LiqTech International, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. LiqTech develops and sells silicon-carbide filtration products, including liquid filtration systems and diesel particulate filters (DPFs), serving marine, industrial and other markets. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $7.42 million | $2.39 million; up 210.3% |
| Gross profit (margin) | $1.48 million (19.9%) | Gross loss of $59,592 (negative 2.5%) |
| Operating income (margin) | $17,457 (0.2%) | Operating loss of $1.40 million |
| Net income (loss) | $34,244 | Net loss of $1.53 million |
| Operating cash flow | $(888,099) | $(1.76) million |
| Investing cash flow | $(169,546) | $(59,937) |
| Cash, cash equivalents and restricted cash | $2.60 million at March 31, including $117,904 restricted | $3.78 million at December 31, 2018 |
- Operating expenses were $1.46 million, up 8.6% year over year. Selling and R&D costs increased; general and administrative costs were nearly flat.
- Current assets were $15.87 million and current liabilities $9.51 million, yielding reported working capital of $6.36 million at March 31, 2019. Accounts payable rose to $5.54 million from $2.12 million at year-end.
- Operating lease liabilities were $1.96 million following adoption of lease accounting; finance lease obligations were $6,651. The filing reports a small guarantee credit line, not material conventional borrowings.
- Stockholders’ equity was $8.62 million; accumulated deficit was $32.25 million.
Changes and business drivers
- Management attributed the revenue increase mainly to marine-industry water-treatment system orders received in 2018 and continuing into Q1 2019, alongside increased DPF market activity.
- Liquid filters and systems revenue rose to $5.04 million from $463,277; DPF revenue increased to $2.24 million from $1.77 million. Europe contributed $5.69 million of sales, versus $1.26 million a year earlier.
- The four largest customers represented approximately 59% of Q1 2019 sales, compared with the two largest representing 21% in Q1 2018.
- Cash used in operations narrowed year over year, but the company still consumed cash. Receivables, other receivables and deposits increased materially; operating cash flow also benefited from increased payables and accrued expenses.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management describes plans to grow marine filtration, expand geographic reach and DPF markets, develop products and increase standardized system sales; these are strategies, not formal forecasts.
- Management identified material weaknesses in disclosure and internal financial controls, attributing them in part to limited finance-department staffing. Remediation plans included hiring, new procedures and a planned ERP system; management did not report that the weaknesses had been resolved.
- Two supplier claims were disputed, for approximately $68,800 and $83,400. No provision was recorded; management said it did not expect payment on the first claim and cited a prior court rejection relating to the second.
- Warranty obligations, including deferred extended-warranty revenue, totaled $734,531 at March 31, 2019, up from $432,225 at year-end, including $313,894 of current-period warranty expense.
- The company adopted the new lease standard on January 1, 2019, recording approximately $2.1 million of right-of-use assets and lease liabilities at adoption; management said the change did not materially affect earnings or cash flows.
- After quarter-end, the company completed a 4-for-1 reverse stock split and began trading on the Nasdaq Capital Market on April 16, 2019. Foreign-currency movements affected reported results and comprehensive income.
- Forward-looking plans depend on uncertain market, competitive and economic conditions. The filing also identifies customer concentration and collection, inventory valuation, revenue recognition, warranty and other estimates as areas requiring judgment.
Investor verification points
- Reconcile working-capital disclosures: the balance sheets imply December 31, 2018 working capital of approximately $6.75 million, while MD&A states $2.99 million and says working capital increased by $1.23 million. Those figures do not reconcile with the balance-sheet amounts or the reported March 31 figure of $6.36 million.
- Review cash conversion and receivables: assess recoverability and timing of collection, including the large increases in accounts receivable, other receivables and deposits, and reliance on higher payables to partly offset cash use.
- Assess customer and product concentration: determine whether the marine-system demand and large-customer orders are recurring, given that four customers generated about 59% of quarterly sales.
- Track control remediation: verify whether the disclosed material weaknesses were remediated and whether planned finance staffing and ERP investments were completed.
- Confirm share-count presentation: the filing presents share figures adjusted for the April reverse split in some places and gives differing post-split share counts in its subsequent-event discussion; verify the effective split ratio and current diluted share count.