Good morning. And welcome to the LiqTech Second Quarter Fiscal Year 2019 Financial Results Conference Call. [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, sir.

Thank you very much, Rocko. Good morning, everyone, and thank you for joining us today to discuss --as LiqTech discusses its second quarter 2019 financial results. I am Robert Blum of Lytham Partners, I will be your moderator for today's call. Joining us on today's call from the company is Sune Mathiesen, the company's Chief Executive Officer. Before I turn the 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 today's call will be available shortly following the conclusion of the live event and that a transcript of the call will be available on the Investor Relations section of the company's website shortly there afterwards. Before, we begin with prepared remarks; we submit for the record the following statements. This conference call may contain forward-looking statements. Although the forward-looking statements reflect a 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 our business, financial conditions and 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. The company therefore urges all listeners not to place undue reliance on these forward-looking statements, which speaks 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 this release and conference call. Now, I’d like to turn the call over to Sune Mathiesen, Chief Executive Officer of LiqTech International. Sune, pleased proceed.

Thank you very much, Robert and good morning to all of you. Thank you for joining us today to discuss our second quarter 2019 results. I believe that we're reporting strong quarter. And I'm excited to be speaking with you today. The second quarter financial results continue to highlight the strong demand for our proprietary ceramic silicon carbide water filtration systems as the leading solution for closed loop marine scrubber applications. The second quarter was again a new record for the company. The revenue was $9.3 million and exceeded the expectations we shared back in May and we also accelerated top profitability. The revenue of $9.3 million was up 258% from the same period in 2018 and up 25% sequentially from the first quarter of 2019. We are clearly gaining significant market traction and our market share continues to grow. In addition to the significant growth in revenue, we also improved profitability with income from operations of $393,000 compared to an income from operations loss of $563,000 in the second quarter last year. On a sequential basis we significantly improve profitability as well. We continue to make progress on leveraging our cost infrastructure and our contribution margins from marine scrubber products improved more than 500 basis points in the second quarter. I'll go more into details on our margin optimization program shortly. Our overall gross margins in the quarter were positively impacted by the 500 basis point improvement in contribution margins from our marine scrubber products. But it was also partly offset by those things of DPF products in the quarter. Resulting in low overhead absorption. We do expect DPF sales to normalize in the coming quarters and we expect further improvement in contributing margins from our marine scrubber products. Finally due to the increases in profitability and proceeds from…

[Operator Instructions] Today's first question comes from Eric Stine of Craig Hallum. Please go ahead.

Hi, Sune. Good morning. May be I'll start with just a marking question. I know it's not widespread but you're starting to see I guess Singapore would be the best example saying that they're going to be purposefully lacks in enforcement early in 2020. Just curious if you think that's a one-off if that has any teeth, and are you seeing any pause in the market as a result?

We're not. We see continued growth in the market. I think the book-to-bill ratio of 1.6 we improves that even though we had a record revenue quarter. We book 60% more than we ship. And so we are not seeing any pauses, we on contrary we see continued growth in the market. And it looks like that will continue in the second half of this year as well.

Got it. May be just turn into the two new scrubber customers. I'm wondering I mean given your commentary is it fair to say that those are our Asian customers. And maybe if you could just characterize them. And just curious if they were a component of your Q2 order strength.

Yes. They were component of our order strength; they were not Asian, however, they were actually European players. We saw a lot of new Asian players come into the market in the second half of 2018. And we've seen a lot of players coming in the first half of 2019 as well. But in this specific quarter it was actually two new Europeans players.

Got it. And I know in the past you say that you count seven of the top ten as customers. I mean how would you characterize these customers? I mean are they on that Top 10 list or they more in the up-and-comer category?

They are more in the around ten spots, so pushing to get into the Top 10 but not in th Top 10.

Got it, okay. Last one for me just as we think about this going forward. I mean I would think especially in light of your backlog, is it fair to think, I know, in the past you've talked about sequential growth throughout the year and obviously strengths heading into 2020. Is that still the expectation that there should be a step up here in revenue for 3Q?

Yes. We definitely feel we had a very strong start. In year, we had a record first quarter, record second quarter and record first six months, so we think definitely that the second half of 2019 will be stronger than the first half.

Our next question today comes from Robert McCarthy of Stephens. Please go ahead.

