LiqTech International, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The unaudited consolidated statements compare with the corresponding 2012 periods. LiqTech develops and sells silicon-carbide ceramic filters for liquid filtration and diesel emissions, plus kiln furniture.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $2.806 million | $3.953 million | $6.205 million | $10.295 million |
| Gross profit (margin) | $0.293 million (10.4%) | $0.416 million (10.5%) | $0.855 million (13.8%) | $2.506 million (24.3%) |
| Operating loss | $1.820 million | $0.887 million | $2.672 million | $0.406 million |
| Net loss attributable to LiqTech | $1.308 million | $0.553 million | $1.978 million | $0.230 million |
| Basic and diluted loss per share | $0.05 | $0.02 | $0.08 | $0.01 |
Q2 gross margin was nearly unchanged year over year; six-month gross margin contracted materially. Operating expenses were $2.112 million in Q2 and $3.527 million for the six months. Non-cash compensation was $0.744 million and $0.775 million, respectively, largely reflecting option, restricted-stock and warrant compensation and shares issued for services.
For the six months, operating cash flow was negative $1.410 million, versus positive $0.085 million in 2012. Investing cash use was $0.281 million; financing cash use was $0.107 million. Cash declined $1.807 million to $2.066 million. The filing reports no available credit lines at the filing date. At June 30, working capital was $6.627 million, down from $8.070 million at December 31, 2012.
At June 30, total assets were $16.723 million and total liabilities $3.397 million. Capital-lease obligations totaled $0.827 million, including $0.204 million current; the balance sheet reports no other borrowings. Operating-lease minimum payments totaled $3.261 million. No dividend or material off-balance-sheet arrangement is reported.
Changes and business developments
- Sales fell 29.0% in Q2 and 39.7% in the first half. Six-month diesel particulate filter (DPF) sales declined from $7.857 million to $3.472 million; liquid-filter sales were broadly flat at $2.239 million versus $2.287 million; kiln-furniture sales rose to $0.494 million from $0.151 million.
- Management attributed weaker DPF demand to postponed U.S. emissions mandates and a lack of new low-emissions-zone activity in Europe. Liquid-filter revenue was affected by delays in acceptance of pending contracts. Lower sales drove the gross-profit decline.
- The company reported a $0.741 million income-tax benefit for the first half, primarily associated with deferred taxes and net operating losses; management recorded deferred tax assets without a valuation allowance, based on expected future taxable profits.
- In May, LiqTech announced an exclusive three-year China supply agreement with Fanrunsi for specified applications, with stated minimum purchase commitments exceeding $6 million to retain exclusivity. Fanrunsi also placed a $190,000 order. The filing does not establish how much of these commitments will convert to recognized revenue.
- Other announced orders included $500,000 of membranes for U.S. public pools, scheduled for delivery over 12 months. The company also described new membrane products, testing and potential market applications; expected commercial uptake remains uncertain.
- CEO Finn Helmer was appointed April 1, 2013. The company entered a subcontract arrangement expected to increase production capacity; the agreement with Scandinavian Brake Systems’ Notox division runs through 2014.
Outlook, risks and contingencies
The filing provides no quantified revenue, earnings or cash-flow guidance. Management said cash flow and other potential funding sources should cover anticipated working-capital and capital-spending needs for the foreseeable future, but warned that unexpected spending or continued negative operating cash flow could burden cash resources. It may seek equity or debt financing; availability and terms are uncertain, and equity could dilute shareholders.
The company said its Danish bank lines were called in July 2013 and that it believed it could refinance with other Danish lenders on similar terms. Refinancing was not reported as completed. Other risks include dependence on silicon carbide and other materials, possible inventory obsolescence, receivables collectability, and realization of deferred tax assets, which depends on future earnings. Management reported no long-lived-asset impairment and stated warranty estimates were immaterial; no material legal contingency is specifically quantified in the supplied filing text.
Investor verification priorities
- Confirm the status and terms of refinancing after the Danish bank lines were called, and assess liquidity against continued operating cash burn.
- Track DPF demand, liquid-filter contract acceptance and sales, gross-margin recovery, and whether the China and pool orders convert into shipments and cash collections.
- Review the quality and aging of receivables and inventory, including the $1.287 million doubtful-account allowance and $0.109 million inventory-obsolescence reserve.
- Assess the assumptions supporting deferred tax assets and future profitability, as well as the potential dilution from outstanding options, warrants and restricted shares.
- Reconcile reported net loss with net loss attributable to LiqTech: the statements show consolidated first-half net loss of $1.992 million and attributable loss of $1.978 million.