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 three 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 to
Commission File Number:
LiqTech International, Inc.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: +
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| | | |
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 | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| Emerging growth company | |
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
As of May 12, 2022, there were
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2022
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. 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 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. 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 Quarterly Report on Form 10-Q 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.
Forward-looking statements include, but are not limited to, statements concerning:
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The COVID-19 outbreak and its effects on our business operations and financial condition; |
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Our dependence on a few major customers for a significant portion of our revenue and the potential adverse effects to our financial condition if we fail to maintain or develop our relationship with one or more of these major customers; |
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The impact on our business operations and financial condition if we fail to raise additional funds; |
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The potential adverse effects to our business operations and financial condition by geopolitical unrest and changes in political, social, regulatory or economic environments; |
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The potential interruption or delay of raw materials caused by restrictions on freight and transportation routes; |
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The exposure to potentially adverse tax consequences on our international operations; |
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The impact to our business operations by adverse conditions or events affecting the marine transportation industry; |
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Our ability to adapt to potentially adverse changes in global and regional economic conditions and legislative, regulatory and political developments; |
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Our dependence on the expertise and experience of our management team and the retention of key management. |
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Our future reliance on qualified additional personnel to expand our business; |
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Our ability to compete in a changing regulatory landscape, enforcement of existing emissions-related environmental regulations and potential further tightening of emission standards worldwide; |
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Our dependence on corporate or government funding for emissions control programs; |
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Our ability to manage our expected revenue growth; |
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Our ability to compete under changing governmental standards by which our products are evaluated; |
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The potential monetary costs of defending our intellectual property rights; |
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Our ability to successfully protect our intellectual property rights; |
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The possibility of a dispute over intellectual property developed in conjunction with third parties we have contractual relationships with; |
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The possibility that we could become subject to litigation that could be costly, limit or cancel our intellectual property rights or divert time and efforts away from our business operations; |
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The potential negative impact to the sales of our products caused by technological advances of our competitors; |
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The adverse effect to our business operations if we fail to obtain adequate supplies of raw materials or fail to obtain raw materials at affordable prices; |
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Our potential reliance on subcontractors or to develop sufficient manufacturing capacity to meet demand; |
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The financial impact of fluctuation and volatility of foreign currencies; |
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The potential liability for environmental harm or damages resulting from technical faults or failures of our products; |
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The possibility that an investor located within the United States may not be able to or find it difficult to enforce any judgments obtained in United States courts because a significant portion of our assets and some of our officers and directors may be located outside of the United States; |
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The possibility that we may not be able to develop and maintain an effective system of internal control over financial reporting, leading to inaccurate reports of our financial results; |
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The possibility of breaches in the security of our information technology systems; |
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The liability risk of our compliance to environmental laws and regulations; |
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The potential negative impact of more stringent environmental laws and regulations as governmental agencies seek to improve minimum standards; |
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The possibility that enforcement actions to suspend or severely restrict our business operations could be brought against the Company for our failure to comply with laws or regulations and the potential costs of defending against such actions. |
Any forward-looking statement made by us herein speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
PART I - FINANCIAL INFORMATION
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | As of | |||||||
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and restricted cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of and at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Inventories, net of allowance for excess and obsolete inventory of and at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Contract assets | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Long-Term Assets: | ||||||||
| Property and equipment, net of accumulated depreciation of and at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Operating lease right-of-use assets | ||||||||
| Deposits and other assets | ||||||||
| Intangible assets, net of accumulated amortization of and at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Goodwill | ||||||||
