LiqTech International, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated results. LiqTech develops and sells silicon-carbide liquid filtration and diesel particulate filter products, and is phasing out kiln furniture.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $3.20 million | $3.40 million | Down 5.9% |
| Gross profit / margin | $555,128 / 17.4% | $562,023 / 16.5% | Profit down 1.2% |
| Operating loss | $1.11 million | $852,561 | Loss widened $255,519 |
| Net loss attributable to LiqTech | $755,435 | $669,811 | Loss widened $85,624 |
| Loss per share | $0.03 | $0.03 | Unchanged, rounded |
| Cash used in operations | $932,443 | $533,657 | Use increased $398,786 |
Operating expenses rose 17.6% to $1.66 million, led by non-cash compensation of $220,418 versus $31,369 and higher selling expenses. Research and development expense fell 31.6% to $100,586. The income tax benefit was $358,442, versus $296,864.
Liquidity, debt and cash flow
- Cash was $3.73 million at March 31, down $1.16 million from year-end 2013. The quarter-end cash decline reflected operating, investing and financing cash use, plus currency translation.
- Working capital was $7.02 million, down $672,929 from December 31, 2013. Current assets were $11.17 million and current liabilities $4.15 million.
- Total liabilities were $4.65 million. Capital lease obligations totaled $707,314, including $201,946 current; the filing reports no other material funded debt on the balance sheet.
- Investing cash use was $141,680, primarily property and equipment purchases; financing cash use was $55,465, primarily capital lease payments.
Material changes and management commentary
- Sales decreased $201,646. Diesel particulate filter sales fell $368,478, liquid filter sales increased $338,142, and kiln furniture sales fell $171,310. Management attributed weaker DPF demand to postponed U.S. mandates and limited new low-emissions-zone activity in Europe; kiln furniture declined as the company de-emphasized that line.
- Geographically, U.S. and Canadian sales rose to $1.01 million from $651,019, while Asian sales fell to $306,621 from $818,552. European sales were $1.81 million versus $1.76 million.
- Management said higher investment in sales resources and new markets could take several quarters to produce returns. The company stated its cash flow and other potential funding sources should cover anticipated working capital and capital spending for the foreseeable future, while warning that continued negative operating cash flow or unplanned costs could strain cash.
Outlook, risks and notable items
- Recent commercial developments included a production order for flat-sheet membranes from the Middle East, an approximately $300,000 algae-concentration prototype-system order, and a $450,000 DPF order for the luxury-boat market. These announcements are orders, not reported Q1 revenue.
- Management’s strategy includes expanding geographic markets, growing liquid filtration and OEM DPF opportunities, and continuing membrane development, including reverse-osmosis research. The filing gives no quantified financial guidance.
- Potential funding needs may be met through equity or debt; availability and terms are uncertain, and equity financing could dilute shareholders. Danish bank credit lines had been called in July 2013, and the company said it had not drawn on them since its 2012 public offering.
- Deferred tax assets totaled $2.33 million, including a $2.24 million long-term asset. Management recognized the assets without a valuation allowance based on its estimate that future profits would permit their use; realization depends on future earnings and tax conditions.
- Outstanding warrants and options were excluded from diluted loss per share as anti-dilutive. Non-cash compensation increased substantially, including restricted-stock and warrant-related expense.
Important facts for investors to verify
- Whether liquid-filter growth and the announced orders convert into sustained sales, and whether DPF demand recovers.
- Cash burn, inventory growth, and the company’s ability to maintain liquidity if operating losses continue.
- Future realization of deferred tax assets and the assumptions supporting the absence of a valuation allowance.
- The potential dilution from outstanding warrants and options, and any future financing needs or terms.
- Management’s reported effective disclosure controls and whether subsequent results support its cash sufficiency outlook.