LiqTech International, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Filed November 14, 2011. Amounts are in U.S. dollars unless noted.
Business context and reporting period
LiqTech develops and manufactures silicon-carbide diesel particulate filters, ceramic liquid-filtration membranes, and kiln furniture. On August 24, 2011, former shell company Blue Moose Media completed a reverse merger with LiqTech USA; Blue Moose later changed its name to LiqTech International. The financial statements reflect LiqTech’s operating business, so the transaction and substantial change in share count are important context for period comparisons.
Financial performance and position
| Metric | Three months ended September 30, 2011 | Nine months ended September 30, 2011 |
|---|---|---|
| Net sales | $6.83 million; up 62.3% year over year | $13.55 million; up 8.8% |
| Gross profit / margin | $1.46 million / 21.4%; prior-year margin 23.3% | $3.32 million / 24.5%; prior-year margin 24.6% |
| Operating income | $668,000 | $764,000 |
| Net income attributable to LiqTech | $484,000; prior year $81,000 | $378,000; prior year $263,000 |
| Basic and diluted EPS | $0.03 | $0.03 |
For the nine-month period, cash from operations was $12,785, compared with $1.91 million in 2010. Investing used $953,000, mainly for property and equipment; financing provided $833,000, including proceeds from the merger-related offering and share transactions. Cash was approximately $398,000 at September 30, down from $559,000 at year-end 2010.
Total assets were $16.13 million and total liabilities $10.13 million. Current assets were $9.71 million versus current liabilities of $8.70 million; management reported working capital of $1.01 million, or $4.67 million excluding related-party notes payable that it expected to repay with the corresponding subscription receivable. The balance sheet reports $517,000 of lines of credit, $450,000 of current notes, $3.67 million of current related-party notes payable, and $1.25 million of capital-lease obligations. The two credit-line disclosures in the notes, however, report approximately $1.61 million outstanding in aggregate, a figure that does not clearly reconcile to the balance sheet. The lines are due on demand, secured by receivables, inventory, and equipment, and had only about $24,000 of combined availability per the note disclosures.
Material changes versus prior comparable periods
- Third-quarter sales growth was driven principally by diesel particulate filters; management attributed demand partly to North America and London’s Low Emission Zone. Nine-month sales rose more modestly.
- Third-quarter gross margin declined 1.9 percentage points year over year; nine-month margin was broadly flat. Operating expenses rose 29.8% in the quarter, while nine-month expenses decreased 1.3% amid cost controls and organizational streamlining.
- Nine-month operating cash flow weakened sharply, mainly due to working-capital needs, including a $2.92 million cash-flow impact from increased receivables; accounts payable also rose.
- Common shares outstanding increased from 9.31 million at year-end 2010 to 21.6 million after the merger and related transactions. The company also granted 2.0 million stock options.
Outlook, commentary, risks, and unusual items
- No quantified revenue, earnings, or margin guidance is provided. Management said manufacturing was at peak capacity, was using subcontractors, and planned capacity expansion. It also reported opening sales offices in France and Germany in October 2011.
- The company received a reported $2 million Danish government grant in 2011 to develop a silicon-carbide reverse-osmosis membrane. Success and commercialization are uncertain.
- A July 2011 fire damaged LiqTech Int. DK’s production facility and offices. Operations and usable equipment were moved. Insurance claims cover casualty and business-interruption losses; management said losses would be within insured amounts, but the final damage assessment was incomplete. The company reported casualty proceeds of approximately $760,000 and business-interruption proceeds, with related amounts recorded in sales and cost of goods sold.
- Customer concentration remained material: four customers represented approximately 39% of nine-month sales, compared with approximately 66% in the prior-year period. The company also identified demand forecasting, receivables collectability, inventory valuation, foreign-currency translation, and production-capacity execution as relevant risks.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the period. The filing provides no quantified market-risk disclosure, citing smaller-reporting-company status.
Important facts for investors to verify
- Reconcile the balance-sheet line-of-credit amount with the higher borrowings disclosed for the two demand facilities, and confirm actual availability and renewal terms.
- Confirm collection and settlement timing for the $3.72 million related-party subscription receivable and corresponding current related-party payable, both tied to the merger transactions.
- Track receivables, operating cash flow, and customer collections given the large receivables increase and minimal operating cash generation.
- Check final fire-loss assessments, insurance reimbursements, and whether proceeds fully cover asset and business-interruption losses.
- Assess the effect of the merger, increased share count, options and warrants, and production-capacity investment on per-share results and future margins.