LiqTech International, Inc. — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011; filed March 29, 2012. This is an annual filing, not a standalone fourth-quarter report. LiqTech manufactures silicon-carbide diesel particulate filters, liquid-filtration membranes and, to a lesser extent, kiln furniture. The August 2011 reverse acquisition of LiqTech USA by former shell company Blue Moose makes the corporate structure and share count materially different from prior periods.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $21.19 million | $15.73 million |
| Gross profit / margin | $5.03 million / 23.7% | $3.67 million / 23.4% |
| Operating income / margin | $1.10 million / 5.2% | $27,074 / 0.2% |
| Net income (loss) attributable to LiqTech | $917,211 | ($6,629) |
| Cash at year end | $1.03 million | $559,259 |
| Cash from operating activities | $5,148 per audited cash-flow statement | $1.75 million |
Sales rose 34.7%. Diesel particulate filters generated $17.21 million (81.2% of sales), liquid filters and services $3.71 million (17.5%), and kiln furniture $272,000 (1.3%). Liquid-filter sales grew about 94%; DPF sales grew about 25%. Europe contributed $13.24 million of sales, versus $7.55 million in 2010; U.S. and Canada sales were $6.64 million, versus $5.59 million.
Operating expenses increased 7.8% to $3.93 million, including $1.94 million of general and administrative expense, $1.48 million of selling expense and $502,413 of R&D. Other income included a $411,436 gain on sale of fixed assets. The company reported $359,508 of income tax expense. Basic and diluted EPS were each reported as $0.06; weighted-average basic shares increased to 14.17 million from 9.31 million.
Year-end current assets were $11.16 million and current liabilities $9.28 million, giving reported working capital of $1.88 million, down from $3.03 million. Management also presents working capital of $5.21 million after excluding $3.33 million of related-party notes payable; the corresponding shareholder note receivable is classified in equity, so the adjustment merits review. Total liabilities were $11.25 million, including $1.26 million of lines of credit, $3.33 million of related-party notes payable, $609,396 of other notes payable and $1.14 million of capital-lease obligations. In March 2012, the company used offering proceeds to repay the two credit lines, which had $1.26 million outstanding at year-end.
The audited cash-flow statement reports operating cash flow of $5,148, investing cash outflow of $946,640 and financing cash inflow of $1.74 million for 2011. Management’s discussion instead cites operating cash use of $52,536 and investing cash use of $888,956; the filing does not reconcile these differences clearly. Receivables and inventory rose significantly, contributing to weak operating cash generation.
Changes, outlook and notable items
- Compared with 2010, revenue, gross profit and operating income improved substantially, and the company returned to attributable profitability. Gross margin increased modestly, from 23.4% to 23.7%.
- The top four customers represented approximately 39% of sales, down from 67% in 2010. The company nevertheless identifies customer concentration and collection risk as material concerns.
- A July 2011 fire damaged a Danish facility. Insurance proceeds included approximately $1.0 million for business interruption, recognized over the covered period, and approximately $1.04 million for casualty losses; the filing also reports a roughly $425,000 gain related to the casualty claim. Certain proceeds and related accruals remained on the year-end balance sheet.
- The company received approval for a $2 million Danish grant to develop a silicon-carbide reverse-osmosis membrane. Intellectual property produced under the project will belong to Aalborg University, with LiqTech eligible to obtain an exclusive business-related license subject to the agreement.
- Management expects operating cash flow and available funding to support anticipated working capital and capital spending, but cautions that unanticipated expenditures or weaker cash generation could strain resources. Plans include capacity expansion, new markets and continued product development; the filing provides no quantified earnings or revenue guidance.
- A production subcontract with Scandinavian Brake Systems’ Notox division runs through 2014 and is expected to increase capacity. The company also disclosed raw-material supply constraints, dependence on subcontractors, and exposure to currency, economic, regulatory and competitive risks.
- On March 2, 2012, after year-end, LiqTech raised approximately $7.4 million net by issuing 2,511,500 shares at $3.25. A February 2012 non-binding LOI contemplated a $15 million cash acquisition of Pirelli’s Romanian subsidiary and a $19 million Pirelli investment in LiqTech shares; definitive agreements and completion were uncertain.
Investor facts to verify
- Reconcile the conflicting 2011 operating and investing cash-flow figures in MD&A with the audited cash-flow statement, and assess working-capital conversion and receivable collectability.
- Review the June 2012 maturity and related-party terms of the $3.33 million payable, its shareholder-receivable offset, and the reported adjusted working-capital calculation.
- Confirm the timing and accounting for fire-related insurance proceeds, deferred business-interruption income and the reported fixed-asset gain.
- Track whether the Pirelli LOI became a definitive transaction, including its financing, dilution, governance rights and potential obligations.
- Assess execution and cost risks from customer concentration, subcontracted capacity, limited silicon-carbide supply, and outstanding warrants and options.
Controls and audit: The auditor issued an unqualified opinion on the financial statements. Management stated that disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not provide an internal-control attestation.