LiqTech International, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020; filed August 10, 2020. The unaudited consolidated statements compare with the same 2019 periods. LiqTech develops and sells silicon-carbide filtration products and systems, including liquid filters, diesel particulate filters (DPFs), and plastic components.
Financial performance
- Q2 revenue: $4.64 million, down 50.1% from $9.30 million. Liquid filter and system sales fell $5.90 million; DPF sales rose $0.41 million, and plastic components contributed $0.76 million.
- Q2 gross profit and margin: $0.49 million and 10.7%, versus $2.08 million and 22.3% a year earlier. Operating expenses rose 41.9% to $2.43 million; operating loss was $1.94 million, versus operating income of $0.36 million.
- Q2 net result: Net loss of $2.56 million, or $0.12 per share, versus net income of $0.15 million, or $0.01 per share. Other expense included $0.37 million of currency losses and a $0.24 million warrant fair-value charge.
- First-half revenue: $14.92 million, down 10.7% from $16.72 million. Gross profit was $3.13 million, down 11.7%, with a 21.0% gross margin versus 21.2%.
- First-half earnings: Operating loss of $1.84 million versus operating income of $0.34 million; net loss of $2.26 million, or $0.11 per share, versus net income of $0.18 million, or $0.01 per share.
- Cash flow, first half: Operating activities provided $1.23 million, compared with $5.07 million used in 2019. Investing used $2.19 million, primarily for production equipment; financing provided $7.30 million, including proceeds from the May equity financing. Cash and restricted cash increased $6.45 million.
Financial position and liquidity
- At June 30, cash, cash equivalents and restricted cash totaled $16.23 million, including $2.71 million restricted; unrestricted cash was $13.52 million. Net working capital was $21.40 million, up from $17.16 million at December 31, 2019.
- Total liabilities were $17.74 million. Reported obligations included $5.10 million of operating and finance lease liabilities, a $0.90 million contingent earn-out, and a $2.81 million warrant liability. The filing reports no off-balance-sheet arrangements.
- In May, the company issued 1.085 million common shares at $5 per share and prefunded warrants for 515,000 shares. The common-stock issuance generated $4.74 million net of stated costs; warrant proceeds were $2.58 million. The warrants are liability-classified and changes in fair value affect earnings.
Material changes, outlook and risks
- Management attributed weaker liquid filtration and water-treatment demand, particularly in marine scrubber systems, to COVID-19 restrictions and reduced order intake. COVID-19 and related operating measures materially adversely affected Q2 results. Reduced manufacturing and lower-margin product mix also weighed on gross margin.
- Plastic-component revenue reflects the business acquired in 2019. DPF sales increased in Q2, which management linked to greater interest in emissions-reduction solutions, but first-half DPF revenue remained below 2019.
- Management said available cash and expected operating cash generation should cover capital requirements for the next 12 months, subject to pandemic-related uncertainties. It expected lower manufacturing levels to continue affecting gross profit and believed it could fulfill most, if not all, existing 2020 delivery obligations. No quantified revenue or earnings guidance was provided.
- The company had a non-cancelable $3.8 million purchase commitment for four furnaces; two remained to be delivered in the second half of 2020. A leasing arrangement was expected to partly finance the purchase.
- Two supplier claims were contested, with no provision recorded; management said it did not expect payment. Warranty liabilities were $1.03 million at June 30.
- Disclosure controls were deemed ineffective because of material weaknesses in internal control over financial reporting. Management described remediation work, including finance staffing, an ERP system and process documentation, but said weaknesses cannot be considered remediated until controls operate effectively for a sufficient period.
- Revenue and receivables were concentrated among a small number of customers: two customers each represented at least 10% of Q2 revenue, and three represented at least 10% of receivables at June 30. The filing also highlights uncertainty around the pandemic’s effects on demand, operations, cash flow and liquidity.
Important facts for investors to verify
- Whether liquid-filter and marine-system orders and production recover, and the resulting effect on gross margin and cash generation.
- Whether the stated 12-month liquidity outlook remains supportable, considering restricted cash, furnace commitments, lease obligations and operating cash needs.
- The terms, potential share dilution and fair-value earnings effects of the 515,000 prefunded warrants.
- Progress in remediating material weaknesses and whether disclosure controls become effective.
- Customer concentration, receivable collection and warranty costs, as well as outcomes of the contested supplier claims.