LiqTech International, Inc. — Q3 2019 Form 10-Q
Business context and period. LiqTech develops and sells silicon-carbide filtration products and systems, including liquid filters and water-treatment systems, diesel particulate filters (DPF), and related products. This unaudited report covers the three and nine months ended September 30, 2019, compared with the same 2018 periods.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $9.67 million | $3.35 million | $26.39 million | $9.34 million |
| Gross profit / margin | $2.23 million / 23.0% | $0.29 million / 8.6% | $5.78 million / 21.9% | $0.89 million / 9.5% |
| Operating income (loss) | $0.26 million | $(0.94) million | $0.67 million | $(2.91) million |
| Net income (loss) | $0.66 million | $(0.92) million | $0.84 million | $(2.72) million |
| Basic and diluted EPS | $0.03 | $(0.05) | $0.04 | $(0.18) |
- Revenue and margins: Sales rose 189% in Q3 and 183% year to date, primarily from liquid filters and water-treatment systems serving marine scrubber projects. DPF sales declined in both comparisons. Liquid filters and systems generated $21.41 million of nine-month sales; DPF products generated $4.32 million. Management attributed improved gross margins to higher sales of liquid systems, improved manufacturing costs, and a warranty-accrual reassessment.
- Expenses and earnings quality: Nine-month operating expenses increased 35% to $5.11 million, including higher administrative staffing and related costs. Q3 other income included a $403,000 currency-transaction gain; nine-month currency gains were $245,000. Q3 comprehensive loss was $358,000 and nine-month comprehensive loss was $10,000, reflecting foreign-currency translation losses despite positive net income.
- Cash flow: Cash used in operating activities was $4.52 million for the first nine months, versus $3.84 million used in 2018. Receivables and other receivables increased with shipped orders, weighing on cash conversion. Investing activities used $1.64 million, including the BS Plastic acquisition. Financing provided $14.72 million, principally from the May share offering.
- Liquidity and obligations: September 30 cash was $9.96 million, plus $1.68 million restricted cash for customer-related payment guarantees. Working capital was $19.78 million, versus $6.75 million at December 31, 2018. Total liabilities were $12.69 million. The filing reports no material conventional borrowing balance; obligations include $2.24 million of operating lease liabilities and a $875,000 contingent acquisition earn-out. A $3.8 million non-cancellable furnace purchase obligation remained, of which $1.6 million had been prepaid.
Material changes and notable items
- In May 2019, LiqTech issued 2,215,862 shares at $7.25 per share, generating approximately $14.6 million net proceeds. Shares outstanding increased to 20,547,668 at September 30; the offering strengthened liquidity but diluted existing holders.
- On September 4, the company acquired Danish plastics manufacturer BS Plastic for an initial purchase price of $1.33 million, funded with cash. The seller may receive up to a further $888,060 based on targets over three years. Purchase accounting remained preliminary; the company said it did not expect material adjustments.
- The company adopted lease accounting in 2019, recognizing approximately $2.1 million of right-of-use assets and lease liabilities at adoption. This did not materially affect operating results.
- Management reduced the standard warranty accrual rate from 7% to 3% of sales for products delivered since January 1, 2019 and going forward, based on its assessment of historical warranty costs. The reported warranty obligation was $715,000 at September 30.
Outlook, risks, and controls
- Management stated that cash and cash equivalents at September 30, together with expected operating cash generation, should fund the current operating plan for the next 12 months. It also cautioned that additional capital may be needed to sustain and grow the business, and financing may be unavailable or dilutive or restrictive. No specific revenue or earnings guidance was provided.
- Revenue depends substantially on marine scrubber-related liquid filtration projects; DPF demand declined year over year. Customer concentration is significant: two customers represented 34% and 28% of Q3 sales, and one customer represented 49% of receivables at September 30.
- Operating cash use, elevated receivables, foreign-exchange exposure, the furnace commitment, and the contingent earn-out are key items to monitor. Two supplier claims were disclosed, totaling approximately $152,000; the company contested them and recorded no provision. No material subsequent events were reported through November 14, 2019.
- Management concluded disclosure controls were ineffective at period-end because of material weaknesses associated with limited finance-department staffing. The company had hired additional finance employees and planned further remediation during 2019–2020, including a planned ERP investment. Management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether marine scrubber project demand, customer concentration, and collection timing support continued sales growth and improved operating cash flow.
- Whether the company completes furnace installation as planned and manages the $3.8 million purchase obligation and related prepayments.
- Final BS Plastic purchase accounting, performance against earn-out targets, and the acquired business’s contribution to results.
- Whether the reduced warranty accrual rate remains adequate as the installed base and warranty claims evolve.
- Progress in remediating material weaknesses in financial controls, and whether the stated 12-month liquidity outlook remains achievable without additional financing.