LIQT

Business Context and Reporting Period

LiqTech International, Inc. (LIQT) is a clean technology company specializing in ceramic silicon carbide filters, membranes, and filtration systems. The company operates in three segments: Water, Ceramics, and Plastics. This Form 10-Q covers the quarterly period ended June 30, 2024. The company is classified as a non-accelerated filer and a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 10.1% year-over-year for the quarter and 3.1% for the six-month period. This was driven by lower deliveries of plastic products (due to a non-recurring large sale in 2023) and reduced aftermarket sales, partially offset by increased Diesel Particulate Filter (DPF) sales.
• Margin Compression: Gross profit margin dropped from 23.3% to 16.0% for the quarter and from 17.3% to 11.3% for the six-month period. Management attributed this to an unfavorable revenue mix and a strategic decision to deliver a low-margin pilot system to the Middle East to validate technology.
• Expense Fluctuations: Selling expenses decreased significantly (16.8% for the quarter) due to executive departures (CFO and VP of Sales) and reduced travel/marketing costs. Conversely, General and Administrative (G&A) expenses increased (11.9% for the quarter) due to recruitment costs, legal fees, and new supply chain positions.
• Other Income/Expense: The company recorded a non-cash loss of $453,233 on the disposal of property and equipment during the six-month period. Additionally, amortization of debt discount increased due to the extension of Senior Promissory Notes.

Guidance, Outlook, Risks, and Contingencies

• Going Concern: Management has raised substantial doubt about the company's ability to continue as a going concern for one year from the issuance date due to significant recent losses and an accumulated deficit of $80.4 million. Future success depends on raising additional capital, which may result in shareholder dilution.
• Liquidity: Cash reserves decreased from $10.4 million at year-end 2023 to $5.5 million at June 30, 2024. The company is analyzing alternatives including debt or equity financing.
• Internal Controls: Management concluded that disclosure controls and procedures were not effective as of June 30, 2024, due to material weaknesses in internal controls over financial reporting. Remediation efforts include hiring finance staff and implementing a new ERP system.
• Debt Obligations: The company holds $6.0 million in Senior Promissory Notes, extended to January 1, 2026. If not repaid by the original maturity, interest accrues at 10% per annum, increasing by 1% monthly up to 16%.
• Customer Concentration: The company relies on a few major customers. For the three months ended June 30, 2024, two customers accounted for 16% and 10% of revenue, respectively.

Investor Verification Checklist

• Cash Burn Rate: Verify the sustainability of current cash reserves ($5.5M) against the operating cash burn of ~$3.8M for the six-month period.
• Debt Extension Terms: Confirm the specific interest rate implications of the Senior Promissory Notes extension and the valuation of warrants issued as consideration.
• Internal Control Remediation: Review the timeline and progress of the new ERP implementation and hiring to address material weaknesses in financial reporting.
• Revenue Mix: Assess the long-term impact of the strategic low-margin pilot project on future profitability and whether DPF sales growth can offset declines in other segments.
• Capital Raising: Monitor announcements regarding potential equity or debt offerings to address the going concern uncertainty.