| Total Long-Term Assets | ||||||||
| Total Assets | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | As of | |||||||
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (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 convertible note payable | ||||||||
| Contract liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Deferred tax liability | ||||||||
| Other liabilities, net of current portion | ||||||||
| Finance lease obligations, net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Convertible note payable, less current portion | ||||||||
| Total Long-term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred stock; par value , shares authorized, shares issued and outstanding at March 31, 2022 and December 31, 2021 | ||||||||
| Common stock; par value , shares authorized, and shares issued and outstanding at March 31, 2021 and December 31, 2021, 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 unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross Profit | ||||||||
| Operating Expenses: | ||||||||
| Selling expenses | ||||||||
| General and administrative expenses | ||||||||
| Research and development expenses | ||||||||
| Total Operating Expense | ||||||||
| Loss from Operations | ( | ) | ( | ) | ||||
| Other Income (Expense) | ||||||||
| Interest and other income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Amortization discount on convertible note | ( | ) | - | |||||
| Gain (Loss) on currency transactions | ||||||||
| Total Other Income (Expense) | ( | ) | ||||||
| Loss Before Income Taxes | ( | ) | ( | ) | ||||
| Income Tax Benefit | ( | ) | ( | ) | ||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Basic and Diluted Loss Per Share | $ | ( | ) | $ | ( | ) | ||
| Basic and Diluted Weighted Average Common Shares Outstanding | ||||||||
The accompanying notes are an integral part of these unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS (UNAUDITED)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net Loss | ( | ) | ( | ) | ||||
| Other Comprehensive Income - Currency Translation, Net | ( | ) | ( | ) | ||||
| Total Comprehensive Loss | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
For the period ended March 31, 2022 and March 31, 2021
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income/(Loss) | TOTAL | |||||||||||||||||||
| BALANCE, December 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||
| Common stock issued in settlement of RSUs | ( | ) | - | |||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Currency translation, net | ( | ) | ( | ) | ||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||
| BALANCE, March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
| BALANCE, December 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||
| Common stock issued in settlement of RSUs | ( | ) | ||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Currency translation, net | ( | ) | ( | ) | ||||||||||||||||||||
| Net Income | ( | ) | ( | ) | ||||||||||||||||||||
| BALANCE, March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operations: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of discount on convertible notes payable | ||||||||
| Stock-based compensation |
| |||||||
| Change in deferred tax asset / liability | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Contract assets | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Contract liabilities | ( | ) | ||||||
| Income taxes benefits | ||||||||
| Total Adjustments | ( | ) | ||||||
| Net Cash used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net Cash used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Payments on finance lease obligation | ( | ) | ( | ) | ||||
| Interest payments on convertible note | ( | ) | ||||||
| Net Cash provided by Financing Activities | ( | ) | ( | ) | ||||
| Gain (Loss) on Currency Translation | ( | ) | ( | ) | ||||
| Net change in Cash and Restricted Cash | ( | ) | ( | ) | ||||
| Cash and Restricted Cash at Beginning of Period | ||||||||
| Cash and Restricted Cash at End of Period | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Supplemental Disclosures of Cash Flow Information: |
||||||||
| Cash paid during the period for: |
||||||||
| Interest |
$ | $ | ||||||
| Income Taxes |
||||||||
The accompanying notes are an integral part of these unaudited 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 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 in Item 2, the management's discussion and analysis section. 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 North America, Europe, Asia, Australia, and South America.
Consolidation -- The consolidated financial statements include the accounts of the Company and 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 previously issued financial statements have been reclassified to be consistent with the current period presentation. 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.
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, LiqTech Water Projects and LiqTech Emission Control is the Danish Krone (“DKK”); the functional currency of LiqTech China is the Renminbi (“RMB”); 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 three months ended March 31, 2022 and 2021. Translation gains and losses are deferred and accumulated as a component of other comprehensive income (loss) 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.
Cash 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 March 31, 2022 and December 31, 2021, the Company held $
Accounts held in each U.S. institution are insured by the Federal Deposit Insurance Company (“FDIC”) up to $250,000. At March 31, 2022 and December 31, 2021 the Company had $
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 March 31, 2022 and December 31, 2021 are as follows:
| March 31, 2022 | December 31, 2021 | |||||||
| 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 costs, applying 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 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 / 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. When the Company issues invoices to the customer and the billing is higher than the capitalized Contract assets, the net amount is transferred to Contract liabilities. Contract assets/liabilities are transferred to revenue and cost of goods sold when the right to consideration is unconditional and billed per the terms of the contractual agreement.
Contract assets also include 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. Also included in Contract assets are short-term receivables such as VAT and other receivables.
Leases -- The Company has elected 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 are 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 is 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 reduced by accrued lease payments. The Company’s lease terms may include options to extend or terminate the lease, for which the Company will reflect the change when it is reasonably certain that those options will be exercised. Operating lease cost for lease payments will be recognized on a straight-line basis over the lease term.
