LiqTech International, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. LiqTech develops and sells silicon-carbide liquid filtration and diesel particulate filter products, and was phasing out kiln furniture. The filing was signed August 12, 2014.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $3.97 million | $2.81 million | $7.17 million | $6.21 million |
| Gross profit / margin | $0.85 million / 21.4% | $0.29 million / 10.4% | $1.41 million / 19.6% | $0.85 million / 13.8% |
| Operating loss | $(1.05) million | $(1.82) million | $(2.16) million | $(2.67) million |
| Net loss attributable to LiqTech | $(0.76) million | $(1.31) million | $(1.52) million | $(1.98) million |
| Loss per share | $(0.03) | $(0.05) | $(0.06) | $(0.08) |
- Six-month revenue increased 15.6%; liquid-filter sales rose $1.14 million, while kiln-furniture sales fell $0.32 million. Europe contributed $4.80 million of six-month sales, versus $3.33 million a year earlier.
- Operating expenses for the six months were nearly flat at $3.57 million. Higher selling and administrative expenses were largely offset by lower non-cash compensation and R&D expense.
- The six-month income-tax benefit was $0.70 million, primarily deferred; the company recorded the benefit without a valuation allowance based on management’s expectation of future taxable profits.
Cash, liquidity, and debt
- Cash fell to $1.27 million at June 30 from $4.88 million at year-end. Operating activities used $3.24 million in the first half, compared with $1.41 million used in the prior-year period; capital expenditures were $0.18 million.
- Working capital was $6.31 million, down from $7.69 million at December 31, 2013. Current assets were $9.48 million and current liabilities $3.16 million.
- Total liabilities were $3.62 million, including $0.65 million of capital lease obligations. The filing reports no drawn bank line; Danish bank lines had been called in July 2013. Operating-lease commitments totaled $2.44 million.
Changes, outlook, and risks
- Management attributed improved gross profit to higher sales and efforts to reduce production costs. Selling and marketing spending increased as the company invested in sales capacity and new markets; management cautioned returns could take several quarters.
- Management said existing cash and potential funding sources should cover foreseeable working-capital and capital-spending needs, but warned that continued negative operating cash flow or unexpected spending could strain resources. Additional financing may be needed; availability and terms are uncertain and equity funding could dilute shareholders. No formal financial guidance was provided.
- Subsequent to quarter-end, the company completed an offering of 8.0 million shares at $1.50 per share, estimating net proceeds of approximately $10.8 million. It used approximately $2.3 million toward its July 28 acquisition of Provital Solutions A/S, with the balance for transaction costs and general corporate purposes. Additional shares issued as acquisition consideration are partly subject to lock-up and performance-based escrow conditions.
- Provital’s escrow-share release depends on specified 2014–2016 revenue and EBITDA targets. The CEO resigned and Sune Mathiesen was appointed CEO and director effective July 30; his agreement includes a DKK 1.5 million annual base salary and a performance-related bonus.
- Management cited foreign-currency exposure; Q2 recorded a $48,112 currency-transaction loss, compared with a gain of $77,199 a year earlier. Other notable costs included a one-time increase in legal expenses and a $107,111 bad-debt provision. Four customers accounted for 20%, 9%, 6% and 6% of sales, respectively.
- The company’s multi-year exclusive FMC Technologies agreement may be terminated by FMC at any time with notice. Forward-looking plans depend on market conditions, business execution and other uncertain assumptions. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Investor verification priorities
- Confirm final offering proceeds, share dilution, and the company’s post-offering cash position and cash burn.
- Track Provital integration, acquisition accounting, and whether the revenue and EBITDA hurdles for escrow-share releases are met.
- Assess whether gross-margin gains can continue while selling and administrative spending rises, and whether operating cash flow improves.
- Review the assumptions supporting realization of $2.63 million in long-term deferred tax assets and the concentration of sales among major customers.
- Monitor potential dilution from outstanding options and warrants, as well as the FMC agreement’s termination risk.