UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the nine months period ended
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________________ to _______________________
Commission File Number:
LiqTech International, Inc.
(Exact name of registrant as specified in its charter)
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Registrant’s telephone number, including area code: +
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
| Large accelerated filer | ☐ | | ☒ |
| Non-accelerated filer | ☐ | Smaller reporting company | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes
The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, at November 9, 2020, was
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2020
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” regarding the plans and objectives of management for future operations and market trends and expectations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties, including but not limited to the risks described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. This is especially underlined by the anticipated impacts from the COVID-19 pandemic on the Company, including the related effects to our business operations, results of operations, cash flows, and financial position, and our future responses to the COVID-19 pandemic. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
PART I - FINANCIAL INFORMATION
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | As of | |||||||
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ and $ at September 30, 2020 and December 31, 2019, respectively | ||||||||
| Inventories, net of allowance for excess and obsolete inventory of $ and $ at September 30, 2020 and December 31, 2019, respectively | ||||||||
| Contract assets | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Long-Term Assets: | ||||||||
| Property and Equipment, net of accumulated depreciations of $ and $ at September 30, 2020 and December 31, 2019, respectively | ||||||||
| Operating lease right-of-use assets | ||||||||
| Deposits and other assets | ||||||||
| Intangible assets, net of accumulated depreciations of $ and $ at September 30, 2020 and December 31, 2019, respectively | ||||||||
| Goodwill | ||||||||
| Total Long-Term Assets | ||||||||
| Total Assets | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | As of | |||||||
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (Unaudited) | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of finance lease obligations | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Current portion of contingent earn-out liability | ||||||||
| Contract liabilities | ||||||||
| Income taxes payable | ||||||||
| Total Current Liabilities | ||||||||
| Deferred tax liability | ||||||||
| Finance lease obligations, net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Contingent earn-out liability, net of current portion | ||||||||
| Total Long-term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders' Equity: | ||||||||
| Series A Mandatory Convertible Preferred stock; par value $, shares authorized, shares issued and outstanding at September 30, 2020 and December 31, 2019 | ||||||||
| Common stock; par value $, shares authorized, and shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| For the Three Months Ended |
For the Nine Months Ended |
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| September 30, |
September 30, |
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2019 |
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2019 |
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| Revenue |
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| Cost of Goods Sold |
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| Gross Profit |
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| Operating Expenses: |
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| Selling expenses |
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| General and administrative expenses |
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| Research and development expenses |
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| Total Operating Expense |
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| Income (Loss) from Operations |
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| Other Income (Expense) |
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| Gain on modification of earn-out liability |
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| Interest and other income |
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| Interest expense |
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| Fair value adjustment of warrants |
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| Gain (Loss) on currency transactions |
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| Gain (Loss) on sale of fixed assets |
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| Total Other Income (Expense) |
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| Income (Loss) Before Income Taxes |
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| Income Tax Provision (Benefit) |
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| Net Income (Loss) |
$ | ( |
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$ | $ | ( |
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$ | ||||||||
| Basic Income (Loss) Per Share |
$ | ( |
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$ | $ | ( |
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$ | ||||||||
| Diluted Income (Loss) Per Share |
$ | ( |
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$ | $ | ( |
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$ | ||||||||
| Basic Weighted Average Common Shares Outstanding |
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| Diluted Weighted Average Common Shares Outstanding |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE -LOSS (UNAUDITED)
| For the Three Months Ended |
For the Nine Months Ended |
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| September 30, |
September 30, |
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| 2020 |
2019 |
2020 |
2019 |
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| Net Income (Loss) |
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| Other Comprehensive Income - Currency Translation, Net |
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| Total Comprehensive Loss |
$ | ( |
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$ | ( |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
For the period ended September 30, 2020 and September 30, 2019
| Accumulated Other | ||||||||||||||||||||||||
| Additional | Compre- | |||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | hensive | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income/(Loss) | TOTAL | |||||||||||||||||||
| BALANCE, December 31, 2019 | ( | ) | ( | ) | ||||||||||||||||||||
| Common shares issued in settlement of RSUs for services by the board of directors | ||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||
| Currency translation, net | ( | ) | ( | ) | ||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||
| BALANCE, March 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||
| Common shares issued in settlement of RSUs for services by the board of directors | ( | ) | ||||||||||||||||||||||
| Common shares issued for cash at $ per share, net of offering cost of $, May 2020 | ||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||
| Currency translation, net | ||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||
| BALANCE, June 30, 2020 | ( | ) | ( | ) | ||||||||||||||||||||
| Prefunded warrants, , transferred to equity upon modification in August 2020 | ||||||||||||||||||||||||
| Additional offering cost of $, related to the capital raise in May 2020 | ( | ) | ( | ) | ||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||
| Currency translation, net | ||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||
| BALANCE, September 30, 2020 | ( | ) | ( | ) | ||||||||||||||||||||
| BALANCE, December 31, 2018 | ( | ) | ( | ) | ||||||||||||||||||||
| Common shares issued in settlement of RSUs for services by the board of directors | ||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Currency translation, net | ( | ) | ( | ) | ||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||
| BALANCE, March 31, 2019 | ( | ) | ( | ) | ||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||
| Exercise of warrants | ( | ) | ||||||||||||||||||||||
| Common shares issued for cash at $ per share, net of offering cost of $, May 2019 | ||||||||||||||||||||||||
| Rounding shares in connection with reverse stock split | ||||||||||||||||||||||||
| Currency translation, net | ||||||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||
| BALANCE, June 30, 2019 | ( | ) | ( | ) | ||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||
| Additional offering costs of $, related to the capital raise in May 2019 | ( | ) | ( | ) | ||||||||||||||||||||
| Currency translation, net | ( | ) | ( | ) | ||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||
| BALANCE, September 30, 2019 | ( | ) | ( | ) | ||||||||||||||||||||
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Nine Months Ended |
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| September 30, |
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| 2020 |
2019 |
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| Cash Flows from Operating Activities: |
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| Net Income (Loss) |
$ | ( |
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$ | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operations: |
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| Depreciation and amortization |
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| Stock-based compensation |
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| Change in fair value of warrant liability |
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| Gain on modification of earn-out liability |
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| Change in deferred tax asset / liability |
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| Changes in assets and liabilities: |
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| Accounts receivable |
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| Inventory |
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| Contract assets |
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| Deposits |
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| Prepaid expenses and other current assets |
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| Accounts payable |
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| Accrued expenses |
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| Operating lease liabilities |
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| Total Adjustments |
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| Net Cash (used in) Operating Activities |
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| Cash Flows from Investing Activities: |
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| Purchase of property and equipment |
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| Purchase of other intangible assets |
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| Net cash paid for acquisition |
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| Net Cash used in Investing Activities |
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| Cash Flows from Financing Activities: |
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| Payments on finance lease obligation |
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| Proceeds from exercise of stock options |
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| Proceeds from issuance of prefunded warrants |
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| Proceeds from issuance of common stock, net |
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| Net Cash provided by Financing Activities |
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| Gain on Currency Translation |
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| Net change in Cash, Cash Equivalents and Restricted Cash |
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| Cash, Cash Equivalents and Restricted Cash at Beginning of Period |
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| Cash, Cash Equivalents and Restricted Cash at End of Period |
$ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Nine Months Ended September 30, |
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| 2020 |
2019 |
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| Supplemental Disclosures of Cash Flow Information: |
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| Cash paid during the period for: |
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| Interest |
$ | $ | ||||||
| Income Taxes |
$ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared according to the instructions to Form 10-Q and Section 210.8-03(b) of Regulation S-X of the Securities and Exchange Commission (SEC) and, therefore, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted.
Management has analyzed the impact of the Coronavirus pandemic ("COVID-19") on its financial statements as of September 30, 2020 and has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets.
The consolidated financial statements include the accounts of LiqTech International, Inc., the “Company” and its subsidiaries. The terms "Company", “us", "we" and "our" as used in this report refer to the Company and its subsidiaries, which are set forth below. The Company engages in the development, design, production, marketing and sale of automated filtering systems, ceramic silicon carbide liquid applications and diesel particulate air filters in the United States, Canada, Europe, Asia and South America. Set forth below is a description of the Company and each of its subsidiaries:
LiqTech International, Inc., a Nevada corporation organized in July 2004, formerly known as Blue Moose Media, Inc.
LiqTech USA, a Delaware corporation and a
LiqTech Holding A/S (formerly known as LiqTech International A/S), a Danish corporation, incorporated on January 15, 2000 (“LiqTech Holding”), a
LiqTech NA, Inc. (“LiqTech NA”), incorporated in Delaware on July 1, 2005, a
LiqTech Water A/S (formerly known as LiqTech Systems A/S), a Danish Corporation (“LiqTech Water”), incorporated on September 1, 2009, engaged in the manufacture of fully automated filtering systems for use within marine applications, municipal pool and spa applications, and other industrial applications within Denmark and international markets.
LiqTech Plastics A/S (formerly known as BS Plastic A/S), a Danish Corporation (“LiqTech Plastics”), acquired on September 1, 2019, engaged in the manufacture of specialized machined and welded plastic parts within Denmark and international markets.
LiqTech Ceramics A/S, a Danish corporation (“LiqTech Ceramics”), incorporated on December 20, 2019, engaged in the development, design, application, marketing and sales of membranes, ceramic diesel particulate and liquid filters, and catalytic converters in Europe, Asia and South America.
LiqTech Water Projects A/S, a Danish corporation (“LiqTech Water Projects”), incorporated on July 28, 2020 that is a dormant company without activity.
LiqTech Germany (“LiqTech Germany”), a
LiqTech PTE Ltd (“LiqTech Sing”), a
Consolidation -- The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority-owned subsidiary. All material intercompany transactions and accounts have been eliminated in the consolidation.
Reclassification – Certain amounts presented in previous issued financial statements have been reclassified to be consistent with the presentation in the current period. In the statement of operations and comprehensive (loss), the Company has reclassified the prior year comparative amounts of general and administrative expenses and other expenses to be consistent with the current classification. Further contingent earn-out liability has been reclassified to accrued expenses considering an amendment to the original earn-out agreement from 2019 has changed the contingent liability to a fixed-amount liability.
Functional Currency / Foreign currency translation -- The functional currency of LiqTech International, Inc., LiqTech USA, Inc. and LiqTech NA is the U.S. Dollar. The Functional Currency of LiqTech Holding, LiqTech Water, LiqTech Plastics, LiqTech Ceramics and LiqTech Water Projects is the Danish Krone (“DKK”); the functional currency of LiqTech Germany is the Euro; and the functional currency of LiqTech Singapore is the Singapore Dollar. The Company’s reporting currency is the U.S. Dollar for the purpose of these consolidated financial statements. The balance sheet accounts of the foreign subsidiaries are translated into U.S. Dollars at the period-end exchange rates, and all revenue and expenses are translated into U.S. Dollars at the average exchange rates prevailing during the nine months ended September 30, 2020 and 2019. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arose from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.
Significant events -- In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid- March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, most of our employees were working remotely during the shutdown. Since the beginning of May, the businesses in Denmark have been opening up as the effect of COVID-19 has largely been constrained and the number of infections and fatalities decreased significantly. However, we now again see the number of infected people and fatalities increase all over the world, and tightening restrictions are again introduced in many countries. Since the start of September, we have again introduced limitations in the number of employees working directly on the production sites, and all employees who can work from home, is encouraged to do so.
We are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, result of operations, liquidity and cash flows due to uncertainties, and our compliance with the measures implemented to avoid the spread of the virus did have a material adverse impact on our financial results for the second and third quarter of 2020. We have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for the next 12 months from the issuance of this quarterly report. In addition, as a result of reduced order intake and decreased manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2020.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products and transportation restrictions, especially if it results in a prolonged global recession.
Cash, Cash Equivalents and Restricted Cash -- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. As of September 30, 2020, and December 31, 2019, the Company held $
Accounts Receivable -- Accounts receivable consist of trade receivables arising in the normal course of business. The Company establishes an allowance for doubtful accounts that reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, age, financial information that is publicly accessible and other currently available evidence.
The roll-forward of the allowance for doubtful accounts for the period ended September 30, 2020 and December 31, 2019 is as follows:
| September 30, 2020 | December 31, 2019 | |||||||
| Allowance for doubtful accounts at the beginning of the period | $ | $ | ||||||
| Bad debt expense | ||||||||
| Receivables written off during the periods | ( | ) | ( | ) | ||||
| Effect of currency translation | ( | ) | ||||||
| Allowance for doubtful accounts at the end of the period | $ | $ | ||||||
Inventory – Inventory directly purchased is carried at the lower of cost or net realizable value, as determined on the first-in, first-out method.
For inventory produced, standard costs that approximate actual cost on the FIFO method are used to value inventory. Standard costs are reviewed at least annually by management, or more often in the event that circumstances indicate a change in cost has occurred.
Work in process and finished goods include material, labor and production overhead costs. The Company adjusts the value of its inventory to the extent that management determines that the cost cannot be recovered due to obsolescence or other factors.
Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movement, expected useful lives, and estimated future demand of the products and spare parts.
Contracts Assets – Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract assets also includes unbilled receivables, which usually comprise the last invoice remaining after the delivery of the water treatment unit, where revenue is recognized at the transfer of control based upon signed acceptance of the water treatment unit by the customer. Most commonly this invoice is sent to the customer at commissioning of the product or no later than 12 months after the delivery. Further included in Contract Assets are short-term receivables such as VAT and other receivables.
Leases -- In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Subsequent ASUs were issued to provide additional guidance.
On January 1, 2019, the Company adopted Topic 842 using the optional transition method, under which the new standards were applied prospectively rather than restating the prior periods presented. The Company elected the package of practical expedients permitted, which among other things, allowed the Company to carry forward the historical lease classification. The Company made the accounting policy elections to not recognize lease assets and liabilities with an initial term of 12 months or less and to not separate lease and non-lease components. The Company’s accounting for finance leases (formerly called capital lease obligations) remains substantially unchanged. Operating lease right-of-use (“ROU”) assets and liabilities were recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, an incremental borrowing rate based on the information available at the commencement date was used in determining the present value. The Company will use the implicit rate when readily determinable. The operating lease ROU asset also included prepaid lease payments and was reduced by accrued lease payments. The Company’s lease accounting may include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Operating lease costs for lease payments will be recognized on a straight-line basis over the lease term. The Company’s adoption of Topic 842 did not materially impact its results of operation.
Property and Equipment -- Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed for financial statement purposes on a straight-line basis over the estimated useful lives of the assets, which range from to years.
Goodwill and Intangible Assets -- The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business, with the residual purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
Acquired intangible assets with determinable useful lives are amortized on a straight-line or accelerated basis over the estimated periods benefited, ranging from to years. Customer relationships and other non-contractual intangible assets with determinable lives are amortized over periods of years.
The Company evaluates the recoverability of long-lived assets by comparing the carrying amount of an asset to estimated future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. The evaluation of recoverability involves estimates of future operating cash flows based upon certain forecasted assumptions, including, but not limited to, revenue growth rates, gross profit margins, and operating expenses over the expected remaining useful life of the related asset. A shortfall in these estimated operating cash flows could result in an impairment charge in the future.
Goodwill is not amortized but is evaluated annually for impairment at the reporting unit level or when indicators of a potential impairment are present. The Company estimates the fair value of the reporting unit using the discounted cash flow and market approaches. Forecast of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, using primarily expected category expansion, pricing, market segment fundamentals, and general economic conditions.
Revenue Recognition -- On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” which includes clarifying ASUs issued in 2015, 2016 and 2017 (“new revenue standard”). The new revenue standard was applied to all open revenue contracts using the modified retrospective method as of January 1, 2018. The new revenue standard did not have a material impact on revenue recognition.
The Company sells products throughout the world; sales by geographical region are as follows for the three and nine months ended September 30, 2020 and 2019:
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| United States and Canada | $ | $ | $ | $ | ||||||||||||
| Australia | ||||||||||||||||
| South America | ( | ) | ||||||||||||||
| Asia | ||||||||||||||||
| Europe | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The Company’s sales by product line are as follows for the three and nine months ended September 30, 2020 and 2019:
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Liquid filters and systems | $ | $ | $ | $ | ||||||||||||
| Diesel particulate filters | ||||||||||||||||
| Plastic components | ||||||||||||||||
| Development projects | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
For membranes, diesel particulate filters and plastic components, revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied, which occurs when control of the products transfers to the customer or when services are rendered by the Company. The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title and risks and rewards of ownership have transferred to the customer. This generally occurs when the product is shipped or accepted by the customer. Revenue for service contracts are recognized as the services are provided. Revenue is measured as the amount of consideration expected to be received in exchange for transferring the goods or providing services. The satisfaction of performance obligations under the terms of a revenue contract generally gives rise to the right for payment from the customer. The Company's standard payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Pre-payments received prior to satisfaction of performance obligations are recorded as a Contract liability. Given the insignificant days between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers.