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. Forecasts 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 Company sells products throughout the world, and sales by geographical region are as follows for the three months ended March 31, 2022 and 2021:
| For the Three months ended | ||||||||||||||||
| % Distribution | March 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| North America | % | % | $ | $ | ||||||||||||
| Australia | % | % | ||||||||||||||
| Asia | % | % | ||||||||||||||
| Europe | % | % | ||||||||||||||
| % | % | $ | $ | |||||||||||||
The Company’s sales by product line are as follows for the three months ended March 31, 2022 and 2021:
| For the Three Months | ||||||||||||||||
| % Distribution | Ended March 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Liquid filters and systems | % | % | $ | $ | ||||||||||||
| Diesel particulate filters | % | % | ||||||||||||||
| Plastic components | % | % | ||||||||||||||
| Development projects | % | % | ||||||||||||||
| % | % | $ | $ | |||||||||||||
For liquid filters and systems, 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 product 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 along with 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 is 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 to receive 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. Considering the relatively short time 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 to the customer based upon sales and delivery conditions specified in the sales contract. This typically occurs upon shipment of the system from the production facility but can also occur upon other agreed delivery terms. In connection with the completion of the system, it is normal procedure to issue a FAT (Factory Acceptance Test) asserting 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), this portion is 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 filtration systems. We measure the 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 represent 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 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 assets/liabilities are transferred to revenue and cost of goods sold when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract liabilities also include deferred revenue related to the second performance obligation stated under Revenue Recognition, for which the obligation is attributed to the commissioning of the water treatment system.
.
The roll-forward of Contract assets / liabilities for the periods ended March 31, 2022 and December 31, 2021 is as follows:
| March 31, 2022 | December 31, 2021 | |||||||
| 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 for the three-month periods ended March 31, 2022 and 2021 were $
Research and Development Cost -- The Company expenses research and development costs as incurred. Included in operating expense for the three-month periods ended March 31, 2022 and 2021 were research and development costs of $
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 with respect to 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) are based on the weighted average number of shares of Common Stock outstanding during each period. Diluted earnings per common share are based on shares outstanding (computed as under basic EPS) and potentially dilutive common shares. Potential shares of Common Stock included in the diluted earnings per share calculation include in-the-money stock options, RSU’s and warrants that have been granted but have not yet been exercised.
Stock Awards -- During the years presented in the accompanying consolidated financial statements, the Company has granted stock awards. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation.
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, accrued expenses and convertible notes payable 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; liabilities including contract liabilities and contingencies; the disclosures of contingent assets and liabilities at the date of the financial statements; and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.
Recent Accounting Pronouncements – In November 2021, the FASB issued ASU 2021-10, Disclosures by Business Entities about Government Assistance: The FASB is issuing this Update to increase the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. The ASU will be effective for annual reporting periods after December 15, 2021. We are still assessing the impact of ASU 2021-10 on our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023, and interim periods within those annual periods, and early adoption is permitted in annual reporting periods ending after December 15, 2020. We are still assessing the impact of ASU 2020-06 on our condensed consolidated financial statements.
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.
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 – GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has limited cash and incurred significant recent losses. These factors raise substantial doubt about the ability of the Company to continue as a going concern for a period of one year from the issuance of these financial statements. There is no assurance that the Company will be successful in raising additional cash through the issuance of debt or equity instruments or return to achieving profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
NOTE 3 - INVENTORY
Inventory consisted of the following on March 31, 2022, and December 31, 2021:
| March 31, 2022 | December 31, 2021 | |||||||
| 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 4 - LEASES
The Company leases certain vehicles, real property, production equipment 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 Taicang, China.
