Good day and welcome to the LiqTech International Reports' Third Quarter of Fiscal Year 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference call over to Mr. Robert Blum of Lytham Partners. Mr. Blum, the floor is yours, sir.

Great, thank you so much. Good morning everyone and thank you for joining us on today's conference call to discuss LiqTech international's third quarter 2022 financial results. Joining us on today's call from the company are Fei Chen, Chief Executive Officer; Alex Buehler, Former Interim Chief Executive Officer and Member of the Board of Directors; and Simon Stadil, 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. 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 advice interested parties other risks that may affect our 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 this date and the date of the release in 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 in conference call. Now, I'd like to turn the call over to Fei Chen, CEO of LiqTech International. Fei, please proceed.

Thank you, Robert. Let me start out by saying what an honor it is to be the CEO of LiqTech at this important stage of the company's development and how grateful I am for the boss strong support. I have now been at LiqTech for eight weeks and the response from entire organizations has been overwhelmingly warm, including some many of you our investors with whom I have had the opportunity to speak. I believe we all understand the tremendous opportunity that is in front of us to leverage our highly unique technological advantages, brand competences and sustainability value to build a growing and profitable business in the years to come. I need more than eight weeks to provide you with step by step details on our going forward strategic plan, let me provide some high level observations and initial thoughts on how we are accelerating our commercial and business development processes. First, it needs to be a great interest that we have tremendous technologies. For those not familiar, I was the international innovation platform director responsible for establishing Grundfos' water treatment division. Grundfos is one of the world leaders in the development, manufacturing and the distribution of water and the liquid pumps. Where at Grundfos in 2012 I was introduced to LiqTech's technology. At that time I saw the uniqueness of LiqTech's silicon carbide membrane technology and reached out to the company for a potential collaboration to accelerate the commercialization of this membrane technology. Unfortunately, LiqTech rejected the idea electing instead to go it alone. It is therefore very interesting for me all of the years, these years later to assume the responsibility to accelerate the commercialization of LiqTech membrane technology, which is even stronger today. Strategically, it's rather obvious that we are currently too reliance on large silicon…

Thank you, Fei. Let me add some color on the financial highlights for the third quarter and full year outlook. Revenue for the quarter was 3.3 million compared to 4.1 million in the same period last year representing a 0.8 million or 20% decrease. This development reflects a quarter with stable contribution from our plastics, ceramics and aftermarket businesses, underpinned by increased share of membrane and spare part sales. However, the quarter was also impacted by a slowdown in water system deliveries due to reduced order intake and delayed shipments due to general supply chain issues and longer lead time on our core EQS [ph] membrane production. The quarter also reflects a period with unprecedented volatility in Europe. This due to geopolitical unrest related to the Ukraine-Russia conflict with a significant surge in both gas and electricity prices across Europe and also appeared with increased macroeconomic uncertainty and rising inflation. For our business, the uncertainty did result in reduced order intake for our ceramic DPF and plastic products, which was partly offset by the delivery of large, marine and on-road DPF orders for the Asian market secured earlier in the year. Looking close at the numbers for each of our segments. Ceramics reported $1.9 million in revenue underpin by a couple of large membrane and DPF orders followed by water and plastic revenue of 0.8 million and 0.7 million respectively. The reduction in plastics revenue of 22% compared to same period last year generally reflects a slow start to the quarter with lower than expected order intake during European summer holiday, amidst the escalating energy crisis. Turning to the water systems business. The revenue of 0.8 million represented a 47% reduction compared to Q3 last year with the lack of system deliveries explaining the reduction partly offset by increased aftermarket…

Thank you, Simon. Look into quarter four, we have a busy quarter ahead of us as we focus executing the various initiatives I mentioned today and delivering a number of systems that are currently in production. In the coming weeks, we will further define the growth strategy and substantiate our sales forecast and the budget for 2023. We will translate this into guidance and communicate with everyone at appropriated time. One final comment that I would like to make and that is to thank Alex for his leadership over the past six months. This [indiscernible] and the guidance have helped to position the company going forward. It’s never an easy task to assume the role as the interim CEO, but by all accounts he handled it to. I am extremely excited to be leading this company as I believe the best days are ahead of us. I thank you all for your time today. At this point, I would like to turn the call over to the operator to address any questions from audience. Mike, please proceed.

Yes, ma’am. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question we have will come from Robert Brown of Lake Street Capital. Please go ahead.

Hi, good morning. Just quickly if you – I'm kind of wondering about the pricing environment. I know you've taken some pricing actions. How has that impacted the different pipelines in different markets? I presume it depends on the market, but how's the pricing impact been able to be flowed through?

Hi, Rob. It's Simon here. I'll start out and then Fei can comment further. So, clearly, if – folks on our products plastics, DPFs, membranes, we haven't seen a price erosion. We have on the other side seen pricing being fairly stable in a very inflationary environment. Clearly, we have worked to increase our pricing to offset the cost inflation we have seen. And obviously, that's always a balancing act, but in terms of price competition and price situation that's not on the agenda. On the system side, there is obviously a more complex picture where we are trying to leverage the value proposition and the value we are creating for our clients to basically increase our pricing and achieve a high contribution margin process business going forward. But at this point in time, I would say it is a fairly robust picture on pricing and no price erosion.

