LiqTech International, Inc. — Q1 2017 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2017. LiqTech develops and sells silicon-carbide filtration products and systems, including diesel particulate filters (DPFs) and liquid filtration systems. It is phasing out kiln furniture. Figures are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $2.968 million | $3.630 million |
| Gross profit / margin | $271,417 / 9.1% | $745,958 / 20.5% |
| Operating expenses | $1.280 million | $1.703 million |
| Operating loss | $(1.008) million | $(957,000) |
| Net loss | $(833,270) | $(3.754) million |
| Loss per share | $(0.02) | $(0.10) |
| Cash used in operations | $(512,322) | $(287,396) |
- Revenue fell 18.2%. Liquid filters and systems sales declined by about $1.56 million, partly offset by an $860,070 increase in DPF sales. DPF sales rose to $2.283 million from $1.423 million; liquid filters and systems fell to $620,071 from $2.179 million.
- Gross margin contracted as sales shifted away from liquid filtration, which management says historically carries higher margins. Operating expenses declined 24.9%, but operating loss increased by $51,150.
- Net loss improved by $2.92 million primarily because Q1 2016 included $2.774 million of income tax expense; Q1 2017 had no income tax expense. A $178,675 foreign-currency transaction gain also supported 2017 results.
- Cash declined to $515,467 from $1.209 million at year-end. The balance sheet reports current assets of $8.057 million and current liabilities of $5.312 million; MD&A instead gives $8.320 million and $5.575 million, respectively. Both sets imply working capital of approximately $2.745 million, but the filing’s current-asset and liability values are inconsistent.
- Total liabilities were $5.370 million. Notes payable and capital lease obligations together were approximately $163,000. The company reported no available general-purpose lines of credit; its approximately $13,600 guarantee facility was fully committed. Operating lease minimum payments totaled $1.455 million.
Changes, outlook and risks
- Management cited delays in liquid-filtration business opportunities, decreased liquid-filter sales, longer sales cycles, delayed shipments on large DPF orders, and delays collecting receivables from large water-treatment systems. China market activity contributed to stronger DPF sales.
- The company reported substantial doubt about its ability to continue as a going concern, citing limited cash and recent losses. It said additional funding is needed and that financing may not be available on acceptable terms, or at all.
- A proposed $4 million investment by Hunan Yonker had not been completed by its extended April 15, 2017 deadline; Yonker said Chinese regulatory review was ongoing. Separately, on May 12, 2017, the company completed a private placement of 6.3 million shares at $0.25 per share for $1.575 million, increasing shares outstanding to 43,229,264.
- Management described a two-year Grundfos framework agreement with a minimum value of $450,000 and a $120,000 water-treatment-system order. The filing gives no financial guidance or quantified forecast.
- Four customers represented approximately 59% of Q1 2017 sales, compared with 51% a year earlier. A pending Italian litigation matter seeks €750,000; the company disputes the claims, and the outcome remained uncertain pending an expert assessment expected in Q2 2017.
- The company was closing its Germany and Singapore operations, with completion expected during 2017. It also recorded a $7.343 million goodwill impairment in 2016.
Key facts for investors to verify
- Reconcile the inconsistent current-asset and current-liability figures in the balance sheet and MD&A.
- Assess whether the May 2017 placement proceeds adequately address near-term funding needs and monitor any further financing requirements.
- Track operating cash burn, collections, customer concentration, and progress on delayed or large orders.
- Confirm whether the Yonker investment or any related China joint-venture plans proceed; the stated investment had not closed by the filing date.
- Monitor gross-margin recovery, liquid-filtration demand, the Italian litigation, and the planned Germany and Singapore closures.