LiqTech International, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021; filed November 15, 2021. The unaudited consolidated statements cover the company’s water filtration, ceramic filter and membrane, and plastics businesses.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $4.14 million | $3.54 million | $12.16 million | $18.47 million |
| Gross profit (margin) | $0.20 million (4.7%) | $(0.31) million (-8.7%) | $0.63 million (5.2%) | $2.83 million (15.3%) |
| Operating loss | $(2.61) million | $(2.83) million | $(7.98) million | $(4.67) million |
| Net loss | $(2.90) million | $(3.87) million | $(8.46) million | $(6.13) million |
| Loss per share, basic and diluted | $(0.13) | $(0.18) | $(0.39) | $(0.29) |
- Revenue mix and change: Q3 revenue rose 17% year over year, while nine-month revenue fell 34%. Nine-month liquid filters and water-treatment sales declined $8.70 million; DPFs and membranes rose $1.71 million and plastics rose $0.84 million.
- Cash flow: Nine-month operating cash outflow was $4.41 million, investing cash outflow $1.25 million, and financing cash inflow $14.00 million. Financing was primarily from the April convertible-note transaction.
- Liquidity: September 30 cash and restricted cash totaled $20.69 million, including $1.50 million restricted. Working capital was $16.33 million, compared with $15.84 million at year-end 2020.
- Debt and leases: The company reported a convertible note carrying value of $14.30 million, including $5.88 million classified as current, and finance lease obligations of $3.03 million. Operating lease liabilities were $7.27 million.
- Balance sheet: Total assets were $48.39 million, total liabilities $32.70 million, and stockholders’ equity $15.70 million at September 30, 2021.
Material changes versus comparable periods
- Q3 gross profit improved from a loss to a profit, helped by higher sales and production utilization and the absence of significant U.S. facility-closure costs recorded in the prior-year quarter. Q3 net loss narrowed by $0.97 million.
- Nine-month gross profit fell 78%; the company attributed this mainly to lower sales of higher-margin water-treatment systems and competitive pricing. Despite lower revenue, operating expenses rose 15%, reflecting higher selling and R&D spending, partly offset by lower general and administrative costs. Nine-month net loss increased by $2.33 million.
- COVID-19-related restrictions continued to weigh on marine scrubber water-treatment system deliveries. DPF and membrane demand and plastics sales increased.
- The company closed LiqTech NA operations in January 2021 and said Germany and Singapore operations were in the process of closing. It entered an eight-year lease for a production facility in China and incorporated a China subsidiary during the quarter.
Outlook, risks, and unusual items
- Management said cash on hand and ongoing operating cash generation might not be sufficient for capital requirements over the next 12 months, considering planned growth investment and significant uncertainty. It cited pandemic impacts, order levels, manufacturing utilization, and supply-chain disruption; it could not predict the full effects.
- The April 2021 senior unsecured convertible note had $15 million principal, 5% annual interest, and is payable at 112% of principal at maturity in October 2023. Investor-elected monthly redemptions of $840,000 may begin March 2022, payable in cash or shares under the note terms. The filing records a $1.8 million original issue discount and substantial debt-related issuance costs and discount amortization.
- Management reported disclosure controls were not effective at September 30 because of material weaknesses in internal control over financial reporting. Remediation efforts included finance hires, a new ERP system, and process documentation; management said remediation was not complete.
- Customer concentration remains a risk: three customers each represented at least 10% of Q3 revenue (21%, 11%, and 10%). The filing also identifies dependence on a limited number of major customers and on emissions rules and funding for related programs.
- Other notable exposures include foreign-currency movements, warranty obligations (reported at $0.95 million), and a $1.50 million cash deposit securing customer guarantees. The company reported no off-balance-sheet arrangements and no subsequent events.
Key facts for investors to verify
- Whether operating cash burn and planned investment can be funded through the next 12 months, and whether additional financing may be needed.
- The convertible note’s redemption and conversion mechanics, share dilution potential, and the basis for classifying $5.88 million as current.
- Whether marine water-treatment orders and gross margins recover, and whether higher DPF, membrane, and plastics sales can offset weakness in water systems.
- Progress in remediating the disclosed material weaknesses and the reliability of future financial reporting.
- Customer concentration, supply-chain constraints, China facility commitments, and the execution and economics of the Middle East joint venture.