For contracts with customers that include multiple performance obligations, judgment is required to determine whether performance obligations specified in these contracts are distinct and should be accounted for as separate revenue transactions for recognition purposes. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are generally determined based on the prices charged to customers or using expected cost-plus margin.
System sales are recognized when the Company transfers control based upon signed acceptance of the system by the customer, which typically occurs upon shipment of the system in accordance with the terms of the contract. In connection with the system sale, it is normal procedure to issue a FAT (Factory Acceptance Test) stating that the customer has accepted the performance of the system as it is being shipped from our production facility in Hobro. As part of the performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer), and this commissioning is therefore considered a second performance obligation and is valued at cost, with the addition of a standard gross margin. This second performance obligation is recognized as revenue at the time of provision of the commissioning services together with the cost incurred. Part of the invoicing to the customer is also attributed to the commissioning, and at transfer of the control of the system (i.e. the first performance obligation), some of the invoicing will still be awaiting commissioning and is therefore recognized as Contract assets.
Aftermarket sales represent parts, extended warranties and maintenance services. For the sale of aftermarket parts, the Company transfers control and recognizes revenue when parts are shipped to the customer. When customers are given the right to return eligible parts and accessories, the Company estimates the expected returns based on an analysis of historical experience. The Company adjusts estimated revenues at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed. The Company recognizes revenue for extended warranty and maintenance agreements based on the standalone selling price over the life of the contract.
The Company has received long-term contracts for grants from government entities for the development and use of silicon carbide membranes in various water filtration and treatment applications and historically in the installation of various water filtrations systems. We measure transfer of control of the performance obligation on long-term contracts utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs, such as labor and materials. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenue and a significant factor in the accounting for such performance obligations. The timing of when we bill our customers is generally dependent upon advance billings terms, milestone billings based on completion of certain phases of the work or when services are provided, or products are shipped. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported on our balance sheet as Contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported on our balance sheet as Contract liabilities.
Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract liabilities are payments received from customers prior to satisfaction of performance obligations, and these balances are typically related to prepayments for third-party expenses that are incurred shortly after billing. Contract liabilities also include deferred revenue related to the second performance obligation stated under Revenue Recognition, where the obligation is attributed to the commissioning of the water treatment system.
The roll-forward of Contract assets / liabilities for the period ended September 30, 2020 and December 31, 2019 is as follows:
| September 30, 2020 | December 31, 2019 | |||||||
| Cost incurred | $ | $ | ||||||
| Unbilled project deliveries | ||||||||
| VAT | ||||||||
| Other receivables | ||||||||
| Prepayments | ( | ) | ( | ) | ||||
| Deferred Revenue | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| Distributed as follows: | ||||||||
| Contract assets | $ | $ | ||||||
| Contract liabilities | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Advertising Cost -- Costs incurred in connection with advertising of the Company’s products are expensed as incurred. Advertising costs are included in sales expenses, and total advertising costs amounted to $
Research and Development Cost -- The Company expenses research and development costs for the development of new products as incurred. Included in operating expense for the nine months ended September 30, 2020 and 2019 were $
Income Taxes -- The Company accounts for income taxes in accordance with FASB ASC Topic 740 Accounting for Income Taxes. This statement requires an asset and liability approach in accounting for income taxes.
Income/(Loss) Per Share -- The Company calculates earnings (loss) per share in accordance with FASB ASC 260, Earnings Per Share. Basic earnings per common share (EPS) is based on the weighted average number of common shares outstanding during each period. Diluted earnings per common share is based on shares outstanding (computed as under basic EPS) and potentially dilutive common shares. Potential common shares included in the diluted earnings per share calculation include in-the-money stock options, RSUs, and warrants that have been granted but have not yet been exercised.
Stock Options and Awards -- During the years presented in the accompanying consolidated financial statements, the Company has granted stock options and awards. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Stock-based compensation costs of $
Warrant Liability -- The Company issued common stock warrants in May 2020 in conjunction with an equity financing. In accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), the fair value of these warrants was initially classified as a liability on the Company’s Consolidated Balance Sheet because, according to the original terms of the warrant, a fundamental transaction could have given rise to an obligation of the Company to pay cash to its warrant holders, which was out of the control of the Company. On August 12, 2020 the terms of the prefunded warrant were amened and the potential obligation of the Company to pay cash to its warrant holders were removed. From the date of the execution of the amended warrant, it qualifies as an equity instrument and the liability measured at fair value on August 12, 2020 of $
Fair Value of Financial Instruments -- The Company accounts for fair value measurements for financial assets and liabilities in accordance with FASB ASC Topic 820. The authoritative guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
| ● | Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities; |
|
| ● | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
|
| ● | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, other receivables, prepaid expenses, accounts payable and accrued expenses approximate their recorded values due to their short-term maturities.
Accounting Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets including accounts receivable; allowance for doubtful accounts; contract assets; reserve for excess and obsolete inventory; depreciation and impairment of property, plant and equipment; goodwill and intangible assets; liabilities including contract liabilities and contingencies; the disclosures of contingent assets and liabilities at the date of the financial statements; warrant liability; and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.
Recent Accounting Pronouncements – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is intended to help stakeholders during the global market-wide reference rate transition period and will be in effect for a limited time through December 31, 2022. Adoption is permitted at any time. The Company is currently evaluating the impact on its financial statements.
On March 9, 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments.” This ASU was issued to clarify and improve various financial instruments topics. The guidance has various effective dates but is basically effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We will adopt the new standard effective March 1, 2021 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurement by removing, modifying and adding certain disclosures. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash that requires companies, in the Statement of Cash Flows, to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Consequently, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. For the period ended September 30, 2020, the Company has recorded $
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, including subsequently issued ASUs to clarify the implementation guidance in ASU 2016-13. The amendment introduces new guidance for credit losses on financial assets measured at amortized cost, including finance receivables and trade receivables. Under this new model, expected credit losses are based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability, replacing the previous incurred loss model. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company adopted ASU 2016-13 effective January 1, 2020 and concluded there was no material impact to the condensed consolidated financial statements.
Other recent accounting pronouncements issued by the FASB did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
NOTE 2 - INVENTORY
Inventory consisted of the following on September 30, 2020 and December 31, 2019:
| September 30, 2020 | December 31, 2019 | |||||||
| Furnace parts and supplies | $ | $ | ||||||
| Raw materials | ||||||||
| Work in process | ||||||||
| Finished goods and filtration systems | ||||||||
| Reserve for obsolescence | ( | ) | ( | ) | ||||
| Net Inventory | $ | $ | ||||||
Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movements, expected useful lives, and estimated future demand for the products.
NOTE 3 - LEASES
The Company leases certain vehicles, real property and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. The majority of our operating leases are non-cancelable operating leases for production and office space in Hobro, Aarhus and Copenhagen, Denmark as well as in White Bear Lake, Minnesota.
During the nine months ended September 30, 2020, cash paid for amounts included for the measurement of lease liabilities was $
Supplemental balance sheet information related to leases as of September 30, 2020 and December 31, 2019 was as follows
| September 30, 2020 | December 31, 2019 | |||||||
| Operating leases: | ||||||||
| Operating lease right-of-use | $ | $ | ||||||
| Operating lease liabilities – current | $ | $ | ||||||
| Operating lease liabilities – long-term | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Finance leases: | ||||||||
| Property and equipment, at cost | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| Finance lease liabilities - current | $ | $ | ||||||
| Finance lease liabilities – long-term | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term: | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted average discount rate: | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
Maturities of lease liabilities at September 30, 2020 were as follows:
| Operating lease | Finance lease | |||||||
| 2020 (remaining 3 months) | $ | $ | ||||||
| 2021 | ||||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Thereafter | ||||||||
| Total payment under lease agreements | ||||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Total lease liability | $ | $ | ||||||
NOTE 4 - LINES OF CREDIT
In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or security bond. For that purpose, we have a guarantee credit line of (approximately $
NOTE 5 - AGREEMENTS AND COMMITMENTS
Agreements -- LiqTech Water Projects has entered into a joint venture agreement to supply and operate water treatment systems for oil and gas producers in the Middle East. The partner in the joint venture is a local company. LiqTech Water Projects expects to deliver technological know-how, design of water treatment systems and components to support potential projects in the Middle East. The joint venture will be established in the form of a jointly owned limited liability company, incorporated under the laws in the local country, and LiqTech Water Projects holds
401(K) Profit Sharing Plan -- LiqTech NA has a 401(k) profit sharing plan and trust covering certain eligible employees. The amount LiqTech NA contributes is discretionary. For the nine months ended September 30, 2020 and 2019, matching contributions were expensed and totaled $
Contingencies -- From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.
On November 20, 2018 a former supplier to Liqtech Holding contacted the Company with a claim of DKK
On February 27, 2019, LiqTech Water was contacted by a former supplier alleging that the Company owed DKK
Product Warranties - The Company provides a standard warranty on its systems, generally for a period of to years after customer acceptance. The Company estimates the costs that may be incurred under its standard warranty programs and records a liability for such costs at the time product revenue is recognized.
In addition, the Company sells an extended warranty for certain systems, which generally provides a warranty for up to years from the date of commissioning. The specific terms and conditions of the warranties vary depending upon the product sold and the country in which the Company does business. Revenue received for the sale of extended warranty contracts is deferred and recognized in the same manner as the costs incurred to perform under the warranty contracts.
The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the cost per claim.
Changes in the Company's current and long-term warranty obligations included in accrued expenses on the balance sheet, as of September 30, 2020 and December 31, 2019 were as follows:
| September 30, 2020 | December 31, 2019 | |||||||
| Balance at December 31 | $ | $ | ||||||
| Warranty costs charged to cost of goods sold | ||||||||
| Utilization charges against reserve | ( | ) | ( | ) | ||||
| Release of accrual related to expired warranties | ||||||||
| Foreign currency effect | ( | ) | ||||||
| Balance at September 30 | $ | $ | ||||||
Purchase Obligation - The Company has a purchase obligation to the supplier of new furnaces for our production facility in Ballerup for which the Company has received three units while the last unit will be delivered in late 2020. The total obligation amounts to $
NOTE 6 - EARNINGS PER SHARE
Basic and diluted net income (loss) per common share is determined by dividing net income (loss) by the weighted average common shares outstanding during the period. For the periods where there is a net loss, stock options and warrants have been excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive. Consequently, the weighted average common shares used to calculate both basic and diluted net loss per common share would be the same.
The following data show the amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive common stock for the nine months ended September 30, 2020 and 2019:
| For the Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Net Income (Loss) attributable to LiqTech International Inc. | $ | ( | ) | $ | ||||
| Weighted average number of common shares used in basic earnings per share | ||||||||
| Effect of dilutive securities, stock options, RSUs, and warrants | ||||||||
| Weighted average number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share | ||||||||
For the nine months ended September 30, 2020, the Company had
For the nine months ended September 30, 2019, the Company had
NOTE 7 - STOCKHOLDERS' EQUITY
Common Stock – As of September 30, 2020 and 2019, respectively the Company had
Voting -- Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including the election of directors, and do not have any right to cumulate votes in the election of directors.
Dividends -- Subject to the rights and preferences of the holders of any series of preferred stock, if any, which may at the time be outstanding, holders of common stock are entitled to receive ratably such dividends as our Board of Directors from time to time may declare out of funds legally available. Our Board of Directors has not declared and paid dividends in the past and there are no plans to do so in the near future.
Liquidation Rights -- In the event of any liquidation, dissolution or winding-up of affairs, after payment of all of our debts and liabilities and subject to the rights and preferences of the holders of any outstanding shares of any series of our preferred stock, the holders of common stock will be entitled to share ratably in the distribution of any of our remaining assets.
Other Matters -- Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption rights or sinking fund provisions with respect to our common stock. All of the issued and outstanding shares of common stock on the date of this Annual report are validly issued, fully paid and non-assessable.
Preferred Stock -- Our Board of Directors has the authority to issue preferred stock in one or more classes or series and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.
The Company has
Stock Issuance
Since January 1, 2020, the Company has made the following issuances of common stock:
On January 15, 2020, the Company issued
On May 21, 2020, the Company completed a Securities Purchase Agreement with certain accredited investors in a private placement pursuant to which the Company issued and sold an aggregate of
On June 6, 2020, the Company issued
On July 8 and August 18, 2020, the Company issued a total of
For the nine months ended September 30, 2020 and 2019, the Company has recorded stock-based compensation expense of $
Warrants
In connection with the Securities Purchase Agreement entered into in May 2020, a prefunded warrant (“the Warrant”) to purchase an aggregate of
On August 12, 2020 the prefunded warrant was amended. In the initial warrant, the warrant holder could request that the Company should repay the value of the unexercised portion of warrants in case a fundamental transaction should occur. The amended agreement required the fundamental transaction to be approved by the Board of Directors before any repayment could take place. This amendment changed the classification of the agreement from a liability to equity, and the following is a summary of the periodic changes in the fair value during the nine months ended September 30, 2020:
| September 30, 2020 | ||||
| Warrants outstanding January 1, 2020 | ||||
| Prefunded warrants issued May 2020 | ||||
| Exercises and conversions | ||||
| Warrants outstanding September 30, 2020 | ||||
Stock-based Compensation
In 2013, the Company’s Board of Directors adopted a Share Incentive Plan (the “Incentive Plan”). Under the terms and conditions of the Incentive Plan, the Board of Directors is empowered to grant shares (Restricted Stock Units, or “RSUs”) to officers and directors of the Company. At September 30, 2020,
The Company recognizes compensation costs for stock grants to Directors and management based on the stock price on the date of the grant.
The Company recognized stock-based compensation expense related to share grants of $
A summary of the status of the RSU's outstanding as of September 30, 2020 and changes during the period are presented below:
| September 30, 2020 | ||||||||||||
| Number of units | Weighted Average Fair value | Aggregated Intrinsic | ||||||||||
| Outstanding, December 31, 2019 | $ | $ | ||||||||||
| Granted | - | |||||||||||
| Vested and settled with share issuance | ( | ) | - | |||||||||
| Forfeited | - | |||||||||||
| Outstanding, September 30, 2020 | $ | $ | ||||||||||
Stock Options
In August 2015, the Company’s Board of Directors adopted the 2015 Plan. Under the terms and conditions of the 2015 Plan, the Board of Directors is empowered to grant stock options to employees, officers, and directors of the Company. At September 30, 2020,
The Company recognizes compensation costs for stock option awards to employees based on the grant-date fair value. The value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model.
The Company recognized stock-based compensation expense related to options of $
A summary of the status of the options outstanding under the Company’s stock option plans on September 30, 2020 is presented below:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Exercise | Number | Weighted Life (years) | Weighted | Number | Weighted | |||||||||||||||||
| $ | - | - | - | $ | - | - | $ | - | ||||||||||||||
| Total | - | - | $ | - | - | $ | - | |||||||||||||||
A summary of the status of the options on September 30, 2020 and changes during the period is presented below:
| September 30, 2020 | ||||||||||||||||
| Shares | Weighted | Average | Weighted | |||||||||||||
| Outstanding at beginning of period | $ | $ | ||||||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | ( | ) | - | - | ||||||||||||
| Forfeited | - | - | - | - | ||||||||||||
| Expired | ( | ) | - | - | - | |||||||||||
| Outstanding at end of period | $ | - | $ | |||||||||||||
| Vested and expected to vest | - | $ | - | - | $ | |||||||||||
| Exercisable end of period | - | $ | - | - | $ | |||||||||||
NOTE 8 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE
The following table presents customers accounting for 10% or more of the Company’s revenue:
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Customer A | % | % | % | % | ||||||||||||
| Customer B | % | * | % | * | ||||||||||||
| Customer C | * | * | * | % | ||||||||||||
| Customer D | * | % | * | % | ||||||||||||
* Zero or less than 10%
The following table presents customers accounting for 10% or more of the Company’s accounts receivables:
| September 30, 2020 | December 31, 2019 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | % | ||||||
| Customer D | % | * | ||||||
| Customer E | * | % | ||||||
* Zero or less than 10%
As of September 30, 2020, approximately
NOTE 9 - SUBSEQUENT EVENTS
The Company’s management reviewed material events through November 9, 2020.
