LiqTech International, Inc.

To answer your question, please press star then 2. Please note today's event is being recorded. I would now like to turn the conference over to Robert Bloom with Little 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 Lick Tech International second quarter 2024 financial results conference call for the period ended June 30th, 2024. Joining us on today's call from the company is Fei Chen, the company's chief executive officer, and Philip 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 dialed into the call through the traditional teleconference line, as the operator indicated, please press star then 1 to ask a question. If you are listening through the webcast portal and would like to ask a question, please 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 a good faith in judgment and management, forward-looking statements are inherently subject to known and unknown risks and uncertainties that may cause X 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 LickTech International. Fei, please proceed. Thank you.

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 receipt 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 LIHTC 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 Rieselbach 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 it will mark the third consecutive quarter in which we have received and delivered a produced water filtration system for the oil and gas industry. Joining the rateback order I mentioned in quarter one and commercial pilot unit to NASA in quarter two. From a higher level perspective, the border oil and gas industry and the US in particular is increasingly understanding the importance to use produced water to offset fresh water demands 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 three orders are considered pilot orders whereby the initial objective is to demonstrate and document the efficiency of our unique silicon carbon ceramic utilization technology in treating produced water to facilitate reinjection and the beneficial reuse and meet current regulatory requirements with each customer in each specific area. The ResuVac system is currently onsite with the oil and gas customer. To date, the system has been running stably for more than two months with preliminary data highlighting that all requirements are being met. Assuming we are successful in full testing with the new pilot unit, which we estimate would be approximately three to four months, it's our belief that two things will come out of it. Number one, each of the customers who are currently utilizing the systems will deploy new systems widely across their operations with significant larger treatment capacity. Number two, as this fair weather customers deploy them in their operations, we will have strong commercial approval points to convince other companies to adapt our technology for their full commercial systems. When I took over as CEO about two years ago, I stated that oil and gas market would be a tremendous long-term opportunity for Leetech. However, it would take some time to develop. With the progress made over the past three quarters, I firmly believe that we are on the cross of something significant within this key target market for the tech. Another key initiative I laid out when I took over as CEO was to align ourselves with partners that can open up key markets for our solutions. It is a strategy that worked extremely well during my time with TopShop and the ground force. And one that I thought would work well with Leetech, given the unique diversification that our filtration systems can provide. As a small company, we simply cannot have an internal sales team that is aggressively targeting the multiple industry segments that our products can address. To that end, over the past year, we have signed the following distribution agreements. For the produced water oil and the gas industry, we have signed up NASA in the Middle East and the Reserve Direct in the U.S., both of which have been key contributors to our recent progress within the industry I just touched upon. Within the commercial pool system markets, we have bought on Alpsisan, Total Foods, Waterco, Barn Ray, and NAPCOM. Again, each of these partners have driven system sales for LITIC, which I will go into more detail on in a moment. Within the phosphorous acid market, we signed an agreement with Silicon Feature. They are in active dialogue with some food-grade phosphorous acid producers in China. We continued this progress of bringing on partners that can help driving awareness and adoption of our solutions with particular progress made within the marine scrubber market. To that end, in May, we entered into a partnership agreement with Dan Marine Group to expand our presence in Chinese shipbuilding and repair market for marine scrubber water treatment, as well as new exhaust gas recirculation water treatment system for dual-fuel marine vessels. The agreement also includes the servicing by Dan Marine Group of existing LICTEC marine installations, including fast delivery of spare parts and on-site repair work. Also in May, we announced an agreement with Fremen, where established maritime representative to the shipping industry in Greece. Fremen will bring LITIC close to the various influential ship owners through its extensive network. In July, we announced an agreement with Danby Marine and South Korea based maritime representative to the shipping industry for Danby to market our marine cargo water treatment solutions within South Korea the second largest shipbuilding market in the world, after China. We are starting activities to recover the customer-related ships we had in the market. These three new partners, along with our previously signed agreement with Yuyong Focals in China, from whom we received two marine scuba water treatment system orders in the past year, should help us expand our presence in this important market for LITSEC. One other partnership agreement I wanted to touch on was our announcement two weeks ago that we have entered into a MOU with China Haisheng Engineering Company to explore the application of LITSEC's advanced filtration system for the challenged industry water treatment in China. China is a significant market for industry water treatment with environmental protection and sustainability of increasing importance to the government and the enterprises. I am excited about what this collaboration with China Heisman for live industry uses will bring to the table. Partnerships and collaborations will be a key for us going forward. They often take time to materialize, but we are getting to see results with nearly all of them. We have signed up over the past 18 months or so and believe we will see further positive impact in the years to come. As I highlighted in the press release this morning, we successfully delivered five swimming pool systems during the second quarter. The swimming pool market is an important recurring revenue opportunity for Leetex. However, as I stated on the call last quarter, our budget and the expectations we set forth for the second quarter included eight swimming pool systems for delivery. Unfortunately, three systems anticipated to be shifted from municipal applications in the UK and Australia were delayed due to government funding, causing us to fall short by about 500,000 from the outlook we provided. One big deployment that will benefit the swimming pool market for us is the receipt of NSF certification for our systems in the US. For those that are not aware, we are unable to sell our commercial swimming pool solutions in the US as we work through this approval process. With the certification now in hand, we are in conversations with partners that will help drive adoption in the US with the goal to have new agreements in place by the end of the year. So where we are disappointed with the delays from the three planned systems, the pool market continues to remain strong for us and will be a key contributor to our recurring revenue in the future. When you dive deep into the financial results, a few things may not be as obvious, and I think it bears mentioning. All told, we are seeing incremental growth in our system sales. During the second quarter, we reported $1.3 million in system sales, which is up from $1.2 million in the year-ago second quarter and $1.2 million in Q1 of this year. Further, during the second quarter, DPF sales was 1.6 million, a 23% increase compared to the year-ago period and up about 4% sequentially.

