LiqTech International, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016; unaudited. LiqTech develops and sells silicon-carbide ceramic filtration products and systems, including liquid filtration systems and diesel particulate filters (DPFs). It is phasing out kiln furniture.
Financial performance
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Net sales | $4.02 million; +136.3% year over year | $7.65 million; +101.0% |
| Gross profit / margin | $1.13 million / 28.1% | $1.87 million / 24.5% |
| Operating loss | $229,162 | $1.19 million |
| Net loss attributable to LiqTech | $329,376; $0.01 per share | $4.08 million; $0.10 per share |
| Operating cash flow | Not separately presented for the quarter | Cash used of $664,498 |
Six-month revenue growth was led by liquid filters and systems, which generated $4.99 million versus $1.63 million a year earlier. DPF sales were $2.57 million versus $1.91 million; kiln furniture sales declined to $94,918 from $269,469. Europe accounted for $6.77 million of six-month sales. Two customers represented 27% and 25% of six-month sales, respectively.
Liquidity, debt and balance sheet
- June 30 cash was $637,035, down from $1.37 million at year-end 2015; restricted cash fell from $292,826 to zero.
- Working capital was $7.28 million, down from $7.64 million; current assets were $10.63 million and current liabilities $3.35 million.
- Total liabilities were $3.52 million. Notes payable were $63,719; capital lease obligations totaled $242,845. The company reported no available lender credit lines; its approximately $70,600 guarantee facility was fully utilized.
- Cash used in investing and financing activities was $69,741 and $90,809, respectively, for the first half. Cash ended the period at $637,035.
Material changes and management commentary
- Second-quarter gross profit turned positive from a $558,442 loss in the prior-year quarter, supported by higher sales. Operating expenses declined 20.9% in the quarter and 11.6% for the first half, including lower selling and administrative costs.
- Despite improved first-half operating performance, the six-month net loss increased year over year, principally because income tax expense was $2.87 million versus a $967,104 tax benefit in 2015. The company recorded a roughly $3.0 million valuation allowance on deferred tax assets, citing limited expected ability of certain U.S. and other entities to realize loss carryforwards.
- Management attributed growth to increased order inflow for liquid filtration systems and improved DPF market activity; it cited a longer-than-anticipated sales cycle and declining North American DPF sales as negative evidence.
- Management said cash flows and potential funding sources, including possible common-stock sales, should meet anticipated working-capital needs for the next 12 months. It cautioned that unexpected costs or continued negative operating cash flow could strain resources; additional financing may not be available on acceptable terms and equity financing could dilute shareholders.
Outlook, risks and unusual items
- No formal financial guidance was provided. A $2.0 million follow-on Serbia groundwater-treatment order was expected to be delivered partly in the second and partly in the third quarter of 2016. A July 2016 Chinese strategic agreement was valued at $2.2 million, with a first $375,000 order expected for September delivery, subject to customary quality approvals.
- A lawsuit in Italy seeks €750,000 (approximately $690,000 at December 31, 2015) over allegedly defective products supplied to a venture. The matter was at a preliminary stage; management disputed the claims and intended to defend them. The filing did not provide a clear estimate of the potential financial outcome.
- Operating lease commitments totaled $1.16 million. The company was in the process of closing its Germany and Singapore operations, with completion expected during 2016.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No subsequent events were reported through August 11, 2016.
Important facts for investors to verify
- Whether reported order growth converts into revenue and cash, particularly given the stated extended sales cycle and customer concentration.
- Cash runway, cash collections, working-capital needs, and availability of financing in light of low cash, operating cash use, and no available lender credit lines.
- The assumptions supporting deferred-tax-asset realization and the potential for further valuation allowances or tax expense.
- Delivery, acceptance, and payment status for major filtration-system orders, including the Serbia project and the subsequent China agreement.
- Progress and possible exposure in the Italian litigation, and the costs and timing of the planned subsidiary closures.