Yes, I think I would like to add on top of that the new end markets, which we mentioned today, we really believe because our solution has a unique property there, so we might have much better price in the future.

Okay, thank you. And then I am just wondering if you can elaborate a little bit on your efforts to expand the distribution channels in water. Maybe what sort of is the distribution environment there and how have you seen that kind of developed historically and what sort of the opportunity in the water market with adding a distribution relationships?

And I mean we have different end markets. I just give you a concrete example. For example, for the pool and the spa market definitely is a very much distributor driven market already in beforehand. So we just need to choose the right distributor and go close to them and really get commitment from them and deliver what we need. So this is what we're already being doing today. We just want to get further strength and on the distribution side. And the press – produced water I mentioned today is a new area because we have the systems in Middle East region is up running now. With this data in hand we will be able to find the right partner to go into this region and really pushing out in this application. So you will hear more from us. We are looking at the different market segment and choosing the right partner and really pushing out distribution channel.

Okay, thank you. I'll turn it over.

Thanks, Rob.

The next question we have will come from John Litman [ph], Investor.

Hi, good morning. Thanks for your time. Can you hear me?

Yes. Hi, John.

Hi. Hi, great, thank you. Just a couple questions on the $7 million to $8 million to breakeven, are we estimating that to get to that level we need to get back into the marine scrubber business? Or are you in the belief that the current businesses that we're generating revenue from in this quarter are substantial enough to get to that breakeven point [Technical Difficulty] of the membrane to get to that?

As we – as I mentioned earlier we have a strategy in two steps. We would like to really emphasize our recurring business and that means the pool and the spa membrane and plastics and also DPFs areas we want to grow there. And on top of that we have the different end market where marine scrubber will be one of the end markets. So with the two combinations we do together in order to achieve the $7 million to $8 million and we believe with the reoccurring – recurring business will give us a very solid foundation and build on top system delivery. So this is two leg strategy we are working on. And the marine scrubber will be contributing, but because of the delay of the legislation, we do not expect big growth in that segment.

Thank you. Thank you, Fei. And just another question with the 17.6 or so million dollars in cash on the balance sheet, do you think that I mean it's no small task for you to more than double your current sales to get to break even. Do you think that you have the ample liquidity to get to that breakeven level with the balance sheet you have today?

Yes. Yes, we have. I think it is a bigger picture here, John. First of all, you need to look at what we have achieved this year. I think the capital structure obviously is an important vital step, getting the convertible note of our balance sheet, reducing our CapEx commitments and really using the CapEx group spend this year to invest into the right machinery. We have significant capacity at our facilities in Denmark, so we don't need CapEx over the coming years to grow our business even significant growth. So that gives us a lot of comfort. And finally with the cost reduction that we have achieved so far this year down 30% on OpEx and fixed costs since Q1. We don't have a long runway to get to cash flow breakeven. And with 17.6 million in the bank account I'm very confident – we are very confident that we have enough runway to get this company up to where it belongs.

That's fantastic. One last question for some of the not sophisticated investors including myself out there. If you do get to breakeven, the incremental revenue generated, Fei, from these new applications, I'm not as familiar, within the full space outside of in some of these other verticals. What is the incremental contribution margin from these recurring revenues or new revenue applications? I'd assume pretty high margin and high contribution once you pass that chasm of getting to break even.

Yes, you're absolutely correct. I think one of the key mechanisms to achieve stability is obviously growing your top line or even better also improving your contribution margin at the same time. And that's obviously a strategic focus of ours. I think a minimum of 40% we need to deliver on, we are striving higher than that and even in Q1 this year and you look into our Q3 numbers and adjust some of the non-recurring items, we are above 40%. And that's basically a focus of ours. So you can say for every million dollars of implemented revenue, we should have at least 40% fall through to Q2 [ph] EBITDA and help us achieve that cash flow stability faster than what we've guided to you in the past. And as also mentioned today, we guided to seven to eight. We now confident in saying it's more seven and if we achieve higher, better pricing, maybe it could go lower than that. But again, I'm very cautious about that in an environment where we have inflationary pressure on our costs. So – but let's see how the world looks like in early next year and I'll provide more guidance on that.

Sounds like we've got the right team there now. Thanks a lot folks. We'll look forward to connecting in coming quarters.

Thank you.

Thank you, John.

[Operator Instructions] At this time, we're showing no further questions. We will go ahead and conclude today's question-and-answer session. I will now like to turn the conference back over to the management team for any closing remarks.

Thank you, Mike. I would like to close this conference call by saying thank you all very much for being with us today. We look forward to come communicating with you soon in the New Year. Thank you.

And we thank you ma'am and to the rest of the management team for your time also today. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you everyone. Take care and have a wonderful and blessed day.