On November 3, 2020, the Company amended its Articles of Incorporation to increase the number of authorized shares of the Company’s Common Stock from
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report. In addition, the following discussion should be read in conjunction with our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 30, 2020 and the financial statements and notes thereto. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Overview
LiqTech International, Inc. is a clean technology company that provides state-of-the-art products for gas and liquid purification by manufacturing ceramic silicon carbide filters. For more than a decade, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in three business areas: ceramic membranes for liquid filtration, diesel particulate filters (DPFs) for the control of soot exhaust particles from diesel engines and plastic components for usage in various industries. Using nanotechnology, we develop proprietary products using patented silicon carbide technology. Our products are based on unique silicon carbide membranes that facilitate new applications and improve existing technologies. We market our products from our offices in Denmark and the United States and through local representatives and distributors. The products are shipped directly to customers from our production facilities in Denmark and the United States.
The terms “LiqTech”, “we”, “our”, “us”, the “Company” or any derivative thereof, as used herein, refer to LiqTech International, Inc., a Nevada corporation, together with its direct and indirect wholly-owned subsidiaries, including LiqTech USA, Inc., a Delaware corporation (“LiqTech USA”), which owns all of the outstanding equity interest in LiqTech Holding A/S (formerly known as LiqTech International A/S), a Danish limited company organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“LiqTech Holding”), together with its direct wholly-owned subsidiaries LiqTech Water A/S (formerly known as LiqTech Systems A/S) (“LiqTech Water”), LiqTech Ceramics A/S (“LiqTech Ceramics”) and LiqTech Plastics A/S (formerly known as BS Plastic A/S) (“LiqTech Plastics”), three Danish limited companies organized under the Danish Act on Limited Companies of the Kingdom of Denmark and LiqTech NA, Inc., a Delaware corporation (“LiqTech NA”). Collectively, LiqTech USA, LiqTech Holding, LiqTech Water, LiqTech Ceramics, LiqTech Plastics and LiqTech NA are referred to herein as our “Subsidiaries”.
We conduct operations in the Kingdom of Denmark and the United States. Our Danish operations are located in the Copenhagen area, Hobro and Aarhus, and our U.S. operations are conducted in White Bear Lake, Minnesota.
As part of our cost reduction plan and due to several years of declining activity, we have decided to start the process of closing down operations in LiqTech NA.
Our Strategy
Our strategy is to create stockholder value by leveraging our competitive strengths in silicon carbide filters and membranes by focusing on discrete applications in key end markets. Essential features of our strategy include:
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● |
Maintain and gain new marine industry customers. We currently provide water filtration systems for scrubber technology providers, ship owners and ship operators. We are expanding our range of marine products to better leverage existing customer relationships. |
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● |
Enter new geographic markets and expand existing markets. We plan to continue to manufacture and sell our products from our core operations in Denmark. We work with distributors, agents and partners to access other important geographic markets. |
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● |
Strengthen our position in the DPF market. We believe that we have a strong position in the retrofit market for diesel particulate filter (DPF) systems. We intend to continue our efforts to maintain our market position in this area. Furthermore, we intend to leverage our experience in the OEM market by expanding our presence with new products relating to diesel particulate filter systems. |
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● |
Develop and improve technologies and enter new end markets. We intend to continue to develop our ceramic membranes and improve the efficiency for our filtration products. Through continuous research and development, we intend to find new uses for our products and plan to expand into new markets that offer significant opportunity for the Company. |
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● |
Focus on the development and sales of standardized water filtration and treatment systems. We will continue our focus on selling systems based on our unique SiC Filters. We will also combine the ceramic membranes with other technologies to offer our customers complete filtration solutions. We will continue our focus on developing smaller standard systems, like our ground water treatment system and our residential swimming pool system. |
Developments
Results of Operations
The financial information below is derived from our unaudited condensed consolidated financial statements included elsewhere in this report.
Comparison of the Three Months Ended September 30, 2020 and September 30, 2019
The following table sets forth our revenues, expenses and net income for the three months ended September 30, 2020 and 2019:
| Three Months Ended September 30, |
||||||||||||||||||||||||
| Period to Period Change |
||||||||||||||||||||||||
| 2020 |
As a % of Sales |
2019 |
As a % of Sales |
US$ |
Percent % |
|||||||||||||||||||
| Revenue |
3,543,730 | 100.0 | % |
9,672,716 | 100.0 | % |
(6,128,986 | ) |
(63.4 | )% |
||||||||||||||
| Cost of Goods Sold |
3,852,210 | 108.7 | 7,444,978 | 77.0 | (3,592,768 | ) |
(48.3 | ) |
||||||||||||||||
| Gross Profit |
(308,480 | ) |
(8.7 | ) |
2,227,738 | 23.0 | (2,536,218 | ) |
(113.8 | ) |
||||||||||||||
| Operating Expenses |
||||||||||||||||||||||||
| Selling expenses |
741,738 | 20.9 | 461,010 | 4.8 | 280,728 | 60.9 | ||||||||||||||||||
| General and administrative expenses |
1,526,327 | 43.1 | 1,353,428 | 14.0 | 172,899 | 12.8 | ||||||||||||||||||
| Research and development expenses |
256,239 | 7.2 | 189,216 | 2.0 | 67,023 | 35.4 | ||||||||||||||||||
| Total Operating Expenses |
2,524,304 | 71.2 | 2,003,654 | 20.7 | 520,650 | 26.0 | ||||||||||||||||||
| Profit (Loss) from Operation |
(2,832,784 | ) |
(79.9 | ) |
224,084 | 2.3 | (3,056,868 | ) |
(1,364.2 | ) |
||||||||||||||
| Other Income (Expense) |
||||||||||||||||||||||||
| Gain on modification of earn-out liability |
301,573 | 8.5 | - | - | 301,573 | - | ||||||||||||||||||
| Interest and other income | 8,164 | 0.2 | 28,736 | 0.3 | (20,572 | ) | (71.6 | ) | ||||||||||||||||
| Interest expense |
(41,388 | ) |
(1.2 | ) |
(369 | ) |
(0.0 | ) |
(41,019 | ) |
11,116.3 | |||||||||||||
| Fair value adjustment of warrants |
(664,350 | ) |
(18.7 | ) |
- | - | (664,350 | ) |
- | |||||||||||||||
| Gain (loss) on currency transactions |
(660,747 | ) |
(18.6 | ) |
403,432 | 4.2 | (1,064,179 | ) |
(263.8 | ) |
||||||||||||||
| Gain (loss) on sale of fixed assets |
- | - | 474 | 0.0 | (474 | ) |
(100.0 | ) |
||||||||||||||||
| Total Other Income (Expense) |
(1,056,748 | ) |
(29.8 | ) |
432,273 | 4.5 | (1,489,021 | ) |
(344.5 | ) |
||||||||||||||
| Profit (loss) Before Income Taxes |
(3,889,532 | ) |
(109.8 | ) |
656,357 | 6.8 | (4,545,889 | ) |
(692.6 | ) |
||||||||||||||
| Income Taxes Expense (Income) |
(16,113 | ) |
(0.5 | ) |
- | - | (16,113 | ) |
- | |||||||||||||||
| Net Profit (loss) |
(3,873,419 | ) |
(109.3 | ) |
656,357 | 6.8 | (4,529,776 | ) |
(690.1 | ) |
||||||||||||||
Revenues
Revenue for the three months ended September 30, 2020 was $3,543,730 compared to $9,672,716 for the same period in 2019, representing a decrease of $6,128,986, or 63%. The change in revenue consists of a decrease in sales of liquid filters of $6,021,586 and in sales of DPFs of $320,792, offset by an increase in sales of plastics of $218,811. The decrease in sales of liquid filters and water treatment systems is a result of the negative impact of the COVID-19 virus that has caused a significant decrease in new orders since the start of 2020. The demand for our DPFs also decreased in the period, but we see increased interest in environmental solutions to reduce global CO2-emissions, and received new orders in the third quarter of 2020. The increase in sales of plastic components is related to the business acquired in September 2019.
Gross Profit
Gross profit for the three months ended September 30, 2020 was $(308,480) compared to $2,227,738 for the same period in 2019, representing a decrease of $2,536,218 or 114%. The decrease in gross profit is due to the decline in sales of liquid filters and water treatment systems where sales command a higher gross margin. This resulted in the gross profit being negatively impacted by costs related to decisions made prior to the impact of COVID-19, as the Company had decided to ramp-up investments in additional employees, improvement of the business facilities and other fixed costs that are now included in Cost of Goods sold. Further the initial effect of closing our activities in North America has resulted in a write-off of inventory in the amount of $170,000, which has been expensed in the period. Included in the gross profit is depreciation of $476,705 and $298,576 for the three months ended September 30, 2020 and 2019, respectively.
Expenses
Total operating expenses for the three months ended September 30, 2020 were $2,524,304, representing an increase of $520,650, or 26%, compared to $2,003,654 for the same period in 2019.
Selling expenses for the three months ended September 30, 2020 were $741,738 compared to $461,010 for the same period in 2019, representing an increase of $280,728 or 61%. This change is attributable to the pre COVID-19 decision of adding new sales employees to grow future sales and the average of sales employees has therefore increased from 9 in 2019 to 12 in 2020. Other expenses related to the update of the Company’s website and other marketing materials have also resulted in increased selling expenses.
General and administrative expenses for the three months ended September 30, 2020 were $1,526,327 compared to $1,353,428 for the same period in 2019, representing an increase of $172,899, or 13%. Included in expenses for the three months ended September 30, 2020 is an estimated write-off of $200,000 related to the valuation of the remaining fixed assets in LiqTech NA. Further, the increase in expenses is attributable to the addition of administrative employees, where the number of employees increased from 17 in 2019 to 20 in 2020. The increase in the number of employees also created additional IT and office costs. As part of the cost reductions implemented after the impact of the COVID-19, several employees have exited as of September 30, 2020. Included in general and administrative expenses is non-cash compensation expenses of $46,681 and $23,167 for the three months ended September 30, 2020 and September 30, 2019, respectively, representing an increase of $23,514, or 101%, attributable to stock grants to members of the Board and management.
The following is a summary of non-cash compensation:
| For the Three Months Ended |
||||||||
| September 30, |
September 30, |
|||||||
| 2020 |
2019 |
|||||||
| Compensation for vesting of restricted stock awards issued to the Board of Directors |
$ | 5,014 | $ | 23,167 | ||||
| Compensation for vesting of restricted stock awards issued to management |
41,667 | - | ||||||
| Total Non-Cash Compensation |
$ | 46,681 | $ | 23,167 | ||||
Research and development expenses for the three months ended September 30, 2020 were $256,239 compared to $189,216 for the same period in 2019, representing an increase of $67,023, or 35%. This change is attributable to an increase in the number of employees engaged in research and development activities as the Company focuses on the further development of existing and new products for the marine industry.
Other Income (Loss)
Net other income (loss) for the three months ended September 30, 2020 was $(1,056,748) compared to $432,273 for the comparable period in 2019, representing a decrease of $1,489,021. Included in the net expenses for the three months ended September 30, 2020 is the negative effect of $664,350 resulting from the fair value measurement of the prefunded warrants issued in May 2020. The agreement was changed in August 2020 resulting in a reclassification of the warrant from debt to an equity instrument that does not require fair value measurement. Additionally, losses on currency translations due to the negative impact of the USD/DKK exchange rate has impacted Net other income (loss) for the period, resulting in an expense of $660,747 compared to income of $403,432 in the comparable period and representing a decrease of $1,064,179, or 264%. Further Net income (loss) is positively affected by $301,573 relating to the gain on modification of the earn-out agreement with the former owner of BS Plastic A/S, where the former owner has agreed to reduce the earn-out consideration from a total of DKK 6 million over three years to a fixed earn-out of DKK 4 million over a period of two years.
Net Income (Loss)
Net income (loss) for the three months ended September 30, 2020 was $(3,873,419) compared to $656,357 for the comparable period in 2019, representing a decrease of $4,529,776.
This change was primarily attributable to the significant decrease in revenue and the increase in operating expenses caused primarily by the growth in headcount to support additional sales and production that was negatively impacted by COVID-19. Additionally, the fair value measurement associated with the warrant liability and the negative adjustment caused by currency translation as described above further widened the net loss for the period ended September 30, 2020.
Comparison of the Nine Months Ended September 30, 2020 and September 30, 2019
The following table sets forth our revenues, expenses and net income for the nine months ended September 30, 2020 and 2019:
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Nine Months Ended September 30, |
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|
Period to Period Change |
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|||||
|
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|
2020 |
|
|
As a % of Sales |
|
|
2019 |
|
|
As a % of Sales |
|
|
$ |
|
|
Percent % |
|
||||||
| Revenue |
|
|
18,467,057 |
|
|
|
100.0 |
% |
|
|
26,391,100 |
|
|
|
100.0 |
% |
|
|
(7,924,043 |
) |
|
|
(30.0 |
)% |
| Cost of Goods Sold |
|
|
15,641,998 |
|
|
|
84.7 |
|
|
|
20,613,172 |
|
|
|
78.1 |
|
|
|
(4,971,174 |
) |
|
|
(24.1 |
) |
| Gross Profit |
|
|
2,825,059 |
|
|
|
15.3 |
|
|
|
5,777,928 |
|
|
|
21.9 |
|
|
|
(2,952,869 |
) |
|
|
(51.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Selling expenses |
|
|
2,024,485 |
|
|
|
11.0 |
|
|
|
1,458,633 |
|
|
|
5.5 |
|
|
|
565,852 |
|
|
|
38.8 |
|
| General and administrative expenses |
|
|
4,585,857 |
|
|
|
24.8 |
|
|
|
3,161,855 |
|
|
|
12.0 |
|
|
|
1,424,002 |
|
|
|
45.0 |
|
| Research and development expenses |
|
|
883,752 |
|
|
|
4.8 |
|
|
|
591,572 |
|
|
|
2.2 |
|
|
|
292,180 |
|
|
|
49.4 |
|
| Total Operating Expenses |
|
|
7,494,094 |
|
|
|
40.6 |
|
|
|
5,212,060 |
|
|
|
19.7 |
|
|
|
2,282,034 |
|
|
|
43.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Profit (Loss) from Operations |
|
|
(4,669,035 |
) |
|
|
(25.3 |
) |
|
|
565,868 |
|
|
|
2.1 |
|
|
|
(5,234,903 |
) |
|
|
(925.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gain on modification of the earn-out agreement |
|
|
301,573 |
|
|
|
1.6 |
|
|
|
- |
|
|
|
- |
|
|
|
301,573 |
|
|
- |
||
| Interest and other income | 12,901 | 0.1 | 54,186 | 0.2 | (41,285 | ) | (76.2 | ) | ||||||||||||||||
| Interest (expense) |
|
|
(102,926 |
) |
|
|
(0.6 |
) |
|
|
(6,394 |
) |
|
|
(0.0 |
) |
|
|
(96,532 |
) |
|
|
1,509.7 |
|
| Fair value adjustment of warrants |
|
|
(901,250 |
) |
|
|
(4.9 |
) |
|
|
- |
|
|
|
- |
|
|
|
(901,250 |
) |
|
|
- |
|
| Loss on currency transactions |
|
|
(821,681 |
) |
|
|
(4.4 |
) |
|
|
244,872 |
|
|
(0.9 |
) |
|
|
(1,066,553 |
) |
|
|
(435.6 |
) |
|
| Gain (loss) on sale of fixed assets |
|
|
- |
|
|
|
- |
|
|
|
(21,145 |
) |
|
|
(0.1 |
) |
|
|
21,145 |
|
|
|
(100.0 |
) |
| Total Other Income (Expense) |
|
|
(1,511,383 |
) |
|
|
(8.2 |
) |
|
|
271,519 |
|
|
1.0 |
|
|
(1,782,902 |
) |
|
|
(656.6 |
) |
||
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Profit (Loss) Before Income Taxes |
|
|
(6,180,418 |
) |
|
|
(33.5 |
) |
|
|
837,387 |
|
|
|
3.2 |
|
|
|
(7,017,805 |
) |
|
|
(838.1 |
) |
| Income Taxes Expense (Income) |
|
|
(46,687 |
) |
|
|
(0.3 |
) |
|
|
- |
|
|
|
- |
|
|
|
(46,687 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Profit (Loss) |
|
|
(6,133,731 |
) |
|
|
(33.2 |
) |
|
|
837,387 |
|
|
|
3.2 |
|
|
|
(6,971,118 |
) |
|
|
(832.5 |
) |
Revenues
Revenue for the nine months ended September 30, 2020 was $18,467,057 compared to $26,391,100 for the same period in 2019, representing a decrease of $7,924,043 or 30%. The change in revenue consists of a decrease in sales of liquid filters and water treatment systems of $8,983,058 and a decrease of sales in DPFs of $590,537, offset by an increase in sales of plastics of $1,562,606 and an increase in sales of development projects of $86,946. The increase in sales of plastic components is related to the business acquired in September 2019. The decrease in demand for our liquid filters, water treatment systems and DPFs is mainly due to impacts of the ongoing COVID-19 pandemic, which have resulted in significant restrictions and business limitations across the globe, causing a significant decline in delivery of water treatment systems for the marine scrubber industry.
