LiqTech International, Inc. — Q2 2021 Form 10-Q
Business context and period. LiqTech develops and sells silicon-carbide filtration products and systems, diesel particulate filters, and plastic components. This unaudited quarterly report covers the three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $4.02 million, down 13.5% | $8.01 million, down 46.3% |
| Gross profit / margin | $0.32 million / 8.0%, versus $0.49 million / 10.7% | $0.44 million / 5.4%, versus $3.13 million / 21.0% |
| Operating loss | $2.56 million, versus $1.94 million | $5.37 million, versus $1.84 million |
| Net loss | $3.10 million, versus $2.56 million | $5.56 million, versus $2.26 million |
| Loss per share | $0.14, versus $0.12 | $0.26, versus $0.11 |
| Operating cash flow | Six-month use of $0.91 million, versus $1.23 million provided in 2020 |
- Revenue mix and segments: The six-month revenue decline was driven primarily by Water, down $8.00 million in segment revenue, as marine scrubber-system demand and deliveries weakened. DPF and membrane sales rose 38% and plastic-component sales also increased, but did not offset Water’s decline.
- Margins and costs: Management attributed weaker gross profit to lower sales of higher-margin water systems, competitive pricing, and production capacity and staffing costs. Six-month operating expenses increased 17% to $5.81 million, including higher selling and R&D spending; G&A declined 11%.
- Liquidity: At June 30, cash, cash equivalents and restricted cash totaled $25.12 million, including $1.50 million restricted. Net working capital was $21.67 million. Management said projected cash on hand and operating cash generation should cover capital requirements for at least 12 months from the report’s issuance, subject to significant uncertainties.
- Debt and leases: The company issued a $15.0 million-principal senior unsecured convertible note in April. Its June 30 carrying amount was $14.00 million after discount and issuance costs, including $3.36 million classified as current. The note bears 5% annual interest, is due October 1, 2023 at 112% of principal at maturity, and permits monthly redemptions beginning March 2022 under specified pricing terms. Operating and finance lease liabilities totaled $7.88 million.
Changes, outlook and risks
- Q2 revenue fell 13.5%; first-half revenue fell 46.3%, and first-half net loss more than doubled. The principal driver was pandemic-related weakness in marine scrubber markets. The company also cited lower factory utilization and higher costs relative to sales.
- Management continued investment in sales capacity, marketing and product development while reducing administrative headcount and pursuing cost savings. It expected to meet most, if not all, existing 2021 delivery obligations at then-current production levels. No quantified revenue or earnings guidance was provided.
- COVID-19 impacts remained uncertain, including possible weaker demand and restrictions on production or shipping. Other disclosed risks include dependence on major customers, raw-material sourcing, foreign-exchange movements, regulatory and emissions-program demand, and execution of growth plans and joint ventures.
- Disclosure controls were deemed ineffective at June 30 due to previously identified material weaknesses in internal control over financial reporting. Remediation included finance hiring, ERP and IT investment, and process redesign; management said remediation was not complete until controls operated effectively for a sufficient period.
- The Middle East water-treatment joint venture is structured with LiqTech holding 49%. A former supplier claim was paid in January 2021; another disputed supplier claim had no provision recorded, citing a prior court rejection. No subsequent events were reported, and the filing states there were no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether marine and water-treatment demand recovers, and whether DPF, membrane and plastics growth can offset continued weakness in Water.
- Whether gross margins improve as production volumes rise and capacity is better utilized.
- The convertible note’s redemption and conversion mechanics, cash repayment exposure, and potential share dilution.
- Cash burn, restricted cash, working-capital movements, and the basis for management’s 12-month liquidity assessment.
- Progress and effectiveness of internal-control remediation, given the disclosed material weaknesses.
- Customer concentration and the commercial progress and funding needs of the Middle East joint venture.