As I mentioned last quarter, we are seeing increased interest in our DPF solutions.

We think the European inline transportation market has renewed focus on black carbon emission reduction across We are also seeing strong sales for our features for emergency electricity generators. Similar to pool systems, we are pleased with the growth coming from our DPF solutions, which in many ways was an afterthought for Dixit previously, but has become a solid contributor for us today. Watt and Michael are two revenue areas, system sales and DPF sales. That are both showing growth. For quarter two system sales and DPF sales were up more than 400,000 combined year-over-year and 200,000 sequentially. Offsetting this growth were pullbacks during the second quarter within our system aftermarket solutions, which were done from the year-ago period by about 300,000. Our ceramic membrane sales, which were done about 400 from last year, and our plastic components, which were down about 200,000. Where these other three areas are a bit less core to our focus, they are still contributors to our financial results, and we are focused on developing new channels and opportunities to expand these areas. Philip will expand in more detail on this in a moment. To wrap things up, as our outlook suggests, we expect to see revenue of about 4 to 5 million in the third quarter. At the mid-point, that would be similar to what we just reported in the second quarter. The biggest variables we have pertain to timing of delivery on a few systems, particularly within the swimming pool market. It is my belief that as we achieve the expected traction within the oil and the gas market, I indicated experience a reramp in the market and continue the positive overall trajectory in the market, we will see this fourth quarter significantly above the levels achieved or expected in the first three quarters of this year. The groundwork we have set in terms of partnerships, collaboration, and regulatory approvals should all help contribute to this growth. Let me turn the call over to Philip to review the financial results in more detail.

Thank you, Philip, 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 5.0 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. EPF 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 NESA. The delivery of five pool filtration systems along with stable contribution from DPF sales attributed to focus sales efforts that began in that date, 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 related solely to a large one-off sale that was recorded in 2023 without recurrence in the current year. In terms of forward guidance, as Faye 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 two quarters of 2024. We remain committed to growing our business over the coming quarters as we work intensively to execute our ambition to further penetrate the global oil and gas, chemicals, and food system markets with our proven and industry-leading solutions. Looking at our gross profit for the quarter, we reported 0.7 million on implied gross profit margin of approximately 16% compared to 1.2 million and 23.3% in prior year's second quarters. The unfavorable change is first of all a result of the revenue mix for the quarter. In particular, the delivery of the containerized oil and gas pilot system impacted margins resulting in a decrease compared to typical levels. This decision was strategically undertaken to showcase and validate the effectiveness of our technology. As we still have overhead and other fixed costs that are not fully being absorbed, one of the key metrics we look at to highlight the progress being made is our contribution margin. During the quarter, when you back up fixed costs, our contribution margin ended at approximately 46% compared to 52% in the same quarter before the last year. with the unfavorable change mainly explained by revenue mix and especially the delivery of the containerized oil and gas pilot system as mentioned before. From an operational perspective, we still have excess capacity with the recently installed new kilns and revitalization of our ceramics facility. Our immediate goal is to capitalize on this positive momentum by shortening delivering lead times while still maintaining the high quality of our membranes and filters. As previously stated, we still maintain our guidance that our business will be breakeven measured on an adjusted EBITDA basis, assuming a quarterly revenue of approximately 7 million and potentially lower with the right revenue mix. Turning to OPEX, total operating expenses for the quarter was 2.8 million, which is comparable to the same for the last year, with a slight increase of 38,000 or approximately 1.4%. As stated over the last few quarters, we remain focused on running a lean business by monitoring cost and carefully evaluating our spend to ensure we do not jeopardize our financial objectives. Moving on to the next item. Net other expenses during the quarter were 39,000 compared to an income of 33,000 in Q2 of last year, with the development mainly explained by reduced interest income as well as increased debt discount amortization due to the extension of the maturity date for the senior permission notes. Concluding on the P&L, net loss was 2.1 million for the quarter compared to 1.6 million for the comparable period in 2023. This quarter's result was mainly driven by the decrease in revenue and lower margins. Finally, let me briefly comment on our cash flow and balance sheet before summarizing and handing back over to Faye. We ended the quarter with $5.5 million in cash, down $2.2 million compared to the first quarter. explained by cash use and operating activities, and increased net working capital mainly related to the increased activity levels, and capex of 0.2 million related to replacement of kiln insulation. To summarize, balancing our cash flow remains a key KPI for our business as we are determined to preserve cash to maintain our strategic and financial flexibility. We also acknowledge that we need to increase the throughput of our existing facilities in order to accelerate growth, reduce lead times, and ultimately pave the way to a business imbalance from both a net income and cash flow perspective. Thanks, everyone, for your support, and now back over to you.

