LiqTech International, Inc. — Q3 2015 Form 10-Q
Business context and period: Unaudited results cover the three and nine months ended September 30, 2015, compared with the same 2014 periods. LiqTech develops and sells silicon-carbide filtration products and systems, including liquid filtration and diesel particulate filters (DPFs); it is phasing out kiln furniture. Provital, acquired in July 2014, manufactures automated filtration systems.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $6.93 million | $4.93 million | $10.74 million | $12.10 million |
| Gross profit (margin) | $2.31 million (33.4%) | $1.47 million (29.8%) | $1.71 million (15.9%) | $2.87 million (23.7%) |
| Operating income (loss) | $0.73 million | $(0.17) million | $(3.33) million | $(2.33) million |
| Net income (loss), attributable to LiqTech | $0.62 million | $0.35 million | $(2.34) million | $(1.17) million |
| Basic and diluted EPS | $0.02 | $0.01 | $(0.06) | $(0.04) |
- Cash flow: Nine-month operating cash use was $2.15 million, versus $3.71 million in 2014. Investing used $0.41 million; financing provided $0.04 million. Cash declined $3.51 million to $2.35 million, including a $0.99 million currency-translation impact.
- Liquidity and debt: September 30 cash was $2.35 million; current assets were $11.61 million and current liabilities $4.27 million on the balance sheet. Total liabilities were $4.48 million, including $0.36 million in capital lease obligations. The company reported no available general-purpose bank line; its former Provital standby line was cancelled in June. A separate guarantee facility had about $71,000 of guarantees outstanding against a roughly $75,000 limit.
- Balance sheet: Total assets were $27.57 million, including $7.78 million goodwill and $4.18 million long-term deferred tax assets; stockholders’ equity was $23.09 million. Nine-month other comprehensive loss was $4.10 million, principally reflecting currency translation.
Changes versus prior comparable periods
- Q3 sales rose 40.6% year over year, with gross profit up 57.8%; the quarter returned to operating and net income from an operating loss in Q3 2014. Management attributed the sales increase to higher DPF and liquid-filter/system sales; the quarter included a $2.4 million South American order.
- Nine-month sales fell 11.3%, and gross profit declined 40.5%. Management cited weaker first-half DPF activity and delayed liquid-system deliveries, partly offset by stronger Q3 shipments. Nine-month operating and net losses worsened despite lower total operating expenses.
- Quarterly currency transaction results shifted from a $238,000 gain in 2014 to a $35,000 loss in 2015, reducing the benefit of stronger operating results. For the nine-month period, currency transaction gains were $98,000 versus $192,000.
- Research and development expense increased to $537,000 for nine months from $224,000, reflecting investment in new products and Provital’s inclusion. The stronger U.S. dollar reduced some reported expenses denominated in Danish kroner and euros.
Outlook, risks and notable items
- No formal earnings or revenue guidance is provided. Management said it believed cash flow and potential funding sources would cover anticipated working capital and capital spending for the foreseeable future, while warning that continued negative operating cash flow or unanticipated spending could strain cash resources. Additional financing may be unavailable or dilutive.
- Reported commercial developments included a $6.1 million wastewater-treatment system order, expected to be delivered in 2015 with installation expected in the first half of 2016; a $790,000 mining-related order expected in the first half of 2016; and a Chinese DPF order of $814,000. Timing and conversion of announced orders into recognized revenue remain important to monitor.
- Customer concentration increased: four customers represented approximately 43% of nine-month sales, with individual shares of 16%, 12%, 9% and 6%. Sales are also exposed to geographic and currency factors.
- Provital acquisition consideration includes escrowed shares tied to revenue and EBITDA milestones for 2015, with catch-up provisions extending to 2016. Goodwill relates to Provital; management’s latest disclosed annual impairment test, conducted in December 2014, found no impairment.
- Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting. The filing disclosed no material subsequent events through November 12, 2015. Management’s deferred-tax-asset realization estimate depends partly on future earnings.
Most important facts for investors to verify
- Reconcile the filing’s liquidity figures: MD&A reports working capital of $7.278 million and current assets of $11.551 million, while the balance sheet shows current assets of $11.606 million and current liabilities of $4.273 million, implying different working-capital arithmetic.
- Track cash burn, receivable collections, and the availability and terms of financing, given $2.15 million of operating cash use and the absence of a general-purpose credit line.
- Confirm delivery, installation, customer acceptance and revenue-recognition timing for large system orders, particularly the $6.1 million order.
- Monitor customer concentration, first-half sales weakness, gross-margin recovery and whether improved Q3 performance is sustained.
- Assess Provital’s performance against acquisition earnout milestones and the assumptions supporting deferred tax assets and goodwill.
- Review potential dilution: at September 30, 7.23 million warrants and 1.01 million options were outstanding; weighted-average shares were substantially higher than in the prior-year nine-month period.