10-Q: LiqTech Reports Q2 2025 Loss Amid Revenue Growth, Tariff Risks

LiqTech International, Inc. reported increased revenue for Q2 2025 and the first half of 2025, driven by liquid filtration and plastics, but faced declining gross profit margins and continued net losses, alongside ongoing internal control weaknesses and new tariff risks.

Summary

• Revenue for the three months ended June 30, 2025, increased by 10.5% to $4,957,489, and for the six months, it increased by 9.8% to $9,575,030, primarily driven by liquid filtration systems (including a full-scale PureFlow system delivery and pool systems), plastics products, and ceramic membranes, partially offset by decreased Diesel Particulate Filter (DPF) sales.
• Gross profit declined by 32.4% for the three months to $484,578 (9.8% margin) and by 38.3% for the six months to $609,634 (6.4% margin), mainly due to underutilization of manufacturing capacity following DPF sales decline, increased inventory provisions, and development costs for a first-time full-scale PureFlow system.
• Net loss attributable to LiqTech International, Inc. increased to $(2,151,885) for the three months ended June 30, 2025, from $(2,111,700) in the prior year, and to $(4,503,277) for the six months, from $(4,499,995) in the prior year.
• Loss per common share improved to $(0.22) for the three months and $(0.47) for the six months, compared to $(0.36) and $(0.77) respectively in the prior year, primarily due to a significant increase in weighted-average common shares outstanding.
• Cash and restricted cash decreased by $2,195,279 from December 31, 2024, to $8,673,449 as of June 30, 2025, with net working capital also decreasing by $1,424,835 to $14,311,974.
• The company established a joint venture, Nantong JiTRI LiqTech Green Energy Technology Co., Ltd, in China in January 2025, focusing on the marine water treatment market, which received RMB 8,000,000 (approximately USD 1.1 million) in R&D funding from the JV partner.
• The maturity date for senior promissory notes was extended from January 1, 2026, to May 1, 2027, and warrant exercise prices were reduced from $5.20 to $2.00 with an extended expiration to December 31, 2029.
• Management concluded that disclosure controls and procedures were not effective as of June 30, 2025, due to material weaknesses in internal controls over financial reporting.

Sentiment

Score: 3

Explanation: While revenue grew, the significant decline in gross profit margin, increased net losses, and persistent internal control weaknesses indicate fundamental operational challenges. The extension of debt maturity and repricing of warrants, while providing short-term relief, also signal financial strain. New tariff risks add further uncertainty.

Positives

• Revenue increased by 10.5% for the three months ended June 30, 2025, to $4,957,489, and by 9.8% for the six months to $9,575,030.
• Net cash used in operating activities decreased by $871,843 for the six months ended June 30, 2025, compared to the prior year.
• Net cash provided by financing activities showed a favorable change of $1,971,649 for the six months ended June 30, 2025, primarily due to a related party loan and capital contribution from noncontrolling interest.
• Research and development expenses decreased by 40.4% for the three months and 28.6% for the six months, reflecting streamlined R&D functions and the exit from a loss-making project.
• General and administrative expenses decreased by 0.1% for the three months and 6.0% for the six months, due to non-recurring costs in the prior year and savings on consulting services.
• The establishment of a joint venture in China for the marine water treatment market represents a strategic expansion.

Negatives

• Gross profit decreased by 32.4% for the three months and 38.3% for the six months ended June 30, 2025, compared to the prior year.
• Gross profit margin declined significantly to 9.8% for the three months (from 16.0%) and 6.4% for the six months (from 11.3%).
• Net loss attributable to LiqTech International, Inc. increased by 2.3% for the three months and 0.1% for the six months ended June 30, 2025.
• Underutilization of DPF manufacturing capacity and increased provisions/write-offs for slow-moving DPF inventory negatively impacted gross profit.
• Cash and restricted cash decreased by $2,195,279 from December 31, 2024, to June 30, 2025.
• Net working capital decreased by $1,424,835 from December 31, 2024, to June 30, 2025.
• Disclosure controls and procedures were deemed not effective as of June 30, 2025, due to material weaknesses in internal controls over financial reporting.
• Interest expense increased by 116.7% for the three months and 10.6% for the six months ended June 30, 2025.

