LiqTech International, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparisons are with FY 2011. The filing does not provide a clear standalone fourth-quarter financial summary. LiqTech develops and manufactures silicon-carbide ceramic filters for liquid filtration and diesel emissions control, plus kiln furniture. It operates in the United States and Denmark and sells internationally.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $16.92 million | $21.19 million |
| Gross profit / margin | $2.70 million / 16.0% | $5.03 million / 23.7% |
| Operating income (loss) | $(3.89) million | $1.10 million |
| Net income (loss) attributable to LiqTech | $(2.77) million | $0.92 million |
| Basic and diluted EPS | $(0.12) | $0.06 |
| Cash from (used in) operating activities | $(0.48) million | $0.01 million |
- Product sales in 2012 were $12.18 million from diesel particulate filters (DPFs), $4.19 million from liquid filters, and $0.55 million from kiln furniture. DPFs represented 72% of sales; liquid filters, 25%.
- At year-end, cash was $3.87 million and working capital was $8.07 million, up from $1.03 million and $1.88 million, respectively, in 2011. Current assets were $11.83 million and current liabilities $3.76 million.
- Bank credit lines had no borrowings outstanding at year-end, with approximately $1.59 million available. Notes payable and related-party notes were paid off during 2012. Capital-lease obligations totaled $0.93 million, including current and long-term portions.
- Investing activities used $1.74 million; financing activities provided $5.00 million, principally reflecting approximately $7.1 million net proceeds from the March 2012 stock offering and debt repayments. The company ended the year with $3.87 million of cash.
Material changes versus FY 2011
- Sales fell 20.2%, primarily because DPF sales declined $5.03 million. Management attributed weaker DPF demand to delayed U.S. emissions mandates and completion of London’s Low Emission Zone program, which had supported 2011 sales.
- Liquid-filter sales increased $0.48 million and kiln-furniture sales increased $0.28 million. Despite this growth, the product mix did not offset the DPF decline.
- Gross margin contracted by 7.7 percentage points to 16.0%. Operating expenses increased 67.9% to $6.60 million, including higher sales investment, public-company costs, R&D spending, and a $1.08 million increase in bad-debt expense.
- The company moved from attributable net income of $0.92 million to a $2.77 million loss. A $1.17 million income-tax benefit partially reduced the reported loss.
- Cash from operations turned negative. Inventory increased $1.16 million, while accounts receivable declined; the company also paid down credit lines and related-party debt.
Outlook, commentary, risks, and unusual items
- No specific quantitative revenue, earnings, or cash-flow guidance is provided. Management said available cash and credit facilities were expected to fund anticipated working capital and capital spending for the foreseeable future, but warned that continued negative operating cash flow or unexpected expenditures could strain resources.
- Management is investing in new markets and SiC membrane products. Subsequent to year-end, the company reported ASTM F838-05 sterile-filtration certification, new membrane-disc and flat-sheet products, and expected potential product revenue in 2013. These are development and market-expansion prospects, not reported FY 2012 sales or guaranteed outcomes.
- A December 2012 non-exclusive OEM supply agreement with Denovo included progressive minimum order quantities for 2013–2016. A March 2013 development and supply arrangement with FMC concerned shale oil/gas flowback filtration; FMC may terminate the agreement, and exclusivity depends on purchase commitments and successful testing.
- A customer responsible for 12.4% of 2012 sales entered receivership in January 2013. LiqTech recorded a $700,000 allowance against receivables from that customer. Total year-end allowance for doubtful accounts was $1.24 million.
- Customer concentration increased: the four largest customers represented approximately 42% of 2012 sales, versus 39% in 2011. Production also depends on subcontractors, while silicon carbide, platinum, and palladium costs and availability may affect supply and margins.
- Other key risks include uneven enforcement or funding of emissions regulations, competition, limited patent protection, foreign-exchange exposure, and the possibility of needing additional financing. Credit lines are due on demand and secured by certain receivables, inventory, and equipment.
- FY 2011 included insurance-related proceeds and a gain on fixed-asset sales following a 2011 facility fire; these items make the prior-year comparison less representative. Government grants were $0.55 million in 2012, down from $3.04 million in 2011.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Whether DPF demand recovers and whether growing liquid-filtration sales can offset continued weakness in the DPF business.
- Collection prospects for the receiver-placed customer’s receivables and the adequacy of the $700,000 customer-specific allowance and broader bad-debt reserve.
- Whether gross margins improve as sales volumes, product mix, manufacturing capacity, and subcontractor use change.
- Cash burn, inventory levels, capital spending, and the practical availability and refinancing terms of demand credit lines.
- Whether announced membrane certifications, products, and supply or development agreements convert into repeat orders and material revenue on the expected schedule.
- Potential dilution from outstanding warrants and options; the filing reports 6,625,575 warrants and 1,964,130 options outstanding at year-end.