R&D projects. In summary, our system sales and related services experienced a significant increase. The Plastics business continued its stable performance and the Ceramics business experienced a decline, reflecting our focus on profitable deliveries. To be specific, the key revenue drivers during the year was a record high number of pool system deliveries shipped to clients across Europe and Asia Pacific, but also the delivery of our first…

Thank you, Phillip. In closing, we remain committed to executing against our strategic road map, focus on long-term value creation. Over the past year, we have launched a clearly defined commercial strategy that has already yet positive results. Going forward, our business will be underpinned by strong recurring revenues within our established businesses and increased foothold in our strategic target markets. This growth covered with improved operational execution across organizations will be key to drive safe change in gross margins and positive cash flows. I look forward to continuing to execute again our strategic initiatives in 2024 to drive value creation for our shareholders. With that, operator, we would be happy to take any questions.

[Operator Instructions] Today's first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Hi, Fei. Hi, Phillip.

Hi, Robert.

Hi, Rob.

First question is on the good progress in the oil & gas kind of area with the U.S. partner. Just wanted to get a sense, I guess, in both the new partnerships, how has that play out? Is there a -- what is the test period? And how does the incremental order activity sort of play out? What is it dependent?

Yes. As you have heard, we are very excited about this opportunity because we actually just signed the distribution agreement with this new partner 1 month ago. And they are so happy to see [indiscernible]. We already have the first pilot plan on the way to U.S. actually already this week. So really, we are working with this partner very close together. And our joint goal is to make this pilot plan up running as soon as [indiscernible] underground in U.S. because that will be a very good showcase to the other potential partners and customers and about our new technology for the produced water in U.S., a very interesting market for us.

Great. And could you just sort of highlight some of the regulatory driver or other drivers for the system and what the customers are really interested in here?

Yes. I mean the regulatory drive -- the situation is in U.S., especially in the areas like Texas, New Mexico and some other states, it's really the oil producing state. And there is more and more water scarcity coming up. And there's really a discussion going on about the [indiscernible] beneficial reuse of the water both for the industry and for agriculture and also for reinjection. And for all these applications and use you do need to kind of treat the water before you do any other treatment. So our U.S. membrane is the best for the pretreatment for produced water. In all other uses, you can either use for the reinjection of use for the agriculture irrigation and also for the industry process in radios, we can be the efficient first set. So that's why our application actually is really directly related to the upcoming regulatory requirements, but even not only the regulatory, even the industry needs is really related to us because everyone is looking at how to reuse the water.

Okay, great. Congratulations on that progress there. And then sort of the ethylene glycol market, I think you had some delays there. How does that market sort of look at this point? Are you waiting really for that project to kind of kick in? Or are there other customers that, that system can be used on? And can you see growth in '24 in that market?

Yes, the NED market we -- as we announced, we was expecting the second part of the order coming already last year, and this was delayed because we need some operation period in the offshore platform and that offshore platform from is right at the coast of Israel. So it was really be delayed. And then everything was delayed quite longer than what we expected in the beginning. And now things are starting going back to normal. So we do believe we will have something happened in 2024, as it's going to be even in 2024. And we also start working with the other companies besides this company able to use this technology. So there's more potential also there. But definitely for this can create to customers we expect something to happen in 2024.

Okay, great. And then last question is on the DPF market. I think that was down a little bit as you really focused on the margin there. How does that look in '24? Should that grow in '24? And I guess what sort of the dynamics there that you see?

Yes, the recent 2023 DPF market has gone down is because we got a very huge order from one customer in Asia. And that big order actually is not a very good margin for us. So we made adjustments. We do not want to sell any DPFs to this kind of project in -- we really want to improve our profitability. So we sent our photos. And that's why the revenue goes down, but the profitability has goes up quite a lot significantly. And very happy to tell you, Rob, this year, the first quarter, the sales order for DPF actually increased 11% compared to the same quarter 2023. So we definitely expect a very nice growth of DPF this year. And both for -- especially for some new emerging areas like black carbon emissions and also the emergency electricity generated for the data centers around the world and that was really increasing demanding. So we really believe it's going to be an increase, quite a nice increase this year.

Okay, great. Thank you. I will turn it over.

Thank you.

The next question comes from Lucas Ward with Ascendiant Capital Markets. Please go ahead.

Hi, Fei. Hi, Phillip. Good afternoon. Rob, good morning.

Hi, [indiscernible].

I'm actually in your time zone, the Danish time zone right now. And yes, this is exciting. I have a few questions. First of all, like on your business development, like if you look at your overall order book, how does it look? Is it getting better? Is it worse than it was, let's say, 6 months ago?

I mean this is a very, very relevant question. When I come in 2022 -- late 2022, and I realize we have to build up a sales pipeline because we do not have very nice sales pipeline at all. And that's what we have done in 2023, the whole year to build up the new sales team and the sales pipeline. So I would say very confidently and the project we made working into 2024 is based on the pipeline and that's why it's much more improved than 2023.

Okay. So it is getting better. Can you also help us understand that sales cycle? Again, it seems like a really important thing. Like you've talked about the need to shorten it. When you look at system sales, as an example, what is the time between you would typically get an order and when you would actually book revenues?

I mean this -- we have different segments, right? Each of the segments are different. And if I take the commercial pool system as example, what we really have been doing in 2023 is really reduce the cycle from we got order to we deliver, so we can book the revenue. And we have standardized our design and we streamline our production so the delivery time has reduced from 24 weeks to 6 weeks. So that means when we got order today, maximum 6 weeks, we were able to convert that into revenue. And that's really a significant improvement compared with before.

Okay. I guess in some of the target markets where you're still developing it, that you can't just do that right off the bat. But the goal over time is to get that kind of efficiency. Is that fair?

