LiqTech International, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Financial statements are unaudited. LiqTech develops and sells silicon-carbide filtration products and engineered systems, with Water, Ceramics, and Plastics segments and operations primarily in Denmark.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $4.99 million | $5.02 million | $9.00 million | $8.66 million |
| Gross profit / margin | $1.16 million / 23.3% | $0.15 million / 3.0% | $1.55 million / 17.3% | $0.39 million / 4.5% |
| Operating loss | $(1.60) million | $(4.59) million | $(3.80) million | $(7.93) million |
| Net loss | $(1.56) million | $(6.51) million | $(3.94) million | $(10.25) million |
| Loss per share | $(0.27) | $(1.62) | $(0.70) | $(3.07) |
| Cash used in operating activities | Not separately stated for the quarter | $(3.76) million | $(11.03) million |
Q2 revenue declined 0.6% year over year; first-half revenue increased 4.0%. Management attributed the first-half increase to aftermarket activity and plastic products, partly offset by lower ceramic product sales. Gross profit improved substantially on better product mix, pricing discipline, and manufacturing efficiency. Q2 operating expenses were $2.77 million, down 42%, but included $1.79 million of restructuring costs in the prior-year comparison; excluding those costs, Q2 expenses decreased about 6%.
Financial position and liquidity
- At June 30, 2023, cash and restricted cash were $12.59 million, down from $16.60 million at December 31, 2022. The six-month cash decrease was $4.00 million.
- Net working capital was $19.05 million, versus $21.58 million at year-end 2022. Total current assets were $25.90 million and current liabilities were $6.84 million.
- Total liabilities were $17.30 million; stockholders’ equity was $20.02 million.
- Senior promissory notes had $6.00 million principal outstanding, reported net of discount at $5.65 million. They are due June 2024 and are interest-free for the initial 24 months; if unpaid after the second anniversary, interest starts at 10% and rises 1 percentage point monthly, capped at 16%.
- Finance and operating lease liabilities totaled $5.68 million. The prior $15 million convertible note was repaid in June 2022.
- First-half investing cash outflow was $0.29 million, primarily for maintenance and production equipment. Financing cash outflow was $0.20 million.
Changes, outlook, and risks
- Management said gross-margin improvement reflected product mix, pricing, ERP-supported business intelligence, and operational optimization. It also cited ongoing remediation costs and increased depreciation from manufacturing investments.
- Management believes available cash and expected operating cash generation should cover capital requirements and committed investments for the next 12 months, based on projections subject to uncertainty. However, the filing states that recurring losses, operating cash use, and dependence on additional financing raise substantial doubt about the company’s ability to continue as a going concern for one year after issuance. Management cautions that financing may not be available on acceptable terms and that failure to obtain funding could require substantial reductions or suspension of operations.
- No quantified full-year revenue or earnings guidance is provided. The company’s strategy emphasizes recurring aftermarket business, development of filtration applications, and cost and profitability improvements.
- Risks highlighted include macroeconomic and geopolitical uncertainty, inflation and European energy volatility, supply-chain disruption, customer concentration, access to financing, foreign-exchange exposure, and regulatory and environmental changes.
- Disclosure controls and procedures were deemed ineffective at June 30, 2023 due to material weaknesses in internal control over financial reporting. Remediation efforts include adding finance personnel, investing in ERP and supporting systems, and redesigning and documenting reporting controls; management says remediation is not complete.
- A commercial settlement concerning alleged corrosion in marine wastewater systems provided for shared remediation costs. The company reported $0.69 million in warranty obligations at June 30, 2023; warranty reserve utilization during the half-year included costs related to the settlement.
- The company effected a 1-for-8 reverse stock split on May 26, 2023. The filing reports 5,700,226 common shares outstanding at June 30, and 4,490,104 warrants outstanding; outstanding RSUs were 341,545. These instruments may affect future dilution.
Important facts for investors to verify
- Whether cash use and operating losses improve enough to address the stated going-concern doubt, and what financing alternatives are available.
- The June 2024 senior-note repayment plan and the potential interest escalation if the notes remain unpaid.
- Whether gross-margin gains persist after accounting for remediation work, manufacturing costs, and higher depreciation.
- Progress and timing of remediation of the material weaknesses in financial reporting controls.
- Customer concentration, order intake, and execution of aftermarket and project work; one customer represented 13% of Q2 revenue, and one customer represented 20% of receivables at quarter-end.