Hello, welcome to LiqTech International's Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw from the queue, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners.
Thank you so much, MJ. Good morning, everyone, thank you all for joining us on today's conference call to discuss LiqTech International's second quarter 2023 financial results for the period ending June 30th, 2023. Joining us on today's call from the company are Fei Chen, the company's Chief Executive Officer, 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 I 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 are numbered by interested parties of the 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 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. Good day to everyone on the call. I am excited to get the opportunity to speak with you all today. During the second quarter, we continued to successfully execute against our strategy to drive profitable growth, which results in a strong 25% sequential increases in revenue and a significant improvement in gross margins. This combination of top-line growth and the gross margin improvement, coupled with tight controls of operating expenses, resulted in improving our Adjusted EBITDA loss to just $0.6 million, compared to a loss of $3.54 million in the year ago quarter. Adjusted EBITDA loss is the best performance the company has achieved for years and demonstrates our very achievable pathway to consistent profitability in the near term.
As I stated on the last few quarters' calls, we have a tremendous opportunity ahead of us to leverage our highly unique technological advantage, brand competencies, and sustainability value to build a growing and profitable business. We moved quickly forward following my appointment to define our corporate vision and commercial strategy with a clear focus on four key initiatives. Reminder, those four initiatives are: a focus on recurring revenue solutions, the creation of new partnerships and distribution agreements to expand our commercial reach, enhancement of operational efficiencies, and the deployment of larger system sales. To accomplish those goals, we brought on board key sales and operations personnel, which have made an immediate positive impact on the business.
Further, I have leveraged many of my relationships and strategic approaches that was proven to be successful when I was at Topsoe and Grundfos, two of the leading industry companies in the world, with an emphasis on water treatment, chemicals, and clean energy technologies. Where the new team has only been together for three full quarters now, I'm extremely pleased with the progress we have made and anticipate continued progress in the quarters to come. Let me dive into details we are making against our four key initiatives. Let's start with our recurring revenue opportunities, which includes installed base sales, diesel particulate filter, ceramic membranes, and the plastic business. Our swimming pool systems business somewhat overlaps between systems and recurring revenue, and I will likewise go into details there.
Across all of these key areas, we have improved our pricing discipline through enhanced cost visibility and elevated market intelligence to deliver increased gross profits. As I said last quarter, growth is one thing. We are extremely pleased with the profitability metrics that came out of these recurring areas, which contributed to the overall strong contribution margins. From a membrane element standpoint, we continue to increase ceramic membrane orders during the second quarter, which will be for delivery in quarter three. On the DPF side, we experienced a stable revenue contribution. We do not expect tremendous growth here. Looking persistently into new application areas to hold this business steady. Finally, on the plastic side, in the second quarter, we experienced significant sequential growth of approximately 67%.
This is mainly driven by a large order we received at end of last year in the area of biological-based material development. For the coming period, our team continues to find new and exciting opportunities to deploy our capabilities. Stabilizing and growing our recurring business opportunity is the base by which this business can be sustainable, profitable. I am pleased with the progress here and believe we have further growth ahead in this area of focus. Let us transition to our systems business. As a reminder to those who may be new to our company, this includes our larger system solutions in the areas of industrial water treatment, marine scrubber systems, the broader oil and gas situation, and acid purification markets. It also includes some cross-hour in swimming pool systems.
The system business certainly has longer lead times and requires our team to identify areas where our solutions can offer superior performance and add value to our customers. During the quarter, we signed commercial contracts for delivery of 10 pool systems and successfully performed on-site commissioning of our first MEG unit at the customer's offshore platform in the Mediterranean. Subsequently, we saw 45% of growth in this area. Swimming pool systems have clearly been a leading driver for us during 2023, following the launch of our enhanced Aqua Solution membrane based on our proprietary silicon carbide membrane technology. Year- to- date, we have received 15 pool system orders from a wide variety of geographic locations. Revenue growth during the quarter was driven by the successful on-site commissioning of our first MEG unit. This was the first of a two-part order for an offshore project.
