LiqTech International, Inc. — Q3 2020 Form 10-Q
Business context and period: The filing covers the three and nine months ended September 30, 2020. LiqTech develops and sells silicon-carbide filtration products and systems, diesel particulate filters, and plastic components. Its operations are concentrated in Denmark and the United States. Unless stated otherwise, amounts are U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3.54 million | $9.67 million | $18.47 million | $26.39 million |
| Gross profit (loss) | $(0.31) million | $2.23 million | $2.83 million | $5.78 million |
| Gross margin | (8.7)% | 23.0% | 15.3% | 21.9% |
| Operating income (loss) | $(2.83) million | $0.22 million | $(4.67) million | $0.57 million |
| Net income (loss) | $(3.87) million | $0.66 million | $(6.13) million | $0.84 million |
| Basic and diluted EPS | $(0.18) | $0.03 | $(0.29) | $0.04 |
- Nine-month operating expenses rose 44% to $7.49 million, including selling expense of $2.02 million, general and administrative expense of $4.59 million, and research and development expense of $0.88 million.
- Cash, cash equivalents, and restricted cash were $14.49 million at September 30, 2020, including $1.52 million restricted. Net working capital was $18.65 million, versus $17.16 million at December 31, 2019.
- For the first nine months, operating cash outflow was $0.60 million, investing cash outflow was $3.23 million, and financing cash inflow was $7.23 million. Capital spending included $2.90 million for property and equipment, principally new furnaces.
- Total liabilities were $13.60 million. The filing reports finance lease obligations of $0.19 million and operating lease liabilities of $4.98 million; it does not disclose conventional funded debt. A credit line is used for leasing arrangements and customer guarantees. Total current assets were $27.77 million and current liabilities $9.12 million.
Material changes versus the comparable period
- Revenue fell 63% in Q3 and 30% year to date. The main driver was lower sales of liquid filters and water-treatment systems, particularly for marine scrubber applications; plastic-component sales increased following the 2019 acquisition.
- Lower sales of higher-margin liquid filtration systems, reduced manufacturing levels, and fixed production costs contributed to Q3 negative gross profit. Q3 cost of goods sold included a $170,000 inventory write-off connected with the North American wind-down.
- The nine-month net loss worsened by $6.97 million year over year. Higher operating expenses, lower revenue, currency transaction losses, and warrant fair-value expense were significant factors.
- Cash increased from year-end, primarily reflecting the May 2020 financing. The company issued 1,085,000 common shares and 515,000 prefunded warrants; common shares outstanding rose to 21,655,461 at September 30. The warrant terms were amended in August, after which the warrants were classified as equity.
Outlook, risks, contingencies, and unusual items
- Management said COVID-19 measures materially adversely affected results in Q2 and Q3. Reduced order intake and production are expected to pressure gross profit until manufacturing can return to higher capacity. Management believed existing cash and ongoing operating cash generation would cover capital requirements for at least 12 months from the filing date, while emphasizing substantial uncertainty. It expected to fulfill most, if not all, existing 2020 delivery obligations.
- The company reduced or deferred expenses, limited production-site staffing, and encouraged remote work. It began winding down LiqTech NA, citing declining activity; Q3 and year-to-date expenses included an estimated $200,000 write-off of remaining North American fixed assets. LiqTech Germany and Singapore operations were also being closed.
- Other unusual items included a $0.90 million year-to-date warrant fair-value loss, a $0.30 million gain from revising the LiqTech Plastics earn-out, and $0.82 million of year-to-date currency transaction losses. Currency translation also affected comprehensive income.
- A $3.8 million non-cancellable purchase obligation relates to new furnaces; a lease is expected to partly finance the purchase. The filing reports two disputed former-supplier claims of approximately $68,800 and $83,400, with no provision recorded. Warranty liabilities were $1.06 million.
- Management concluded disclosure controls were ineffective at September 30 because of material weaknesses in internal controls. Remediation efforts included a new ERP system, added finance resources, and process and control documentation; management said remediation was not complete. COVID-19 may constrain progress.
- After quarter-end, shareholders approved increasing authorized common shares from 25 million to 100 million; the amendment was made November 3, 2020.
Most important facts for investors to verify
- Whether order intake, customer demand, and production utilization recover, especially in marine water-treatment systems, and how that affects gross margins and cash burn.
- Whether management’s 12-month liquidity assessment remains valid, including the availability and terms of credit facilities, restricted cash, and furnace-related financing and payments.
- The scale and timing of North American closure costs, any further asset or inventory write-downs, and the status of the $3.8 million furnace commitment.
- Potential dilution from the 515,000 prefunded warrants, outstanding stock awards, and the expanded authorized share capacity.
- Progress in remediating material weaknesses and the effect of currency movements, customer concentration, disputed claims, and warranty costs on future results.