LiqTech International, Inc. — Q2 2018 Form 10-Q
Business context and period. LiqTech develops and sells silicon-carbide filtration products, including liquid filtration systems and diesel particulate filters (DPFs), in the United States, Europe and other international markets. This report covers the three and six months ended June 30, 2018; the financial statements are unaudited. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $3.60 million | $2.93 million | $5.99 million | $5.89 million |
| Gross profit / margin | $0.66 million / 18.3% | $0.19 million / 6.6% | $0.60 million / 10.0% | $0.46 million / 7.9% |
| Operating loss | $0.56 million | $0.98 million | $1.96 million | $1.99 million |
| Net loss | $0.26 million | $1.19 million | $1.80 million | $2.03 million |
| Loss per share | $0.004 | $0.03 | $0.03 | $0.05 |
Cash flow and liquidity. For the six months, operating activities used $3.33 million, investing activities used $0.08 million, and financing activities provided $5.85 million. Cash at June 30 was $4.49 million, up from $2.49 million at year-end 2017. Working capital was $8.61 million, versus $4.66 million at year-end. The April stock offering generated $6.61 million gross proceeds and approximately $5.87 million net proceeds after offering costs.
Debt and obligations. Total liabilities were $3.52 million, all classified as current. Capital lease obligations were approximately $11,500 at June 30. The company reported no available borrowing lines; its approximately $14,800 guarantee facility was fully utilized and secured by certain subsidiary assets. Future minimum operating lease payments were $639,814.
Other key metrics. Total assets were $14.13 million and stockholders’ equity was $10.61 million at June 30. Common shares outstanding rose to 72.74 million from 44.43 million at year-end, reflecting the public offering and conversion of preferred shares. One customer represented approximately 12% of first-half sales.
Material changes versus prior periods
- Q2 sales increased 23.0% year over year; first-half sales increased only 1.6%. First-half liquid filters and systems revenue rose by $835,285, while DPF revenue fell by $619,922 and kiln-furniture revenue fell by $120,227. The company said it decided to discontinue kiln furniture.
- Q2 gross margin improved to 18.3%, which management attributed to higher activity and a more favorable mix of liquid filters and systems. First-half gross margin also improved, to 10.0% from 7.9%.
- Operating expenses rose 4.7% in the first half, including higher general and administrative and research and development costs; selling expenses declined. R&D spending increased as the company invested in its scrubber solution.
- First-half net loss narrowed by $228,850. Q2 net loss improved substantially, but the comparison also benefited from a $296,140 currency-transaction gain in Q2 2018 versus a $206,362 loss a year earlier. First-half currency transactions produced a $217,086 gain versus a $27,687 loss.
- First-half operating cash use increased by $1.50 million year over year, mainly reflecting reductions in accrued expenses, contract balances and accounts payable.
Outlook, risks and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing limited cash and recent losses. Management believes the April equity raise and potential marine-scrubber business are helping address the uncertainty, but there is no assurance of further financing or a return to profitability.
- Commercial prospects: The company reported framework agreements with two large marine-scrubber manufacturers and a letter of intent with a third. Agreements described estimated deliveries of more than 95 systems and a minimum of 35 systems during initial terms spanning 2018–2019; these are prospective opportunities, not assurance of completed sales. Management provided no formal quantified revenue or earnings guidance.
- Contingency: A customer disputed approximately $1.10 million related to a water-treatment installation, alleging noncompliance under testing conditions the company says were outside the contract parameters. The company intended to pursue collection; the outcome could not be reasonably estimated, and no legal action had been initiated as of the filing.
- Legal outcome after quarter-end: On July 31, 2018, an Italian court rejected a plaintiff’s €750,000 claim against a subsidiary and ordered the claimant to pay the company’s legal expenses.
- Controls: Management concluded disclosure controls were ineffective due to material weaknesses identified in the 2017 audit and said remediation efforts were underway.
- Subsequent leadership and auditor changes: The board chair resigned July 2 and a successor was appointed. The company changed its independent accounting firm in July; the CFO’s retirement became effective August 14, with a successor effective August 15.
- The company adopted the new revenue-recognition standard on January 1, 2018 using the modified-retrospective method and reported no material impact. It was evaluating the upcoming lease-accounting standard.
Most important facts for investors to verify
- Whether the scrubber framework agreements and letter of intent convert into firm orders, deliveries and collected cash, and on what timetable.
- Whether cash burn can be reduced and the company can fund operations without further dilutive equity or restrictive debt financing.
- Progress on remediation of the material weaknesses and whether disclosure controls become effective.
- Status and recoverability of the approximately $1.10 million disputed customer balance, and any related legal developments.
- Whether improved gross margins persist as product mix, DPF demand and liquid-system sales evolve; assess the continuing effect of currency gains and losses.
- The impact of the substantial share-count increase and any additional financing on existing shareholders.