LiqTech International, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. LiqTech develops and sells silicon-carbide filtration products, principally diesel particulate filters (DPFs), liquid filters, and kiln furniture.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $3.40 million | $6.34 million; down 46.4% |
| Gross profit / margin | $562,023 / 16.5% | $2.09 million / 33.0% |
| Operating income (loss) | $(852,561) | $480,580 |
| Net income (loss) attributable to LiqTech | $(669,811); $(0.03) per share | $322,601; $0.01 per share |
| Operating cash flow | $(533,657) | $733,894 provided |
| Cash at period end | $3.12 million | $3.87 million at Dec. 31, 2012 |
| Working capital | $7.44 million | $8.07 million at Dec. 31, 2012 |
Investing activities used $129,720, primarily for equipment and investments; financing activities used $76,688, principally for capital-lease payments. Total liabilities were $4.21 million, including $856,382 in capital-lease obligations. No amounts were outstanding on the two Danish credit lines at quarter-end; approximately $1.54 million was available, subject to borrowing-base limits. The company reported total assets of $18.02 million and stockholders’ equity of $13.81 million.
Material changes and operating drivers
- DPF sales declined $3.41 million year over year, mainly due to postponed U.S. emissions mandates and the absence of London low-emission-zone activity that had benefited the prior-year quarter. DPFs represented 57% of sales, versus 84% a year earlier.
- Liquid-filter sales increased to $1.20 million from $901,926; kiln-furniture sales increased to $263,891 from $102,229. Together, these gains partially offset the DPF decline.
- Gross margin contracted substantially as lower sales reduced gross profit. Operating expenses fell 12.1% to $1.41 million, but not enough to offset the gross-profit decline.
- Foreign-currency transaction losses were $114,173, versus $1,449 in Q1 2012. Currency translation reduced other comprehensive income by $106,447.
- Sales were geographically concentrated in Europe ($1.76 million), Asia ($818,552), and the United States and Canada ($651,019). No customer exceeded 10% of Q1 2013 sales; four customers represented 55% collectively in Q1 2012.
Outlook, developments, and risks
- Management said available cash and credit facilities, together with other potential funding sources, should cover anticipated working-capital and capital-spending needs for the foreseeable future. It cautioned that continued negative operating cash flow or unanticipated expenditures could strain resources; additional financing might not be available on acceptable terms and could dilute shareholders or impose restrictive debt terms.
- The company expected to continue investing in production equipment. A subcontract arrangement with Scandinavian Brake Systems, extending through 2014, was expected to increase production capacity.
- A March 25 agreement with FMC Technologies provides for exclusive use of LiqTech membrane technology in oil-and-gas applications and includes a multi-year, multi-million-dollar commitment. The filing does not provide the commitment amount or expected revenue timing.
- Management reported ASTM F838-05 approval for sterile liquid filtration and the launch of new membrane-disc and flat-sheet products. It expected flat-sheet membrane sales during 2013. The filing also described potential market applications and a possible customer expansion exceeding $1 million, which was under consideration, not reported as a completed order.
- A customer placed into receivership in January 2013 had accounted for 12.4% of 2012 sales. LiqTech had recorded a $700,000 allowance against that customer’s receivables at year-end 2012.
- Key risks include access to silicon carbide and other raw materials, foreign-exchange movements, collection of receivables, inventory obsolescence, execution of new products and market expansion, and the uncertainty of future financing. Management reported no material subsequent events through May 14, 2013. Finn Helmer was appointed CEO effective April 1, 2013.
Most important facts for investors to verify
- Whether DPF demand stabilizes and newer liquid-filtration products can replace lost DPF revenue while restoring gross margins.
- Actual cash burn, working-capital needs, and continued access to the demand credit lines and any additional financing.
- Receivable recoverability, especially the exposure to the customer in receivership and the adequacy of the recorded allowance.
- Fulfillment and revenue timing of the FMC agreement, and whether anticipated 2013 flat-sheet sales and potential customer expansion become firm orders.
- Supply availability and cost of silicon carbide and other critical materials, alongside production capacity and foreign-exchange exposure.