LiqTech International, Inc. — Q3 2018 Form 10-Q
Business and period. The company develops and sells silicon-carbide ceramic filters and automated filtration systems, including liquid filters and diesel particulate filters (DPFs). This unaudited report covers the three and nine months ended September 30, 2018, compared with the same 2017 periods; balance-sheet comparisons are to December 31, 2017.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $3.35 million | $2.46 million | $9.34 million | $8.35 million |
| Gross profit (loss) | $289,000 | $(316,000) | $889,000 | $148,000 |
| Gross margin | 8.6% | (12.9%) | 9.5% | 1.8% |
| Operating loss | $(942,000) | $(1.42 million) | $(2.91 million) | $(3.40 million) |
| Net loss | $(922,000) | $(1.48 million) | $(2.72 million) | $(3.51 million) |
| Loss per share, basic and diluted | $(0.013) | $(0.03) | $(0.04) | $(0.09) |
For the first nine months, operating cash flow was negative $3.84 million (versus negative $2.70 million in 2017); investing cash outflow was $146,000. Financing provided $5.91 million, chiefly from the April share offering. Cash increased to $3.86 million from $2.49 million at year-end 2017. At September 30, current assets were $11.99 million, current liabilities $4.32 million, and working capital $7.67 million. Total liabilities were $4.32 million; the balance sheet reports no borrowings, with $74,000 in current capital-lease obligations. The guarantee credit line was fully committed to guarantees, and the company reported no other available lines of credit.
Changes and operating drivers
- Q3 sales rose 36.3%; nine-month sales increased 11.8%. Liquid filters and systems drove nine-month growth, rising $1.33 million, while DPF sales fell $219,000 and kiln-furniture sales fell $124,000. The company said it was discontinuing kiln furniture.
- Gross margin improved substantially year over year, which management attributed to higher sales and a more favorable mix, particularly liquid filtration systems. Nine-month operating expenses rose 6.9%, including higher general and administrative and R&D spending; selling costs declined.
- The April registered offering issued 19.45 million common shares at $0.34 per share, generating approximately $6.6 million gross proceeds and $5.87 million net proceeds after offering costs. The Series A preferred shares also converted into 8.80 million common shares. Common shares outstanding increased to 72.74 million at quarter-end from 44.43 million at year-end 2017.
Outlook, risks, and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern for one year from issuance, citing limited cash and significant losses. The April equity raise and prospective scrubber-related business are described as steps toward alleviating that doubt; success is not assured.
- Commercial outlook: Two framework agreements with marine scrubber manufacturers estimated more than 95 systems and at least 35 systems for delivery during their initial 2018–2019 terms; the filing describes these as potential or estimated sales, not guaranteed revenue. A third framework agreement, announced October 1, concerned development of a scrubber-wastewater product. Management gave no quantified revenue or earnings guidance.
- Other risks and events: The company continued to use cash in operations and said it may need additional financing, which may be unavailable or dilutive. Foreign-currency movements contributed $241,000 of nine-month other income. A customer dispute over a water-treatment installation was settled September 28: the customer agreed to pay $437,000 as final payment and waive further demands. An Italian lawsuit seeking €750,000 was rejected in July, with the plaintiff ordered to pay the company’s legal expenses.
- Controls: Management concluded disclosure controls were ineffective because of material weaknesses identified in the 2017 audit; remediation efforts were underway, including after hiring a new CFO in August 2018.
- The company adopted ASC 606 in January 2018 and reported no material impact. The filing noted that the new lease standard, effective for the company in 2019, was still being evaluated.
Important facts for investors to verify
- Whether cash generation, collections, and available financing can address the disclosed going-concern uncertainty; note that nine-month operating cash burn exceeded the September 30 cash balance.
- Whether framework-agreement estimates convert into firm orders, deliveries, revenue, and cash receipts on the anticipated timetable.
- The status and collectability of receivables, contract assets, and the $437,000 customer settlement, as well as the effect of currency movements.
- Progress in remediating the disclosed control weaknesses and any resulting changes to financial reporting reliability.
- The impact of the significant increase in shares outstanding on per-share results and future dilution.