Business Context and Reporting Period
Company: Blue Moose Media, Inc. (effectively Liqtech International Inc. following a reverse merger).
Filing Type: Form 8-K (Current Report).
Reporting Date: August 25, 2011 (Event Date: August 23, 2011).
Transaction Overview: Blue Moose Media, Inc., a shell company, completed a reverse merger with Liqtech USA, Inc. (Liqtech). Liqtech USA became a wholly-owned subsidiary, and the combined entity will operate under the name "LIQTECH INTERNATIONAL, INC." The transaction is accounted for as a recapitalization of Liqtech, with Liqtech's historical financial statements serving as the historical statements for the combined entity.
Business Description: The company develops and manufactures specialized filters using re-crystallized silicon carbide technology. Primary product lines include Diesel Particulate Filters (DPFs) for exhaust control, ceramic membranes for water filtration, and kiln furniture for the refractory industry.
Key Financial Metrics
Note: Financial data below reflects Liqtech USA and its subsidiaries (the accounting acquirer) for the periods ended June 30, 2011, and December 31, 2010.
Revenue and Profitability
- Six Months Ended June 30, 2011:
- Net Sales: $6,723,211
- Gross Profit: $1,854,883 (Gross Margin: 27.0%)
- Net Loss: $(105,963)
- EBITDA: $867,000
- Year Ended December 31, 2010:
- Net Sales: $15,728,817
- Gross Profit: $3,673,844 (Gross Margin: 23.4%)
- Net Loss: $(6,629)
- EBITDA: $1,505,521
Liquidity and Capital Resources
- Cash and Cash Equivalents (June 30, 2011): $266,544
- Working Capital (June 30, 2011): $3,552,627
- Lines of Credit:
- Liqtech Denmark: DKK 6,000,000 (~$1.07M) facility; ~$300,000 available as of June 30, 2011.
- Liqtech Delaware: $100,000 facility; $0 outstanding as of Dec 31, 2010.
- Cometas: DKK 3,000,000 facility; $268,517 outstanding as of Dec 31, 2010.
- Recent Financing (August 2011): Private placement of 63 Units raised $4,800,000 in cash and a $1,500,000 promissory note.
Debt
- Notes Payable: $450,000 outstanding (June 30, 2011) on a $500,000 facility.
- Capital Lease Obligations: $1,093,339 present value (June 30, 2011).
- Acquisition Debt: Promissory notes of DKK 19,500,000 (~$3.77M) issued to former shareholders as part of the acquisition consideration.
Material Changes vs. Prior Period
- Revenue Decline (YTD 2011 vs. 2010): Net sales decreased 18.5% to $6.72M. The decline was primarily driven by lower revenues from DPF sales outside the US and a ~$1.1M decrease in catalytic coating revenues.
- Profitability Shift: The company moved from a net profit of $181,769 in the first half of 2010 to a net loss of $105,963 in the first half of 2011. This was caused by a $269,682 decrease in gross profit (largely due to a 51% increase in depreciation on production equipment) partially offset by a $215,789 decrease in operating expenses.
- Customer Concentration: For the year ended Dec 31, 2010, four customers accounted for approximately 67% of total revenues.
- Corporate Structure: Complete change in management and board of directors. The company changed its name to reflect the Liqtech identity.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary
- Capacity Expansion: Manufacturing facilities are operating at peak capacity. The company has contracted a subcontractor in Tennessee to meet demand and plans to expand production in Denmark and Minnesota.
- R&D: Received a $2 million grant from the Danish National Advanced Technology Foundation to develop a SiC-based reverse osmosis membrane.
- Market Drivers: Future growth depends on government funding for emissions control programs and the enforcement of stricter environmental regulations.
Risk Factors
- Raw Material Supply: Reliance on silicon carbide, platinum, and palladium. Limited supply of silicon carbide could impact production.
- Customer Concentration: Heavy reliance on a few major customers; loss of one could materially affect operations.
- Regulatory Dependence: Business is sensitive to government funding for emissions programs and changes in environmental standards.
- Stock Liquidity: Common stock trades on the OTC Bulletin Board with limited trading volume; classified as a "penny stock."
- Foreign Currency: Functional currency is Danish Krone; reporting currency is USD, exposing the company to exchange rate fluctuations.
Unusual Items / Subsequent Events
- Fire Incident (July 19, 2011): The CoMeTas AS corporate office and production facility suffered fire and water damage. Management estimates insurance will cover losses to assets and business interruptions. Operations have moved to a new facility.
- Accountant Change: Terminated Pritchett, Siler & Hardy, P.C. and retained Gregory & Associates, LLC in connection with the merger.
Investor Verification Checklist
- Insurance Coverage: Verify the extent of damages from the July 2011 fire at the CoMeTas facility and confirm insurance claim status.
- Customer Concentration: Assess the stability of the top four customers who generated 67% of 2010 revenue.
- Raw Material Costs: Monitor pricing and availability of silicon carbide, platinum, and palladium.
- Regulatory Funding: Track government budget allocations for diesel emissions reduction programs, particularly in California and federal EPA programs.
- Debt Covenants: Review terms of the new $3.77M promissory notes issued to former shareholders and existing lines of credit for restrictive covenants.
- Stock Liquidity: Evaluate the ability to trade shares given the OTC listing and "penny stock" status.