Good morning. How are you, sir? So let's just talk about the book-to-bill first, I mean, the suggestion of, I think your average content on a scrubber is in that $500,000 range. One could surmise that the shipments in the quarter on the marine vessel side could be as high as 17 or 18 range. We could apply a book- to-bill order strength of about high 20s. I think that would indicate backlog growth for you probably mid single digits for the second quarter. Is that a fair characterization or am I doing the math wrong?

Yes. So we shift about our marine scrubber business in the first quarter was about $8.3 million - $8.4 million of revenue. So we booked about 60% more than that.

Understood, okay. Well, I will pursue that line of questioning offline. Then I guess the next thing is just maybe in terms of following up with some of Eric's solid questioning. Could you characterize what you're seeing that's different in the market? And I guess it would be around the increased adoption of closed-loop scrubbers and the related technology. But obviously works at awful about lot, others did talk about the precipitous drop in orders, but obviously that was due to some compares and also the fact that as we get closer to compliance and longer lead times there could be a kind of a strategic pause for open loop scrubbers. Could you just take this opportunity to kind of expand on your comments why you think you're going to just grow a lot better and you're more disconnected from what their comments are?

Yes. I think if we take those two and it's correct that been out and said that they have seen a softening in scrubber demand. And I think it relates to two things. One fact is that they used to have a very, very high market share. I can go 12-24 months back, it was a limited number of players in the industry and these two guys probably had 25%-30% market share each. What we've seen over the last 12 months is it's a huge number of new players in the industry with some [dollars] and South Korean players, a lot of Chinese players coming into the industry. We've seen new European players come into the industry. And I think what they are experiencing is that they are losing market share. And so we actually think the overall scrubber market is unchanged or still growing. What we are also seeing is a larger proportion of closed loop companies and we think the market is moving slowly but safely from open loop systems to higher driven closed loop systems, obviously benefiting our business.

Yes and your core possibility were very strong as were contribution margins, obviously, I think FX moved against. I think we think that will reverse in the second half. Maybe you could talk about in that context the margin enhancement. Some of the initiatives there and I think one thing that was suggested in the past was obviously more in sourcing occurring. So I wanted to get any kind of qualitative update on that ability to in source to the obviously that's going to have very, potentially very profound impact on the gross margin.

That correct. So we made a good improvement in the second quarter and improved more than 500 basis points on our marine scrubber margins. And that was really due to optimizations in house. What we'll see in the third and fourth quarters is in sourcing of currently outsourced manufacturing is one component. And that will be a big driver for March in optimization. And we are doing certain design changes as well that we're implementing in this current quarter. And that would also improve our margins. So even though we made significant improvements in the second quarter, we are expecting significant improvements again in the third and fourth quarters.

Finally, if you'll indulge me the diesel particulate sales in the quarter, I don't know if you called out how much that was an actual dollar basis and then obviously power plant excusing me revenues in association with diesel particulate and then any of the power revenues. I don't know if you disclose that or not.

We do not disclose that yet and I think it will be meaningful to start disclosing that when we get into 2020. We're doing very well on booking orders in the power plant site. And we think will be a meaningful part of our revenue stream in 2020. Coming back to the diesel particulate filters, it's correct that we had a very weak quarter for diesel particulate filters. We had revenues and let me checks I am accurate; we have revenue of about $100,000 in the second quarter of these particulate filters which is exceptionally low. And it would take the first half of the year and it's also go about $3 million of revenue which is a normal level force. And we're expecting to see a normal daily or normalized level but again in the third and fourth quarters. So it was an exceptional quarter for the diesel particulate filters which will normalize in this quarter. But unfortunately it also means that we had a lower absorption of overhead. And it kind of hit the overall gross margin. So we are pleased with the improvements on the marine scrubber business and we know that diesel particulate filters sales will normalize in the third quarter.

And conversely obviously the implied revenues of association with marine, at least by my expectation are going up on the basis of that, right. So that's probably a net positive in terms of the growth days. So with that I'll leave it and get back into queue. And I look forward to seeing you soon.

And our next question today comes from Rob Brown of Lake Street Capital Markets. Please go ahead.

Hi, Sune. On the closed loop scrubber market what's sort of the penetration rate of new orders at this point? And how do you see that playing out into 2020?

So what we're missing at this stage is a feedback from the scrubber manufacturers. Our sense of what is going on are also seeing is a larger part of scrubber installations being closed loop now. We have seen especially China has been very aggressive in legislation. They've come out and they want to implement further legislation and ban open loop discharge. But also implement new legislation and discharge limits on PAH, on noise and so forth. And we think this is a trend. We think we'll see more and more ports around the world ban open-loop discharge and we think eventually global ban against the open loop discharge. And I think a lot of ship owners are seeing this right now. And our sense right now is that a larger proportion of the scrubber installations and especially [planned] scrubber installations are closed-loop versus open loop.