Gross Profit
Gross profit for the nine months ended September 30, 2020 was $2,825,059 compared to gross profit of $5,777,928 for the same period in 2019, representing a decrease of $2,952,869, or 51%. The decrease in gross profit is due to the decline in sales of liquid filters and water treatment systems, where sales command a higher gross margin. Included in the gross profit is depreciation of $1,384,344 and $724,205 for the nine months ended September 30, 2020 and 2019, respectively.
Expenses
Total operating expenses for the nine months ended September 30, 2020 were $7,494,094, representing an increase of $2,282,034, or 44%, compared to $5,212,060 for the same period in 2019.
Selling expenses for the nine months ended September 30, 2020 were $2,024,485 compared to $1,458,633 for the same period in 2019, representing an increase of $565,852, or 39%. This change is attributable to the addition of new sales employees from an average of 9 in 2019 to an average of 12 in 2020.
General and administrative expenses for the nine months ended September 30, 2020 were $4,585,857 compared to $3,161,855 for the same period in 2019, representing an increase of $1,424,002, or 45%. Included in expenses for the nine months ended September 30, 2020 is an estimated write-off of $200,000 related to the valuation of the remaining fixed assets in LiqTech North America. Further the increase is attributable to the addition of administrative employees, where the number of employees increased from 13 in 2019 to 23 in 2020. The increase in the number of employees also created additional IT and office costs. Included in general and administrative expenses is Non-cash compensation expenses that were $270,238 and $174,778 for the nine months ended September 30, 2020 and September 30, 2019, respectively, representing an increase of $95,458, or 55%, attributable to stock grants to members of the Board and management.
The following is a summary of non-cash compensation:
| For the Nine Months Ended |
||||||||
| September 30, |
September 30, |
|||||||
| 2020 |
2019 |
|||||||
| Compensation for vesting of restricted stock awards issued to the Board of Directors |
$ | 131,349 | $ | 174,778 | ||||
| Compensation for vesting of restricted stock awards issued to management |
138,889 | - | ||||||
| Total Non-Cash Compensation |
$ | 270,238 | $ | 174,778 | ||||
Research and development expenses for the nine months ended September 30, 2020 were $883,752 compared to $591,572 for the same period in 2019, representing an increase of $292,180, or 49%. This change is attributable to an increase in the number of employees engaged in research and development activities as the Company focuses on the further development of existing and new products for the marine industry.
Other Income (Loss)
Net other income (loss) for the nine months ended September 30, 2020 was $(1,511,383) compared to $271,519 for the comparable period in 2019, representing a decrease of $1,782,902. Included in the net other expenses for the nine months ended September 30, 2020 is the negative effect of $901,250 resulting from the fair value measurement of the prefunded warrants issued in May 2020. Additionally, losses on currency translations due to the negative impact of the USD/DKK exchange rate has impacted Net other income (loss) for the period resulting in an expense of $821,681 compared to income of $244,872 in the comparable period, representing a decrease of $1,066,553. Further, Net income (loss) is positively affected by $301,573 relating to the gain on modification of the earn-out agreement with the former owner of BS Plastic A/S, where the former owner has agreed to reduce the earn-out consideration from a total of DKK 6 million over three years to a fixed earn-out of DKK 4 million over a period of two years.
Net Income (Loss)
Net income (loss) for the nine months ended September 30, 2020 was $(6,133,731) compared to $837,387 for the comparable period in 2019, representing a decrease of $6,971,118.
This change was primarily attributable to the significant decrease in revenue and the increase in operating expenses caused primarily by the growth in headcount to support additional sales and production. Further losses on currency translations due to the negative impact of the USD/DKK exchange rate and the negative fair value adjustment of $901,250 related to the prefunded warrant liability have widened the Net Loss for the period.
Liquidity and Capital Resources
In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid-March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who must work at our production facilities. Otherwise, most of our employees worked remotely during the shutdown. Since the beginning of May, businesses in Denmark began opening up as the effect of COVID-19 had largely been contained and the number of infections and fatalities decreased significantly. However, we now again see the number of infected people and fatalities increasing all over the world and tight restrictions are again being introduced in many countries. Since the start of September, we have again introduced limitations in the number of employees working directly at our production sites. All employees who can work from home are encouraged to do so.
We are unable to predict the full impact that COVID-19 will have on our long-term financial condition, the results of operations, liquidity and cash flows due to uncertainties. Our compliance with the measures implemented to avoid the spread of the virus have had a material adverse impact on our financial results for the second and third quarters of 2020. To the extent possible, we have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for at least the next 12 months from the issuance of this quarterly report. In addition, as a result of the reduced order intake and decreased manufacturing levels, our future gross profit will also likely be unfavorably impacted until such time that we are able to operate our manufacturing facilities at higher capacity levels as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2020.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products, especially if it results in a global recession. It could also lead to volatility in access to our products due to government actions impacting our ability to produce and ship products.
We have historically satisfied our capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. At the filing date, the Company had an available line of credit from the bank amounting to DKK20,000,000 ($3,000,000), which is used for a leasing arrangement and guarantees issued to customers for prepayments and for warranties after delivery.
Additionally, on May 21, 2020, the Company completed a private placement with certain accredited investors pursuant to which the Company issued and sold an aggregate of 1,085,000 shares of common stock, par value $0.001 per share, at a purchase price of $5.00 per share for gross proceeds of $4,662,125, including costs of $762,875 for placement fees, legal fees, auditor fees and other cost related to the capital raise, and a prefunded warrant to purchase an aggregate of 515,000 shares of Common Stock, at a purchase price of $5.00 per share, for gross proceeds of $2,575,000.
On September 30, 2020, we had cash of $14,492,549 and net working capital of $18,654,526, and at December 31, 2019, we had cash of $9,783,932 and net working capital of $17,155,126. On September 30, 2020, our net working capital has increased by $1,499,400 compared to December 31, 2019 primarily related to the increase in cash as a result of the private placement in May 2020.
In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or a security bond. For that purpose, we maintain a guarantee credit line of DKK10,000,000 (approximately $1,500,000). The credit line is secured by a cash deposit of $1,500,000. Further, we have a guarantee for a specific project delivered in 2016 of DKK 94,620 (approximately $14,878 at September 30, 2020) with a bank, subject to certain base limitations. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Systems such as receivables, inventory, and equipment.
Cash Flows
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Cash provided (used) by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. Cash used by operating activities for the nine months ended September 30, 2020 was $603,095, representing an increase of $3,915,556 compared to cash used by operating activities of $4,518,651 for the nine months ended September 30, 2019. The change in cash used by operating activities for the nine months ended September 30, 2020 compared to the same period in 2019 was mainly due to reductions in Accounts receivable of $7,288,289 and Contract assets/liabilities (net) of $4,623,774, off-set by the decrease in Net Income (Loss) of $6,971,118 and a decrease in Accounts payable of $4,128,401.
Net cash used in investing activities was $3,229,674 for the nine months ended September 30, 2020 as compared to net cash used in investing activities of $1,641,605 for the nine months ended September 30, 2019, representing an increase of $1,588,069. This increase was due primarily to the purchase of property and equipment related to the installation of new furnaces in Ballerup to increase production capacity. Further, the Company has paid the first earn-out installment ($301,573) related to the purchase of LiqTech Plastics (former known as BS Plastic).
Cash provided by financing activities was $7,229,505 for the nine months ended September 30, 2020 as compared to net cash provided by financing activities of $14,720,965 for the nine months ended September 30, 2019. This change of $7,491,460 was mainly due to net cash proceeds of $7,237,125 related to the capital raise in May 2020 compared to net proceeds of $14,601,554 from the capital raise in May 2019.
Off Balance Sheet Arrangements
As of September 30, 2020, we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in our consolidated financial statements.
Significant Accounting Policies and Critical Accounting Estimates
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:
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The assessment of revenue recognition, which impacts revenue and cost of sales; |
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the assessment of allowance for product warranties, which impacts gross profit; |
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the assessment of collectability of accounts receivable, which impacts operating expenses when and if we record bad debt or adjust the allowance for doubtful accounts; |
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the assessment of recoverability of long-lived assets, which impacts gross profit or operating expenses when and if we record asset impairments or accelerate their depreciation; |
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the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes; |
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the valuation of inventory, which impacts gross profit; and |
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the recognition and measurement of loss contingencies, which impact gross profit or operating expenses when we recognize a loss contingency, revise the estimate for a loss contingency, or record an asset impairment. |
Recently Enacted Accounting Standards
For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see “Note 1: Recently Enacted Accounting Standards” in the accompanying Financial Statements.
Subsequent Events
The Company’s management reviewed material events through November 9, 2020.
On November 3, 2020, the Company amended its Articles of Incorporation to increase the number of authorized shares of the Company’s Common Stock from 25,000,000 shares to 100,000,000 shares following approval by the Company’s shareholders at the annual meeting held on October 29, 2020.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the design and effectiveness of our internal controls over financial reporting and disclosure controls and procedures (pursuant to Rule 13a-15(b) and (c) under the Exchange Act) as of the end of the period covered by this Quarterly Report. We have excluded the acquired company LiqTech Plastics (formerly known as BS Plastic) from the assessment of internal controls over financial reporting as of September 30, 2020 due to the limited time that the Company has been part of the LiqTech Group and an immaterial impact on the consolidated financial statements. A weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a misstatement of the registrant's financial statements will not be prevented or detected on a timely basis.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or override of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives
Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2020 were not effective as of the period covered by this Quarterly Report due to material weaknesses in internal controls over financial reporting. For more information on material weaknesses identified by management, please reference our Form 10-K filed on March 30, 2020 for the year ended December 31, 2019.
Changes in Internal Control over Financial Reporting
The implementation of the new ERP-system from the beginning of 2020 together with implementation of additional internal control procedures, has strengthened the Company´s internal control environment. From the report received from the Company´s external auditor as a result of the audit of 2019, we have focused on improving controls to address each reported deficiency; however, the impact of COVID-19 restrictions has restricted the pace of the progress significantly.
Management's Remediation Initiatives
In response to the identified material weaknesses, our management, with oversight from the Company’s Audit Committee, has been and will continue to dedicate necessary resources to enhance the Company’s internal control over financial reporting and remediate the identified material weaknesses. As an example of such remediation, the Company in 2019 hired additional employees into the finance department, and we plan to continue to work on remediating the material weaknesses during 2020 by improving competencies and processes. Further, an investment in a new ERP system has been made along with other supporting IT programs to support the controls and processes of the Company, and these investments are an important part of the remediation of the material weaknesses. Lastly, the Company has started the process of redesigning and ensuring documentation of all processes and procedures related to the financial reporting process to ensure the effective design and operation of process-level controls.
While management believes that the steps that we have taken and plan to take will improve the overall system of internal control over financial reporting and will remediate identified material weaknesses, the material weaknesses cannot be considered remediated until the applicable relevant controls operate for a sufficient period of time.
Limitations on the Effectiveness of Internal Controls
An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
None.
We are unable to accurately predict the full impact of COVID-19 on our business, and the COVID-19 pandemic may adversely impact our business as a result of the pandemic’s global economic impact.
In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid-March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, most of our employees were working remotely during the shutdown. Since the beginning of May, the businesses in Denmark have been opening up as the effect of COVID-19 has largely been constrained and the number of infections and fatalities decreased significantly. However, we now again see the number of infected people and fatalities increasing all over the world, and tightening restrictions are again introduced in many countries. Since the start of September, we have again introduced limitations in the number of employees working directly on the production sites, and all employees who can work from home are encouraged to do so.
We are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, results of operations, liquidity and cash flows due to uncertainties, and our compliance with the measures implemented to avoid the spread of the virus did have a material adverse impact on our financial results for the second and third quarters of 2020. We have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. In addition, as a result of reduced order intake and decreased manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products, especially if it results in a global recession. It could also lead to volatility in access to our products due to government actions impacting our ability to produce and ship products.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
| ITEM 6. EXHIBITS |
| 4.1 |
Filed herewith |
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| 31.1 |
Filed herewith |
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| 31.2 |
Filed herewith |
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| 32.1 |
Furnished herewith |
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| 32.2 |
Furnished herewith |
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| 101. INS |
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
Filed herewith |
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| 101. CAL |
Inline XBRL Taxonomy Extension Calculation Link base Document |
Filed herewith |
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| 101. DEF |
Inline XBRL Taxonomy Extension Definition Link base Document |
Filed herewith |
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| 101. LAB |
Inline XBRL Taxonomy Label Link base Document |
Filed herewith |
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| 101. PRE |
Inline XBRL Extension Presentation Link base Document |
Filed herewith |
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| 101. SCH |
Inline XBRL Taxonomy Extension Scheme Document |
Filed herewith |
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| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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LiqTech International, Inc. |
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| Dated: November 9, 2020 |
/s/ Sune Mathiesen |
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Sune Mathiesen, Chief Executive Officer |
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(Principal Executive Officer) |
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| Dated: November 9, 2020 |
/s/ Claus Toftegaard |
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Claus Toftegaard, Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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Exhibit 4.1
FIRST AMENDMENT
TO
PRE-PREFUNDED COMMON STOCK PURCHASE WARRANT
THIS FIRST AMENDMENT TO PRE-FUNDED COMMON STOCK PURCHASE WARRANT (this “Amendment”), dated as of August 12, 2020, by and between LiqTech International, Inc. (the “Company”) and Lytton-Kambara Foundation (together with its assigns, the “Holder”), amends that certain Pre-Funded Common Stock Purchase Warrant issued on May 27, 2020 by the Company to the Holder with respect to 515,000 shares of the Company’s Common Stock as Warrant Certificate No.: PFW-1 (the “Warrant”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Warrant.
RECITALS
WHEREAS, Section 5(1) of the Warrant provides that the Warrant may be amended by the written consent of the Company and the Holder.
NOW, THEREFORE, in consideration of the premises, covenants and agreements set forth herein and of other good and valuable consideration, the receipt and legal sufficiency of which they hereby acknowledge, and intending to be legally bound hereby, the parties hereby agree as follows:
Section 1. Section 3(e) is hereby deleted and replaced in its entirety by the following, with italicized text added to the original text:
“(e) Fundamental Transaction.
(1) If, any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (other than as a result of a stock split, combination or reclassification of shares of Common Stock covered by Section 3(a) above), or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternative Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding anything to the contrary, solely in the event of a Fundamental Transaction that is approved by the Board of Directors of the Company, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction, purchase this Warrant from the Holder by paying to the older an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction. “Black Scholes Value” means the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a five-year period, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to five years from the date of the public announcement of the applicable Fundamental Transaction. The payment of the Black Scholes Value will be made by wire transfer of immediately available funds within five Business Days of the Holder’s election (or, if later, on the effective date of the Fundamental Transaction). The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant and the other Transaction Documents in accordance with the provisions of this Section 3(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.”
Section 2. General
(a) No Other Amendments. Except as expressly set forth in this Amendment, all of the other terms and conditions of the Warrant shall remain in full force and effect on the terms and subject to the conditions set forth therein. This Amendment does not constitute, directly or by implication, an amendment or waiver of any provision of the Warrant, or any other right, remedy, power or privilege of any party, except as expressly set forth herein.
(b) References to Warrant. Each party acknowledges and agrees that all references to the Warrant refer to the Warrant as amended by this Amendment (or as the Warrant may be further amended or modified after the hereof in accordance with the terms of the Warrant).
(c) Counterparts. This Amendment may be executed in any number of counterparts, including by facsimile or other electronic transmission, by the parties hereto, each of which counterparts when so executed shall be an original, but all counterparts taken together shall constitute one and the same instrument.
(d) Miscellaneous. Sections 5(c), 5(e), 5(h), 5(l), 5(m) and 5(n) of the Warrant are hereby incorporated herein by reference as if fully set forth herein, and such provisions apply to this Amendment as if all references to the “Warrant” contained therein were instead references to this Amendment.
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(Signature Page Follows)
IN WITNESS WHEREOF, the Company and the Holder have caused this Amendment to be duly executed as of the date first above indicated.
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LIQTECH INTERNATIONAL, INC.
