LiqTech International, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; filed November 14, 2013. Financial statements are unaudited. LiqTech develops and sells silicon-carbide filtration products, including liquid filters, diesel particulate filters (DPFs), and kiln furniture.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $2.950 million | $3.115 million | $9.155 million | $13.411 million |
| Gross profit / margin | $274,473 / 9.3% | $579,008 / 18.6% | $1.129 million / 12.3% | $3.085 million / 23.0% |
| Operating loss | $1.318 million | $667,315 | $3.990 million | $1.073 million |
| Net loss attributable to LiqTech | $903,956 | $427,872 | $2.882 million | $657,779 |
| Loss per share, basic and diluted | $0.04 | $0.02 | $0.12 | $0.03 |
- Revenue mix, nine months: DPF sales were $4.859 million, down from $9.766 million; liquid-filter sales were $3.680 million, up from $3.329 million; kiln-furniture sales were $616,114, up from $315,836. Europe contributed $4.992 million and the U.S. and Canada $2.264 million. No customer represented more than 10% of sales in 2013.
- Cash flow: Operating cash use was $2.232 million for the first nine months, versus $1.230 million a year earlier. Investing activities used $416,000; financing provided $318,000. Cash fell $2.311 million from year-end 2012 to $1.563 million at September 30.
- Liquidity and obligations: Working capital was $6.345 million, down from $8.070 million at December 31, 2012. Total liabilities were $3.520 million, including $800,926 of capital-lease obligations. The company reported no available credit lines; its bank lines were called in July 2013. Future minimum operating-lease payments totaled $2.828 million.
- Other balance-sheet items: Total assets were $16.764 million, down from $19.040 million at year-end 2012. Inventory increased to $4.819 million, including a $216,079 obsolescence reserve. The company recorded a $1.122 million long-term deferred tax asset and recognized a $1.045 million income-tax benefit for the nine-month period.
Changes versus the prior comparable periods
- Nine-month sales declined 31.7%, principally because DPF sales fell $4.907 million. Management attributed weaker DPF demand to postponed U.S. emissions mandates and limited new low-emission-zone activity in Europe.
- Gross margin contracted to 12.3% for the nine months from 23.0%. Management attributed the Q3 deterioration to lower sales, increased obsolete-inventory reserves, and fixed production costs against lower 2013 sales.
- Nine-month operating expenses rose 23.1% to $5.119 million. Non-cash compensation increased to $1.052 million from $97,805, largely reflecting stock, restricted-stock, warrant, and option awards; selling and marketing costs also increased. Research and development expense decreased to $351,000 from $471,000.
- Liquid filters and kiln furniture grew, but that growth did not offset the DPF sales decline. Management said it had increased sales and marketing investment and expected profitability from those investments to take several quarters.
Outlook, developments, and risks
- Management stated that cash flow and other potential funding sources should cover anticipated working-capital and capital-spending needs for the foreseeable future, while cautioning that continued negative operating cash flow or unexpected expenses could strain cash resources. No numerical revenue or earnings guidance was provided.
- In September and October, holders exercised options and warrants for an aggregate $4.051 million in cash; $450,000 was received by September 30 and $3.601 million afterward. Exercisers received 2.701 million shares and replacement options or warrants with a $2.70 exercise price. The company said the capital would support orders and growth and could improve its ability to list on an exchange.
- Commercial developments included orders for produced-water test systems, including one reported at $300,000, and repeat membrane orders for wastewater treatment. The filing also reported NSF/ANSI Standard 61 certification for drinking-water-system use and ASTM F838-05 sterile-filtration testing. These announcements and market opportunities are not assurances of future sales.
- A production-capacity subcontract with Scandinavian Brake Systems was expected to increase capacity through the end of 2014. Management also identified limited silicon-carbide supply and possible increases in silicon carbide, platinum, or palladium prices as risks to production and profitability.
- Other risks include dependence on successful expansion of liquid-filtration markets, delayed DPF demand, inventory obsolescence, customer collections, foreign-currency movements, and the ability to obtain additional financing on acceptable terms. Management recorded no long-lived-asset impairment; it said warranty estimates were immaterial and reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the post-exercise share count: the filing reports 24,811,500 shares outstanding at September 30, 2.701 million shares issued in the exercise transaction, and 27,212,500 shares outstanding at November 14; those figures do not arithmetically reconcile as presented.
- Confirm the timing and availability of the $3.601 million received after quarter-end and assess liquidity against ongoing operating cash use, the absence of credit lines, and lease commitments.
- Track whether DPF demand stabilizes and whether liquid-filter growth and announced test-system orders convert into recurring, profitable revenue.
- Assess inventory recoverability and deferred-tax-asset realization, which depend in part on future demand and taxable profits; the company recorded no valuation allowance based on management’s expectation of future profits.
- Consider dilution from outstanding warrants and options and the substantial increase in non-cash share-based compensation.