Okay, great. Then on the power plant market, you talked about a couple projects you've won and some activity this year that leads into next year. But what's sort of the average kind of revenue per project and what markets are you seeing activity in?

So we started back home in Denmark few years back on power plants. And it was really good to see that we got traction with it a number of power plant in Denmark so far. And we kind of expanded our view into Europe. We recently completed a $1.1 million installation in Finland. And we plan to expand into Germany, Sweden, and Norway and so let's say countries near to Denmark will be the first countries we are targeting. We're booking orders right now and again we think it would be more meaningful partners on revenue in 2020 numbers.

Okay, great. Thanks for the color and then lastly on the framework agreement, the third framework agreement that you're working on. Where you at in terms of order flow there and taking it out of that wraps?

Still early stages. We said for a while that we think this will turn into a meaningful revenue from beginning of 2020. And that should still be true.

Today's next question comes from Liam Burke of B. Riley FBR. Please go ahead.

Thank you. Hi, Sune. How are you today? You talked about the scrubber market. You talked about legislation. Do you view and you don't have to give me a specific number but do you view the overall demand for scrubbers changing either upward or downward to the original base case you made when you entered the filtration market?

Really unchanged. We had high expectation for scrubbers' option. We predicted about 20% uptick in scrubbers by 2025. And so far and that prediction has been pretty accurate. So we had high ambitions and so far they proved correct.

Okay and you mentioned orders getting back to the power plant. You didn't mention countries, different countries but in terms of order expected --orders you have in the pipeline now, have you gone beyond Denmark and into other countries in Europe, are you still just in Denmark on the order backlog?

No. We are looking to expand into Europe and have expanded into Europe. And we kind of working in the countries close to home which makes a lot of sense for us right now. And as we expand our presence in the power plant business, we will add further countries far away from home.

Our next question today is a follow-up from Robert McCarthy of Stephens. Please go ahead.

Yes. Thank you for taking another couple of rounds here. But I guess the question I would have is obviously you've highlighted some import opportunity. Has that been driven by just maybe a change and how people are thinking about the market in compliance? How do you think about that opportunity? Is there any way to size it in terms of content per port and how you would think about doing that in the context of kind of your thesis around the propensity for closed-loop adoption overall?

Yes. Thank you very much for that question. And it's actually a very exciting opportunity for us. It is so by the end of this year we'll have 4,000 open loop scrubbers either installed or in order which is obviously a huge potential market for us for open loop conversions or to sell them an import solution. And what we would be selling is a small filtration system that they can run while import. And it will allow them to run the auxiliary engines while import and provide power for the ship. So that is a sizeable opportunity in terms of dollars, we estimated around to $200,000 to $250,000 per installation and you have about 4,000 of them out there potentially. So huge potential.

Great. And then as a follow up on the power-plant opportunity. Have you seen in terms of revenue trends even more sequential strength 1Q versus 2Q or anything you can give us about what you've seen in terms of the near-term revenue trends at power?

Yes. Again, we --it's early stages. And we're booking orders, written in our order book, we are pleased with our progress. We've been doing it for a couple of years. We know have a well-functioning product for the power plant market. And now we are expanding beyond Denmark. And so it's still not let's a big part of our business, but as we move into 2020, we think it would be a meaningful part of our business.

And finally NOx I mean could you just paint the catalyst scenario around that no pun intended. Where we expect to see IMO coming out with a similar kind of ban there? Would you expect local jurisdictions or local governments to put in effect that ban? How should the regulatory wave kind of occur so that we will be under the balls of our feet waiting for kind of you to give the commercial response to the regulation? How do we think about that?

We think that NOx reduction is the next big mandate in the marine business. We have seen this mandate for sulfur reduction, such reduction which is IMO 2020. And we think there will be a mandate for NOx reduction as well sometime in the future. In the meantime there are environmental protection zones in place and there you already have to install NOx reduction products. So there is an existing market for NOx reduction in the marine business. And we think that in the near future we will see open mandate for that as well. End of Q&A

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back to Sune Mathiesen for any closing remarks.

Thank you very much. And thanks to everyone joining us today on the call. And we look forward to speaking with you again on our next conference call that is live in Q3 in November. And thank you again. And I wish you all a good day.

And thank you sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines. And have a wonderful day.