By: /s/ Sune Mathiesen Name: Sune Mathiesen Title: Chief Executive Officer
LYTTON-KAMBARA FOUNDATION
By: /s/ Laurence W. Lytton Name: Laurence W. Lytton Title: President |
Exhibit 31.1
OFFICER’S CERTIFICATE
PURSUANT TO SECTION 302
I, Sune Mathiesen, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2020 of Liqtech International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: November 9, 2020 |
By: |
/s/ Sune Mathiesen |
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Name: |
Sune Mathiesen |
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Title: |
Chief Executive Officer and Principal Executive Officer |
Exhibit 31.2
OFFICER’S CERTIFICATE
PURSUANT TO SECTION 302
I, Claus Toftegaard, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2020 of Liqtech International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: November 9, 2020 |
By: |
/s/ Claus Toftegaard |
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Name: |
Claus Toftegaard |
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Title: |
Chief Financial Officer and Principal Financial and Accounting Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Liqtech International, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2020 as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report ”), the undersigned hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
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Date: November 9, 2020 |
By: |
/s/ Sune Mathiesen |
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Name: |
Sune Mathiesen |
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Title: |
Chief Executive Officer and Principal Executive Officer |
A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the U.S. Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Liqtech International, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2020 as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report ”), the undersigned hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
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Date: November 9, 2020 |
By: |
/s/ Claus Toftegaard |
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Name: |
Claus Toftegaard |
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Title: |
Chief Financial Officer and Principal Financial and Accounting Officer |
A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the U.S. Securities and Exchange Commission or its staff upon request.
Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) |
Sep. 30, 2020 |
Dec. 31, 2019 |
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| Accounts receivable, allowance for doubtful accounts | $ 154,089 | $ 612,434 |
| Inventories, allowance for excess and obsolete inventory | 765,512 | 665,308 |
| Property and equipment, accumulated depreciations | 12,066,768 | 10,815,995 |
| Intangible assets, accumulated depreciations | $ 229,335 | $ 141,282 |
| Preferred stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized (in shares) | 2,500,000 | 2,500,000 |
| Preferred stock, shares issued (in shares) | 0 | 0 |
| Preferred stock, shares outstanding (in shares) | 0 | 0 |
| Common stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
| Common stock, shares authorized (in shares) | 25,000,000 | 25,000,000 |
| Common stock, shares issued (in shares) | 21,655,461 | 20,547,668 |
| Common stock, shares outstanding (in shares) | 21,655,461 | 20,547,668 |
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
| Revenue | $ 3,543,730 | $ 9,672,716 | $ 18,467,057 | $ 26,391,100 |
| Cost of Goods Sold | 3,852,210 | 7,444,978 | 15,641,998 | 20,613,172 |
| Gross Profit | (308,480) | 2,227,738 | 2,825,059 | 5,777,928 |
| Operating Expenses: | ||||
| Selling expenses | 741,738 | 461,010 | 2,024,485 | 1,458,633 |
| General and administrative expenses | 1,526,327 | 1,353,428 | 4,585,857 | 3,161,855 |
| Research and development expenses | 256,239 | 189,216 | 883,752 | 591,572 |
| Total Operating Expense | 2,524,304 | 2,003,654 | 7,494,094 | 5,212,060 |
| Income (Loss) from Operations | (2,832,784) | 224,084 | (4,669,035) | 565,868 |
| Other Income (Expense) | ||||
| Gain on modification of earn-out liability | 301,573 | 0 | 301,573 | 0 |
| Interest and other income | 8,164 | 28,736 | 12,901 | 54,186 |
| Interest expense | (41,388) | (369) | (102,926) | (6,394) |
| Fair value adjustment of warrants | (664,350) | 0 | (901,250) | 0 |
| Gain (Loss) on currency transactions | (660,747) | 403,432 | (821,681) | 244,872 |
| Gain (Loss) on sale of fixed assets | 0 | 474 | 0 | (21,145) |
| Total Other Income (Expense) | (1,056,748) | 432,273 | (1,511,383) | 271,519 |
| Income (Loss) Before Income Taxes | (3,889,532) | 656,357 | (6,180,418) | 837,387 |
| Income Tax Provision (Benefit) | (16,113) | 0 | (46,687) | 0 |
| Net Income (Loss) | $ (3,873,419) | $ 656,357 | $ (6,133,731) | $ 837,387 |
| Basic Income (Loss) Per Share (in dollars per share) | $ (0.18) | $ 0.03 | $ (0.29) | $ 0.04 |
| Diluted Income (Loss) Per Share (in dollars per share) | $ (0.18) | $ 0.03 | $ (0.29) | $ 0.04 |
| Basic Weighted Average Common Shares Outstanding (in shares) | 21,653,514 | 20,547,667 | 21,059,251 | 19,350,533 |
| Diluted Weighted Average Common Shares Outstanding (in shares) | 21,653,514 | 20,563,540 | 21,059,251 | 19,366,545 |
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
| Net Income (Loss) | $ (3,873,419) | $ 656,357 | $ (6,133,731) | $ 837,387 |
| Other Comprehensive Income - Currency Translation, Net | 1,422,294 | (1,014,265) | 1,666,112 | (846,970) |
| Total Comprehensive Loss | $ (2,451,125) | $ (357,908) | $ (4,467,619) | $ (9,583) |
Condensed Consolidated Statement of Stockholders' Equity (Unaudited) (Parentheticals) |
3 Months Ended |
|---|---|
|
Sep. 30, 2020
USD ($)
shares
| |
| Common Stock [Member] | |
| Shares issued, offering cost | |
| Additional offering cost, related to the capital raise | |
| Additional Paid-in Capital [Member] | |
| Shares issued, offering cost | 81,923 |
| Additional offering cost, related to the capital raise | (81,923) |
| Shares issued, offering cost | $ 81,923 |
| Prefunded warrants, transferred to equity (in shares) | shares | 515,000 |
| Additional offering cost, related to the capital raise | $ (81,923) |
Note 1 - Summary of Significant Accounting Policies |
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| Significant Accounting Policies [Text Block] |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared according to the instructions to Form 10-Q and Section 210.8-03(b) of Regulation S-X of the Securities and Exchange Commission (SEC) and, therefore, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted.
Management has analyzed the impact of the Coronavirus pandemic ("COVID-19") on its financial statements as of September 30, 2020 and has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets.
The consolidated financial statements include the accounts of LiqTech International, Inc., the “Company” and its subsidiaries. The terms "Company", “us", "we" and "our" as used in this report refer to the Company and its subsidiaries, which are set forth below. The Company engages in the development, design, production, marketing and sale of automated filtering systems, ceramic silicon carbide liquid applications and diesel particulate air filters in the United States, Canada, Europe, Asia and South America. Set forth below is a description of the Company and each of its subsidiaries:
LiqTech International, Inc., a Nevada corporation organized in July 2004, formerly known as Blue Moose Media, Inc.
LiqTech USA, a Delaware corporation and a 100% owned subsidiary of the Company formed in May 2011.
LiqTech Holding A/S (formerly known as LiqTech International A/S), a Danish corporation, incorporated on January 15, 2000 (“LiqTech Holding”), a 100% owned subsidiary of LiqTech USA, handling all joint group activities such as management, marketing, finance, IT etc.
LiqTech NA, Inc. (“LiqTech NA”), incorporated in Delaware on July 1, 2005, a 100% owned subsidiary of LiqTech USA, engaged in the production, marketing and sale of ceramic diesel particulate and liquid filters in the United States and Canada.
LiqTech Water A/S (formerly known as LiqTech Systems A/S), a Danish Corporation (“LiqTech Water”), incorporated on September 1, 2009, engaged in the manufacture of fully automated filtering systems for use within marine applications, municipal pool and spa applications, and other industrial applications within Denmark and international markets.
LiqTech Plastics A/S (formerly known as BS Plastic A/S), a Danish Corporation (“LiqTech Plastics”), acquired on September 1, 2019, engaged in the manufacture of specialized machined and welded plastic parts within Denmark and international markets.
LiqTech Ceramics A/S, a Danish corporation (“LiqTech Ceramics”), incorporated on December 20, 2019, engaged in the development, design, application, marketing and sales of membranes, ceramic diesel particulate and liquid filters, and catalytic converters in Europe, Asia and South America.
LiqTech Water Projects A/S, a Danish corporation (“LiqTech Water Projects”), incorporated on July 28, 2020 that is a dormant company without activity.
LiqTech Germany (“LiqTech Germany”), a 100% owned subsidiary of LiqTech Holding, incorporated in Germany on December 9, 2011. The Company is in the process of closing operations as all activity in the company has ceased.
LiqTech PTE Ltd (“LiqTech Sing”), a 95% owned subsidiary of LiqTech Holding, incorporated in Singapore on January 19, 2012. The Company is in the process of closing operations as all activity in the company has ceased.
Consolidation -- The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority-owned subsidiary. All material intercompany transactions and accounts have been eliminated in the consolidation.
Reclassification – Certain amounts presented in previous issued financial statements have been reclassified to be consistent with the presentation in the current period. In the statement of operations and comprehensive (loss), the Company has reclassified the prior year comparative amounts of general and administrative expenses and other expenses to be consistent with the current classification. Further contingent earn-out liability has been reclassified to accrued expenses considering an amendment to the original earn-out agreement from 2019 has changed the contingent liability to a fixed-amount liability.
Functional Currency / Foreign currency translation -- The functional currency of LiqTech International, Inc., LiqTech USA, Inc. and LiqTech NA is the U.S. Dollar. The Functional Currency of LiqTech Holding, LiqTech Water, LiqTech Plastics, LiqTech Ceramics and LiqTech Water Projects is the Danish Krone (“DKK”); the functional currency of LiqTech Germany is the Euro; and the functional currency of LiqTech Singapore is the Singapore Dollar. The Company’s reporting currency is the U.S. Dollar for the purpose of these consolidated financial statements. The balance sheet accounts of the foreign subsidiaries are translated into U.S. Dollars at the period-end exchange rates, and all revenue and expenses are translated into U.S. Dollars at the average exchange rates prevailing during the nine months ended September 30, 2020 and 2019. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arose from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.
Significant events -- In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid- March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, most of our employees were working remotely during the shutdown. Since the beginning of May, the businesses in Denmark have been opening up as the effect of COVID-19 has largely been constrained and the number of infections and fatalities decreased significantly. However, we now again see the number of infected people and fatalities increase all over the world, and tightening restrictions are again introduced in many countries. Since the start of September, we have again introduced limitations in the number of employees working directly on the production sites, and all employees who can work from home, is encouraged to do so.
We are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, result of operations, liquidity and cash flows due to uncertainties, and our compliance with the measures implemented to avoid the spread of the virus did have a material adverse impact on our financial results for the second and third quarter of 2020. We have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for the next 12 months from the issuance of this quarterly report. In addition, as a result of reduced order intake and decreased manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2020.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products and transportation restrictions, especially if it results in a prolonged global recession.
Cash, Cash Equivalents and Restricted Cash -- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. As of September 30, 2020, and December 31, 2019, the Company held $1,515,632 and $2,714,173, respectively, of restricted cash. The restricted cash is held as security by a local financial institution for ensuring a leasing facility and for payment guarantees issued for the benefit of customers in connection with prepayments of sales orders and for warranties after the delivery of sales orders. The Company had balances held in a financial institution in the United States in excess of federally insured amounts on September 30, 2020 and December 31, 2019.
Accounts Receivable -- Accounts receivable consist of trade receivables arising in the normal course of business. The Company establishes an allowance for doubtful accounts that reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, age, financial information that is publicly accessible and other currently available evidence.
The roll-forward of the allowance for doubtful accounts for the period ended September 30, 2020 and December 31, 2019 is as follows:
Inventory – Inventory directly purchased is carried at the lower of cost or net realizable value, as determined on the first-in, first-out method.
For inventory produced, standard costs that approximate actual cost on the FIFO method are used to value inventory. Standard costs are reviewed at least annually by management, or more often in the event that circumstances indicate a change in cost has occurred.
Work in process and finished goods include material, labor and production overhead costs. The Company adjusts the value of its inventory to the extent that management determines that the cost cannot be recovered due to obsolescence or other factors.
Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movement, expected useful lives, and estimated future demand of the products and spare parts.
Contracts Assets – Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract assets also includes unbilled receivables, which usually comprise the last invoice remaining after the delivery of the water treatment unit, where revenue is recognized at the transfer of control based upon signed acceptance of the water treatment unit by the customer. Most commonly this invoice is sent to the customer at commissioning of the product or no later than 12 months after the delivery. Further included in Contract Assets are short-term receivables such as VAT and other receivables.
Leases -- In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Subsequent ASUs were issued to provide additional guidance.
On January 1, 2019, the Company adopted Topic 842 using the optional transition method, under which the new standards were applied prospectively rather than restating the prior periods presented. The Company elected the package of practical expedients permitted, which among other things, allowed the Company to carry forward the historical lease classification. The Company made the accounting policy elections to not recognize lease assets and liabilities with an initial term of 12 months or less and to not separate lease and non-lease components. The Company’s accounting for finance leases (formerly called capital lease obligations) remains substantially unchanged. Operating lease right-of-use (“ROU”) assets and liabilities were recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, an incremental borrowing rate based on the information available at the commencement date was used in determining the present value. The Company will use the implicit rate when readily determinable. The operating lease ROU asset also included prepaid lease payments and was reduced by accrued lease payments. The Company’s lease accounting may include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Operating lease costs for lease payments will be recognized on a straight-line basis over the lease term. The Company’s adoption of Topic 842 did not materially impact its results of operation.
Property and Equipment -- Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed for financial statement purposes on a straight-line basis over the estimated useful lives of the assets, which range from to years.
Goodwill and Intangible Assets -- The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business, with the residual purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
Acquired intangible assets with determinable useful lives are amortized on a straight-line or accelerated basis over the estimated periods benefited, ranging from to years. Customer relationships and other non-contractual intangible assets with determinable lives are amortized over periods of years.
The Company evaluates the recoverability of long-lived assets by comparing the carrying amount of an asset to estimated future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. The evaluation of recoverability involves estimates of future operating cash flows based upon certain forecasted assumptions, including, but not limited to, revenue growth rates, gross profit margins, and operating expenses over the expected remaining useful life of the related asset. A shortfall in these estimated operating cash flows could result in an impairment charge in the future.
Goodwill is not amortized but is evaluated annually for impairment at the reporting unit level or when indicators of a potential impairment are present. The Company estimates the fair value of the reporting unit using the discounted cash flow and market approaches. Forecast of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, using primarily expected category expansion, pricing, market segment fundamentals, and general economic conditions.
Revenue Recognition -- On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” which includes clarifying ASUs issued in 2015, 2016 and 2017 (“new revenue standard”). The new revenue standard was applied to all open revenue contracts using the modified retrospective method as of January 1, 2018. The new revenue standard did not have a material impact on revenue recognition.
The Company sells products throughout the world; sales by geographical region are as follows for the three and nine months ended September 30, 2020 and 2019:
The Company’s sales by product line are as follows for the three and nine months ended September 30, 2020 and 2019:
For membranes, diesel particulate filters and plastic components, revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied, which occurs when control of the products transfers to the customer or when services are rendered by the Company. The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title and risks and rewards of ownership have transferred to the customer. This generally occurs when the product is shipped or accepted by the customer. Revenue for service contracts are recognized as the services are provided. Revenue is measured as the amount of consideration expected to be received in exchange for transferring the goods or providing services. The satisfaction of performance obligations under the terms of a revenue contract generally gives rise to the right for payment from the customer. The Company's standard payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Pre-payments received prior to satisfaction of performance obligations are recorded as a Contract liability. Given the insignificant days between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers.
For contracts with customers that include multiple performance obligations, judgment is required to determine whether performance obligations specified in these contracts are distinct and should be accounted for as separate revenue transactions for recognition purposes. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are generally determined based on the prices charged to customers or using expected cost-plus margin.
System sales are recognized when the Company transfers control based upon signed acceptance of the system by the customer, which typically occurs upon shipment of the system in accordance with the terms of the contract. In connection with the system sale, it is normal procedure to issue a FAT (Factory Acceptance Test) stating that the customer has accepted the performance of the system as it is being shipped from our production facility in Hobro. As part of the performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer), and this commissioning is therefore considered a second performance obligation and is valued at cost, with the addition of a standard gross margin. This second performance obligation is recognized as revenue at the time of provision of the commissioning services together with the cost incurred. Part of the invoicing to the customer is also attributed to the commissioning, and at transfer of the control of the system (i.e. the first performance obligation), some of the invoicing will still be awaiting commissioning and is therefore recognized as Contract assets.
Aftermarket sales represent parts, extended warranties and maintenance services. For the sale of aftermarket parts, the Company transfers control and recognizes revenue when parts are shipped to the customer. When customers are given the right to return eligible parts and accessories, the Company estimates the expected returns based on an analysis of historical experience. The Company adjusts estimated revenues at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed. The Company recognizes revenue for extended warranty and maintenance agreements based on the standalone selling price over the life of the contract.