During the three months ended March 31, 2022, cash paid for amounts included for the measurement of finance lease liabilities was $
During the three months ended March 31, 2022, cash paid for amounts included for the measurement of operating lease liabilities was $
Supplemental balance sheet information related to leases as of March 31, 2022 and December 31, 2021 was as follows:
| March 31, 2022 | December 31, 2021 | |||||||
| Operating leases: | ||||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| 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 March 31, 2022 were as follows:
| Operating Lease | Finance lease | |||||||
| 2022 (remaining 9 months) | $ | $ | ||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total payment under lease agreements | ||||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Total lease liability | $ | $ | ||||||
NOTE 5 - LINES OF CREDIT
In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or a security bond. For that purpose, we have a guaranteed credit line of EUR
NOTE 6 – LONG-TERM DEBT
Convertible Note
On March 24, 2021, we entered into a Securities Purchase Agreement with an institutional investor pursuant to which the Company agreed to issue and sell a $
The Note is a senior, unsecured obligation of the Company, payable at
The Note has interest payable quarterly beginning June 1, 2021, at a rate of
The Company may provide written notice to the Holder electing to convert the entire Principal Amount of the Note if (1) the Daily VWAP per share of Common Stock exceeds one hundred and seventy-five percent (
Beginning on March 1, 2022, and on the first day of each calendar month thereafter, at the election of the Investor or Holder, if applicable, the Company shall be required to redeem $
The components of the Convertible Note are as follows:
| March 31, 2022 | March 31, 2021 | |||||||
| Convertible note | $ | |||||||
| Less: unamortized debt issuance costs | ( | ) | ||||||
| Convertible note payable | $ | $ | ||||||
| Current portion of convertible note payable | ||||||||
| Convertible note payable, less current portion | ||||||||
| Convertible note payable | $ | $ | ||||||
For the three months ended March 31, 2022 and 2021, the Company recognized interests of $
NOTE 7 - AGREEMENTS AND COMMITMENTS
Agreements -- LiqTech is planning to establish a joint venture 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 expects to deliver technological know-how along with the 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 is expected to hold
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 February 27, 2019, LiqTech was contacted by a former supplier alleging that the Company owed DKK
The Company entered arbitration on March 31, 2022 regarding a commercial dispute related to the delivery of a water treatment system installed on a commercial power plant. The parties disagree on whether the supplied equipment performs according to the agreed performance criteria. The dispute also relates to equipment down time and the use of additives to operate the equipment. The claim against LiqTech amounts to DKK
Product Warranties - The Company provides a standard warranty for 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 installation occurred. 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 March 31, 2022 and December 31, 2021, were as follows:
| March 31, 2022 | December 31, 2021 | |||||||
| Balance at January 1 | $ | $ | ||||||
| Warranty costs charged to cost of goods sold | ||||||||
| Utilization charges against reserve | ( | ) | ||||||
| Release of accrual related to expired warranties | ||||||||
| Foreign currency effect | ( | ) | ( | ) | ||||
| Balance at the end of the period | $ | $ | ||||||
NOTE 8 - EARNINGS PER SHARE
Basic and diluted net income (loss) per common share is determined by dividing net income (loss) by the weighted average number of shares of Common Stock outstanding during the period. For the periods where there is a net loss, stock options, warrants and Restricted Stock Units (“RSUs”) have been excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive. Consequently, the weighted average number of shares of Common Stock used to calculate both basic and diluted net loss per common share are the same for the reported periods.
For the period ended March 31, 2022, the Company had
The following table shows the amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive Common Stock for the three months ended March 31, 2022 and 2021:
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net (Loss) | $ | ( | ) | $ | ( | ) | ||
| 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 three months ended March 31, 2022 and 2021 respectively, the Company had options outstanding to purchase common stock.
NOTE 9 - STOCKHOLDERS' EQUITY
Common Stock – The Company has
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.
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, 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, 2022, the Company has made the following issuances of Common Stock:
On January 3, 2022, the Company issued
On January 3, 2022, the Company issued
Warrants
In connection with the securities purchase agreement entered in May 2020, we issued a prefunded warrant (“the Warrant”) to purchase an aggregate of
On August 17, 2021, the Company entered an exchange agreement with an existing shareholder to exchange an aggregate of shares of Common Stock for equivalent shares of prefunded warrants (the “Exchange Agreement”). The prefunded warrants will be exercisable at an exercise price of $
The following is a summary of the periodic changes in warrants outstanding for the three months ended March 31, 2022 and 2021:
| 2022 | 2021 | |||||||
| Warrants outstanding at January 1 | ||||||||
| Common stock exchanged to prefunded warrant | ||||||||
| Exercises and conversions | ||||||||
| Warrants outstanding at March 31 | ||||||||
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 RSUs to officers and directors of the Company. At March 31, 2022,
The Company recognizes compensation costs for RSU 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 RSU grants of $
A summary of the status of the RSUs as of March 31, 2022 and changes during the period are presented below:
| March 31, 2022 | ||||||||||||
| Number of units | Weighted Average Fair value | Aggregated Intrinsic | ||||||||||
| Outstanding, December 31, 2021 | $ | $ | ||||||||||
| Granted | - | |||||||||||
| Vested and settled with share issuance | ( | ) | ( | ) | - | |||||||
| Forfeited | - | - | - | |||||||||
| Outstanding, March 31, 2022 | $ | $ | ||||||||||
NOTE 10 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE
The following table presents customers accounting for 10% or more of the Company’s revenue:
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Customer A | % | * | % | |||||
| Customer B | * | % | % | |||||
| Customer C | * | % | % | |||||
* Zero or less than 10%
The following table presents customers accounting for 10% or more of the Company’s Accounts receivable:
| March 31, 2022 | December 31, 2021 | |||||||
| Customer B | * | % | % | |||||
| Customer C | * | % | % | |||||
| Customer D | % | * | % | |||||
| Customer E | * | % | % | |||||
* Zero or less than 10%
As of March 31, 2022 and December 31, 2021, approximately
NOTE 11 – SEGMENT REPORTING
The Company operates in three segments: Water, Ceramics and Plastics. Effective as of January 1, 2020, the group structure was changed, with shared group activities transferred to an individual reporting unit separated from the business units. Costs and assets for these activities were therefore separated during 2020.
