LiqTech International, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 15, 2012. Unaudited consolidated results are presented against Q1 2011. The company develops and sells silicon-carbide filtration products, including diesel particulate filters, liquid filters and kiln furniture. The 2011 comparison follows the 2011 reverse acquisition and should be read in that context.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $6.342 million | $2.917 million; up 117.4% |
| Gross profit / margin | $2.090 million / 33.0% | $0.680 million / 23.3% |
| Operating income (loss) / margin | $0.481 million / 7.6% | $(0.116) million / (4.0)% |
| Net income (loss) attributable to LiqTech | $0.323 million; $0.01 per basic and diluted share | $(0.128) million; $(0.01) per share |
| Operating cash flow | $0.734 million provided | $0.339 million used |
| Investing cash flow | $0.672 million used | $0.373 million used |
| Financing cash flow | $5.353 million provided | $0.301 million provided |
Cash was $6.552 million at March 31, versus $1.033 million at December 31, 2011. Working capital was $8.695 million, compared with $1.878 million at year-end; excluding the $3.468 million related-party note payable, reported working capital would be $12.163 million. The company raised approximately $7.4 million net through a March registered stock offering, which was the main driver of financing cash flow and higher cash.
At quarter-end, bank lines of credit had no borrowings and approximately $1.616 million remained available, subject to borrowing-base limits. A $475,000 institutional note was paid off during the quarter. Related-party notes payable of $3.468 million were current and due June 30, 2012; a corresponding $3.468 million shareholder note receivable is presented as a reduction of equity, rather than as an asset. Capital lease obligations totaled $1.129 million, including $0.200 million current. Total liabilities were $9.243 million.
Material changes and operating drivers
- Revenue growth was led by diesel particulate filters, with sales of $5.338 million versus $2.393 million. Liquid-filter sales rose to $0.902 million from $0.497 million; kiln-furniture sales rose to $0.102 million from $0.027 million.
- Management attributed higher DPF demand partly to London’s Low Emission Zone and increased sales activity. Gross margin expanded to 33.0% from 23.3%.
- Operating expenses rose 102.2% to $1.609 million. Selling expense increased with sales investment and entry into new markets; G&A reflected reverse-acquisition and offering costs, a $110,000 addition to bad-debt expense and stock-option compensation. R&D expense nearly doubled to $227,000.
- Accounts receivable, net, was $5.310 million, and the doubtful-account allowance increased to $514,466 from $389,032 at year-end. Inventory rose to $3.400 million from $2.981 million; the obsolescence reserve increased to $89,374 from $13,000.
- Common shares outstanding increased to 24.112 million from 21.600 million at year-end following issuance of 2.512 million shares in the offering. The company also reported 6.626 million outstanding warrants and 2.274 million options at quarter-end.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided. Management said a new subcontract arrangement with Scandinavian Brake Systems, extending through 2014, is expected to significantly increase production capacity; it also plans further equipment investment, particularly for liquid filtration.
- A February 2012 non-binding letter of intent contemplated acquiring Pirelli’s Romanian subsidiary for $15 million cash, alongside a contemplated $19 million Pirelli investment in LiqTech shares. Definitive agreements were not signed in this filing, and the company cautioned that the transaction might not occur. The proposal includes potential preferred-stock governance rights and other commercial terms.
- Four customers represented approximately 55% of Q1 sales, versus 42% in Q1 2011. Silicon carbide, platinum and palladium supply or price increases could affect production costs; management noted silicon carbide supply is limited. The company also cites competition, inventory-demand estimation, receivable collectability and foreign-currency translation as relevant risks.
- A July 2011 fire damaged a Danish production and office facility. The company received approximately $1.0 million under business-interruption coverage and recognized about $300,000 as increased sales and $50,000 as increased cost of goods sold in Q1; approximately $250,000 remained deferred under the policy.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter. No material off-balance-sheet arrangements were identified.
Important facts for investors to verify
- Whether the related-party notes payable and shareholder note receivable were collected or repaid by their June 30, 2012 maturity, and how their offsetting presentation affects liquidity.
- Whether the Pirelli transaction advanced beyond the non-binding letter of intent, including its funding, share issuance, governance provisions and purchase terms.
- Whether revenue growth and gross-margin improvement were sustained, particularly given customer concentration and the Q1 contribution from business-interruption insurance.
- Whether production expansion, subcontract capacity and access to key raw materials support planned growth without materially increasing costs or inventory risk.