LiqTech International, Inc. — Q2 2017 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017; financial statements are unaudited. LiqTech develops and sells silicon-carbide filtration products and systems, including liquid filtration systems and diesel particulate filters (DPFs). Unless noted, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $2.93 million | $4.02 million | $5.89 million | $7.65 million |
| Gross profit / margin | $193,000 / 6.6% | $1.13 million / 28.1% | $464,000 / 7.9% | $1.87 million / 24.5% |
| Operating loss | $977,000 | $229,000 | $1.99 million | $1.19 million |
| Net loss | $1.19 million | $329,000 | $2.03 million | $4.08 million |
| Loss per share | $0.03 | $0.01 | $0.05 | $0.10 |
- Six-month operating cash outflow was $1.83 million, versus $664,000 in 2016. Investing activities used $60,000; financing provided $1.71 million, principally from the stock placement. Cash increased by $72,000 to $1.28 million.
- At June 30, cash was $1.28 million, working capital $3.99 million, current assets $9.19 million, and current liabilities $5.20 million. The company said it had no available lender credit lines. A separate Danish guarantee facility of approximately $14,500 was fully utilized.
- Notes payable totaled $50,775 and capital lease obligations $30,818. Operating lease minimum payments were $1.35 million.
- Total assets were $11.76 million and total liabilities $5.26 million. Accounts receivable, net, was $1.57 million; the allowance for doubtful accounts was $2.28 million.
Changes versus comparable periods
- Q2 sales fell 27.2% year over year; first-half sales fell 22.9%. Lower liquid-filter and systems sales drove the declines: management attributed them to delayed business opportunities and noted that these products historically carry higher margins.
- First-half liquid filters and systems sales declined to $1.62 million from $4.99 million. DPF sales rose to $4.16 million from $2.57 million, primarily reflecting increased market activity in China. Kiln-furniture sales were $120,000; the company intends to phase out this product line.
- Gross margin contracted substantially in both periods. Despite lower operating expenses, Q2 operating and net losses widened. First-half net loss narrowed from 2016, primarily because 2016 included $2.87 million of income tax expense; operating loss itself worsened.
- On May 19, the company issued 7.3 million shares at $0.25 per share, raising $1.825 million. Shares outstanding increased from 36.93 million immediately before the placement to 44.23 million afterward.
Outlook, risks, and notable items
- Going concern: Management disclosed limited cash and significant recent losses that raise substantial doubt about the company’s ability to continue as a going concern. It stated that additional funding is needed and that financing may not be available on acceptable terms, or at all. No formal financial guidance was provided.
- The placement proceeds were intended to accelerate the marine-scrubber business. The company reported orders for marine-scrubber wastewater-treatment systems of $480,000, $380,000, and $290,000 during 2017, as well as a $120,000 flue-gas-condensate treatment order. It also cited a two-year Grundfos framework agreement with a minimum value of $450,000.
- A proposed $4 million investment by Hunan Yonker was declined by China’s National Development and Reform Commission in June; the company therefore did not receive those proposed proceeds.
- Management cited delayed filtration-system sales cycles, reduced liquid-filter sales, delayed shipments on large DPF orders, and collection delays on large water-treatment systems. Foreign-currency transaction losses were $206,000 in Q2, compared with a small gain in Q2 2016.
- A lawsuit in Italy seeks €750,000 over alleged defective products. The case was in preliminary stages pending a court-appointed expert’s assessment; the company disputed the claims and intended to defend them.
- Germany and Singapore subsidiaries had no operations and were being wound down, with completion expected during 2017. Management identified no other material subsequent events through August 14, 2017.
Most important facts for investors to verify
- Whether operating cash burn can be reduced and additional financing secured, given the explicit going-concern warning and absence of available lender credit lines.
- Whether delayed liquid-filtration projects convert to revenue, and whether DPF growth and marine-scrubber orders can improve revenue mix and gross margins.
- Customer payment and receivable collection status, including the substantial doubtful-account allowance and reported delays involving large water-treatment projects.
- Potential dilution and funding implications of the share placement, and the effect of Yonker’s declined investment on the company’s financing and China plans.
- Outcome and potential financial exposure of the Italian litigation; the filing does not provide a clear estimate of any possible loss.