Good morning, and welcome to the LiqTech International Second Quarter Fiscal Year 2024 Financial Results Conference Call. [Operator Instructions] 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. [Operator Instructions] 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 the gas industry, joining the Razorback order I mentioned in quarter 1 and the commercial pilot unit to NESR in quarter 2. From a high-level perspective, the broader oil and gas industry and the U.S., in particular, is increasingly understanding the importance to use produced water to offset fresh water demand, both inside and outside the oil field. Our solution can be key to reducing OpEx for our customers and meeting their desire set forth to drive sustainability going forward. As I have stated, each of these 3 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 and meet current regulatory requirements with each…

Thank you, Fei, and good morning, everyone. Now 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 and up sequentially compared to the $1.5 million in Q1. DPF and ceramic membrane sales of $1.7 million compared to $1.8 million in the same period last year and $1.8 million in Q1. And finally, plastic revenue of $0.9 million compared to $1.1 million in Q1 last year and $0.9 million in Q1. To be specific, the key revenue drivers for this quarter was the delivery of an oil and gas produced water pilot as part of our distribution agreement with NESR. The delivery of 5-pool filtration systems, along with stable contribution from DPF sales attributed to focused sales efforts that began in late 2023 and generated elevated activity in the current year. Our aftermarket services decreased due to elevated remediation work and associated deliveries in the same period in 2023, and the decline in plastics revenue relates solely to a large one-off sale that was recorded in 2023 without recurrence in the current year. In terms of forward guidance, as Fei mentioned, we expect the revenue for the third quarter of 2024 to be between $4.0 million and $5.0 million, which will be similar to the first 2 quarters of 2024. We remain committed to growing our business over the coming quarters as we work intensively to execute on our ambition to further penetrate the global oil and gas, chemicals and pool system markets with our proven and industry-leading solutions. Looking at…

Thank you, Phillip. As I mentioned and as Phillip elaborated on, we have experienced nice growth within our system sales and DPF business year-over-year and sequentially. The change in revenue from the year ago quarter is entirely due to deliveries of plastic products, ceramic membranes and aftermarket sales. We recognize the top and the bottom line numbers of what people will focus on. However, I would like to point out that we are making progress within our core growth initiatives to drive new system sales and expand our DPF operations. Importantly, we have a wide range of initiatives in place to continue this growth with new partnerships, collaborations and regulatory approval in place. However, it should be clear that my biggest excitement right now is the progress we are making within the produced water treatment for the oil and gas industry. Quarter 3 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 to reach out to Robert Blum to coordinate. Further, I will be conducting virtual one-one-one meetings at Lytham Partners' 2024 Investor Conference on August -- October 1, again, reach out to Robert to coordinate. With that, operator, we would be happy to take any questions.

[Operator Instructions] 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 time line for that pilot evaluation and I guess the kind of next steps or opportunity that this customer represents?

The pilot, we are going to -- I mean, we're delivering in quarter 3. We're taking about 3 to 4 months to finish the testing. And after that, we expect to see some progress in that direction.

Okay. Great. And then the kind of valuation metrics that you're looking at, I guess, maybe if you could just remind us on kind of what you're looking for or what the customer is looking for and what you sort of evaluate when you do these pilot programs?

So Rob, can you repeat your question? That was not very clear.

Sorry about that. I just wanted to clarify the -- as you evaluate these pilot programs, what are the key things that you and the customer are looking for in terms of the ability of the system and what are they really evaluating on these pilot programs?

Okay. Okay. I mean what they really like our system is our system is -- have a very high mobility and also very reliable and also very automation. It's totally digitalized. We're able to have the remote monitoring and the control automation and the membrane is a very stable quality. So the pilot we have together with Razorback, at our customer site, it has been running more than 2 months, and the membrane has extremely stable quality and lifetime and the water purification result is very good and stable. So this is what they're evaluating. So it's -- basically it's the reliability, it's mobility and automation.

Okay. Great. And then on the U.S. pool market, you talked about getting the NSF certification. Maybe give us some more color on what that means in terms of being able to sell into the market and your expectations or what you think the pipeline looks like in the U.S. market?

We are very excited to get this NSF certification because that means we're able to start going to the U.S. market. But we have already, behind the scene, doing the go-to-market planning. So it's not like we just start now. So right now, we have the plans in place. So we're going to start approaching the potential partners already from now. And it is our intention. We would like to have some partners in place by the end of this year. So we're able to really start going to the U.S. market.

Okay. Good. And the U.S. -- or sorry, the pool system order that you talked about in the U.K. and Australia that did not ship in the quarter, the 3 systems. Do you expect those to ship in, I guess, the rest -- sometime in the rest of the year, Q3 or Q4? Or are those sort of on hold for a while?

