LiqTech International, Inc. — Q3 2023 Form 10-Q
Business context and period. LiqTech develops and sells silicon-carbide filtration products and engineered systems for water treatment, ceramics and diesel particulate filtration, and plastics. This unaudited report covers the three and nine months ended September 30, 2023, compared with the same periods in 2022.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $5.07 million | $3.31 million | $14.07 million | $11.96 million |
| Gross profit / margin | $0.95 million / 18.7% | $0.11 million / 3.2% | $2.50 million / 17.8% | $0.50 million / 4.2% |
| Operating loss | $1.70 million | $2.28 million | $5.49 million | $10.21 million |
| Net loss | $1.41 million | $1.75 million | $5.36 million | $12.01 million |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $(2.97) million | $(11.48) million |
At September 30, 2023, cash and restricted cash were $11.83 million, down from $16.60 million at December 31, 2022. Net working capital was $16.84 million, versus $21.58 million. Total assets were $36.84 million and total liabilities $17.56 million. Senior promissory notes had $6.00 million principal and a $4.54 million carrying value after unamortized discount; finance lease liabilities were $3.46 million and operating lease liabilities $2.83 million.
For the first nine months, investing cash outflow was $2.26 million, primarily for manufacturing equipment. Financing cash inflow was $0.72 million, including sale-and-leaseback proceeds; the comparable 2022 period included substantial equity and debt financing. Gross profit improved, but the company continued to report operating and net losses and used cash in operations.
Material changes versus the prior period
- Q3 revenue rose 53.4%; nine-month revenue rose 17.6%. Management attributed growth to water-system and aftermarket sales, spare parts and membrane housings, pool systems, and external R&D projects. Nine-month ceramics revenue declined, partly reflecting the prior-year delivery of a large legacy DPF order.
- Gross margin improved substantially in both comparisons. Management cited higher volumes, improved product mix, pricing discipline, manufacturing efficiencies, and cost reductions; it also noted remediation costs and higher depreciation from manufacturing investments.
- Nine-month operating expenses fell 25%, including because 2022 included $1.79 million of restructuring costs. Excluding those costs, expenses declined 9%. Selling costs increased as the company added sales staff; general and administrative costs and R&D costs declined year over year.
- Operating cash use improved by $8.51 million year over year, but remained negative. Cash and working capital fell from year-end levels.
Outlook, risks and unusual items
- Going concern: The filing states that recurring losses and cash use raise substantial doubt about the company’s ability to continue as a going concern for one year after issuance. Management says current projections indicate cash on hand and expected operating cash generation should cover requirements for the next 12 months, but acknowledges significant uncertainty and no assurance that its cost reductions and profitability measures will succeed.
- Debt amendment: The $6 million senior notes’ maturity was extended from June 20, 2024, to January 1, 2026, under an amendment entered into October 13, 2023, effective September 30. In consideration, the company issued warrants for 531,250 shares at $5.20 per share. If the notes are not repaid by the second anniversary of issuance, the stated interest rate rises to 10%, increasing by 1% monthly up to 16%.
- Risks: Management highlights macroeconomic and geopolitical uncertainty, inflation and energy-price volatility, supply-chain and component availability, customer concentration, access to financing and liquidity, foreign-currency movements, and potential changes in environmental regulation. One customer represented 12% of Q3 revenue; customer identities are anonymized.
- Contingencies: A 2022 settlement concerning alleged corrosion in marine wastewater-treatment systems involved shared remediation costs. Warranty-reserve utilization in the first nine months included costs related to this settlement. The filing reports no off-balance-sheet arrangements.
- Controls: Management concluded disclosure controls were not effective at September 30, 2023, due to material weaknesses in internal control over financial reporting. Remediation efforts include finance hires, a new ERP system, and process redesign; weaknesses are not considered remediated until controls operate effectively for a sufficient period.
- No quantified revenue, earnings, or margin guidance is provided. The stated outlook is based on management projections and remains subject to substantial uncertainty.
Important facts for investors to verify
- Whether operating cash generation and available liquidity can support the business over the next 12 months, given the explicit going-concern substantial doubt.
- The final terms and accounting for the note extension and additional warrants, including potential dilution and interest consequences if the notes remain unpaid.
- Whether improved gross margins and revenue growth persist as product mix, delivery timing, and customer demand change.
- Progress in remediating material weaknesses in financial reporting controls and the timing of effective operation.
- The remaining cost and exposure from marine-system remediation, product warranties, and inventory reserves.