LiqTech International, Inc. — Form 10-Q Summary
Period: Quarter and six months ended June 30, 2012; filed August 14, 2012. LiqTech develops and sells silicon-carbide filtration products, including diesel particulate filters, liquid filters and kiln furniture. The financial statements are unaudited. Comparisons with 2011 require caution because the 2011 period preceded the August 2011 reverse acquisition and public-company transition.
Financial performance
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net sales | $3.95 million | $3.81 million | $10.30 million | $6.72 million |
| Gross profit / margin | $0.42 million / 10.5% | $1.18 million / 30.9% | $2.51 million / 24.3% | $1.85 million / 27.6% |
| Operating income (loss) | ($0.89 million) | $0.21 million | ($0.41 million) | $0.10 million |
| Net income (loss) attributable to LiqTech | ($0.55 million) | $0.02 million | ($0.23 million) | ($0.11 million) |
| Basic EPS | ($0.02) | $0.00 | ($0.01) | ($0.01) |
Second-quarter sales increased 3.9%, but gross profit fell 64.6% as cost of goods sold rose faster than sales. Management attributed lower diesel-filter demand partly to postponed U.S. emissions mandates and weaker activity in other markets; liquid-filter sales increased. First-half sales rose 53.1%, supported by diesel and liquid filters, while the gross margin declined 3.3 percentage points. Operating expenses increased 65.6% for the half, including higher selling, general and administrative, and research and development costs. Selling costs reflected investment in sales resources and new markets; management said returns may take several quarters.
First-half sales by product were approximately $7.86 million for diesel particulate filters, $2.29 million for liquid filters and $0.15 million for kiln furniture. Research and development expense was $0.38 million, up from $0.25 million.
Cash flow, liquidity and debt
- Cash was $5.17 million at June 30, 2012, versus $1.03 million at December 31, 2011. Working capital was $11.13 million, compared with $1.88 million at year-end.
- First-half operating cash flow was $85,188, versus cash used of $627,291 in 2011. Investing activities used $815,242, including $676,632 for property and equipment and $138,610 for investments.
- Financing activities provided $5.09 million. The company received approximately $7.4 million net from its March registered offering of 2,511,500 shares at $3.25 per share, while also repaying borrowings and related-party notes.
- Bank lines of credit had no outstanding balance at June 30, with approximately $1.52 million available in total, subject to borrowing-base limits; borrowings are due on demand and secured by receivables, inventory and equipment. The $475,000 institutional note was repaid in March, and related-party notes payable and receivable were paid off in June.
- Capital lease obligations totaled approximately $1.02 million, including $190,388 current and $828,740 long-term. Total liabilities were $3.79 million.
Material developments, outlook and risks
- The company issued 2.51 million shares in the March offering to fund product development and marketing, membrane engineering and testing, and sales-office expansion. Shares outstanding increased from 21.6 million at year-end to 24.11 million at June 30.
- A subcontract with Scandinavian Brake Systems’ Notox division, extending through 2014, is expected by management to significantly increase production capacity. The company also opened a Singapore sales office in January 2012.
- Discussions with Pirelli shifted from a proposed strategic partnership and asset purchase to a potential commercial relationship. Management expected the parties might reach an arrangement in coming quarters, but gave no assurance.
- No quantified revenue or earnings guidance is provided. Management’s statements about expected capacity, sales investments and a potential Pirelli relationship are forward-looking and uncertain.
- Risks discussed include postponed emissions mandates and fluctuations in demand, limited silicon-carbide supply and possible increases in silicon-carbide, platinum or palladium costs, customer concentration, execution of new-market investments, and foreign-currency translation. Four large customers are reported at 18%, 11%, 9% and 5% of sales in one disclosure; MD&A separately describes the four largest as approximately 47% in total, an apparent inconsistency to verify.
- Operating lease commitments were $3.82 million. Management said warranty estimates were immaterial and reported no long-lived-asset impairment charge for the periods presented. It reported no material subsequent events through August 13, 2012, and concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the sharp second-quarter gross-margin decline reflects temporary production or product mix factors, and whether margins recover as sales and capacity change.
- The customer-concentration figures: the listed percentages total 43%, while MD&A states approximately 47%.
- The ability to convert first-half sales growth and planned sales and R&D spending into sustainable operating profitability and cash generation.
- Availability and cost of key raw materials, and whether the Notox subcontract delivers the expected capacity through 2014.
- The terms and actual status of any Pirelli commercial agreement; the filing describes only a potential relationship, not a completed deal.
- Comparability of 2011 results and per-share figures given the reverse acquisition and substantial increase in shares outstanding; also confirm the balance-sheet comparative date, which is labeled “December 31, 2012” in one presented heading but elsewhere shown as December 31, 2011.