LiqTech International, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; filed November 10, 2022. The company develops and sells silicon-carbide filtration products and systems, including water filtration systems, diesel particulate filters, and plastic components. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $3.31 million | $4.14 million | $11.96 million | $12.16 million |
| Gross profit (margin) | $0.11 million (3.2%) | $0.20 million (4.7%) | $0.50 million (4.2%) | $0.63 million (5.2%) |
| Operating loss | $2.28 million | $2.61 million | $10.21 million | $7.98 million |
| Net loss | $1.75 million | $2.90 million | $12.01 million | $8.46 million |
| Basic and diluted loss per share | $0.04 | $0.13 | $0.37 | $0.39 |
For the nine months, operating cash outflow was $11.48 million, versus $4.41 million in 2021; investing cash outflow was $0.79 million, and financing provided $13.36 million. Cash and restricted cash ended the period at $17.61 million, including $1.31 million restricted. Working capital was $23.31 million, compared with $11.20 million at year-end 2021.
Total liabilities were $16.60 million. Debt included $6.00 million face value of senior promissory notes, carried at $5.40 million net of discount, and $2.23 million of finance lease liabilities. Operating lease liabilities totaled $3.12 million. The prior $15 million convertible note was repaid in full in June 2022.
Changes versus comparable periods
- Q3 revenue declined 20.2%; lower water-system deliveries and plastics sales were partly offset by stronger ceramics sales. Nine-month revenue declined 1.6%.
- Gross margin fell in both comparisons, with management citing inflation in electricity, raw materials, labor, freight and logistics, unfavorable product mix, and inventory write-downs.
- Q3 net loss narrowed year over year, aided by lower interest and note-discount expense, cost reductions, and a $0.63 million foreign-currency transaction gain. For the nine months, net loss widened, mainly due to restructuring costs and costs associated with repaying the convertible note.
- In May, the company raised approximately $26.45 million gross through a public offering of shares and pre-funded warrants. Common shares outstanding rose from 21.29 million at December 31, 2021 to 43.90 million at September 30, 2022. The company also issued $6 million of senior notes and warrants in June.
Outlook, risks and unusual items
- Liquidity and going concern: Management said cash on hand and anticipated operating cash generation should cover capital requirements and committed investments for the next 12 months, but acknowledged significant uncertainties. Separately, the filing states that recurring losses raise substantial doubt about the company’s ability to continue as a going concern for one year from issuance; there is no assurance its cost reductions and revenue-growth plans will achieve profitability.
- Restructuring: The second-quarter program generated $1.79 million in charges, including executive separation, employee reductions, suspension of the planned China facility, capex cancellation costs, and asset and inventory write-downs. Management reported a roughly 25% reduction in headcount and labor costs through organizational realignment.
- Customer claim: A former customer asserted potential warranty claims related to corrosion in marine wastewater systems delivered in 2019, with estimated remediation costs of $1.5 million. The company disputes the claim and was discussing a commercial settlement, then expected in Q4 2022 or early 2023.
- Key risks: Management highlighted macroeconomic and geopolitical uncertainty, the European energy crisis, inflation, supply-chain disruption, possible weaker order intake, customer concentration, foreign-exchange exposure, and dependence on additional funding if liquidity or cash generation deteriorates. One customer represented 17% of nine-month revenue.
- Controls: Management concluded disclosure controls were ineffective at September 30 because of material weaknesses in internal control over financial reporting. Remediation efforts included finance hires, an ERP investment, and process redesign; the weaknesses were not yet considered remediated.
- The filing provides no formal revenue or earnings guidance. Management cited price increases and power-price surcharges as measures to protect profitability. No subsequent events were reported.
Important facts for investors to verify
- Whether cash generation and available liquidity can sustain operations given the stated going-concern doubt and continued operating cash burn.
- Whether the disputed $1.5 million warranty claim leads to a settlement or additional costs.
- How quickly margins recover from energy, input-cost, product-mix, and inventory pressures, and whether cost reductions deliver the expected savings.
- The dilution and potential share-count impact of the 31.44 million outstanding pre-funded warrants and other warrants and equity awards.
- Progress in remediating material weaknesses in internal controls and the potential implications for reporting reliability.