Risks

• Potential adverse effects on operations and financial performance from armed conflicts or geopolitical tensions.
• Potential adverse impact of global trade restrictions, tariffs, and geopolitical tensions on business and supply chain, particularly with regard to China and EU.
• Potential negative impact of prolonged energy market volatility and supply disruptions.
• Potential adverse impact of health crises, pandemics, and public health emergencies.
• Dependence on a few major customers and the ability to maintain future relationships.
• Ability to operate with financial stability and secure access to external financing and adequate liquidity.
• Ability to secure and source supplies of raw materials and key components in due time and at competitive prices.
• Ability to achieve revenue growth and penetrate new markets.
• Dependence on the expertise and experience of the management team and retention of key employees.
• Reliance and access to qualified personnel to expand the business.
• Ability to adapt to potentially adverse changes in legislative, regulatory, and political frameworks.
• Changes in interest rates or tightening of debt capital markets.
• Changes in emissions and environmental regulations, and potential further tightening of emission standards.
• Exposure to potentially adverse tax consequences.
• Ability to compete under changing governmental standards by which products are evaluated.
• Financial impact from the fluctuation and volatility of foreign currencies.
• Potential monetary costs of defending intellectual property rights.
• Ability to successfully protect intellectual property rights and manufacturing know-how.
• Possibility of a dispute over intellectual property developed in conjunction with third parties.
• Possibility of becoming subject to costly litigation that could limit or cancel intellectual property rights or divert management efforts.
• Potential negative impact to product sales caused by technological advances of competitors.
• Potential liability for environmental harm or damages resulting from technical faults or failures of products.
• Difficulty for U.S. investors to enforce judgments obtained in U.S. courts due to significant assets and some officers/directors being located outside the U.S.
• Possibility of not being able to develop and maintain an effective system of internal control over financial reporting, leading to inaccurate financial reports.
• Possibility of breaches in the security of information technology systems.
• Liability risk of compliance to environmental laws and regulations.
• Potential negative impact of more stringent environmental laws and regulations as governmental agencies seek to improve minimum standards.

Future Outlook

Management believes that current cash on hand and ongoing cash generated from operations will be sufficient to cover capital requirements and committed investments for the next 12 months. This outlook is subject to significant uncertainties, including global macroeconomic issues, trade wars, geopolitical instability, commodity price volatility, and continued global supply chain disruptions. The company acknowledges potential reduced or changed demand for its products and services if unfavorable market dynamics persist, especially due to global recession, structural regulatory shifts, or escalating interest rates and tariffs impacting customer investment decisions.

Management Comments

• Our strategy is to leverage our core competencies in material science, advanced filtration, and systems integration, creating differentiated products with compelling value propositions to penetrate attractive end markets with regulatory tailwinds and sustainability implications.
• Management believes that the actions implemented and planned will improve the overall system of internal control over financial reporting and will remediate the identified material weaknesses.

Industry Context

The company operates in the clean technology sector, focusing on water treatment, emissions control (DPFs), and advanced ceramic and plastic components. While the water treatment and plastics segments show growth, aligning with global sustainability trends and demand for purification solutions, the decline in DPF sales suggests challenges in the automotive/transportation emissions market, possibly due to evolving regulations or market shifts. The establishment of a joint venture in China for marine water treatment indicates a strategic move into a growing market driven by stricter environmental regulations for shipping. The increased tariff risks highlight the vulnerability of globalized manufacturing and supply chains in the current geopolitical climate.

Corporate Governance

Legal Proceedings

• The company may be involved in litigation relating to claims arising out of its operations in the normal course of business, but no specific new material proceedings were disclosed.

Related Party Transactions

• The joint venture, Nantong JiTRI LiqTech Green Energy Technology Co., Ltd (90% owned by LiqTech), received R&D funding of RMB 8,000,000 (approximately USD 1.1 million) from its 10% JV partner (an unrelated third party to LiqTech). This funding is classified as a long-term loan with a 12% annual interest rate and may be converted into equity at LiqTech's discretion.

Stakeholder Impact

• Shareholders: Increased net loss, decreased gross profit margins, and material weaknesses in internal controls could negatively impact investor confidence and share value. Potential future dilution from warrants and RSUs remains.
• Employees: Reduction in the average number of employees engaged in research and development activity due to streamlining and centralization of the R&D function.
• Customers: Continued revenue growth in liquid filtration and plastics segments indicates ongoing demand, while decreased DPF deliveries suggest a shift in that market segment.
• Creditors: Extension of senior promissory note maturity date provides more time for repayment, but the increased interest rate upon default and ongoing net losses could be a concern.
• JV Partner: Provided significant R&D funding to the joint venture, indicating a strong commitment to the marine water treatment market in China.

Next Steps

• Develop and reinforce new products and applications to provide clean water and reduce pollution.
• Expand the range of products to better leverage existing customer relationships and develop new relationships within the oil & gas, marine, chemical, and other industries.
• Better penetrate existing end markets where the value proposition is strong, targeting and developing new customers.
• Work with distributors, agents, and partners to access other important geographic markets.
• Develop new end markets for core products and applications, evaluating opportunities to develop strategic partners.
• Continue dedicating necessary resources to enhance internal control over financial reporting and remediate identified material weaknesses.
• Redesign and ensure documentation of all processes and procedures related to the financial reporting process.

Key Dates

Recommendation

The company reported a significant decline in gross profit margin and an increased net loss despite revenue growth, indicating fundamental operational inefficiencies and profitability challenges. Persistent material weaknesses in internal controls raise concerns about financial reporting reliability. While debt maturity was extended, the underlying financial performance and new tariff risks create substantial uncertainty and downside potential, making the stock a 'sell' for seasoned investors.

Keywords

LiqTech International, LIQT, Q2 2025, 10-Q, SEC filing, financial results, water treatment, ceramic filters, silicon carbide, diesel particulate filters, DPF, plastics, environmental technology, clean technology, marine water treatment, China joint venture, tariffs, internal controls, net loss, revenue growth, gross profit margin