The Company has received long-term contracts for grants from government entities for the development and use of silicon carbide membranes in various water filtration and treatment applications and historically in the installation of various water filtrations systems. We measure transfer of control of the performance obligation on long-term contracts utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs, such as labor and materials. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenue and a significant factor in the accounting for such performance obligations. The timing of when we bill our customers is generally dependent upon advance billings terms, milestone billings based on completion of certain phases of the work or when services are provided, or products are shipped. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported on our balance sheet as Contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported on our balance sheet as Contract liabilities.
Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract liabilities are payments received from customers prior to satisfaction of performance obligations, and these balances are typically related to prepayments for third-party expenses that are incurred shortly after billing. Contract liabilities also include deferred revenue related to the second performance obligation stated under Revenue Recognition, where the obligation is attributed to the commissioning of the water treatment system.
The roll-forward of Contract assets / liabilities for the period ended September 30, 2020 and December 31, 2019 is as follows:
Advertising Cost -- Costs incurred in connection with advertising of the Company’s products are expensed as incurred. Advertising costs are included in sales expenses, and total advertising costs amounted to $82,545 and $80,630 for the nine months ended September 30, 2020 and 2019, respectively. Total advertising costs for the three months´ period ended September 30, 2020 and 2019 respectively, were $20,522 and $8,280.
Research and Development Cost -- The Company expenses research and development costs for the development of new products as incurred. Included in operating expense for the nine months ended September 30, 2020 and 2019 were $883,752 and $591,572, respectively, of research and development costs. For the three months period ended September 30, 2020 and 2019, research and development costs were $256,239 and $189,216, respectively.
Income Taxes -- The Company accounts for income taxes in accordance with FASB ASC Topic 740 Accounting for Income Taxes. This statement requires an asset and liability approach in accounting for income taxes.
Income/(Loss) Per Share -- The Company calculates earnings (loss) per share in accordance with FASB ASC 260, Earnings Per Share. Basic earnings per common share (EPS) is based on the weighted average number of common shares outstanding during each period. Diluted earnings per common share is based on shares outstanding (computed as under basic EPS) and potentially dilutive common shares. Potential common shares included in the diluted earnings per share calculation include in-the-money stock options, RSUs, and warrants that have been granted but have not yet been exercised.
Stock Options and Awards -- During the years presented in the accompanying consolidated financial statements, the Company has granted stock options and awards. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Stock-based compensation costs of $270,238 and $174,778 have been recognized for the vesting of options and stock awards granted to Directors, management and certain key employees for the nine months ended September 30, 2020 and 2019, respectively. For the three months´ period ended September 30, 2020 and 2019, stock-based compensation was $46,681 and $23,167 respectively.
Warrant Liability -- The Company issued common stock warrants in May 2020 in conjunction with an equity financing. In accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), the fair value of these warrants was initially classified as a liability on the Company’s Consolidated Balance Sheet because, according to the original terms of the warrant, a fundamental transaction could have given rise to an obligation of the Company to pay cash to its warrant holders, which was out of the control of the Company. On August 12, 2020 the terms of the prefunded warrant were amened and the potential obligation of the Company to pay cash to its warrant holders were removed. From the date of the execution of the amended warrant, it qualifies as an equity instrument and the liability measured at fair value on August 12, 2020 of $3,476,250 has been reclassified to the Company´s Equity. Corresponding changes in the fair value measurement of the warrants are recognized in earnings on the Company’s Consolidated Statement of Operations in each subsequent period.
Fair Value of Financial Instruments -- The Company accounts for fair value measurements for financial assets and liabilities in accordance with FASB ASC Topic 820. The authoritative guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, other receivables, prepaid expenses, accounts payable and accrued expenses approximate their recorded values due to their short-term maturities.
Accounting Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets including accounts receivable; allowance for doubtful accounts; contract assets; reserve for excess and obsolete inventory; depreciation and impairment of property, plant and equipment; goodwill and intangible assets; liabilities including contract liabilities and contingencies; the disclosures of contingent assets and liabilities at the date of the financial statements; warrant liability; and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.
Recent Accounting Pronouncements – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is intended to help stakeholders during the global market-wide reference rate transition period and will be in effect for a limited time through December 31, 2022. Adoption is permitted at any time. The Company is currently evaluating the impact on its financial statements.
On March 9, 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments.” This ASU was issued to clarify and improve various financial instruments topics. The guidance has various effective dates but is basically effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We will adopt the new standard effective March 1, 2021 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurement by removing, modifying and adding certain disclosures. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash that requires companies, in the Statement of Cash Flows, to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Consequently, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. For the period ended September 30, 2020, the Company has recorded $1,515,632 as Restricted cash, $12,976,917 as Unrestricted cash, and a total of $14,492,549 as Cash, Cash equivalents and Restricted cash. For the period ended December 31, 2019, the amounts were $2,714,173 in Restricted cash and $7,069,759 in Unrestricted cash.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, including subsequently issued ASUs to clarify the implementation guidance in ASU 2016-13. The amendment introduces new guidance for credit losses on financial assets measured at amortized cost, including finance receivables and trade receivables. Under this new model, expected credit losses are based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability, replacing the previous incurred loss model. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company adopted ASU 2016-13 effective January 1, 2020 and concluded there was no material impact to the condensed consolidated financial statements.
Other recent accounting pronouncements issued by the FASB did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
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Note 2 - Inventory |
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NOTE 2 - INVENTORY
Inventory consisted of the following on September 30, 2020 and December 31, 2019:
Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movements, expected useful lives, and estimated future demand for the products.
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Note 3 - Leases |
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| Lessee, Operating and Finance Leases [Text Block] |
NOTE 3 - LEASES
The Company leases certain vehicles, real property and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. The majority of our operating leases are non-cancelable operating leases for production and office space in Hobro, Aarhus and Copenhagen, Denmark as well as in White Bear Lake, Minnesota.
During the nine months ended September 30, 2020, cash paid for amounts included for the measurement of lease liabilities was $799,737, and the Company recorded operating lease expense of $881,641.
Supplemental balance sheet information related to leases as of September 30, 2020 and December 31, 2019 was as follows
Maturities of lease liabilities at September 30, 2020 were as follows:
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Note 4 - Lines of Credit |
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NOTE 4 - LINES OF CREDIT
In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or security bond. For that purpose, we have a guarantee credit line of (approximately $1,500,000). The credit line is secured by a cash deposit of $1,500,000. Further, we have a guarantee for a specific project delivered in 2016 of DKK 94,620 (approximately $14,878 at September 30, 2020) with a bank, subject to certain base limitations. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Water such as receivables, inventory, and equipment.
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Note 5 - Agreements and Commitments |
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| Commitments and Contingencies Disclosure [Text Block] |
NOTE 5 - AGREEMENTS AND COMMITMENTS
Agreements -- LiqTech Water Projects has entered into a joint venture agreement to supply and operate water treatment systems for oil and gas producers in the Middle East. The partner in the joint venture is a local company. LiqTech Water Projects expects to deliver technological know-how, design of water treatment systems and components to support potential projects in the Middle East. The joint venture will be established in the form of a jointly owned limited liability company, incorporated under the laws in the local country, and LiqTech Water Projects holds 49% of the shares. All profits of the company are to be allocated proportional to the ownership share and none of the parties are liable for the company’s liabilities towards third parties.
401(K) Profit Sharing Plan -- LiqTech NA has a 401(k) profit sharing plan and trust covering certain eligible employees. The amount LiqTech NA contributes is discretionary. For the nine months ended September 30, 2020 and 2019, matching contributions were expensed and totaled $10,844 and $8,684, respectively. For the three months´ period ended September 30, 2020 and 2019, matching contributions expensed totaled $3,860 and $3,007 respectively.
Contingencies -- From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.
On November 20, 2018 a former supplier to Liqtech Holding contacted the Company with a claim of DKK 448,500 ($68,800) alleging that an agreement from 2016 had not been respected. The Company has contested the claim due to lack of evidence to support the claim. No provision has been made as of September 30, 2020, as the Company believes that it has valid supporting defenses and does not expect the claim to materialize in any payments to the former supplier.
On February 27, 2019, LiqTech Water was contacted by a former supplier alleging that the Company owed DKK 543,905 ($83,400) for services rendered in 2017. The claimant has previously filed a lawsuit to claim payment for the services, which was denied by the Company due to severe errors in the services rendered, and the claim was rejected by a court of law in 2018. Due to the nature of the new claim and the previous ruling from the court of law, no provision has been made as of September 30, 2020.
Product Warranties - The Company provides a standard warranty on its systems, generally for a period of to years after customer acceptance. The Company estimates the costs that may be incurred under its standard warranty programs and records a liability for such costs at the time product revenue is recognized.
In addition, the Company sells an extended warranty for certain systems, which generally provides a warranty for up to years from the date of commissioning. The specific terms and conditions of the warranties vary depending upon the product sold and the country in which the Company does business. Revenue received for the sale of extended warranty contracts is deferred and recognized in the same manner as the costs incurred to perform under the warranty contracts.
The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the cost per claim.
Changes in the Company's current and long-term warranty obligations included in accrued expenses on the balance sheet, as of September 30, 2020 and December 31, 2019 were as follows:
Purchase Obligation - The Company has a purchase obligation to the supplier of new furnaces for our production facility in Ballerup for which the Company has received three units while the last unit will be delivered in late 2020. The total obligation amounts to $3.8 million and the Company has entered into a leasing agreement with a bank to partly finance the purchase. The lease agreement will commence upon the receipt of all furnaces covered by the purchase contract. The Company has no right to cancel the order.
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Note 6 - Earnings Per Share |
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| Earnings Per Share [Text Block] |
NOTE 6 - EARNINGS PER SHARE
Basic and diluted net income (loss) per common share is determined by dividing net income (loss) by the weighted average common shares outstanding during the period. For the periods where there is a net loss, stock options and warrants have been excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive. Consequently, the weighted average common shares used to calculate both basic and diluted net loss per common share would be the same.
The following data show the amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive common stock for the nine months ended September 30, 2020 and 2019:
For the nine months ended September 30, 2020, the Company had 144,966 stock grants outstanding to issue common stock (RSUs). Further, the Company had 515,000 prefunded warrants outstanding to issue common stock.
For the nine months ended September 30, 2019, the Company had 49,878 stock grants outstanding to issue common stock (RSUs). Further, the Company had 25,000 options outstanding to purchase common stock at $2.96 per share.
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Note 7 - Stockholders' Equity |
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| Stockholders' Equity Note Disclosure [Text Block] |
NOTE 7 - STOCKHOLDERS' EQUITY
Common Stock – As of September 30, 2020 and 2019, respectively the Company had 25,000,000 authorized shares of common stock, $0.001 par value. As of September 30, 2020 and 2019, respectively, there were 21,655,461 and 20,547,668 common shares issued and outstanding.
Voting -- Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including the election of directors, and do not have any right to cumulate votes in the election of directors.
Dividends -- Subject to the rights and preferences of the holders of any series of preferred stock, if any, which may at the time be outstanding, holders of common stock are entitled to receive ratably such dividends as our Board of Directors from time to time may declare out of funds legally available. Our Board of Directors has not declared and paid dividends in the past and there are no plans to do so in the near future.
Liquidation Rights -- In the event of any liquidation, dissolution or winding-up of affairs, after payment of all of our debts and liabilities and subject to the rights and preferences of the holders of any outstanding shares of any series of our preferred stock, the holders of common stock will be entitled to share ratably in the distribution of any of our remaining assets.
Other Matters -- Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption rights or sinking fund provisions with respect to our common stock. All of the issued and outstanding shares of common stock on the date of this Annual report are validly issued, fully paid and non-assessable.
Preferred Stock -- Our Board of Directors has the authority to issue preferred stock in one or more classes or series and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.
The Company has 2,500,000 authorized Preferred stock, $0.001 par value. As of September 30, 2020, and 2019 there were no mandatory convertible preferred shares issued and outstanding.
Stock Issuance
Since January 1, 2020, the Company has made the following issuances of common stock:
On January 15, 2020, the Company issued 8,212 shares of restricted stock valued at $45,000 for services provided by the Board of Directors. The Company will recognize the stock-based compensation of the award over the requisite service period. The shares vested immediately.
On May 21, 2020, the Company completed a Securities Purchase Agreement with certain accredited investors in a private placement pursuant to which the Company issued and sold an aggregate of 1,085,000 shares of common stock, par value $0.001 per share, at a purchase price of $5.00 per share for gross proceeds of $4,662,127 including costs of $762,875 for placement fees, lawyer fees, auditor fees and other costs related to the capital raise, and a prefunded warrant to purchase an aggregate of 515,000 shares of Common Stock, at a purchase price of $5.00 per share, for gross proceeds of $2,575,000.
On June 6, 2020, the Company issued 8,333 shares of restricted stock valued at $69,333 for services provided by the Board of Directors. The Company will recognize the stock-based compensation of the award over the requisite service period. The shares vested immediately.
On July 8 and August 18, 2020, the Company issued a total of 6,248 shares in connection with employees exercising stock options granted under the 2015 Stock Options Plan (the "2015 Plan"). The shares were issued at a share price of $2.96 and generated net proceeds of $18,500.
For the nine months ended September 30, 2020 and 2019, the Company has recorded stock-based compensation expense of $270,238 and $174,778, respectively.
Warrants
In connection with the Securities Purchase Agreement entered into in May 2020, a prefunded warrant (“the Warrant”) to purchase an aggregate of 515,000 shares of Common Stock at a purchase price of $5.00 per share was issued. Subject to certain beneficial ownership limitations, the Warrant is immediately exercisable and may be exercised for no additional consideration. The Warrant does not expire. A holder of the Warrant will not have the right to exercise any portion of the Warrant if the holder, together with Affiliates and Attribution Parties (as such terms are defined in the Warrant), would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrant. Upon notice from the holder to the Company, however, the holder may decrease or increase the beneficial ownership limitation (but not above 9.99% of the number of shares of Common Stock outstanding).
On August 12, 2020 the prefunded warrant was amended. In the initial warrant, the warrant holder could request that the Company should repay the value of the unexercised portion of warrants in case a fundamental transaction should occur. The amended agreement required the fundamental transaction to be approved by the Board of Directors before any repayment could take place. This amendment changed the classification of the agreement from a liability to equity, and the following is a summary of the periodic changes in the fair value during the nine months ended September 30, 2020:
Stock-based Compensation
In 2013, the Company’s Board of Directors adopted a Share Incentive Plan (the “Incentive Plan”). Under the terms and conditions of the Incentive Plan, the Board of Directors is empowered to grant shares (Restricted Stock Units, or “RSUs”) to officers and directors of the Company. At September 30, 2020, 144,966 shares were granted and outstanding under the Incentive Plan. Directors of the Company receive share compensation as follows: (i) an initial grant of 25,000 shares of common stock that vest over a -year period upon appointment to the Board, followed by an annual grant of $30,000 in shares of common stock per annum after full vesting of the initial grant. Further the Company has granted shares to management for 2020 as part of the Incentive Plan, totaling 92,081 shares that vest over a three-year period.
The Company recognizes compensation costs for stock grants to Directors and management based on the stock price on the date of the grant.
The Company recognized stock-based compensation expense related to share grants of $270,238 and $174,778 for the nine months ended September 30, 2020 and 2019, respectively. For the three months’ period ended September 30, 2020 and 2019 respectively, the stock-based compensation related to share grants was $46,681 and $23,167. On September 30, 2020, the Company had $546,319 of unrecognized compensation cost related to non-vested stock grants.
A summary of the status of the RSU's outstanding as of September 30, 2020 and changes during the period are presented below:
Stock Options
In August 2015, the Company’s Board of Directors adopted the 2015 Plan. Under the terms and conditions of the 2015 Plan, the Board of Directors is empowered to grant stock options to employees, officers, and directors of the Company. At September 30, 2020, no options were granted and outstanding under the 2015 Plan.
The Company recognizes compensation costs for stock option awards to employees based on the grant-date fair value. The value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model.
The Company recognized stock-based compensation expense related to options of $0 for the nine months ended September 30, 2020 and 2019. On September 30, 2020, the Company had $0 of unrecognized compensation cost related to non-vested options.
A summary of the status of the options outstanding under the Company’s stock option plans on September 30, 2020 is presented below:
A summary of the status of the options on September 30, 2020 and changes during the period is presented below:
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Note 8 - Significant Customers / Concentration / Disaggregated Revenue |
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| Segment Reporting Disclosure [Text Block] |
NOTE 8 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE
The following table presents customers accounting for 10% or more of the Company’s revenue:
* Zero or less than 10%
The following table presents customers accounting for 10% or more of the Company’s accounts receivables:
* Zero or less than 10%
As of September 30, 2020, approximately 98% and 2% of the Company’s assets were located in Denmark and the United States, respectively. As of December 31, 2019, approximately 91% and 9% of the Company’s assets were located in Denmark and the United States, respectively.
