LiqTech International, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 31, 2021. This is an annual report, not a standalone fourth-quarter report. LiqTech develops and manufactures silicon-carbide filtration products, water-treatment systems, diesel particulate filters, and industrial plastic components. The 2019 comparison includes plastics for only part of the year following its 2019 acquisition.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $22.53 million | $32.64 million |
| Gross profit / margin | $2.15 million / 9.5% | $7.16 million / 21.9% |
| Operating loss | $8.26 million | $0.58 million |
| Net income (loss) | $(9.81) million | $0.04 million |
| Operating cash flow | $(2.60) million | $(4.55) million |
| Investing cash flow | $(4.01) million | $(3.70) million |
| Financing cash flow | $7.22 million | $14.63 million |
Revenue fell 31%. Liquid filters and systems generated $14.15 million, down from $25.46 million; diesel particulate filter revenue was $5.13 million, down from $5.65 million; and plastics revenue rose to $2.65 million from $0.90 million. Development-project revenue was $0.60 million. The filing attributes the sharp decline mainly to COVID-19-related weakness in marine scrubber demand and delayed or reduced business activity.
Gross margin contracted as higher-margin liquid-system sales declined, production ran below capacity, and investments in facilities and staffing preceded the demand downturn. Operating expenses rose 34% to $10.40 million, including higher selling, administrative, and R&D costs. Other expenses included a $1.47 million foreign-currency transaction loss and a $0.90 million warrant fair-value charge; the earn-out modification generated a $0.31 million gain. The reported tax benefit was $0.47 million.
Liquidity, obligations, and capital
At year-end, cash, cash equivalents, and restricted cash totaled $13.26 million, including $1.52 million restricted; unrestricted cash was $11.75 million. Net working capital was $15.84 million, down from $17.16 million. Operating cash use improved year over year, partly reflecting lower receivables and contract assets, but the company remained cash-flow negative from operations.
Year-end liabilities included $3.51 million of finance-lease obligations and $5.19 million of operating-lease liabilities. The filing reports a DKK 20 million (approximately $3.0 million) available credit line associated with leasing arrangements and customer guarantees, and a separate guarantee facility secured by a $1.5 million cash deposit. No off-balance-sheet arrangements were reported. In May 2020, the company raised approximately $7.24 million gross through a private placement of common shares and pre-funded warrants.
After year-end, on March 24, 2021, the company entered an agreement, subject to closing conditions, to issue a $15 million principal senior convertible note due 2023 and 80,000 common shares for an aggregate purchase price of $15 million. The filing does not establish in the supplied text that this transaction had closed.
Material changes, outlook, and risks
- COVID-19 materially affected 2020 results, with reduced orders—particularly in shipping—lower production, and restrictions on operations. Management said lower utilization could continue to weigh on gross profit until production recovers.
- Management believed cash on hand and projected operating cash generation would cover capital requirements for at least 12 months from the report’s issuance, while emphasizing substantial uncertainty. It expected to fulfill most, if not all, existing 2021 delivery obligations. No specific revenue or earnings guidance was provided.
- Customer concentration remains significant: the four largest customers accounted for approximately 53% of 2020 sales, versus 68% in 2019. One customer represented 27% of sales and 39% of year-end receivables; the filing notes no firm long-term volume commitments.
- Capacity investments included a new furnace expected to more than triple existing furnace capacity. The company also launched a next-generation membrane in November 2020. R&D spending increased to $1.28 million.
- The company reported material weaknesses in internal control over financial reporting and concluded disclosure controls were ineffective at December 31, 2020. Remediation work included a new ERP system and process redesign; management said weaknesses would not be considered remediated until controls operated effectively for a sufficient period. The auditor issued an unqualified opinion on the financial statements but did not audit internal controls.
- Unusual items included a $450,000 write-off related to closing North American activities and a $96,900 supplier-litigation loss recorded in 2020 and paid in January 2021. Another supplier claim of approximately $89,800 was contested, with no provision recorded.
- Other risks include foreign-exchange exposure (no currency hedges at year-end), customer credit and collection risk, evolving emissions and environmental rules, production capacity and raw-material constraints, and possible need for additional capital. The company’s Danish operations and marine, oil-and-gas, and industrial markets expose results to economic and regulatory developments.
Key investor verification points
- Assess whether marine and other liquid-filtration orders and production utilization recovered after the 2020 COVID-19 downturn, and whether margins improved.
- Verify actual cash runway and operating cash flow, including the status, closing, conversion terms, and dilution implications of the proposed $15 million convertible note.
- Review customer concentration, receivable collectability, and the exposure represented by the largest customer balances.
- Track progress in remediating internal-control material weaknesses and any subsequent auditor or management conclusions.
- Reconcile lease and guarantee commitments, restricted cash, and the impact of the North American closure and other unusual charges.
- Confirm execution and economics of the Middle East joint venture and whether planned capacity expansion is supported by sufficient demand.