They are delayed because of the government funding. And unfortunately, you know how the government are, they don't give you a new date, say, when it's going to come in. So from a conservative point of view, we try to make some other opportunities to replace them. And we don't know if they certainly will come to Q3, Q4 or maybe they will postpone to Q1, Q2 next year. So we try to make some other compensation from other opportunities for the [Technical Difficulty] because we don't get a certain date from the government, say, when this will come.

Okay. Good. And my last question is really on the -- some of the partnerships you've developed in the, I guess, the Korean ship market partnership in particular. How do you see that playing out in the scrubber ramp and the marine ramp?

I really think we have very good opportunity for this new scrubber segment for the EGR for dual-fuel engine ship. And those ships, expect in 2024 to 2027 period will be 400 new ships coming to place in this special segment. And our solution is really very good for this segment. We actually have made some modification to really have a much higher capacity and the longer continued operation, and this is something very unique compared with other competitor solution in the market. So in this way, we believe we have very good opportunity able to go into this segment very strongly. So that's why we are actively building up the partnership in this area. And also, we're also very actively working into the most effective way going to the market and if there's any other business model should be applied for really going -- intensively going to this market because the market is coming up now. And for the next 4 years will be really, really interesting. So I hope I can tell something more in the next quarter, and we are really strongly going back there.

[Operator Instructions] Our next question comes from Lucas Ward at Ascendiant Capital Markets.

Fei, Phillip and Robert. So regarding the full year outlook, it sounds like you're expecting a similar type of revenue run rate for Q3, although Phillip gave a fairly wide band there, but a much better Q4. Do you have a target for the full year that you can share at this point?

I mean, we have shared the quarter 3 prediction. And we don't -- we do not want to tell what is the Q4 look like because it's really going to be a big, bigger quarter, and we need to see something fell into place before we have the certain number, but it's definitely going to be a much better quarter than the first 3 quarters. That we can say.

Okay. How about gross margins? How do you see those trending? It looks like it was 16% for Q2, so they seem to be coming up relative to last year, certainly relative to late last year.

Yes. So gross margin is connected with the revenue because we have fixed cost and then we have our variable cost. So whenever the revenue is lower than the same quarter last year, as you compared it to, the gross profit margin would be lower. But as I also mentioned, we are also monetizing our contribution margin, which is still about 45%.

Okay. Yes. That's an internal figure, right? Like would it be possible for us to calculate that, from the numbers that you report?

Not at this moment, no.

Okay. That's fine. And so just looking at the drivers of the revenue, it looks like the aftermarket solution sales were soft. What drives that? Like what impact -- I mean, if we're selling a lot of systems, why wouldn't the aftermarket solution revenues just sort of track with that?

I mean up to now, our aftermarket service primarily is the marine scrubber. And that's also one of the reason why we signed this contract with Dan Marine Group. And in the past years, after we have shot the marine scrubber, we have not been very good at the setup, the aftersales, both the system and the sales channel. And so we missed opportunity there. And what we're really now trying to see is we really believe the aftermarket for the marine will come back. And the Dan Marine Group will be the one to help us with the fast delivery and also very close to the customers. And for the new marine scrubber market, the EGR market, we're also working on a new service concept. So in this way, we were able to, from the beginning, already have a service package with the customer, and that will also be the case with the oil and gas market. We also intend to have a service package agreement with the customer from the beginning when we start selling the commercial project. So the aftermarket is really under development. And this is what we see, the unstable situation.

Okay. Could you comment on the geopolitical situation? I know this is a problem in Q1. The war was impacting your O&G prospects in the Middle East. Is that still an issue on your radar screen?

Yes. That's actually one of the big reason why we have moved our focus primarily to the U.S. market I'm sure because we believe the geopolitics situation is really unstable, and we don't know what's really happening. So we now change to a more stable market and we also see the U.S. market actually is coming up with a lot of traction for the produced water treatment. So we are very happy actually we made this change, and we can see the results already.

Okay. Got it. Could you comment in general on the ceramic membrane business? Historically, this has been a big segment? Like what are the -- what is the growth outlook for it?

I think what we are now investigating is we have been a manufacturer for ceramic membrane for more than 15 years. But the way we're selling our ceramic membrane has been a little bit ad hoc. So we don't really have a very systematic knowledge about the -- how we should selling our membrane and how is the price setting and what is really the most competitive way to do our membrane selling. So this is what we are now working on very systematically to getting the knowledge and also trying to find the right partners to bring our membrane into the market because our membrane is in high end and it's for some special applications. So that's where the place we have to be very sharp on. So this is one of the reason why we have signed this MoU with this Chinese partner called Haisum because they have some very unique applications. We are now doing the pilot testing with them. So I hope in a quarter or so I will be able to present some results there. This is the way we're going to do it. It's more selective and more focused, and really have much more max knowledge about what's the best way to selling our membrane.

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 very much forward to communicating with you soon again in 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.