LiqTech International, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2012. LiqTech develops and sells silicon-carbide filtration products, principally diesel particulate filters (DPFs), liquid filters and kiln furniture. Its operations span the United States and Denmark, with sales across several regions. LiqTech A/S merged into LiqTech International A/S on August 23, 2012.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $3.12 million | $6.83 million | $13.41 million | $13.55 million |
| Gross profit / margin | $0.58 million / 18.6% | $1.46 million / 21.4% | $3.08 million / 23.0% | $3.32 million / 24.5% |
| Operating income (loss) | $(0.67) million | $0.67 million | $(1.07) million | $0.76 million |
| Net income (loss) attributable to LiqTech | $(0.43) million | $0.48 million | $(0.66) million | $0.38 million |
| Basic EPS | $(0.02) | $0.03 | $(0.03) | $0.03 |
- Cash flow: Nine-month operating cash use was $1.23 million, versus $13,000 provided in the prior-year period. Investing activities used $1.19 million, principally for equipment and investments. Financing provided $5.06 million, including approximately $7.4 million net proceeds from the March share offering. Cash rose to $3.71 million from $1.03 million at December 31, 2011.
- Liquidity and debt: Working capital was $10.90 million at September 30, compared with $1.88 million at year-end 2011. No bank-line borrowings or notes payable remained outstanding; approximately $1.56 million was available under two demand lines of credit, subject to borrowing-base limits. Capital lease obligations totaled $995,000, including current and long-term portions.
- Balance sheet: Total assets were $20.45 million and total liabilities $3.83 million. Inventory increased to $4.07 million from $2.98 million at year-end 2011. Trade receivables were $4.40 million, net of a $384,000 allowance for doubtful accounts.
Material changes versus prior periods
- Q3 sales fell 54.4% year over year, primarily because DPF sales declined $3.92 million. Management attributed weaker DPF demand to delayed U.S. emissions mandates and the absence of London low-emission-zone sales that benefited Q3 2011.
- Nine-month sales were down only 1.0%, as liquid-filter sales rose 70% to $3.33 million and kiln-furniture sales increased to $316,000, partly offsetting a 14% decline in DPF sales to $9.77 million.
- Nine-month operating expenses rose 63% to $4.16 million. Selling expense increased 75% and general and administrative expense increased 64%, including public-company costs, expanded sales investment, and a $235,000 addition to bad-debt expense. R&D spending rose 26% to $471,000.
- The March 2012 offering issued 2,511,500 shares at $3.25 per share for approximately $7.4 million net proceeds. Shares outstanding increased to 24,111,500 from 21,600,000 at December 31, 2011; warrants and options also represent potential dilution.
- The company repaid related-party notes and bank lines during 2012. The related-party note payable and corresponding shareholder receivable were paid in June; the filing describes these balances as discounted and reports related discount amortization.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided. Management expects the Scandinavian Brake Systems/Notox subcontract, in place through the end of 2014, to significantly increase production capacity and meet capacity needs during that period. Management also planned further production-equipment investment as needed.
- Management said returns on expanded sales resources and new-market investment may take several quarters. Growth efforts target liquid filtration markets including produced water, desalination and water purification.
- Key risks include volatile DPF demand and dependence on customer and regulatory activity; limited availability and potential price increases for silicon carbide, platinum and palladium; customer concentration; collectability of receivables; and inventory-demand estimates. The four largest customers represented approximately 38% of nine-month sales.
- Management recorded no valuation allowance against deferred tax assets, believing future profits would permit their realization. That judgment depends on future earnings. The company reported a nine-month income-tax benefit of $361,000 despite a pretax loss.
- Operating leases require approximately $3.72 million of future minimum payments. The company stated it was unaware of material off-balance-sheet arrangements and reported no material subsequent events through November 13, 2012.
- After quarter-end, the company agreed to pay its board chairman DKK 400,000 (approximately $68,846) for prior investor-relations and other services, plus DKK 50,000 monthly for one year of ongoing services. A director resigned effective September 30, 2012. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether DPF demand recovers and whether liquid-filter growth can offset continued weakness in the core DPF business.
- Whether the new subcontract delivers the expected capacity, and the capital and operating costs required to expand production.
- Cash generation, receivables and bad-debt allowance adequacy, and the rising inventory balance.
- The assumptions supporting deferred-tax-asset realization and the related tax benefit reported during a loss period.
- Related-party note settlement and discount-amortization accounting, as well as the chairman’s post-quarter compensation agreement.
- Potential dilution from the increased share count and outstanding warrants and options.