LiqTech International, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. LiqTech develops and sells silicon-carbide filtration products and systems, diesel particulate filters, and plastic components. All amounts below are U.S. dollars.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $5.02 million | $4.02 million | $8.66 million | $8.01 million |
| Gross profit (margin) | $148,140 (3.0%) | $320,710 (8.0%) | $393,681 (4.5%) | $435,325 (5.4%) |
| Operating loss | $4.59 million | $2.56 million | $7.93 million | $5.37 million |
| Net loss | $6.51 million | $3.10 million | $10.25 million | $5.56 million |
| Loss per share | $0.20 | $0.14 | $0.38 | $0.26 |
| Operating cash flow | Not separately stated | Not separately stated | $(11.03) million | $(0.91) million |
- At June 30, cash and restricted cash totaled $19.70 million; working capital was $25.88 million, versus $11.20 million at year-end 2021. Current assets were $33.78 million and current liabilities $7.90 million.
- Total liabilities were $18.45 million. Borrowings included $5.34 million net carrying value of senior notes; the $6 million face-value note is due June 2024 and is interest-free for its first 24 months, with stepped-up interest if not repaid by then. Finance lease liabilities were $2.46 million and operating lease liabilities $3.47 million.
- Cash from financing was $13.47 million, reflecting $24.45 million net proceeds from an equity offering and $6 million from new notes, offset principally by repayment of the convertible note. Investing cash outflow was $0.23 million.
Changes versus the prior comparable period
- Q2 revenue rose 24.9%; first-half revenue rose 8.0%. Q2 water filtration and systems revenue increased substantially, while DPF and plastics sales were broadly comparable. For the first half, water systems and plastics growth was partly offset by lower development-project and ceramics sales.
- Profitability weakened: gross margin fell to 3.0% in Q2 and 4.5% for the first half. Management cited lower ceramics profitability, product quality-related lost productivity, unfavorable product mix, rising energy, raw-material, labor and freight costs, and currency effects.
- Operating expenses included $1.79 million of Q2 restructuring charges. First-half operating expenses increased 43%, and net loss increased by $4.70 million year over year.
- Operating cash use rose to $11.03 million from $0.91 million, reflecting the larger loss and working-capital needs, including higher receivables, contract assets and prepayments.
Outlook, management commentary and risks
- Management said cash on hand and expected operating cash generation should cover capital requirements and committed investments for the next 12 months, but acknowledged significant uncertainty. Separately, the filing states that recurring losses raise substantial doubt about the Company’s ability to continue as a going concern; there is no assurance cost reductions and revenue growth will succeed.
- The restructuring reduced headcount and labor costs by approximately 25%, suspended the planned China manufacturing and service-center investment, and sought to renegotiate approximately $9 million of capital commitments. Renegotiations were expected to conclude in the second half of 2022.
- The $15 million convertible note was repaid in full on June 22, 2022. The repayment included $11.64 million of principal and a $1.81 million contractual premium. The related discount amortization significantly increased reported expense.
- The May offering raised $26.45 million gross through common stock and pre-funded warrants. Shares issued and outstanding increased to 43.89 million from 21.29 million at year-end. The June note financing also included warrants for 4.25 million shares, plus 230,000 placement-agent warrants.
- Risks include macroeconomic and geopolitical disruption, COVID-19 effects, supply-chain and input-cost pressures, foreign-exchange movements, customer concentration, and dependence on a few major customers. Two customers represented 48% of Q2 revenue and 32% of first-half revenue.
- Disclosure controls were deemed ineffective at June 30 because of material weaknesses in internal control over financial reporting. Management described remediation efforts, including finance hiring, an ERP system and process documentation; it said the weaknesses were not yet fully remediated.
- CEO Sune Mathiesen resigned in May. The Company announced Fei Chen’s appointment as CEO, effective on or before November 1, 2022. Two commercial disputes were settled during the period; the filing reports no other material legal proceeding details beyond its stated contingencies.
- No specific financial guidance was provided. Management cautioned that recession, weaker order intake, renewed pandemic effects and supply-chain disruption could reduce demand, cash generation and liquidity.
Important facts for investors to verify
- Whether the restructuring, headcount reductions and capital-commitment renegotiations produce sustained cost savings and improved cash flow.
- Whether operating cash use and the going-concern uncertainty improve, given management’s 12-month liquidity expectation.
- Gross-margin recovery, particularly in ceramics, and the effects of quality issues, inflation and currency movements.
- The dilution and potential share issuance associated with the offering, pre-funded warrants and note-related warrants; confirm current shares outstanding and warrant terms.
- Progress in remediating the disclosed material weaknesses and the timing of effective controls.
- Customer concentration, collection of receivables, and the payment schedule on the water-treatment system contract, which extends to August 2025.