LiqTech International, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This annual filing does not provide a clear standalone fourth-quarter results breakdown.
Business context
LiqTech develops and manufactures silicon carbide filtration products, principally ceramic membranes for liquid filtration and diesel particulate filters (DPFs). It also sells kiln furniture, which it planned to phase out in 2014. Liquid filtration is growing as a share of sales, while DPF demand remains sensitive to emissions mandates and retrofit programs.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $12.83 million | $16.92 million |
| Gross profit / margin | $1.31 million / 10.2% | $2.70 million / 16.0% |
| Operating loss | $6.22 million | $3.89 million |
| Net loss attributable to LiqTech | $4.83 million; $0.19 per share | $2.77 million; $0.12 per share |
| Cash used in operations | $2.14 million | $0.48 million |
| Cash at year-end | $4.88 million | $3.87 million |
| Working capital | $7.69 million | $8.07 million |
- Sales by product: liquid filters $5.08 million, up from $4.19 million; DPFs $6.93 million, down from $12.18 million; kiln furniture $0.81 million, up from $0.55 million.
- Gross margin contracted as lower sales reduced gross profit while fixed production costs remained comparatively high. Operating expenses rose 14.1% to $7.53 million, including $1.32 million in non-cash compensation versus $0.12 million in 2012.
- Investing activities used $0.65 million; financing activities provided $3.68 million, including proceeds from the 2013 warrant and option exercise offer. Cash increased by $1.01 million during the year.
- Year-end liabilities were $5.10 million, including $0.76 million of capital lease obligations. The filing reports that Danish bank credit lines were called in July 2013; the Company had not drawn on them since its 2012 public offering.
Material changes and developments
- Revenue declined 24.2%, driven mainly by a $5.25 million decrease in DPF sales. Management attributed weaker DPF demand to postponed U.S. mandates and limited new low-emission-zone activity in Europe.
- Liquid-filter sales increased 21.2% and rose to 40% of total sales from 25%. The four largest customers accounted for 26% of 2013 sales, down from 42% in 2012.
- The Company raised approximately $4.05 million through warrant and option exercises in 2013 and began trading on NYSE MKT under ticker LIQT on December 2, 2013.
- New product and market efforts included ASTM F838-05 sterile-filtration certification, membrane discs, flat-sheet membranes, and produced-water test systems. Flat-sheet membrane sales were $5,000 in 2013.
Outlook, risks, and unusual items
- The filing gives no quantified revenue, earnings, or cash-flow guidance. Management said available cash and other potential funding sources should cover anticipated working capital and capital spending for the foreseeable future, while cautioning that continued negative operating cash flow or unexpected costs could strain resources.
- Management expects to expand liquid-filtration markets and production capacity, including through subcontracting. Commercial success of new products and customer testing remains uncertain. A 2014 production order and an algae-system prototype order were reported after year-end.
- Key risks include dependence on a limited number of customers and cancellable purchase orders; customer credit and collections; limited silicon carbide, platinum, and palladium supply; reliance on subcontractors; competition; foreign-exchange exposure; and changing environmental standards.
- A 2012 customer that represented 12.4% of 2012 sales entered receivership. The Company established a $700,000 allowance against that customer’s receivables; the allowance for doubtful accounts was $608,356 at year-end after write-offs and other adjustments.
- The 2013 income-tax benefit was $1.61 million, largely reflecting deferred tax effects. Management recorded no valuation allowance and expected to realize deferred tax assets; realization depends on future earnings. Non-cash compensation and a $186,542 inventory-obsolescence reserve were also notable.
- The Company reported no material legal proceedings as of year-end. Its independent auditor issued an unqualified opinion on the financial statements; management assessed internal control over financial reporting as effective, without auditor attestation.
Important facts for investors to verify
- Whether liquid-filter growth and announced orders convert into recurring revenue and improved gross margins.
- Customer receivable aging, recoverability of the distressed-customer balance, and the adequacy of credit-loss reserves.
- Cash burn, funding needs, and the availability of financing after the bank credit lines were called.
- Production capacity, subcontractor dependence, and continuity and cost of key raw-material supply.
- The support for deferred tax asset recoverability and the effect of future losses on that assessment.
- Potential dilution from outstanding options and warrants; the filing reports 2.56 million options and 7.03 million warrants outstanding at December 31, 2013.