LiqTech International, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014; filed November 13, 2014. Financial statements are unaudited. The company develops and sells silicon-carbide filtration products and systems, diesel particulate filters, and kiln furniture. Provital Solutions, acquired July 29, 2014, added automated water-filtration systems.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $4.93 million | $2.95 million | $12.10 million | $9.15 million |
| Gross profit / margin | $1.47 million / 29.8% | $0.27 million / 9.3% | $2.87 million / 23.7% | $1.13 million / 12.3% |
| Operating income (loss) | $(0.17) million | $(1.32) million | $(2.33) million | $(3.99) million |
| Net income (loss) attributable to LiqTech | $0.35 million | $(0.90) million | $(1.17) million | $(2.88) million |
| Basic EPS | $0.01 | $(0.04) | $(0.04) | $(0.12) |
- Q3 sales rose 67.2% year over year; nine-month sales increased 32.2%. Liquid filters and systems were the main growth driver. Nine-month liquid-filter sales were $6.64 million, versus $3.68 million; ceramic diesel-filter sales were $5.14 million, versus $4.86 million. Kiln-furniture sales fell to $0.33 million from $0.62 million as the company deemphasized that product line.
- Q3 and nine-month gross margins improved substantially. Management attributed the gains to higher sales, lower production costs, and Provital’s higher-margin sales. Despite the improvement, the company remained loss-making from operations and for the nine-month period.
- Q3 attributable net income included a $276,870 income-tax benefit and $237,551 foreign-currency transaction gain, while the company recorded an operating loss. Nine-month net loss included a $972,430 tax benefit and $192,226 currency gain.
- Nine-month operating cash outflow was $3.71 million, versus $2.23 million in 2013. Investing cash outflow was $2.07 million, including the Provital acquisition; financing provided $8.85 million, principally from the July equity offering. Cash increased to $6.74 million from $4.88 million at year-end 2013.
- At September 30, cash was $6.74 million, working capital was $13.85 million, and total assets were $33.64 million. Total liabilities were $4.07 million, including $618,183 in capital-lease obligations and $2,406 outstanding on a demand line of credit. Provital’s line had approximately $335,000 available; separate bank credit capacity supported customer guarantees.
Material changes and notable events
- On July 28, the company completed an offering of 8 million common shares at $1.50 per share, generating approximately $10.8 million net of offering costs. Shares outstanding increased from 27.21 million at December 31, 2013 to 39.30 million at September 30, 2014.
- The Provital acquisition consideration was approximately $2.30 million cash plus 4,044,782 LiqTech shares, valued at approximately $6.07 million. The company recorded $7.98 million of goodwill at September 30. Some acquired shares are locked up or held in escrow, with release tied to Provital revenue and EBITDA targets.
- CEO Finn Helmer resigned effective July 29; Sune Mathiesen became CEO and a director effective July 30. Mathiesen’s agreement includes a sales-linked bonus.
- Foreign-currency translation reduced other comprehensive income by $1.87 million for the nine-month period. Accumulated other comprehensive loss increased to $2.05 million from $0.29 million at year-end 2013.
Outlook, risks, and contingencies
- The filing provides no quantified company-wide financial guidance. Management said cash and potential funding sources should cover anticipated working capital and capital spending for the foreseeable future, but warned that continued negative operating cash flow or unanticipated spending could strain cash resources.
- Management expects selling-resource and market-development investments may take several quarters to contribute to profitability. Future growth plans may require additional capital; equity financing could dilute shareholders, while debt could impose payment obligations and restrictive covenants.
- Management reported that it expects sufficient future profits to realize deferred tax assets and recorded no valuation allowance. The nine-month results nevertheless show a loss; realization depends on future earnings and tax conditions.
- Provital’s bank line is due on demand, although management said it did not expect a call and believed refinancing would be available on similar terms. Customer guarantees and prepayment guarantees are supported by a separate credit line.
- Operating leases require future minimum payments of $2.33 million. The filing identifies foreign-exchange exposure through operations in multiple currencies. Management cautions that forward-looking plans depend on uncertain market, competitive, and economic conditions.
- Recent orders disclosed in the filing include a $350,000 aquaculture filtration system and two power-plant-related orders of $200,000 each. These are order announcements, not a quantified full-year outlook.
Important facts for investors to verify
- Whether the improved gross margin and sales growth persist, particularly after separating Provital’s contribution from organic growth.
- Operating cash use and working-capital movements, including accounts payable, accrued expenses, receivables, and contract billings.
- Provital’s progress against the revenue and EBITDA thresholds governing escrowed acquisition shares, and the acquisition’s contribution to earnings and cash flow.
- The assumptions supporting realization of the $3.02 million long-term deferred tax asset despite continuing year-to-date losses.
- Potential dilution from outstanding warrants and options, in addition to shares already issued in the offering and acquisition.
- The effect of foreign-currency movements, demand credit facilities, and future funding needs on liquidity.