Segment information for the business areas is as follows:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | ||||||||
| Water | $ | $ | ||||||
| Ceramics | ||||||||
| Plastics | ||||||||
| Corporate | ||||||||
| Total consolidated Revenue | ||||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Income (Loss) | ||||||||
| Water | $ | ( | ) | $ | ( | ) | ||
| Ceramics | ( | ) | ( | ) | ||||
| Plastics | ( | ) | ( | ) | ||||
| Other | ( | ) | ( | ) | ||||
| Total consolidated Loss | ( | ) | ( | ) | ||||
| As of | ||||||||
| Total Assets | March 31, 2022 | December 31, 2021 | ||||||
| Water | $ | $ | ||||||
| Ceramics | ||||||||
| Plastics | ||||||||
| Other | ||||||||
| Total consolidated Assets | $ | $ | ||||||
NOTE 12 - SUBSEQUENT EVENTS
In April 2022, the Company re-aligned its corporate management structure, which involved a reduction in headcount and labor costs of approximately
On May 11, 2022, the Company entered into a separation and release agreement with Sune Mathiesen, the Company’s Chief Executive Officer (“CEO”). Mr. Mathiesen had previously taken a medical leave of absence announced in March 2022. LiqTech has retained Heidrick & Struggles, a leading international executive search firm, to assist the Company in a search for a new, permanent CEO. The Company’s current Interim Chief Executive Officer, Alexander J. Buehler, has agreed to maintain the position of Interim CEO for the foreseeable future until a permanent candidate is identified and a proper transition is conducted.
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 31, 2022 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 gas and liquid purification products by manufacturing ceramic silicon carbide filters and membranes. For more than two decades, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in three business areas: ceramic membranes for liquid filtration systems, diesel particulate filters (DPFs) to control 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 office in Denmark and through local representatives and distributors. The products are shipped directly to customers from our production facilities in Denmark.
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 NA, Inc., a Delaware corporation (“LiqTech NA”) and in LiqTech Holding 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 Ceramics A/S (“LiqTech Ceramics”), LiqTech Water A/S (“LiqTech Water”), LiqTech Plastics A/S (“LiqTech Plastics”), LiqTech Water Projects A/S ("LiqTech Water Projects”), LiqTech Emission Control A/S (“LiqTech Emission Control”), all Danish limited companies organized under the Danish Act on Limited Companies of the Kingdom of Denmark, and LiqTech Environment Technologies (China) Co., Ltd. (“LiqTech China”), a Chinese company organized under the Chinese Act on Limited Companies in the Peoples Republic of China. Collectively, LiqTech USA, LiqTech NA, LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics, LiqTech Water Projects, LiqTech Emission Control and LiqTech China are referred to herein as our “Subsidiaries”.
At present, we conduct our operations in the Kingdom of Denmark. Our Danish operations are located in the Copenhagen area, in Hobro, and in Aarhus.
Our Strategy
Our strategy is to leverage our core competencies in material science, fluid dynamics, and systems integration, creating differentiated products with compelling value propositions to penetrate attractive end markets with regulatory and ESG tailwinds. Essential imperatives associated with our strategy include the following:
| ● |
Develop and reinforce new products and applications to provide clean water and reduce pollution We currently provide water filtration systems for scrubber technology providers, shipowners, and ship operators as well as tailored filtration systems for oil & gas operators and services companies. We are expanding our range of products to better leverage existing customer relationships and develop new relationships within the oil & gas, marine, and global chemical industries. |
|
|
|
||
| ● |
Better penetrate existing end markets where our value proposition is strong We have successfully sold products and installed systems into several end markets--including automotive/transportation, clean water and pool filtration, marine, industrial wastewater, and oil & gas. We are focused on targeting and activating new customers in these end markets while working with distributors, agents, and partners to access other important geographic markets. |
|
| ● |
Develop new end markets for our core products and applications. Our existing products and systems are relevant for and valuable to other end markets, and we regularly evaluate opportunities to partner with strategic customers to perfect new applications and validate associated value propositions. |
Results of Operations
The financial information below is derived from our unaudited condensed consolidated financial statements included elsewhere in this report.