We have earlier demonstrated the silicon carbide membrane technology performance in pilot. This on-site commissioning has now verified significant performance improvements of our technology to the MEG regeneration process compared to other membrane technologies. The successful commissioning gives us confidence for additional opportunities within this marked subsegment. Further, we are making progress in phosphoric acid purification with the delivery of a pilot unit to Silicon Filter in China, which we announced it on Monday. We are very pleased to have delivered this pilot unit to our partner in the region, which will help them to demonstrate that our ultrafiltration technology can effectively help their customers enhance their process efficiency and the product quality. We look forward to building on this initial progress in the years to come, as we look to address one of the strategically key markets for phosphoric acid. Partnerships and distribution.
As a reminder, we initially entered into the distribution agreement with Silicon Filter in April 2023 to address the large and growing market opportunity in China. The fact that we are getting an initial pilot order so quickly, really highlights their desire to advance this partnership. On the same front, our collaboration with NISA for oil and gas-related solutions continues to advance, as we have built up an aligned pipeline with clear targets in the near term. I look forward to hopefully sharing more with you on this in the near term. To extend our distribution footprint further, we entered into a MoU to explore the application of our advanced filtration system to industry water treatment in China with Nanjing Wondux.
Wondux is an expert in intelligent environmental governance and resource utilization, with a focus on garbage pollution control, zero discharge of industrial wastewater, recycling of waste salt, extraction of new energy materials, and provides customers with advanced technology equipment, system integration, and overall solutions to environmental problems. Wondux has extended customer groups across China and a good reputation in environmental waste and water treatment area. China is a significant market for industrial water treatment, especially as environmental and sustainability is coming higher and higher, higher up as agenda of the government and enterprises in the country. Entering this MoU will allow us to tap into Wondux's market reach and the market position in China.
I believe with a strategic combination of direct sales and distribution partners, such as our recently signed agreement with Wondux, NISA and Silicon Filter, we have the right combination going forward to make continued progress in our key target markets of swimming pool, oil and gas, acid purification and border water treatment. With two quarters completed and a better visibility into the business, I believe we are at a point where we can now provide an outlook for full year 2023. Based on the progress we are achieving in both our recurring and the system sales businesses, we expect full year 2023 revenue growth of 20%-30%, which would translate into total revenue of about $19 million-$21 million for the year.
We also believe with operational efficiency improvements we have made, that the 2023 full year gross profit margins will be in the range of 15%-20%. Please remember that our gross margin last year was only 3.5%. We are closing the gap on achieving quarterly breakeven. With the strong balance sheet and the tangible progress being made, I am highly optimistic about what is coming for LiqTech. With that, let me turn-
Ladies and gentlemen, it appears we have lost connection with our speakers. Please stand by as we reestablish a connection. Thank you for standing by. Let's pick up where we left off.
Perfect. Thank you, MJ. Good morning, everyone. Simon here, sorry for that. Now, let me add some color on financial highlights for the second quarter. The reported revenue was $5 million, comparable to the second quarter of last year, and up 25% compared to the $4 million reported in the most recent sequential first quarter. Broken down by vertical, sales were as follows: System sales and related services of $2.1 million, comparable to the second quarter of last year, and up 44% compared to the $1.4 million reported in the first quarter. Ceramic DPFs and membrane sales of $1.8 million, again, comparable to the same period last year, and up 27% sequentially compared to the first quarter. Finally, plastics.
Revenue of $1.1 million compared to $1 million in the Q2 last year. Down 3% compared to the first quarter. Overall, the second quarter benefited from a diversified and improved revenue mix, better suited for the existing manufacturing setup, allowing for increased manufacturing throughput and overall efficiency gains. Furthermore, the quarter revenue was underpinned by increased aftermarket activities, leveraging our installed base, spare parts sales, general service and commissioning activity, and contracted remediation work. In comparison, the revenue for the second quarter of last year was mainly driven by a few sizable projects, including the delivery of a liquid filtration system for an oil and gas client in the Middle East, as well as the final delivery of a legacy framework order for DPFs transportation in Asia.
While the overall revenue was comparable to the second quarter of last year, the composition of the revenue is much more diversified in nature this year, reflecting our ambition to build a mobile business and establish business model. As Fei mentioned, we expect full year revenue growth of 20%-30% compared to 2022, evidencing that we indeed are expecting growth in the second half of this year compared to the first 6 months. This despite the impact from the European holiday season, which normally impacts our third quarter due to the slowdown in July. Turning to gross margin and more insight on our journey towards breakeven.