Exactly. What we are doing is we are actually trying to standardize all the solutions for our system market. So in this way, we are able to really reduce the converting time and also reduce -- to increase the quality and the stability of our system. So this is what we are working on across all the product lines, actually.

Okay. Just shifting over to the regulatory environment. Would you say that overall, it's getting better for LiqTech? Or are we going backwards? For instance, we've seen sort of a backlash against ESG. I mean what are you seeing when you go out and try and sell your systems in terms of the regulatory tailwind or headwind?

I mean if you're talking from the macroeconomic point of view, definitely we're seeing the megatrends for the water scarce and for energy efficiency and also for the air pollution improvement. So we are really having some very good megatrends on our back, so we really have some big potential. And one of the things we actually learned from our marine scrubber market is we have to be going out to work with customers. So have their needs, not only based on regulatory requirement alone, really based on their -- also their business needs. So you can see the market we are working today there are a majority of them, not only based on the regulatory approve -- the requirement, it's also because the customer really has the need. Of course, the DPF area is very much regulatory driven, but we have some very good strengths there, like a black carbon emission for marine type industry. It's really more and more enforcement there and also the emergency generator for data center with all these artificial intelligence going in the world. More and more data center required and they have to have the installed [ph]. So there are some really strong victory in these areas. And then the oil gas, as I discussed before, [indiscernible] is not only on the regulatory requirement, it's also about the company really have actual needs they would like to reuse the water. So in that way, we are kind of more stable than only rely on the regulatory requirements.

Got it. Got it. Okay. Just a financial question or two. Do you have your revenue growth outlook at this point?

So we only comment for the next quarter. And what we guide for is if you can compare it to the just-ended quarter, we expect revenue growth of 3% to 8%.

Okay. Is that -- so does that -- should we take from that, that your visibility is not -- that you're confident about your visibility that we would just be looking to [technical difficulty]?

No, the reason we don't make them longer than that is you know our mix -- product mix is quite complicated and some projects are very big, some projects small. And so the dynamic is changing very much. So that's why we do have the forecast for whole year, but [indiscernible] change in mix it's very difficult to say exactly when it's coming. So we feel it's more reliable to tell a quarter of time in this way, we know exactly what is going to happen because the dynamic is very difficult to reflect if you retain the [indiscernible].

Okay. Okay. Last question, and thanks for indulging me. What do you -- based on the mix that you're targeting, let's say, over the next year or two, what is your breakeven accounting breakeven revenue run rate?

So as we also mentioned before, we are still comfortable that our breakeven target, revenue target is $7 million. It could be lower depending on the revenue mix, but that's what we're aiming at.

$7 million per quarter.

Yes.

So if we're able to achieve $7 million a quarter, we will be able to reach breakeven.

Okay, got it. Okay. Thank you so much for answering all my questions.

Thank you very much.

Thank you. [Operator Instructions] The next question comes from Craig Rose with Axiom Asset Management. Please go ahead.

Hello, guys. Thanks for taking my questions. As far as the produced water pilot programs that you're initiating with Middle East and with Razorback Direct, what are the capital requirements to execute on those?

We are going -- we are selling this kind of system through the partners. So basically, we are selling directly to our partners so they purchase the equipment from us, then they run at customer site. They're selling further to the customer site. So this is a very good model for us because we are small company do not have so much capital. So this is the way we are working on.

Okay. And what is the capacity that you're expected to offer as far as like barrels per day for the process you'll be involved in?

And in those small pilot units, we can treat the water between 3,000 to 5,000 barrels per day. But our onset design, we are able to scale up to like 100,000 barrel play is okay for -- I mean we have the model design concept, we're able to scale up. So that's why we are very excited to have those pilot projects going on, especially in U.S. because it's a very interesting market for us. That is our strategic process market, and we hope this pilot unit up running fast and we are able to get the data and also the [indiscernible] we're able to scale up a full-scale commercial system in U.S.

Okay. And so 100,000 barrels per day, what would your process cost a service provider to buy that system that is capable of 100,000 barrels a day?

I cannot answer that question here now because it very much depends on what kind of water quality you have because we need to adjust what kind of elements in our system and [indiscernible]. So it's very much site specific. And also, there's a lot of conditions on the facility [indiscernible] be connected to that. So it's really -- that's something we discussed over time when the customer and the partner come with the request, and we will discuss with them. And the more interesting thing is more discussing about the cost to treat [indiscernible] of water because that's what the industry is using to compare to each other and we are confident our treatment cost will be comparable with other competitive technology. This is more of the things [indiscernible].

And so what is that value? Is that $1, $2, $3 per barrel?

It's a range. It's a range. I think it's between $0.50 to $1, something like that.

Right. But as you said earlier, you're only doing a small portion of the cleanup of the produced water, correct? You're a pretreatment. Is that before or after they kind of clean some of the chemicals first to treat the water?

It depends on the application.

Are you involved in like [indiscernible] at the end? Or are you involved in taking the chemicals out in the beginning?

We are only doing the pretreatment. So basically, if you're using the water for reinjection, then our technology is efficient enough. You don't need any other additional technology. You'll need a water for agriculture irrigation then you might need a desalination and that's not something we are working. We're only working on our technology.

Okay. All right. That's helpful. The release was a little untraditional and break out the fourth quarter [technical difficulty]. I guess the formal release will be -- will have more detail of this quarter. Is that correct?

Sorry, I almost cannot hear what you say.

You reported full year, you didn't break out the quarter. That's a little untraditional. I guess your filings with the government will have more detail.

We are [indiscernible] last year and now. We gave a guidance for each quarter a time.

Thank you very much.

Thank you.

Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

Thank you. I would like to thank you all very much for being with us today. We look forward to communicating with you soon again. Thank you.

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