LiqTech International, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with Q1 2019. The company develops and sells silicon-carbide filtration products, water-treatment systems, and diesel particulate filters. Figures are in U.S. dollars unless noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $10.28 million | $7.42 million | +38.5% |
| Gross profit | $2.64 million | $1.48 million | +78.9% |
| Gross margin | 25.7% | 19.9% | +5.8 percentage points |
| Operating income | $180,929 | $17,457 | Improved |
| Net income | $303,499 | $34,244 | Improved |
| Cash used in operations | $1.96 million | $888,099 | Use increased |
| Cash used in investing | $1.07 million | $169,546 | Use increased |
- Revenue growth was principally driven by liquid filters and systems, which rose to $7.98 million from $5.04 million, reflecting increased marine scrubber-system deliveries. Plastics contributed $581,411 following the 2019 acquisition of BS Plastic. Diesel particulate filter revenue declined to $1.56 million from $2.24 million.
- Gross-margin improvement reflected a favorable sales mix toward liquid filtration systems. Operating expenses rose 68.6% to $2.46 million, including higher selling, administrative, and R&D costs. Management cited increased headcount and related IT and office expenses.
- Net income included a $207,627 foreign-currency transaction gain; interest expense was $104,856. The filing reports an income-tax benefit of $15,309.
- Operating cash use reflected working-capital movements, including higher accounts receivable and lower accounts payable. Investing cash use included $1.06 million of property and equipment purchases, primarily for new Ballerup furnaces and added production capacity.
Liquidity, balance sheet, and obligations
- At March 31, cash, cash equivalents, and restricted cash totaled $6.30 million, down from $9.78 million at year-end 2019. Of the March balance, $2.71 million was restricted, leaving $3.59 million unrestricted.
- Net working capital was $16.43 million, versus $17.16 million at December 31, 2019. Current assets were $25.63 million and current liabilities $9.20 million.
- Total liabilities were $14.25 million. Reported lease obligations were $4.98 million for operating leases and $194,409 for finance leases; contingent earn-out liabilities totaled $880,308. The filing does not report conventional long-term borrowings.
- A DKK 20 million (approximately $3.0 million) bank line is used for leasing arrangements and customer guarantees. A separate DKK 10 million guarantee facility is secured by a $2.7 million cash deposit.
- The company has a non-cancelable $3.8 million purchase obligation for furnaces not yet received; financing through a lease is expected to begin upon receipt.
Outlook, risks, and other notable items
- Management said cash on hand and expected operating cash generation should cover capital requirements for the 12 months after the May 11, 2020 filing date, based on projections subject to pandemic-related uncertainty. This is management’s expectation, not formal financial guidance.
- COVID-19 prompted temporary two-shift production, remote work for most employees, and reduced or deferred spending. Management reported no material adverse effect on Q1 results, but expected reduced manufacturing levels to pressure future gross profit. It believed the company could meet most, if not all, existing 2020 delivery obligations at then-current production rates.
- Revenue and receivables were concentrated: one customer represented 35% of Q1 revenue and 40% of receivables at March 31; two additional customers each represented 12% of revenue, and another represented 11%.
- Management reported disclosure controls were not effective at March 31 because of material weaknesses in internal controls over financial reporting. Remediation efforts include adding finance resources, improving processes and documentation, and planned ERP and IT investments; weaknesses were not yet considered remediated.
- Two supplier claims were contested, with no provisions recorded because the company said it had meritorious defenses. The filing also describes ongoing closures of German and Singapore operations, expected during 2020.
Key facts for investors to verify
- Whether COVID-related production constraints, demand, and cash generation differed materially from management’s stated expectations.
- Cash availability after accounting for restricted cash, customer guarantees, capital needs, and the furnace purchase obligation.
- Collection of significant customer receivables and the company’s exposure to major customers.
- Progress on internal-control remediation and implementation of the planned ERP and supporting systems.
- The filing’s reported net-income and tax-benefit presentation: it lists pretax income of $288,190, a $15,309 tax benefit, and net income of $303,499; investors may wish to confirm the presentation against the company’s filed financial statements.