LiqTech International, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated results. LiqTech develops and sells silicon-carbide filtration products and systems, including liquid filters and diesel particulate filters, and is phasing out kiln furniture. The filing compares the quarter with Q1 2014.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net sales | $2.10 million | $3.20 million; down 34.2% |
| Gross profit (loss) and margin | $(47,000); (2.2%) | $555,000; 17.4% |
| Operating loss | $(1.79) million | $(1.11) million |
| Net loss attributable to LiqTech | $(1.17) million | $(755,000); loss widened about 55% |
| Basic and diluted loss per share | $(0.03) | $(0.03) |
| Cash used in operating activities | $(1.42) million | $(932,000) |
| Cash used in investing activities | $(92,000) | $(142,000) |
| Cash used in financing activities | $(93,000) | Cash provided of $55,000 |
Operating expenses rose 4.9% to $1.74 million. At March 31, cash was $3.08 million and restricted cash was $194,000; working capital was $8.29 million, down from $10.57 million at December 31, 2014. Current assets were $10.97 million and current liabilities $2.68 million. Total liabilities were $2.95 million, including $421,000 in capital lease obligations; no borrowings were outstanding on the disclosed $290,000 standby credit line. A separate $720,000 guarantee facility had about $68,000 in guarantees outstanding.
Total assets were $26.40 million, down from $31.43 million at year-end. The quarter included a $2.38 million foreign-currency translation loss in other comprehensive income and a $1.00 million currency-translation reduction in goodwill. Goodwill ended at $7.46 million; management reported no impairment in its December 2014 annual test. The income statement also included a $233,000 gain on currency transactions. No dividends were reported.
Changes and business drivers
- Sales declined across diesel particulate filters and liquid filters/systems, partly offset by higher kiln-furniture sales. Management attributed weaker diesel-filter demand to reduced activity and market demand, and lower liquid-filter sales to postponed deliveries.
- Lower sales against fixed production costs drove gross margin from 17.4% to negative 2.2%. Cost of goods sold was 102.2% of sales.
- General and administrative expense increased 21.3%, and research and development expense increased 61.5%; the company cited higher costs and the inclusion of acquired Provital in 2015 results. Non-cash compensation declined 66.9%.
- Sales fell in the United States and Canada, Europe, and Asia; kiln-furniture sales increased. No customer accounted for more than 10% of sales.
- Operating cash use increased, with management citing the net loss and reductions in accounts payable and accrued expenses as key factors. Cash and restricted cash together fell to $3.27 million from $6.07 million at year-end; the cash-flow statement also reports a $1.17 million currency-translation effect.
Outlook, risks and notable items
- 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 unanticipated spending or continued negative operating cash flow could strain resources. Additional financing may be needed for strategic acquisitions; availability and terms are uncertain, and equity financing could dilute shareholders.
- Management reported several orders announced during the quarter with expected 2015 or second-quarter deliveries, including a $2.4 million enhanced-oil-recovery system order, a $660,000 order for two systems, a $350,000 marine system order, a $130,000 European system order, and a pilot groundwater-treatment unit. These announced orders are not reported as Q1 revenue.
- Provital acquisition consideration included 4,044,782 shares, with portions held in escrow and subject to performance conditions for 2014–2016. The filing does not establish here whether the applicable targets were achieved.
- Operating leases require future minimum payments of $1.80 million. Customer working and prepayment guarantees are supported by a bank facility and restricted cash.
- The filing gives no formal numerical earnings or revenue guidance. The company cautioned that forward-looking plans depend on uncertain economic, competitive, and market conditions. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting; it reported no material subsequent events through May 12, 2015.
Important facts for investors to verify
- Whether reported delivery postponements and announced orders convert to recognized revenue, and whether the anticipated Q2 deliveries occurred.
- Whether sales recover enough to absorb fixed manufacturing costs and restore positive gross margins.
- The drivers and persistence of operating cash use, and whether available liquidity remains adequate if cash burn continues.
- Provital’s performance against the acquisition’s revenue and EBITDA thresholds, including escrow-share consequences.
- The impact of foreign-exchange movements on cash, goodwill, reported earnings, and equity; and the recoverability of deferred tax assets, which management expects to realize through future profits.
- The outstanding warrants and options, which could dilute shareholders if exercised; the filing reports 7.03 million warrants and 503,500 options outstanding at March 31, 2015.