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Note 9 - Subsequent Events |
9 Months Ended |
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Sep. 30, 2020 | |
| Notes to Financial Statements | |
| Subsequent Events [Text Block] |
NOTE 9 - SUBSEQUENT EVENTS
The Company’s management reviewed material events through November 9, 2020.
On November 3, 2020, the Company amended its Articles of Incorporation to increase the number of authorized shares of the Company’s Common Stock from 25,000,000 shares to 100,000,000 shares following approval by the Company’s shareholders at the annual meeting held on October 29, 2020.
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Significant Accounting Policies (Policies) |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Accounting, Policy [Policy Text Block] | Business and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared according to the instructions to Form 10-Q and Section 210.8-03(b) of Regulation S-X of the Securities and Exchange Commission (SEC) and, therefore, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted.
Management has analyzed the impact of the Coronavirus pandemic ("COVID-19") on its financial statements as of September 30, 2020 and has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets.
The consolidated financial statements include the accounts of LiqTech International, Inc., the “Company” and its subsidiaries. The terms "Company", “us", "we" and "our" as used in this report refer to the Company and its subsidiaries, which are set forth below. The Company engages in the development, design, production, marketing and sale of automated filtering systems, ceramic silicon carbide liquid applications and diesel particulate air filters in the United States, Canada, Europe, Asia and South America. Set forth below is a description of the Company and each of its subsidiaries:
LiqTech International, Inc., a Nevada corporation organized in July 2004, formerly known as Blue Moose Media, Inc.
LiqTech USA, a Delaware corporation and a 100% owned subsidiary of the Company formed in May 2011.
LiqTech Holding A/S (formerly known as LiqTech International A/S), a Danish corporation, incorporated on January 15, 2000 (“LiqTech Holding”), a 100% owned subsidiary of LiqTech USA, handling all joint group activities such as management, marketing, finance, IT etc.
LiqTech NA, Inc. (“LiqTech NA”), incorporated in Delaware on July 1, 2005, a 100% owned subsidiary of LiqTech USA, engaged in the production, marketing and sale of ceramic diesel particulate and liquid filters in the United States and Canada.
LiqTech Water A/S (formerly known as LiqTech Systems A/S), a Danish Corporation (“LiqTech Water”), incorporated on September 1, 2009, engaged in the manufacture of fully automated filtering systems for use within marine applications, municipal pool and spa applications, and other industrial applications within Denmark and international markets.
LiqTech Plastics A/S (formerly known as BS Plastic A/S), a Danish Corporation (“LiqTech Plastics”), acquired on September 1, 2019, engaged in the manufacture of specialized machined and welded plastic parts within Denmark and international markets.
LiqTech Ceramics A/S, a Danish corporation (“LiqTech Ceramics”), incorporated on December 20, 2019, engaged in the development, design, application, marketing and sales of membranes, ceramic diesel particulate and liquid filters, and catalytic converters in Europe, Asia and South America.
LiqTech Water Projects A/S, a Danish corporation (“LiqTech Water Projects”), incorporated on July 28, 2020 that is a dormant company without activity.
LiqTech Germany (“LiqTech Germany”), a 100% owned subsidiary of LiqTech Holding, incorporated in Germany on December 9, 2011. The Company is in the process of closing operations as all activity in the company has ceased.
LiqTech PTE Ltd (“LiqTech Sing”), a 95% owned subsidiary of LiqTech Holding, incorporated in Singapore on January 19, 2012. The Company is in the process of closing operations as all activity in the company has ceased.
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| Consolidation, Policy [Policy Text Block] | Consolidation -- The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority-owned subsidiary. All material intercompany transactions and accounts have been eliminated in the consolidation.
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| Reclassification, Comparability Adjustment [Policy Text Block] | Reclassification – Certain amounts presented in previous issued financial statements have been reclassified to be consistent with the presentation in the current period. In the statement of operations and comprehensive (loss), the Company has reclassified the prior year comparative amounts of general and administrative expenses and other expenses to be consistent with the current classification. Further contingent earn-out liability has been reclassified to accrued expenses considering an amendment to the original earn-out agreement from 2019 has changed the contingent liability to a fixed-amount liability.
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| Foreign Currency Transactions and Translations Policy [Policy Text Block] | Functional Currency / Foreign currency translation -- The functional currency of LiqTech International, Inc., LiqTech USA, Inc. and LiqTech NA is the U.S. Dollar. The Functional Currency of LiqTech Holding, LiqTech Water, LiqTech Plastics, LiqTech Ceramics and LiqTech Water Projects is the Danish Krone (“DKK”); the functional currency of LiqTech Germany is the Euro; and the functional currency of LiqTech Singapore is the Singapore Dollar. The Company’s reporting currency is the U.S. Dollar for the purpose of these consolidated financial statements. The balance sheet accounts of the foreign subsidiaries are translated into U.S. Dollars at the period-end exchange rates, and all revenue and expenses are translated into U.S. Dollars at the average exchange rates prevailing during the nine months ended September 30, 2020 and 2019. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arose from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.
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| Unusual Risks and Uncertainties [Policy Text Block] | Significant events -- In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid- March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, most of our employees were working remotely during the shutdown. Since the beginning of May, the businesses in Denmark have been opening up as the effect of COVID-19 has largely been constrained and the number of infections and fatalities decreased significantly. However, we now again see the number of infected people and fatalities increase all over the world, and tightening restrictions are again introduced in many countries. Since the start of September, we have again introduced limitations in the number of employees working directly on the production sites, and all employees who can work from home, is encouraged to do so.
We are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, result of operations, liquidity and cash flows due to uncertainties, and our compliance with the measures implemented to avoid the spread of the virus did have a material adverse impact on our financial results for the second and third quarter of 2020. We have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for the next 12 months from the issuance of this quarterly report. In addition, as a result of reduced order intake and decreased manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2020.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products and transportation restrictions, especially if it results in a prolonged global recession.
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| Cash and Cash Equivalents, Policy [Policy Text Block] | Cash, Cash Equivalents and Restricted Cash -- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. As of September 30, 2020, and December 31, 2019, the Company held $1,515,632 and $2,714,173, respectively, of restricted cash. The restricted cash is held as security by a local financial institution for ensuring a leasing facility and for payment guarantees issued for the benefit of customers in connection with prepayments of sales orders and for warranties after the delivery of sales orders. The Company had balances held in a financial institution in the United States in excess of federally insured amounts on September 30, 2020 and December 31, 2019.
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| Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block] | Accounts Receivable -- Accounts receivable consist of trade receivables arising in the normal course of business. The Company establishes an allowance for doubtful accounts that reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, age, financial information that is publicly accessible and other currently available evidence.
The roll-forward of the allowance for doubtful accounts for the period ended September 30, 2020 and December 31, 2019 is as follows:
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| Inventory, Policy [Policy Text Block] | Inventory – Inventory directly purchased is carried at the lower of cost or net realizable value, as determined on the first-in, first-out method.
For inventory produced, standard costs that approximate actual cost on the FIFO method are used to value inventory. Standard costs are reviewed at least annually by management, or more often in the event that circumstances indicate a change in cost has occurred.
Work in process and finished goods include material, labor and production overhead costs. The Company adjusts the value of its inventory to the extent that management determines that the cost cannot be recovered due to obsolescence or other factors.
Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movement, expected useful lives, and estimated future demand of the products and spare parts.
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| Receivable [Policy Text Block] | Contracts Assets – Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract assets also includes unbilled receivables, which usually comprise the last invoice remaining after the delivery of the water treatment unit, where revenue is recognized at the transfer of control based upon signed acceptance of the water treatment unit by the customer. Most commonly this invoice is sent to the customer at commissioning of the product or no later than 12 months after the delivery. Further included in Contract Assets are short-term receivables such as VAT and other receivables.
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| Lessee, Leases [Policy Text Block] | Leases -- In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Subsequent ASUs were issued to provide additional guidance.
On January 1, 2019, the Company adopted Topic 842 using the optional transition method, under which the new standards were applied prospectively rather than restating the prior periods presented. The Company elected the package of practical expedients permitted, which among other things, allowed the Company to carry forward the historical lease classification. The Company made the accounting policy elections to not recognize lease assets and liabilities with an initial term of 12 months or less and to not separate lease and non-lease components. The Company’s accounting for finance leases (formerly called capital lease obligations) remains substantially unchanged. Operating lease right-of-use (“ROU”) assets and liabilities were recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, an incremental borrowing rate based on the information available at the commencement date was used in determining the present value. The Company will use the implicit rate when readily determinable. The operating lease ROU asset also included prepaid lease payments and was reduced by accrued lease payments. The Company’s lease accounting may include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Operating lease costs for lease payments will be recognized on a straight-line basis over the lease term. The Company’s adoption of Topic 842 did not materially impact its results of operation.
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| Property, Plant and Equipment, Policy [Policy Text Block] | Property and Equipment -- Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed for financial statement purposes on a straight-line basis over the estimated useful lives of the assets, which range from to years.
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| Goodwill and Intangible Assets, Policy [Policy Text Block] | Goodwill and Intangible Assets -- The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business, with the residual purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
Acquired intangible assets with determinable useful lives are amortized on a straight-line or accelerated basis over the estimated periods benefited, ranging from to years. Customer relationships and other non-contractual intangible assets with determinable lives are amortized over periods of years.
The Company evaluates the recoverability of long-lived assets by comparing the carrying amount of an asset to estimated future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. The evaluation of recoverability involves estimates of future operating cash flows based upon certain forecasted assumptions, including, but not limited to, revenue growth rates, gross profit margins, and operating expenses over the expected remaining useful life of the related asset. A shortfall in these estimated operating cash flows could result in an impairment charge in the future.
Goodwill is not amortized but is evaluated annually for impairment at the reporting unit level or when indicators of a potential impairment are present. The Company estimates the fair value of the reporting unit using the discounted cash flow and market approaches. Forecast of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, using primarily expected category expansion, pricing, market segment fundamentals, and general economic conditions.
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| Revenue from Contract with Customer [Policy Text Block] | Revenue Recognition -- On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” which includes clarifying ASUs issued in 2015, 2016 and 2017 (“new revenue standard”). The new revenue standard was applied to all open revenue contracts using the modified retrospective method as of January 1, 2018. The new revenue standard did not have a material impact on revenue recognition.
The Company sells products throughout the world; sales by geographical region are as follows for the three and nine months ended September 30, 2020 and 2019:
The Company’s sales by product line are as follows for the three and nine months ended September 30, 2020 and 2019:
For membranes, diesel particulate filters and plastic components, revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied, which occurs when control of the products transfers to the customer or when services are rendered by the Company. The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title and risks and rewards of ownership have transferred to the customer. This generally occurs when the product is shipped or accepted by the customer. Revenue for service contracts are recognized as the services are provided. Revenue is measured as the amount of consideration expected to be received in exchange for transferring the goods or providing services. The satisfaction of performance obligations under the terms of a revenue contract generally gives rise to the right for payment from the customer. The Company's standard payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Pre-payments received prior to satisfaction of performance obligations are recorded as a Contract liability. Given the insignificant days between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers.
For contracts with customers that include multiple performance obligations, judgment is required to determine whether performance obligations specified in these contracts are distinct and should be accounted for as separate revenue transactions for recognition purposes. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are generally determined based on the prices charged to customers or using expected cost-plus margin.
System sales are recognized when the Company transfers control based upon signed acceptance of the system by the customer, which typically occurs upon shipment of the system in accordance with the terms of the contract. In connection with the system sale, it is normal procedure to issue a FAT (Factory Acceptance Test) stating that the customer has accepted the performance of the system as it is being shipped from our production facility in Hobro. As part of the performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer), and this commissioning is therefore considered a second performance obligation and is valued at cost, with the addition of a standard gross margin. This second performance obligation is recognized as revenue at the time of provision of the commissioning services together with the cost incurred. Part of the invoicing to the customer is also attributed to the commissioning, and at transfer of the control of the system (i.e. the first performance obligation), some of the invoicing will still be awaiting commissioning and is therefore recognized as Contract assets.
Aftermarket sales represent parts, extended warranties and maintenance services. For the sale of aftermarket parts, the Company transfers control and recognizes revenue when parts are shipped to the customer. When customers are given the right to return eligible parts and accessories, the Company estimates the expected returns based on an analysis of historical experience. The Company adjusts estimated revenues at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed. The Company recognizes revenue for extended warranty and maintenance agreements based on the standalone selling price over the life of the contract.
The Company has received long-term contracts for grants from government entities for the development and use of silicon carbide membranes in various water filtration and treatment applications and historically in the installation of various water filtrations systems. We measure transfer of control of the performance obligation on long-term contracts utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs, such as labor and materials. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenue and a significant factor in the accounting for such performance obligations. The timing of when we bill our customers is generally dependent upon advance billings terms, milestone billings based on completion of certain phases of the work or when services are provided, or products are shipped. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported on our balance sheet as Contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported on our balance sheet as Contract liabilities.
Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract liabilities are payments received from customers prior to satisfaction of performance obligations, and these balances are typically related to prepayments for third-party expenses that are incurred shortly after billing. Contract liabilities also include deferred revenue related to the second performance obligation stated under Revenue Recognition, where the obligation is attributed to the commissioning of the water treatment system.
The roll-forward of Contract assets / liabilities for the period ended September 30, 2020 and December 31, 2019 is as follows:
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| Advertising Cost [Policy Text Block] | Advertising Cost -- Costs incurred in connection with advertising of the Company’s products are expensed as incurred. Advertising costs are included in sales expenses, and total advertising costs amounted to $82,545 and $80,630 for the nine months ended September 30, 2020 and 2019, respectively. Total advertising costs for the three months´ period ended September 30, 2020 and 2019 respectively, were $20,522 and $8,280.
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| Research and Development Expense, Policy [Policy Text Block] | Research and Development Cost -- The Company expenses research and development costs for the development of new products as incurred. Included in operating expense for the nine months ended September 30, 2020 and 2019 were $883,752 and $591,572, respectively, of research and development costs. For the three months period ended September 30, 2020 and 2019, research and development costs were $256,239 and $189,216, respectively.
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| Income Tax, Policy [Policy Text Block] | Income Taxes -- The Company accounts for income taxes in accordance with FASB ASC Topic 740 Accounting for Income Taxes. This statement requires an asset and liability approach in accounting for income taxes.
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| Earnings Per Share, Policy [Policy Text Block] | Income/(Loss) Per Share -- The Company calculates earnings (loss) per share in accordance with FASB ASC 260, Earnings Per Share. Basic earnings per common share (EPS) is based on the weighted average number of common shares outstanding during each period. Diluted earnings per common share is based on shares outstanding (computed as under basic EPS) and potentially dilutive common shares. Potential common shares included in the diluted earnings per share calculation include in-the-money stock options, RSUs, and warrants that have been granted but have not yet been exercised.
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| Share-based Payment Arrangement [Policy Text Block] | Stock Options and Awards -- During the years presented in the accompanying consolidated financial statements, the Company has granted stock options and awards. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Stock-based compensation costs of $270,238 and $174,778 have been recognized for the vesting of options and stock awards granted to Directors, management and certain key employees for the nine months ended September 30, 2020 and 2019, respectively. For the three months´ period ended September 30, 2020 and 2019, stock-based compensation was $46,681 and $23,167 respectively.
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| Warrant Liability [Policy Text Block] | Warrant Liability -- The Company issued common stock warrants in May 2020 in conjunction with an equity financing. In accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), the fair value of these warrants was initially classified as a liability on the Company’s Consolidated Balance Sheet because, according to the original terms of the warrant, a fundamental transaction could have given rise to an obligation of the Company to pay cash to its warrant holders, which was out of the control of the Company. On August 12, 2020 the terms of the prefunded warrant were amened and the potential obligation of the Company to pay cash to its warrant holders were removed. From the date of the execution of the amended warrant, it qualifies as an equity instrument and the liability measured at fair value on August 12, 2020 of $3,476,250 has been reclassified to the Company´s Equity. Corresponding changes in the fair value measurement of the warrants are recognized in earnings on the Company’s Consolidated Statement of Operations in each subsequent period.
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| Fair Value Measurement, Policy [Policy Text Block] | Fair Value of Financial Instruments -- The Company accounts for fair value measurements for financial assets and liabilities in accordance with FASB ASC Topic 820. The authoritative guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, other receivables, prepaid expenses, accounts payable and accrued expenses approximate their recorded values due to their short-term maturities.
