LiqTech International, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2016, compared with Q1 2015. LiqTech develops and sells silicon-carbide filtration products and systems, including liquid-filtration systems and diesel particulate filters (DPFs); it is phasing out kiln furniture. The company reported as a smaller reporting company.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $3.63 million | $2.10 million; up 72.5% |
| Gross profit (margin) | $746,000 (20.5%) | $(47,000) ((2.2)%) |
| Operating loss | $(957,000) | $(1.79) million |
| Net loss attributable to LiqTech | $(3.75) million; $(0.10) per share | $(1.17) million; $(0.03) per share |
| Operating cash flow | $(287,000) | $(1.39) million |
- Revenue growth reflected higher liquid-filter and systems sales and DPF sales; kiln-furniture sales declined. Liquid filters and systems generated $2.18 million, DPFs $1.42 million, and kiln furniture $28,000.
- Operating expenses declined 2.4% to $1.70 million. Selling and administrative expenses fell, while non-cash compensation rose to $167,000 and R&D increased to $189,000.
- Q1 2016 included $2.77 million of income-tax expense, principally related to a $2.77 million increase in the valuation allowance against deferred tax assets. This non-cash charge drove the larger reported net loss despite improved operating results. The long-term deferred tax asset fell from $3.68 million at year-end to $963,000.
- Cash and cash equivalents were $1.32 million at March 31, down from $1.37 million at December 31, 2015; restricted cash declined from $293,000 to zero. Working capital was $7.33 million, versus $7.64 million at year-end.
- Total assets were $23.17 million and total liabilities $3.44 million. Notes payable were $68,819; capital-lease obligations totaled $289,382. Q1 investing and financing cash outflows were $52,000 and $39,000, respectively.
Changes, outlook, and risks
- Management attributed 72.5% sales growth to increased market activity in DPFs and liquid-filtration orders secured in the second half of 2015 beginning to convert to revenue. Europe contributed $3.20 million of Q1 sales; the four largest customers represented approximately 51% of sales, including one at 34%.
- Management said cash flow and other potential funding sources should cover anticipated working-capital and capital-spending needs for the foreseeable future, but warned that unexpected spending or continued negative operating cash flow could strain resources. The company reported no available lender credit lines. A Danish customer-guarantee facility of approximately $72,000 was fully used and secured by certain assets.
- Recent orders included an approximately $2.0 million groundwater-treatment project expected to be delivered in Q2 2016, and a $150,000 French pool-market order. A previously announced $6.1 million mining wastewater system was expected to be installed in the first half of 2016. These are contract expectations, not company-wide financial guidance; the filing provides no quantified revenue or earnings guidance.
- Risks include long sales cycles, declining DPF sales noted as negative evidence in the tax assessment, customer concentration, and the need for possible future financing. A €750,000 (approximately $690,000 at year-end 2015) Italian lawsuit alleges defective products; proceedings were preliminary, and the company said it considers the claims without merit and intends to defend them.
- LiqTech Germany and Singapore were being closed, with completion expected during 2016. Management reported disclosure controls effective and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether announced system orders are delivered, accepted, and converted to revenue and cash on schedule, especially the mining and groundwater projects.
- Whether operating cash flow improves and available liquidity remains adequate given the absence of available general credit lines.
- The basis and recoverability of deferred tax assets, including the substantial Q1 valuation allowance and management’s profit assumptions.
- Whether customer concentration, the large European sales mix, and the prolonged sales cycle change materially in subsequent periods.
- The progress and potential financial exposure of the Italian litigation, and the status of the planned Germany and Singapore closures.
- Potential dilution: 7.33 million warrants and 1.07 million options were outstanding at March 31; excluded from diluted loss per share as anti-dilutive.