LiqTech International, Inc. — Q1 2018 Form 10-Q
Business and period: LiqTech develops and sells silicon-carbide ceramic filters and automated filtration systems, including liquid filtration products and diesel particulate filters (DPFs). This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Net sales | $2.39 million | $2.97 million |
| Gross profit (loss) / margin | $(59,592) / (2.5%) | $271,417 / 9.1% |
| Operating loss | $(1.40) million | $(1.01) million |
| Net loss | $(1.53) million | $(833,270) |
| Basic and diluted loss per share | $(0.03) | $(0.02) |
| Cash used in operating activities | $(1.76) million | $(512,322) |
| Cash and cash equivalents | $827,120 at March 31, 2018 | $2.49 million at December 31, 2017 |
| Working capital | $3.48 million at March 31, 2018 | $4.66 million at December 31, 2017 |
| Total liabilities | $4.38 million at March 31, 2018 | $4.77 million at December 31, 2017 |
Gross margin turned negative as lower sales left fixed production costs less absorbed. Operating expenses were $1.34 million, up 4.9%; general and administrative and R&D costs increased, while selling and non-cash compensation expenses declined. Other expense was $132,070, including a $79,054 currency transaction loss and $56,300 of interest expense; Q1 2017 had $174,848 of other income, including a $178,675 currency gain. No income tax expense was recorded.
Cash used in investing activities was $59,937 and cash used in financing activities was $12,320. The balance sheet reports $13,866 of current capital lease obligations and no other reported borrowings. The company said it had no available lender credit lines; its approximately $15,743 guarantee facility was fully committed and secured by certain subsidiary assets.
Changes versus the prior period
- Sales declined 19.4%. DPF sales fell about $355,000, liquid-filter and system sales fell about $157,000, and kiln-furniture sales fell $64,827; the company said it no longer planned to focus on kiln furniture.
- Sales fell in Europe and North America, while Asia and Australia increased. Ceramic DPFs remained the largest product category, at $1.93 million of sales.
- Net loss worsened by $700,019, reflecting lower gross profit, higher operating expenses, and a swing in other income/expense, including currency effects.
- Operating cash use increased by approximately $1.25 million, driven in part by the net loss and a $923,912 decrease in accrued expenses.
Outlook, risks, contingencies, and notable items
- Going concern: Management stated that limited cash and significant recent losses raised substantial doubt about the company’s ability to continue as a going concern. It said additional funding would be needed and that financing might not be available on acceptable terms, or at all.
- Post-quarter financing: The April 2018 public offering sold 19,448,529 shares for gross proceeds of approximately $6.61 million, with approximately $610,000 in offering costs. The company said the offering improved liquidity.
- Marine scrubbers: Management reported framework agreements and a letter of intent with three large scrubber manufacturers for potential future system sales. One agreement announced in March estimated more than 95 systems for 2018–2019; an April agreement estimated at least 35 systems, with 14 identified. These are estimates under framework agreements, not reported completed sales or guaranteed results.
- Legal and customer dispute: A venture partner sued a subsidiary in Italy seeking €750,000 over alleged defective products; the company disputed the claims. Separately, a customer disputed approximately $1.10 million related to a water-treatment system contract; the company asserted compliance and intended to pursue collection. The filing said outcomes could not be reasonably estimated.
- Controls: Management concluded disclosure controls were ineffective due to material weaknesses identified in the 2017 audit and said remediation efforts were underway.
- The company adopted the new revenue standard on January 1, 2018 and reported no material impact. It was evaluating the impact of the new lease standard, expected to require recognition of lease assets and liabilities.
Important facts for investors to verify
- Cash runway and the use of proceeds from the April offering, alongside management’s stated need for additional funding.
- Whether scrubber framework agreements convert into firm orders, and the timing, volume, margins, and cash collection for deliveries.
- Causes of the negative gross margin and whether sales levels can cover fixed production costs.
- Progress and potential financial effects of the Italian litigation and the disputed water-treatment contract balance.
- Remediation of the reported material weaknesses and any effect on the reliability of future reporting.
- Post-offering share count and dilution, including conversion of the preferred shares; the filing reports 63,937,199 common shares outstanding on May 15, 2018.