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| Use of Estimates, Policy [Policy Text Block] | Accounting Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets including accounts receivable; allowance for doubtful accounts; contract assets; reserve for excess and obsolete inventory; depreciation and impairment of property, plant and equipment; goodwill and intangible assets; liabilities including contract liabilities and contingencies; the disclosures of contingent assets and liabilities at the date of the financial statements; warrant liability; and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.
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| New Accounting Pronouncements, Policy [Policy Text Block] | Recent Accounting Pronouncements – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is intended to help stakeholders during the global market-wide reference rate transition period and will be in effect for a limited time through December 31, 2022. Adoption is permitted at any time. The Company is currently evaluating the impact on its financial statements.
On March 9, 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments.” This ASU was issued to clarify and improve various financial instruments topics. The guidance has various effective dates but is basically effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We will adopt the new standard effective March 1, 2021 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurement by removing, modifying and adding certain disclosures. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash that requires companies, in the Statement of Cash Flows, to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Consequently, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. For the period ended September 30, 2020, the Company has recorded $1,515,632 as Restricted cash, $12,976,917 as Unrestricted cash, and a total of $14,492,549 as Cash, Cash equivalents and Restricted cash. For the period ended December 31, 2019, the amounts were $2,714,173 in Restricted cash and $7,069,759 in Unrestricted cash.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, including subsequently issued ASUs to clarify the implementation guidance in ASU 2016-13. The amendment introduces new guidance for credit losses on financial assets measured at amortized cost, including finance receivables and trade receivables. Under this new model, expected credit losses are based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability, replacing the previous incurred loss model. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company adopted ASU 2016-13 effective January 1, 2020 and concluded there was no material impact to the condensed consolidated financial statements.
Other recent accounting pronouncements issued by the FASB did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
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Note 1 - Summary of Significant Accounting Policies (Tables) |
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| Financing Receivable, Allowance for Credit Loss [Table Text Block] |
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| Schedule of Revenue from External Customers Attributed to Foreign Countries by Geographic Area [Table Text Block] |
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| Reconciliation of Revenue from Segments to Consolidated [Table Text Block] |
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Note 2 - Inventory (Tables) |
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Note 3 - Leases (Tables) |
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| Maturity of Operating and Finance Lease Liabilities [Table Text Block] |
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Note 5 - Agreements and Commitments (Tables) |
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| Schedule of Product Warranty Liability [Table Text Block] |
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Note 6 - Earnings Per Share (Tables) |
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| Schedule of Weighted Average Number of Shares [Table Text Block] |
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Note 7 - Stockholders' Equity (Tables) |
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| Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block] |
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| Schedule of Nonvested Restricted Stock Units Activity [Table Text Block] |
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| Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding and Exercisable [Table Text Block] |
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Note 8 - Significant Customers / Concentration / Disaggregated Revenue (Tables) |
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| Notes Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedules of Concentration of Risk, by Risk Factor [Table Text Block] |
|
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Note 1 - Summary of Significant Accounting Policies - Allowance for Doubtful Accounts (Details) - USD ($) |
9 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2020 |
Dec. 31, 2019 |
|
| Allowance for doubtful accounts | $ 612,434 | $ 971,772 |
| Bad debt expense | 334 | 25,044 |
| Receivables written off during the periods | (468,728) | (362,244) |
| Effect of currency translation | 10,048 | (22,138) |
| Allowance for doubtful accounts | $ 154,089 | $ 612,434 |
Note 1 - Summary of Significant Accounting Policies - Net Sales by Geographical Region (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
| Net Sales | $ 3,543,730 | $ 9,672,716 | $ 18,467,057 | $ 26,391,100 |
| Reportable Geographical Components [Member] | US And Canada [Member] | ||||
| Net Sales | 122,135 | 701,194 | 556,097 | 1,389,423 |
| Reportable Geographical Components [Member] | AUSTRALIA | ||||
| Net Sales | 118,089 | 139,451 | 222,050 | 354,965 |
| Reportable Geographical Components [Member] | South America [Member] | ||||
| Net Sales | (1,972) | 0 | 20,967 | 0 |
| Reportable Geographical Components [Member] | Asia [Member] | ||||
| Net Sales | 358,430 | 2,962,521 | 2,684,474 | 5,135,327 |
| Reportable Geographical Components [Member] | Europe [Member] | ||||
| Net Sales | $ 2,947,048 | $ 5,869,550 | $ 14,983,469 | $ 19,511,385 |
Note 1 - Summary of Significant Accounting Policies - Sales by Product Line (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
| Net Sales | $ 3,543,730 | $ 9,672,716 | $ 18,467,057 | $ 26,391,100 |
| Liquid Filters [Member] | ||||
| Net Sales | 1,899,160 | 7,920,745 | 12,431,157 | 21,414,214 |
| Ceramic Diesel Particulate [Member] | ||||
| Net Sales | 1,009,545 | 1,330,337 | 3,730,302 | 4,320,839 |
| Plastic Products [Member] | ||||
| Net Sales | 503,297 | 284,486 | 1,847,092 | 284,486 |
| Development Projects [Member] | ||||
| Net Sales | $ 131,728 | $ 137,148 | $ 458,506 | $ 371,561 |
Note 1 - Summary of Significant Accounting Policies - Contract Assets and Liabilities (Details) - USD ($) |
9 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2020 |
Dec. 31, 2019 |
|
| Cost incurred | $ 3,563,346 | $ 3,960,199 |
| Unbilled project deliveries | 1,365,926 | 1,971,106 |
| VAT | 180,252 | 862,368 |
| Other receivables | 120,227 | 58,397 |
| Prepayments | (2,552,113) | (1,732,231) |
| Deferred Revenue | (1,096,715) | (876,286) |
| Contract with Customer, Asset (Liability), Net | 1,580,923 | 4,243,553 |
| Contract assets | 3,008,541 | 5,664,929 |
| Contract liabilities | (1,427,618) | (1,421,376) |
| Contract with Customer, Asset (Liability), Net | $ 1,580,923 | $ 4,243,553 |
Note 2 - Inventory - Summary of Inventory (Details) - USD ($) |
Sep. 30, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Furnace parts and supplies | $ 906,503 | $ 621,991 |
| Raw materials | 2,211,687 | 2,125,921 |
| Work in process | 2,653,085 | 1,624,499 |
| Finished goods and filtration systems | 960,775 | 1,492,135 |
| Reserve for obsolescence | (765,512) | (665,308) |
| Net Inventory | $ 5,966,538 | $ 5,199,238 |
Note 3 - Leases (Details Textual) |
9 Months Ended |
|---|---|
|
Sep. 30, 2020
USD ($)
| |
| Operating Lease, Payments | $ 799,737 |
| Operating Lease, Expense | $ 881,641 |
Note 3 - Leases - Balance Sheet Information (Details) - USD ($) |
Sep. 30, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Operating lease right-of-use | $ 4,817,875 | $ 5,053,614 |
| Operating lease liabilities – current | 953,087 | 999,685 |
| Operating lease liabilities – long-term | 4,028,986 | 4,141,855 |
| Total lease liability | 4,982,073 | 5,141,540 |
| Property and equipment, at cost | 1,429,958 | 1,362,272 |
| Accumulated depreciation | (1,243,193) | (1,156,145) |
| Property and equipment, net | 186,765 | 206,127 |
| Finance lease liabilities - current | 37,620 | 34,772 |
| Finance lease liabilities – long-term | 152,476 | 172,273 |
| Total lease liability | $ 190,096 | $ 207,045 |
| Operating leases (Year) | 10 years 2 months 12 days | 10 years 2 months 12 days |
| Finance leases (Year) | 4 years 9 months 18 days | 5 years 6 months |
| Operating leases | 6.30% | 6.40% |
| Finance leases | 3.90% | 3.90% |
Note 3 - Leases - Maturities of Lease Liabilities (Details) - USD ($) |
Sep. 30, 2020 |
Dec. 31, 2019 |
|---|---|---|
| 2020 (remaining 3 months) | $ 275,960 | |
| 2020 (remaining 3 months) | 11,098 | |
| 2021 | 930,047 | |
| 2021 | 44,391 | |
| 2022 | 847,876 | |
| 2022 | 42,745 | |
| 2023 | 801,928 | |
| 2023 | 37,893 | |
| 2024 | 642,760 | |
| 2024 | 38,882 | |
| Thereafter | 3,182,473 | |
| Thereafter | 34,166 | |
| Total payment under lease agreements | 6,681,044 | |
| Total payment under lease agreements | 209,175 | |
| Less imputed interest | (1,698,971) | |
| Less imputed interest | (19,079) | |
| Total lease liability | 4,982,073 | $ 5,141,540 |
| Total lease liability | $ 190,096 | $ 207,045 |
Note 4 - Lines of Credit (Details Textual) - Sep. 30, 2020 |
USD ($) |
DKK (kr) |
|---|---|---|
| Line of Credit Facility, Maximum Borrowing Capacity | $ 1,500,000 | kr 10,000,000 |
| Security Deposit | 1,500,000 | |
| Guarantor Obligations, Current Carrying Value | $ 14,878 | kr 94,620 |
Note 5 - Agreements and Commitments (Details Textual) |
3 Months Ended | 9 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|
|
Feb. 27, 2019
USD ($)
|
Feb. 27, 2019
DKK (kr)
|
Nov. 20, 2018
USD ($)
|
Nov. 20, 2018
DKK (kr)
|
Sep. 30, 2020
USD ($)
|
Sep. 30, 2019
USD ($)
|
Sep. 30, 2020
USD ($)
|
Sep. 30, 2019
USD ($)
|
|
| Defined Contribution Plan, Cost | $ 3,860 | $ 3,007 | $ 10,844 | $ 8,684 | ||||
| Purchase Obligation, Total | $ 3,800,000 | $ 3,800,000 | ||||||
| Minimum [Member] | ||||||||
| Standard Product Warranty, Term (Year) | 1 year | |||||||
| Maximum [Member] | ||||||||
| Standard Product Warranty, Term (Year) | 3 years | |||||||
| Extended Product Warranty, Term (Year) | 4 years | |||||||
| LiqTech International AS [Member] | Claim with Former Supplier for Breach of Agreement [Member] | ||||||||
| Loss Contingency, Damages Sought, Value | $ 68,800 | kr 448,500 | ||||||
| LiqTech International AS [Member] | Claim with Former Supplier for Services Rendered [Member] | ||||||||
| Loss Contingency, Damages Sought, Value | $ 83,400 | kr 543,905 | ||||||
| Joint Venture Agreement [Member] | ||||||||
| Equity Method Investment, Ownership Percentage | 49.00% | 49.00% | ||||||
Note 5 - Agreements and Commitments - Changes in Warranty Obligations (Details) - USD ($) |
9 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2020 |
Dec. 31, 2019 |
|
| Balance | $ 813,288 | $ 432,225 |
| Warranty costs charged to cost of goods sold | 326,740 | 707,079 |
| Utilization charges against reserve | (130,129) | (315,556) |
| Release of accrual related to expired warranties | 0 | 0 |
| Foreign currency effect | 48,818 | (10,460) |
| Balance | $ 1,058,717 | $ 813,288 |
Note 6 - Earnings Per Share - Amounts Used in Computing Earnings Per Share (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|
Sep. 30, 2020 |
Jun. 30, 2020 |
Mar. 31, 2020 |
Sep. 30, 2019 |
Jun. 30, 2019 |
Mar. 31, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
| Net Income (Loss) attributable to LiqTech International Inc. | $ (3,873,419) | $ (2,563,811) | $ 303,499 | $ 656,357 | $ 146,786 | $ 34,244 | $ (6,133,731) | $ 837,387 |
| Weighted average number of common shares used in basic earnings per share (in shares) | 21,653,514 | 20,547,667 | 21,059,251 | 19,350,533 | ||||
| Effect of dilutive securities, stock options, RSUs, and warrants (in shares) | 0 | 16,012 | ||||||
| Weighted average number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share (in shares) | 21,653,514 | 20,563,540 | 21,059,251 | 19,366,545 | ||||
Note 7 - Stockholders' Equity - Warrants (Details) |
9 Months Ended |
|---|---|
|
Sep. 30, 2020
shares
| |
| Warrants outstanding January 1, 2020 (in shares) | 0 |
| Prefunded warrants issued May 2020 (in shares) | 515,000 |
| Exercises and conversions (in shares) | 0 |
| Warrants outstanding September 30, 2020 (in shares) | 515,000 |
Note 7 - Stockholders' Equity - Share Incentive Plan Activity (Details) - Restricted Stock Units (RSUs) [Member] - USD ($) |
9 Months Ended | 12 Months Ended | 39 Months Ended | |
|---|---|---|---|---|
Sep. 30, 2020 |
Dec. 31, 2013 |
Sep. 30, 2020 |
Dec. 31, 2019 |
|
| Outstanding, units (in shares) | 133,747 | |||
| Outstanding, weighted average grant-date fair value (in dollars per share) | $ 5.47 | |||
| Outstanding, aggregated intrinsic value | $ 304,714 | $ 304,714 | $ 50,824 | |
| Granted, units (in shares) | 44,430 | 25,000 | 92,081 | |
| Granted, weighted average grant-date fair value (in dollars per share) | $ 5.92 | |||
| Vested and settled with share issuance, units (in shares) | (33,211) | |||
| Vested and settled with share issuance, weighted average grant-date fair value (in dollars per share) | $ 4.15 | |||
| Forfeited, units (in shares) | 0 | |||
| Forfeited, weighted average grant-date fair value (in dollars per share) | $ 0 | |||
| Outstanding, units (in shares) | 144,966 | 144,966 | ||
| Outstanding, weighted average grant-date fair value (in dollars per share) | $ 5.91 | $ 5.91 |
Note 7 - Stockholders' Equity - Status of Options and Changes During the Year (Details) |
9 Months Ended | 12 Months Ended |
|---|---|---|
|
Sep. 30, 2020
USD ($)
$ / shares
shares
|
Dec. 31, 2019
USD ($)
$ / shares
shares
|
|
| Outstanding, shares (in shares) | 25,000 | |
| Outstanding, weighted average exercise price (in dollars per share) | $ / shares | $ 2.96 | |
| Outstanding, average remaining life (Year) | 7 months 13 days | |
| Outstanding, weighted average intrinsic value | $ | $ 0 | $ 72,250 |
| Exercised, shares (in shares) | (6,250) | |
| Exercised, weighted average exercise price (in dollars per share) | $ / shares | $ 2.96 | |
| Expired, shares (in shares) | (18,750) | |
| Outstanding, shares (in shares) | 0 | 25,000 |
| Outstanding, weighted average exercise price (in dollars per share) | $ / shares | $ 0 | $ 2.96 |
| Vested and expected to vest, weighted average intrinsic value | $ | $ 0 | |
| Exercisable end of period, weighted average intrinsic value | $ | $ 0 |
Note 8 - Significant Customers / Concentration / Disaggregated Revenue (Details Textual) - Geographic Concentration Risk [Member] - Assets, Total [Member] |
9 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2020 |
Dec. 31, 2019 |
|
| DENMARK | ||
| Concentration Risk, Percentage | 98.00% | 91.00% |
| UNITED STATES | ||
| Concentration Risk, Percentage | 2.00% | 9.00% |
Note 8 - Significant Customers / Concentration / Disaggregated Revenue - Concentration of Risk (Details) - Customer Concentration Risk [Member] |
3 Months Ended | 9 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
Dec. 31, 2019 |
|
| Revenue Benchmark [Member] | Customer A [Member] | |||||
| Concentration Risk, Percentage | 23.00% | 34.00% | 27.00% | 31.00% | |
| Revenue Benchmark [Member] | Customer B [Member] | |||||
| Concentration Risk, Percentage | 20.00% | 11.00% | |||
| Revenue Benchmark [Member] | Customer C [Member] | |||||
| Concentration Risk, Percentage | 20.00% | ||||
| Revenue Benchmark [Member] | Customer D [Member] | |||||
| Concentration Risk, Percentage | 28.00% | 17.00% | |||
| Accounts Receivable [Member] | Customer A [Member] | |||||
| Concentration Risk, Percentage | 32.00% | 39.00% | |||
| Accounts Receivable [Member] | Customer B [Member] | |||||
| Concentration Risk, Percentage | 15.00% | 15.00% | |||
| Accounts Receivable [Member] | Customer D [Member] | |||||
| Concentration Risk, Percentage | 10.00% | 17.00% | |||
Note 9 - Subsequent Events (Details Textual) - shares |
Nov. 03, 2020 |
Sep. 30, 2020 |
Dec. 31, 2019 |
|---|---|---|---|
| Common Stock, Shares Authorized (in shares) | 25,000,000 | 25,000,000 | |
| Subsequent Event [Member] | |||
| Common Stock, Shares Authorized (in shares) | 100,000,000 |
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