LiqTech International Stock: Overpromise And Underdeliver (NASDAQ:LIQT)

I have been constantly negative on Danish clean technology company LiqTech International (NASDAQ:LIQT) or “LiqTech” for almost a decade now as the company remains a serious case of overpromise and underdeliver.

LiqTech provides ceramic silicon carbide filters for gas and liquid purification. The company was widely expected to be a primary beneficiary of IMO 2020, a regulation limiting the permitted sulphur content in marine fuel oil.

But installation of marine exhaust gas cleaning systems, also known as “scrubbers” has lagged expectations by a wide margin thus resulting in LiqTech frequently missing management’s projections in recent years.

The company is also looking to expand into the oil and gas markets by establishing a presence in the Middle East and run water filtration plants for major companies. In October, the company received its first major order from Baker Hughes (BKR) but things have moved much slower than initially expected by management.

In Thursday’s Q4 earnings release, the company noted additional delays from “various logistical challenges” and “uncertainty resulting from the conflict in Ukraine and the overall geopolitical environment“.

In combination with ongoing weakness in the marine scrubber segment, management reduced FY2022 top-line expectations from the previously projected range of $50 to $80 million to just $25 to $30 million.

Unfortunately, this is not the first time the company will be missing its own projections by a mile. Remember, LiqTech expected to achieve $100 million in annual sales by 2018 but ended up with a measly $12.2 million.

While unrestricted cash on hand of $16.0 million might be sufficient to avoid a going concern warning in the company’s upcoming annual report on form 10-K, LiqTech investors will likely be subject to substantial near-term dilution as the company has recently started to make required monthly redemption payments on a $15 million toxic convertible note issued last year to a division of hedge fund High Trail Capital (High Trail).

Conditions of the note are truly ugly:

1. An issuer discount of $1.8 million
2. Repayment at 112% of the principal amount
3. Twenty monthly $0.84 million redemption payments in cash or common stock at 90% of the lesser of (i) the volume-weighted average price (“VWAP”) of the Common Stock on the trading day immediately preceding the payment date and (ii) the average of the lowest three (3) VWAPs over the 10 trading days immediately preceding the payment date, which shall in no case be less than the floor price of $1.75 per share
4. 5% annual interest rate, payable either in cash or common stock
5. Issuance of 80,000 new common shares to High Trail

In sum, the annual interest rate for the notes appears to be closer to 20%.

Even worse, the terms provide a strong incentive for High Trail to short the shares ahead of scheduled monthly redemption payments (assuming LiqTech elects to pay in new common shares) thus likely resulting in further substantial pressure on the company’s embattled shares until the $1.75 floor price will be reached.

Assuming an average conversion price of $2.50, LiqTech would be required to issue approximately 6.7 million new common shares, thus increasing outstanding shares by more than 30%.

Given current business conditions, I am estimating negative free cash flow of $10 to $15 million for this year which would result in the requirement to raise more capital in early 2023 at the latest point.

Bottom Line

LiqTech has been a bad case of overpromise and underdeliver for most of the past decade and despite several changes in senior management, this pattern has continued unabatedly.

Thursday’s eye-watering cut to FY2022 projections is just the latest example of management’s ongoing inability (or unwillingness) to forecast the business in an accurate manner.

Even worse, the company’s toxic convertible debt will likely put additional pressure on the share price over the next couple of quarters while the requirement to raise additional capital will provide a real challenge to management.

Given these issues, investors should avoid the shares or even consider selling existing positions and wait for the company to shore up liquidity and finally deliver on its promises.