Business Context and Reporting Period
LiqTech International, Inc. develops and sells silicon-carbide filtration products and systems, diesel particulate filters, and specialized plastic components. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the same 2020 period. The company operates principally in Denmark.
Financial Results and Liquidity
| Metric | Q1 2021 | Q1 2020 or comparison |
|---|---|---|
| Revenue | $4.00 million | $10.28 million; down 61% |
| Gross profit (margin) | $0.11 million (2.9%) | $2.64 million (25.7%) |
| Operating expenses | $2.92 million | $2.46 million; up 19% |
| Operating loss | $2.81 million | Operating income of $0.18 million |
| Net income (loss) | $(2.46) million; $(0.11) per diluted share | $0.30 million; $0.01 per diluted share |
| Cash used in operations | $1.30 million | $1.96 million |
| Cash used in investing activities | $0.41 million | $1.07 million |
| Cash and restricted cash | $10.66 million per balance sheet | $13.26 million at Dec. 31, 2020 |
| Working capital | $12.51 million | $15.84 million at Dec. 31, 2020 |
| Total liabilities | $15.61 million | $17.39 million at Dec. 31, 2020 |
At March 31, finance lease obligations totaled $3.26 million and operating lease liabilities totaled $4.75 million. The company also reported an available $3.0 million line of credit for leasing arrangements and customer guarantees. It had no off-balance-sheet arrangements.
Material Changes Versus the Prior Period
- Revenue fell $6.28 million, primarily from a $6.82 million decline in liquid filters and water-treatment systems, particularly marine scrubber-related demand and deliveries. Management attributed the weakness to COVID-19 restrictions and related business limitations.
- Higher-margin water-system sales declined, contributing to the gross margin contraction. Management also cited costs from earlier production-capacity investments and additional hiring.
- DPF revenue increased $0.37 million and plastics revenue increased $0.23 million. Ceramic DPFs were the largest product-line revenue contributor at $1.93 million.
- Selling expense rose 49% to $1.01 million, reflecting increased sales staffing and marketing; R&D expense rose 41% to $0.44 million.
- Cash used in operating activities improved from the prior-year quarter, but cash and working capital declined from year-end. Foreign-currency translation reduced cash by $0.79 million in the quarter.
Outlook, Risks, and Unusual Items
- No formal revenue or earnings guidance is provided. Management believes cash on hand and ongoing operating cash generation should cover capital requirements for at least 12 months from issuance of the report, subject to uncertainties.
- Management expects gross profit to remain pressured until manufacturing operates at higher capacity and said it expects to fulfill most, if not all, existing 2021 delivery obligations at current production levels.
- COVID-19-related demand, operating restrictions, and possible production or shipping limitations remain significant uncertainties. Other considerations include customer concentration, foreign-exchange movements, warranty estimates, and execution of growth and capacity plans.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2021 because of material weaknesses in internal control over financial reporting. Remediation efforts include finance hires, ERP and IT investments, and process redesign; management said weaknesses are not remediated until controls operate effectively for a sufficient period.
- After quarter-end, on April 8, 2021, the company closed a $15.0 million financing involving a senior convertible note due 2023 and 80,000 common shares. Note conversion terms and potential dilution warrant review.
- A supplier court award of approximately $96,900 was paid in January 2021; a separate supplier claim of approximately $89,800 was contested and no provision was recorded.
Important Facts for Investors to Verify
- Reconcile cash and restricted cash: the balance sheet and MD&A report $10,657,307 at March 31, while the cash-flow statement reports $10,675,307.
- Review the April 2021 convertible-note agreement, including conversion, repayment, interest, and potential dilution terms.
- Assess the persistence of COVID-19 impacts, marine water-system orders, production utilization, and the path to improved gross margins.
- Track liquidity and operating cash use, lease commitments, and use or availability of the disclosed credit facilities.
- Monitor remediation of the material weaknesses and the concentration of sales and receivables among significant customers.