LiqTech International, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. LiqTech develops and sells silicon-carbide filtration products, including liquid filtration systems and diesel particulate filters (DPFs). It reported results in U.S. dollars.
Financial results and liquidity
- Q2 revenue: $9.30 million, up 158.4% from $3.60 million. Gross profit was $2.08 million, with a 22.3% gross margin, versus $0.66 million and 18.3% a year earlier. Operating income was $393,452; net income was $146,786, compared with a $263,526 net loss in Q2 2018. Basic and diluted EPS were $0.01.
- First-half revenue: $16.72 million, up 179.1% from $5.99 million. Gross profit was $3.55 million, with a 21.2% gross margin, versus $0.60 million and 10.0%. Operating income was $410,909 and net income was $181,030, versus operating and net losses of $1.96 million and $1.80 million, respectively, in first-half 2018. EPS was $0.01.
- Revenue mix: Liquid filters and systems generated $13.49 million in first-half 2019 revenue, compared with $2.45 million a year earlier. DPF revenue declined to $2.99 million from $3.54 million. Europe contributed $13.64 million of first-half sales.
- Cash flow: First-half operating cash outflow was $5.07 million, compared with $3.33 million in 2018. Investing cash outflow was $327,559. Financing provided $14.80 million, primarily from the May equity offering. Cash, cash equivalents and restricted cash ended the period at $13.36 million, including $783,499 of restricted cash.
- Liquidity and capitalization: Working capital was $21.37 million, compared with $6.75 million at December 31, 2018. The May registered offering issued 2,215,862 shares at $7.25 per share and generated $14.67 million net proceeds. Total liabilities were $11.73 million; these included $1.96 million of operating lease liabilities and $5,201 of finance lease obligations. The filing reports no material off-balance-sheet arrangements.
Changes versus the prior comparable period
- Management attributed the revenue and profit improvement chiefly to marine scrubber-related liquid filtration and water-treatment projects, which lifted sales and improved product mix. The company described Q2 and first-half revenue as records.
- DPF demand declined, which management attributed to lower market activity. Q2 DPF sales fell $726,340 year over year; first-half DPF sales fell $253,565.
- Operating expenses rose 37.6% in Q2 and 22.4% in the first half. Management cited hiring, especially project managers, and associated employee, equipment and office costs. General and administrative expense was the largest contributor to the increase.
- Currency transactions shifted to a loss: $206,718 in Q2 and $158,560 in the first half, compared with gains of $296,140 and $217,086, respectively, in 2018. These losses offset part of the operating improvement.
- Accounts receivable rose to $8.46 million from $1.31 million at year-end. Management linked the increase, along with higher other receivables, to shipped orders whose final payments are generally invoiced after commissioning.
Outlook, risks and unusual items
- Management said cash and cash equivalents at June 30, together with expected operating cash generation, should fund its current operating plan for the next 12 months. It also cautioned that additional capital may be needed; future financing may be unavailable or dilutive, or carry restrictive debt terms.
- Four largest customers accounted for approximately 74% of first-half sales, versus the largest customer at approximately 12% in first-half 2018, creating significant customer-concentration exposure.
- Operating cash use reflects substantial working-capital demands, particularly receivables and deposits. Deposits increased in part due to prepayments for new production furnaces.
- Management identified ineffective disclosure controls and procedures due to material weaknesses associated with limited finance-department staffing. Planned remediation included hiring, new procedures and an ERP investment; the filing says no material change in internal control occurred during the period.
- The company was closing its Germany and Singapore operations, with closure expected during 2019. Two former-supplier claims of approximately $68,800 and $83,400 were contested; no provision was recorded, and management did not expect payment on the first claim. The second claim had previously been rejected by a court.
- The company adopted the new lease standard in January 2019, recording approximately $2.1 million of right-of-use assets and lease liabilities at adoption; management said adoption did not materially affect operating results. No material subsequent events were reported through August 14, 2019.
Important facts for investors to verify
- Whether marine scrubber-related project revenue and improved gross margins are repeatable, and the timing of customer commissioning and collections.
- Customer concentration, receivable aging and collectability, and the effect of large project deliveries on operating cash flow.
- Progress in addressing the disclosed material weaknesses, including finance staffing and ERP implementation.
- Whether management’s 12-month liquidity expectation is supported by cash conversion, and whether additional financing will be required.
- The status and financial impact of the planned Germany and Singapore closures and the disputed supplier claims.