LiqTech International, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 23, 2018. LiqTech develops and sells silicon-carbide filtration products, including liquid filtration systems and diesel particulate filters (DPFs), with operations in Denmark and the United States.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $11.34 million | $13.91 million |
| Gross profit / margin | $0.21 million / 1.8% | $1.43 million / 10.3% |
| Operating loss / margin | $(4.61) million / (40.6)% | $(13.13) million / (94.5)% |
| Net loss | $(4.46) million | $(16.42) million |
| Operating cash flow | $(3.32) million | $0.42 million |
| Cash at year-end | $2.49 million | $1.21 million |
Net loss per share was $0.11, versus $0.45 in 2016. The smaller loss chiefly reflects the absence of the $7.34 million goodwill impairment recorded in 2016 and lower expenses; it does not indicate improved underlying operating performance. Gross profit fell 85.6%, and the company remained loss-making.
By product line, DPF sales rose 24% to $7.23 million, while liquid filters, services and systems fell 48% to $3.99 million. Kiln furniture sales were $0.13 million; the company plans to phase out that product line. DPFs represented 64% of 2017 sales and liquid filtration 35%. Liquid-system sales were affected by fewer large projects and delays in anticipated marine scrubber orders. Europe contributed $7.89 million of sales, down from $11.61 million.
Liquidity, debt and cash flow
Year-end working capital was $4.66 million, up from $3.50 million; current assets were $9.43 million and current liabilities $4.77 million. Cash increased by $1.28 million, despite $3.32 million of cash used in operations, principally because the company raised equity capital. Investing activities used $0.12 million. Financing activities provided approximately $4.10 million, including proceeds from common and preferred stock offerings.
Reported notes payable were zero at December 31, 2017; capital lease obligations were $26,186, all current. The company said it had no general available line of credit; a small Danish guarantee facility was fully utilized. It reported $780,737 of future minimum operating lease payments.
Changes, outlook and material risks
- Revenue declined 18.4% year over year, while gross margin compressed from 10.3% to 1.8%, reflecting lower sales and a shift away from higher-margin liquid filtration systems.
- The company raised $1.825 million through a May common-stock placement and $2.641 million through a November mandatory convertible preferred-stock placement. The preferred shares are convertible into at least 8,803,348 common shares no later than May 14, 2018, creating potential dilution.
- Management provided no quantified financial guidance. Its stated priorities include marine scrubber water-treatment systems, DPF sales, geographic expansion and product development. Reported subsequent orders included swimming-pool systems for Australia and a $440,000 DPF order from China, expected for delivery in Q2 2018. These orders are not equivalent to full-year guidance.
- The filing and auditor’s report state that limited cash and accumulated losses raise substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on obtaining additional funds or returning to profitable operations; neither is assured.
- Revenue concentration improved: the four largest customers represented about 38% of sales, versus 67% in 2016. Nonetheless, the company has no firm long-term volume commitments and discloses customer credit and collection risks.
- A customer dispute concerns approximately $1.10 million related to a water-treatment installation; the company says it is seeking collection and has written off $402,653 of costs in excess of billings. A separate Italian lawsuit seeks €750,000 over alleged defective products; LiqTech disputes the claims. The outcomes were not reasonably estimable.
- Management reported ineffective disclosure and financial-reporting controls due to material weaknesses involving revenue recognition, review documentation, financial-system access and duties, segregation of duties, and cash disbursements. The external auditor issued an unqualified opinion on the financial statements but did not attest to internal controls.
- Other disclosed risks include dependence on access to capital, raw-material availability and costs, foreign-currency movements, regulatory and market uncertainty, and potential product, environmental or intellectual-property claims. The company received government grants of $462,451 in 2017, compared with $157,804 in 2016.
Important facts for investors to verify
- Cash runway, near-term funding requirements and progress toward resolving the going-concern uncertainty.
- Conversion and final share-count impact of the preferred placement, and reconciliation of the filing’s common shares outstanding figures and dates.
- Whether marine scrubber and other liquid-filtration orders convert into recognized revenue, and whether gross margins recover as sales mix changes.
- Recoverability and outcome of the disputed $1.10 million customer balance and the €750,000 Italian litigation.
- Remediation of the material weaknesses, particularly revenue recognition and cash-disbursement controls.
- The cash-flow statement reports financing cash inflow of $4,104,700, while MD&A states $4,101,700; confirm the correct figure against the filed statements.