LiqTech International, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019, compared with 2018. This is an annual report; the supplied filing text does not provide a clear standalone fourth-quarter income statement.
Business context
LiqTech develops and manufactures silicon-carbide filtration products, including liquid-filtration membranes and systems, diesel particulate filters (DPFs), and, following its 2019 acquisition of BS Plastic, machined and welded plastic parts. The main 2019 growth driver was delivery of water-treatment systems for marine scrubber applications.
Financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $32.64 million | $12.23 million |
| Gross profit / margin | $7.16 million / 21.9% | $1.07 million / 8.7% |
| Operating expenses | $7.55 million | $5.55 million |
| Operating loss | $0.39 million | $4.49 million |
| Net income (loss) | $39,616 | ($3.81 million) |
| Operating cash flow | ($4.55 million) | ($3.91 million) |
| Investing cash flow | ($3.70 million) | ($0.17 million) |
| Financing cash flow | $14.63 million | $6.02 million |
- Revenue increased 166.8%, primarily from liquid filters and systems, up $20.20 million. Liquid filtration represented 78% of sales versus 43% in 2018. DPF sales declined $0.88 million; plastics contributed $0.90 million after the acquisition.
- Gross margin improved with the shift toward liquid-filtration systems. Higher selling, administrative, and R&D costs partly offset the gross-profit increase. Net income was nearly breakeven; the $297,252 income-tax benefit contributed to the reported profit.
- Cash and restricted cash totaled $9.78 million at year-end, including $2.71 million restricted and $7.07 million unrestricted. Working capital was $17.16 million, versus $6.75 million a year earlier.
- Current assets were $27.49 million and current liabilities $10.33 million. The company reported $5.14 million of operating lease liabilities, $0.21 million of finance lease obligations, and a $0.90 million contingent acquisition earn-out. It also disclosed a $3.0 million bank line used for leasing and guarantees; the filing does not clearly state a conventional drawn borrowing balance.
- Operating cash use increased as receivables, contract-related balances, and inventory grew. The May 2019 equity offering generated $14.52 million net proceeds. Capital spending included production-capacity investments.
Material developments, outlook and risks
- Acquired BS Plastic in September 2019 for $2.22 million total consideration, including contingent consideration of up to $0.89 million. It contributed $0.90 million of revenue after acquisition.
- Reported an $8.4 million single order for marine scrubber water-filtration systems and more than 110 confirmed orders for standardized systems during 2019. A new furnace installed in January 2020 was described as having more than triple the throughput of existing furnaces. The filing gives no formal revenue or earnings guidance.
- Management reported severe business interruptions from COVID-19-related travel and work restrictions as of March 2020. It also warned that lower marine fuel prices could weaken scrubber demand, while shipping-sector disruption could affect orders.
- Customer concentration increased: the four largest customers accounted for approximately 68% of 2019 sales, versus 31% in 2018. The largest customer represented 39% of year-end receivables. The company has no firm long-term volume commitments and notes that orders may be delayed, reduced, or cancelled.
- Management reduced the warranty accrual rate from 7% to 3% of delivered-product sales based on claims experience; the year-end warranty liability was $0.81 million. The company also had a non-cancellable $3.8 million furnace purchase obligation, expected to be financed by lease.
- The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Material weaknesses included accounting staffing and review controls, IT general controls, transaction-control documentation, and revenue/shipping documentation. Remediation was ongoing; BS Plastic was excluded from the controls assessment.
- Two supplier claims were disclosed and contested, with no provision recorded; the filing says management did not expect payment. No legal proceeding was identified as likely to have a material adverse effect at year-end.
Most important facts for investors to verify
- Whether marine-system orders convert to recognized revenue and cash collections, given customer concentration and increased receivables.
- COVID-19 effects on shipping customers, delivery schedules, production, and the order backlog, as well as sensitivity to marine fuel prices and scrubber demand.
- Whether capacity expansion, including the new furnace, improves throughput and margins without further substantial cash use.
- Progress in remediating material weaknesses and whether controls over revenue recognition, inventory, IT, and financial reporting become effective.
- Restricted-cash availability, the terms and use of credit and guarantee facilities, lease commitments, furnace purchase obligations, and contingent earn-out payments.
- Warranty experience after the accrual-rate reduction and the collectability of major-customer receivables.