Thank you, Philip. As I mentioned and as Philip elaborated on, we have experienced nice growth within our system sales and DPS 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 are what people will focus on. I would like to point out that we are making progress within our core growth initiatives to drive new system sales and expand our DPS 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 three 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 DTIC

in the quarters to come. One final comment before I turn the hour to your questions.

I will be participating in the HCE One Weight Conference and conducting one-on-one meetings with investors in New York on September 9th. If you happen to be attending and would like to connect, please reach out to Robert Bloom to coordinate. I will be conducting virtual one-on-one meetings at LISM Partners for 2024 investor conference on October 1st. Again, reach out to Robert to coordinate. With that, operator, we would be happy to take any questions.

Thank you. If you would like to ask a question, please press star then one on your telephone keypad. If you'd like to withdraw your question, please press star then two. Today's first question comes from Rob Brown at Lake Street Capital Markets. Please go ahead.

First question on the produced water market and the pilot, what's the timeline 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 three. We'll take about three to four months to finish the testing.

And after that, we expect to see some progress in that direction.

Okay, great.

And then the kind of evaluation metrics that you're looking at, I guess, maybe you just Just remind us on kind of what you're looking for, what the customer is looking for, and what you sort of evaluate when you do these pilot programs.

Can you repeat your question? That was not very clear.

Sorry about that. I just wanted to clarify, 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 I really like about our system is our system... It has a very high mobility and also very reliable and also very automated. 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 RisoBag at our customer side, it has been running more than two 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 basically is the reliability, its mobility, and automation.

Okay, great. Thank you. And then on the U.S. pool market, you talked about getting the NSF certification. Maybe give us 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 scenes doing the go-to-market planning. So it's not like we just start now. So right now we have the plan 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. markets.

Good. And the pool system order that you talked about in the UK and Australia that did not ship in the court of the three systems, do you expect those to ship in, I guess, 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 short. For a conservative point of view, we try to make some other opportunity to replace them. We don't know if they certainly will come to Q3, Q4, or maybe they will postpone to the Q1, Q2 next year. We try to make some other compensation from other opportunities for them because we don't get a certain date from the government to say when this will come.

Okay, good. Thank you. My last question is really on 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. It's called the EGR for dual-fuel engine, SIPP. Those SIPs expect in 2024 to 2027 period will be 400 new SIPs coming to place in this special segment. Our solution is really very good for this segment. We actually have made some modifications to really have a much higher capacity and the longer continue operation. This is something very unique compared with other competitor solutions 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 actually building up the partnership in this area. And also we 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 and intensively going to this market because the market is coming up now. and for the next four years will be really, really interesting. So I hope I can hear something more in the next quarter, and we are really strongly going back there.

Okay, great. Thank you, and congrats to all the partners.

Thank you. And as a reminder, if you'd like to ask a question, please press star and then 1. Our next question comes from Lucas Ward of Ascendium Capital Markets. Please go ahead.

Thanks. Hi. Good afternoon, Fay, Philip, and Robert. Hi. Good afternoon. So, regarding the full-year outlook, it sounds like you're expecting a similar type of revenue run rate for Q3, although Philip gave, you know, 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 three prediction, and we do not want to tell, you know, what is the Q4 look like, because it's really going to be a big, bigger quarter, and we need to see something fit into place before we have the certain number. But it's definitely going to be a much better quarter than the first three quarter. That we can say.

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

Yeah, 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 we compared it to, the gross profit margin would be lower. But as I also mentioned, we're also monitoring our contribution margin, which is still about 45%.

Okay. Yeah. That's an internal figure, right?

Like, would it be possible for us to calculate that, 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 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 swappers.

And that's also one of the reasons why we signed this contract with Dan Marine Group. In the past years, after we have shot the marine squabble, we have not been very good at the setup, the after sales, both the system and the sales channel. We missed opportunity there. What we're really now trying to see is we really believe the after market for the marine will come back. The Dan Marine Group will be the one here with the fast delivery and also very close to the customers. For the new marine scarborough market, the EGR market, we're also working on a new service concept. In this way, we were able to, from the beginning, already have a service package with the customer. 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 beginning when we start selling the commercial project. 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 ONG prospects in the Middle East. Is that still an issue on your radar screen?

Yes, that's actually one of the big reasons why we have moved our focus primarily to the U.S. market and onshore 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 projections 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. 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 we were saying our ceramic membrane has been a little bit ad hoc. So we don't really have very systematic knowledge. about how we should sell our membrane and how the price is selling and what is really the most competitive way to do our membrane selling. 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 reasons why we have sent this MOU with this Chinese partner called Heisong, 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 space weights are saving our membrane.

Okay. Okay. I think I'm good. Thank you very much, Faye, Philip. I appreciate it.

Thank you very much. Thank you. I wish there were no further questions at this time. 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.