The second quarter reflects yet another vital step in the right direction, with a reported gross profit of $1.2 million and a gross profit margin of approximately 23%, compared to just $0.1 million and 3% reported in the same period last year. Even when looking at the first quarter, we saw sizable improvements in gross margin of approximately 10 percentage points due to increased activity levels and more attractive revenue mix. Considering the comparable revenue levels between the second quarter of this year and last year, the improvement in gross margin was mainly driven by the reduction in cost of goods sold. Also increased operational efficiencies supported by the newly implemented ERP platform, where we day by day are gaining more business insights.
Notably, the more established and recurring business lines, including sale of ceramic products and pool systems, were the main drivers behind the improvement in gross profit, further supported by the successful execution of ongoing strategic projects in the Middle East and the Mediterranean. As we still have overheads and other fixed costs that are not fully 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 out fixed costs, our contribution margin was approximately 52%, the highest in more than two years, and well above the 43% reported in Q1, and the 31% reported for the full year last year. As we see continued revenue growth, contribution margin is an important metric to evaluate how quickly we can reach breakeven.
As previously mentioned, we do 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 and profitability as evidenced in the current quarter. Turning to OpEx. Total operating expenses for the quarter was $2.8 million, down 42%, almost $2 million, compared to the $4.7 million reported last year. The decrease was predominantly explained by the restructuring costs recorded in the second quarter of last year, also a continued focus on cost control, partly offset by new investments in building a strong organization and execution platform. Moving to the next item.
Net other expenses during the quarter were minimal compared to the negative $1.9 million last year, with the change reflecting a gain on currency transactions and the early repayment of the convertible note in the second quarter of last year, significantly improving our capital structure. Concluding on the P&L, we reported a net loss of $1.6 million, reflecting an improvement of almost $5 million compared to the net loss reported in the same period last year. Positive development reflects both the increased gross profit derived from both price and mix improvements, also a general reduction in both other and operating expenses.
Commenting on our Adjusted EBITDA, excluding the effects of depreciation and amortization and non-cash compensation, we reported an Adjusted EBITDA of negative $0.6 million, compared to a negative of $1.3 million and $3.4 million for the period of Q1 2023 and Q2 2022. Again, this metric is a key reference point for our cash flow and financial breakeven efforts. Hence, we'll seek to implement this Adjusted EBITDA in future reporting. Finally, let me briefly comment on our cash flow and balance sheet before summarizing and handing over to Fei. We ended the quarter with $12.6 million in cash, down $1.7 million compared to the first quarter, explained by the operational result, maintenance CapEx, and investments in new machinery, machinery that will be delivered later this year.
Furthermore, the development reflects an increase in AR and inventories due to the uptick in activity levels and proactive sourcing of long lead time, long lead time items required for ongoing projects. In summary, the underlying cash flow profile is improving as we are showing progress on both top line and profitability. As reiterated in previous quarters, we are determined to accelerate the path to profitability, which ultimately will allow us to balance our cash flow and regain the required strategic and financial flexibility, so we can execute on the long-term objectives and ultimately create shareholder value. Thanks for your continued support, and over to you, Fei.
Thank you, Simon. Before we open up for your questions, let me quickly summarize. We have moved quickly to accelerate the commercial and the business development processes here at the company, which is showing tangible results. We are growing our more predictable, recurring revenue opportunities, leveraging our differentiated technology. We are also focusing on opportunities where we can deploy larger systems. Based on our outlook, this should translate into 20%-30% growth in revenue during fiscal year 2023. We have improved our pricing discipline through enhanced cost visibility and elevated match intelligence, and have placed a focus on recurring revenue opportunities, which are delivering increased gross profits. As I mentioned, our outlook for the year is gross margins of 15%-20%, compared to 3.5% in fiscal 2023. We are managing efficiencies across the entire organization.
