LiqTech International, Inc. — Q1 2022 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2022, compared with Q1 2021. LiqTech develops and sells silicon-carbide filtration systems and membranes, diesel particulate filters, and plastic components. Its operations are principally in Denmark, with sales across multiple regions.
Key financial results
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $3.64 million | $4.00 million; down 9.0% |
| Gross profit and margin | $0.25 million; 6.8% | $0.11 million; 2.9% |
| Operating loss | $3.33 million | $2.81 million |
| Net loss | $3.75 million; $0.18 per share | $2.46 million; $0.11 per share |
| Operating cash flow | $(5.03) million | $(1.30) million |
| Cash and restricted cash | $11.23 million at March 31 | $17.49 million at December 31, 2021 |
| Net working capital | $5.16 million | $11.20 million at December 31, 2021 |
Gross margin improved year over year, but remained low. Operating expenses rose 22.5% to $3.58 million, including higher general and administrative and research and development costs. Other expense was $0.43 million, compared with $0.33 million of other income a year earlier, reflecting convertible-note interest and discount amortization and a smaller foreign-exchange gain.
Investing cash outflow was $0.18 million and financing cash outflow was $0.93 million, including an $0.84 million convertible-note payment and finance-lease payments. Cash declined by $6.26 million during the quarter. At March 31, current assets were $24.28 million and current liabilities were $19.12 million. The balance sheet reported $14.04 million of convertible-note carrying value, of which $10.08 million was current; finance-lease liabilities were $2.72 million and operating-lease liabilities were $6.74 million.
Material changes and management commentary
- Revenue fell by $0.36 million. Lower liquid-filter and water-system and diesel-particulate-filter sales were partly offset by stronger plastic-component sales. Management cited marine-market weakness, general DPF market conditions, and supply-chain-related order delays.
- Gross profit rose by $0.13 million, which management attributed to sales mix and profitability in plastics, spare parts, and commissioning. Higher electricity, raw-material, labor, freight, and logistics costs partly offset the improvement.
- Operating expenses increased by $0.66 million. Management cited China project and leasehold costs, ERP implementation, recruitment and headcount, and higher development activity.
- The company says cash on hand and expected operating cash generation may not cover capital requirements for the next 12 months. The filing states that limited cash and recent losses raise substantial doubt about its ability to continue as a going concern; there is no assurance it can raise funds or return to profitability.
- The $15 million senior unsecured convertible note bears 5% annual interest and is due October 1, 2023, with repayment at 112% of principal at maturity. Beginning March 2022, the holder may elect monthly $840,000 redemptions; the March, April, and May installments were paid in cash.
- Management said continued supply disruptions, lower order intake and manufacturing levels, COVID-19 effects, geopolitical conditions, and possible changes in demand could affect results and liquidity. It expected to meet most, if not all, existing 2022 delivery obligations at the then-current production rate. No quantified financial guidance was provided.
Risks, contingencies, and unusual items
- Disclosure controls were deemed ineffective at March 31, 2022 because of material weaknesses in internal control over financial reporting. Remediation efforts include finance staffing, a new ERP system, and process redesign; management said weaknesses are not remediated until controls operate effectively for a sufficient period.
- In April 2022, the company realigned management and reported an approximately 25% reduction in headcount and labor costs. CEO Sune Mathiesen resigned effective May 12; an interim CEO was in place while the company searched for a permanent replacement.
- A commercial arbitration concerns a water-treatment system’s performance and related matters. The claim against LiqTech was approximately $249,510 plus interest; the company disputes it, filed a counterclaim for unpaid invoices, and reported settlement discussions. A separate former-supplier claim was settled for approximately $59,700 during the quarter.
- Customer concentration, supply and freight constraints, foreign-currency movements, product warranties, and dependence on key personnel and major customers are among the disclosed risks. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Cash runway, expected cash burn, and the company’s plans to address the disclosed going-concern uncertainty.
- Future monthly convertible-note redemption elections, cash payments, note balance, and potential dilution from conversion or share settlement.
- Whether revenue, order intake, gross margins, and manufacturing utilization recover, particularly in marine, water systems, and DPF markets.
- Progress and effectiveness of internal-control remediation, including ERP implementation and process-level controls.
- Outcome and potential financial impact of the water-system arbitration and any settlement.
- Execution and cost effects of the workforce reduction and CEO transition.