LiqTech International, Inc. — Q2 2015 Form 10-Q
Business context and period. LiqTech develops and sells silicon-carbide filtration products and systems, including liquid filters, diesel particulate filters (DPFs) and kiln furniture. This unaudited report covers the three and six months ended June 30, 2015; the company also includes Provital, acquired in July 2014. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1.70 million | $3.97 million | $3.81 million | $7.17 million |
| Gross profit (loss) | $(0.56) million | $0.85 million | $(0.61) million | $1.41 million |
| Gross margin | (32.8)% | 21.4% | (15.9)% | 19.6% |
| Operating loss | $(2.27) million | $(1.05) million | $(4.07) million | $(2.16) million |
| Net loss attributable to LiqTech | $(1.79) million | $(0.76) million | $(2.97) million | $(1.52) million |
| Basic loss per share | $(0.05) | $(0.03) | $(0.08) | $(0.06) |
For the six months, operating cash flow was $(1.86) million, investing cash flow $(0.14) million and financing cash flow $0.08 million. Cash fell to $3.10 million from $5.85 million at December 31, 2014. Working capital was $6.54 million, down from $10.57 million. Current assets were $10.70 million and current liabilities $4.16 million.
At June 30, total liabilities were $4.40 million, including approximately $0.40 million of capital lease obligations; stockholders’ equity was $22.53 million. The company reported no borrowings on the canceled Provital standby credit line. It had no available lender credit lines at the filing date, although a separate guarantee facility had approximately $71,000 in guarantees outstanding.
Changes versus comparable periods
- Q2 sales declined 57.2% year over year; six-month sales declined 46.9%. DPF and liquid-filter/system sales both fell, while kiln-furniture sales increased from a low base.
- Management attributed lower DPF demand to reduced activity and market mandates, and lower liquid-filtration sales to postponed deliveries of incoming orders.
- Gross margin turned negative in both reported 2015 periods as lower sales were insufficient to absorb fixed cost of goods sold.
- Six-month operating expenses declined 3.0% to $3.46 million, but higher R&D spending—up 160.3% to $365,457—partly offset lower selling and non-cash compensation costs.
- The six-month net loss attributable to LiqTech increased to $2.97 million from $1.52 million. The MD&A contains a sentence describing this as a decrease in loss, but the reported figures show a larger loss.
Outlook, commentary and notable items
- Management stated that cash flow and other potential funding sources should cover anticipated working-capital and capital-spending needs for the foreseeable future, while warning that continued negative operating cash flow or unanticipated spending could strain resources. Additional financing may be needed; availability and terms are uncertain, and equity financing could dilute shareholders.
- The filing reported several orders and agreements announced during 2015, including a $6.1 million wastewater-treatment system order, expected to be delivered in 2015 with final installation expected in the first half of 2016; a $2.4 million system order expected in Q3 2015; and other system orders. Announced annual revenue estimates under new agent/framework arrangements are not guarantees of realized sales.
- The 2014 Provital acquisition included escrowed shares contingent on Provital meeting specified revenue and EBITDA targets, with catch-up provisions. The filing does not state whether the 2014 targets were achieved.
- Foreign currency movements affected results: the six-month statements include a $132,741 currency-transaction gain, while currency translation reduced cash by $829,788 and generated a $1.61 million other-comprehensive loss.
- The company carried $7.77 million of goodwill, all attributable to Provital. Its last disclosed annual impairment test, in December 2014, found no impairment.
- Management’s realization of deferred tax assets depends in part on future taxable profits. The long-term deferred tax asset was $4.35 million; future realization is uncertain.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the period. No subsequent events were reported through August 12, 2015.
Most important facts for investors to verify
- Whether postponed customer deliveries and the reported orders convert into revenue and cash on the announced schedules, particularly the large wastewater system project.
- Whether sales recover enough to absorb fixed manufacturing costs and restore positive gross margins.
- Cash runway and financing needs given $1.86 million of operating cash use, reduced cash, and no available conventional credit line.
- Provital’s performance against acquisition earn-out targets and the resulting release or continued escrow of consideration shares.
- The assumptions supporting deferred tax asset realization and the carrying value of Provital goodwill.
- Potential dilution from outstanding warrants and options; the filing reports 7.23 million warrants and 603,500 options outstanding at June 30, 2015.