In addition to the manufacturing efficiencies I mentioned, year-to-date, operating costs is down 36%, and 18%, excluding the restructuring costs. We are creating new distribution relationships to address certain end markets, and have made investments to the internal team to ensure a effective multi-strategy approach to commercialization. Our agreements with NISA, Silicon Filter, Wondux, and others, are expected to be drivers of future system sales growth. As we keep reiterating, everything we are doing is set against the backdrop of achieving profitability. The organizational transition we are undertaking has proceeded with the emphasis on utilizing our existing core competencies within the company and calibrated with our renewed strategic focus and the market dynamics. As Simon and I both mentioned, we remain on track to deliver breakeven as a $7 million in revenue, a number we think is achievable in the near term.
I am highly optimistic about the future. On final note, we will be attending a series of conferences in New York during the week of September 11th, including the Lake Street Conference. We would love the opportunity to meet with you where we are there. Please work with Robert Blum to coordinate any potential meetings. With that, operator, we would be happy to take any questions.
Thank you, Fei. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.
Hi, Fei and Simon.
Hello?
Hi. Hello.
Hi.
Wanted to follow up on your, on your second half kind of growth confidence, and outlook. Just want to get a sense of the visibility there and, sort of what you're seeing in terms of, of demand and, and what gives you sort of the visibility into the second half growth.
That's a very good question. I would like to say in this way, what we have been working very hard this year, also, since I come to the position, is really to get very reliable sales pipeline and increase the visibility of revenue forecast. When we say we're going to have the growth of revenue trend to 30%, we have very strong visibility behind.
Okay, great. Then, I know you've done a lot of work and made a lot of progress on getting the distribution footprint expanded and, and in place. How much further do you need to go there, or do you feel like you've got what you need? How, you know, sort of how is that, where are you at in that kind of effort?
We are going to continue. I mean, first of all, we already have signed some distributor and partnership contracts. We definitely would like to work on those agreements and partners to really maximize the benefit of that. The first half year, we have signed 15 swimming pool system contracts, and all of those actually have done together with our distributors. Definitely we want to further strengthen that. We do have some markets we're still not really going to yet. Give you example, as a U.S. market for swimming pool systems, there we will work on looking for new, new distributors. We are really both utilize all the agreements we have signed, maximize the benefits of that, then we will continue to find the new partnership and distributors.
Okay, great. Then the system business, the larger system business, you know, I guess the oil and gas market and the marine market, how is that pipeline looking and when do you see that, you know, how do you see that sort of playing out over the next 12 months?
We are, we are very active in those markets with our distributors, and those are the areas take a little bit longer time to really sign the contract, but we have some very, very interesting opportunities in our pipeline, so we would like...
Pardon me. It appears we have lost connection. Please stand by while we reestablish our speaker line. We have reestablished our speakers.
Hi, Fei.
Hi, Rob. We are having interrupted. I did not know that this clear.
Okay. Yeah, I think we were, we were talking about the large system orders. You said you were very active in them and, and should see that pipeline start to convert. I guess, that's what I heard. Feel free to continue to add on it, or I can ask another question.
Yeah. Okay. Yeah, that's what I tried to say. We, we do have some, some very attractive opportunities, and, we hope, in the next two quarters, we're able to tell you some more on that.
Okay, great. Thank you. You talked a little bit about the opportunity in the China acid filtration market. You know, I know you got, I think you got an order there. How is, you know, how would you rate that progress so far? Maybe just characterize the potential of that market.
I mean, the, the phosphoric acid market in China is huge because more than 60% of phosphoric acid market is in China. We are very, very happy we're able to move in that direction. Silicon Filter has been very fast, you know, have this pilot unit order with us already, and in this market, it's quite conservative. The first thing you need to go to the market definitely is have the pilot up running. That's why we are very, very happy we moved so fast, able to have the pilot to China and up running. I hope in the next 2 quarters, I will be able to tell you more about this pilot system in China.
I think it's a very strong sign, both our distributor, very active in the market, really pushing ahead, and also we see a very, very big interest in the Chinese market on our technology.
Okay, great. I'll turn it over. Great, great progress, and thank you.
Thank you.
As a reminder, to ask a question, you may press star then one. Seeing no further questions, I'd like to turn the call back over to management for closing remarks.
Thank you. I just want to thank all of you very much for being with us today. We look forward to communicating with you soon again. Thank you for your support.
The conference is now concluded. Thank you for your participation. You may now disconnect your line.