LiqTech International, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017; unaudited consolidated results. Amounts are in U.S. dollars unless noted.
Business context
LiqTech develops and sells silicon-carbide ceramic filtration products and systems, including liquid filters, diesel particulate filters (DPFs), and kiln furniture. Management said it is phasing out kiln furniture and focusing on filtration opportunities, including marine scrubber wastewater treatment.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $2.46 million | $3.69 million | $8.35 million | $11.34 million |
| Gross profit (loss) | $(316,000) | $386,000 | $148,000 | $2.26 million |
| Gross margin | (12.9%) | 10.5% | 1.8% | 19.9% |
| Operating loss | $(1.42) million | $(899,000) | $(3.40) million | $(2.08) million |
| Net loss | $(1.48) million | $(938,000) | $(3.51) million | $(5.02) million |
| Loss per share, basic and diluted | $(0.03) | $(0.02) | $(0.09) | $(0.13) |
Q3 sales fell 33.4% year over year, and the company moved from gross profit to gross loss. Management attributed weaker sales to delayed liquid-filtration projects, lower general DPF market activity, and the planned exit from kiln furniture. Nine-month sales declined 26.4%; liquid filters and systems fell $4.20 million, partly offset by a $1.36 million increase in DPF sales. The nine-month net loss was lower than in 2016 largely because 2016 included $2.89 million of income tax expense, while gross profit deteriorated substantially.
Operating expenses decreased 14.3% in Q3 and 18.3% for the nine-month period, reflecting lower selling, general and administrative, non-cash compensation, and research and development expenses. These reductions did not offset the gross-profit decline.
Cash, liquidity, and debt
- Cash was $529,000 at September 30, 2017, down from $1.21 million at December 31, 2016. Working capital was $2.82 million, versus $3.50 million at year-end 2016.
- Operating activities used $2.70 million of cash in the first nine months, compared with $1.10 million used in the prior-year period. Investing activities used $82,000; financing activities provided $1.71 million, primarily from the May stock placement.
- Total assets were $10.50 million and total liabilities were $5.30 million at September 30. Notes payable totaled approximately $49,000; capital lease obligations totaled approximately $29,000. The company reported no available lender credit lines, apart from a fully utilized approximately $15,000 Danish guarantee line.
- Management stated that limited cash and recent losses raise substantial doubt about the company’s ability to continue as a going concern. Additional financing or a return to profitable operations is not assured.
Outlook, material developments, and risks
- No numerical revenue, earnings, or cash-flow guidance was provided. Management described plans to expand filtration markets, strengthen DPF sales, develop standardized systems, and pursue marine scrubber wastewater treatment opportunities.
- The company announced several marine scrubber system orders during 2017, including orders of $480,000, $380,000, and $290,000; two additional orders announced in August were not quantified in the filing. Orders and announced opportunities are not assurance of recognized revenue or cash collection.
- A proposed $4 million investment by Hunan Yonker did not proceed after its application was declined by China’s NDRC. The company instead completed a May 2017 private placement of 7.3 million common shares at $0.25 per share, raising $1.825 million.
- On November 14, 2017, after quarter-end, the company raised approximately $1.94 million through a private placement of 1,617,503 Series A convertible preferred shares. The filing describes a 1-to-4 conversion rate and 6,470,012 equivalent common shares; investors should review the certificate and subscription terms for conversion, voting, and dilution details.
- A reported Italian dispute concerns a €750,000 claim alleging defective products supplied to a joint venture. The case was at a preliminary stage pending a court-appointed expert’s findings; the company said it considers the claims without merit and intends to defend them.
- Customer concentration remained notable: the four largest customers represented about 39% of nine-month sales in 2017, compared with two customers representing about 49% in 2016. Sales are also exposed to project timing, market activity, foreign-currency movements, and estimates affecting receivables, inventory, and long-term contracts.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the period. The filing cautions that forward-looking plans depend on uncertain market and business conditions.
Key facts for investors to verify
- Cash runway, operating cash burn, and whether the post-quarter preferred financing is sufficient to address the going-concern warning.
- Preferred-stock rights and the actual potential dilution under its conversion terms.
- Whether marine scrubber and other announced orders convert into deliveries, revenue, and cash receipts, and whether delayed liquid-filtration projects resume.
- Receivable collectability, inventory valuation, and progress and profitability estimates for long-term contracts.
- Developments in the Italian litigation and any resulting financial exposure.