LiqTech International, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; standalone Q4 financial results are not provided in the filing text. LiqTech develops and sells silicon-carbide filtration products and systems, including liquid-filtration systems and diesel particulate filters (DPFs).
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $12.23 million | $11.34 million |
| Gross profit / margin | $1.07 million / 8.7% | $0.21 million / 1.8% |
| Operating loss | $4.49 million | $4.61 million |
| Net loss | $3.81 million | $4.46 million |
| Basic and diluted loss per share | $0.06 | $0.11 |
| Cash used in operating activities | $3.91 million | $3.32 million |
| Cash at year-end | $3.78 million | $2.49 million |
| Working capital at year-end | $6.75 million | $4.66 million |
- Sales increased 7.8%. Liquid-filter and system sales rose to $5.26 million from $3.53 million; DPF sales fell to $6.54 million from $7.23 million. Kiln-furniture sales ended as the company phased out that product line. Government development-project revenue was $431,340.
- Gross margin improved mainly with a greater contribution from higher-margin liquid-filtration business. Operating expenses rose 15.3% to $5.55 million, including higher G&A and R&D costs. G&A included an approximately $301,000 increase in bad-debt provision.
- Other income included a $344,023 foreign-currency transaction gain. A customer dispute settlement generated EUR 380,000 of income in Q4 2018.
- Financing activities provided $6.02 million, principally from an April 2018 public offering that generated $5.87 million net proceeds. Common shares outstanding increased from 44.2 million at year-end 2017 to 72.9 million at year-end 2018; the preferred shares also converted into common shares during 2018.
- Total liabilities were $4.62 million, consisting of current liabilities; the balance sheet reports no material long-term borrowing. The company said it had no general available credit lines, apart from a small Danish guarantee facility of approximately $14,514. Future minimum operating lease payments totaled $2.61 million.
Changes, outlook and risks
- Marine scrubber-related deliveries supported liquid-filtration growth. Management reported more than 50 confirmed orders expected to ship in 2019 as of November 2018, and more than 110 confirmed standardized-system orders as of January 2019. It expected record revenue in Q1 2019, further revenue growth in Q2, and Q1 profitability; these are expectations, not reported results.
- The company had ordered additional furnaces, with delivery expected late in 2019, and said it was positioned to meet planned first-half 2019 deliveries. Management stated that cash and working-capital terms on existing marine contracts provided near-term confidence and that resources should cover commitments for at least 12 months.
- Key risks include customer-order concentration and cancellations, execution and capacity constraints as marine demand ramps, dependence on regulatory enforcement (including IMO 2020), raw-material availability and cost, foreign-exchange exposure, and receivables collection. The four largest customers represented approximately 31% of 2018 sales.
- Management reported material weaknesses in internal control over financial reporting, including revenue recognition, review documentation, financial-system access and duty structuring, segregation of duties, and cash disbursements. It cited additional finance staffing and planned system and process improvements; the auditor did not attest to internal controls.
- Two supplier claims of approximately $68,800 and $83,400 were contested, with no provision recorded. A prior Italian lawsuit ended with the plaintiff ordered to pay costs; a separate customer dispute was settled in 2018, with final payment to LiqTech.
- The financial statements received an unqualified audit opinion. The filing states that disclosure controls were ineffective and management concluded internal control over financial reporting was not effective as of year-end.
Important facts for investors to verify
- Whether 2019 confirmed orders converted into shipments, revenue, cash collections, and positive operating results, and whether management’s Q1/Q2 expectations were achieved.
- Gross margins and cash requirements as liquid systems scale, including capacity expansion, working-capital needs, and customer contract terms.
- Receivable quality, customer concentration, and the adequacy of the $971,772 doubtful-account allowance, given 2018 bad-debt expense and operating cash use.
- Progress remediating the reported material weaknesses, particularly revenue recognition and cash-disbursement controls.
- The effect of the 2018 equity issuance and preferred-stock conversion on dilution, and whether further capital raising may be needed.
- Exposure to the contested supplier claims, foreign-exchange movements, raw-material supply, and changes or delays in environmental regulations.