The following table sets forth our revenues, expenses and net loss for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, |
||||||||||||||||||||||||
| Period to Period Change |
||||||||||||||||||||||||
| 2022 |
As a % of Sales |
2021 |
As a % of Sales |
Variance |
Percent % |
|||||||||||||||||||
| Revenue |
3,637,236 | 100.0 | % |
3,997,877 | 100.0 | % |
(360,641 | ) |
(-9.0 | )% |
||||||||||||||
| Cost of goods sold |
3,391,695 | 93.2 | 3,883,262 | 97.1 | (491,567 | ) |
(12.7 | ) |
||||||||||||||||
| Gross Profit |
245,541 | 6.8 | 114,615 | 2.9 | 130,926 | 114.2 | ||||||||||||||||||
| Operating Expenses |
||||||||||||||||||||||||
| Selling expenses |
1,059,948 | 29.1 | 1,009,498 | 25.3 | 50,450 | 5.0 | ||||||||||||||||||
| General and administrative expenses |
1,916,517 | 52.7 | 1,474,670 | 36.9 | 441,847 | 30.0 | ||||||||||||||||||
| Research and development expenses |
602,737 | 16.6 | 437,607 | 10.9 | 165,130 | 37.7 | ||||||||||||||||||
| Total Operating Expenses |
3,579,202 | 98.4 | 2,921,775 | 73.1 | 657,427 | 22.5 | ||||||||||||||||||
| Loss from Operation |
(3,333,661 | ) |
(91.7 | ) |
(2,807,160 | ) |
(70.2 | ) |
(526,501 | ) |
(18.8 | ) |
||||||||||||
| Other Income (Expense) |
||||||||||||||||||||||||
| Interest and other income |
99 | - | - | - | 99 | 100.0 | ||||||||||||||||||
| Interest (expense) |
(206,461 | ) |
(5.7 | ) |
(40,419 | ) |
(1.0 | ) |
(166,042 | ) |
410.8 | |||||||||||||
| Amortization discount, convertible note |
(297,338 | ) |
(8.2 | ) |
- | - | (297,338 | ) |
100.0 | |||||||||||||||
| Gain (loss) on currency transactions |
75,993 | 2.1 | 371,864 | 9.3 | (295,691 | ) |
(79.6 | ) |
||||||||||||||||
| Total Other Income (Expense) |
(427,707 | ) |
(11.8 | ) |
331,365 | 8.3 | (758,972 | ) |
(229.1 | ) |
||||||||||||||
| Loss Before Income Taxes |
(3,761,368 | ) |
(103.4 | ) |
(2,475,895 | ) |
(61.9 | ) |
(1,285,473 | ) |
(51.9 | ) |
||||||||||||
| Income Tax Benefit |
(14,944 | ) |
(0.4 | ) |
(16,466 | ) |
(0.4 | ) |
1,522 | 0.1 | ||||||||||||||
| Net Loss |
(3,746,424 | ) |
(103.0 | ) |
(2,459,429 | ) |
(61.5 | ) |
(1,286,995 | ) |
(52.3 | ) |
||||||||||||
Revenue
Revenue for the three months ended March 31, 2022 was $3,637,236 compared to $3,997,877 for the same period in 2021, representing a decrease of $360,641, or 9%. The decrease was attributable to a decline in sales of liquid filters, water treatment systems, and DPFs of $685,213, partly offset by an increase in sales of plastic components of $324,572. The decrease in liquid filters and water treatment systems largely reflect the downturn in the marine industry during the COVID-19 pandemic, whereas the decline in DPFs reflects general market conditions and delays in orders due to continued supply chain constraints. The increase in plastics components was a result of dedicated sales effort and increased market penetration.
Gross Profit
Gross profit for the three months ended March 31, 2022 was $245,541 compared to gross profit of $114,615 for the same period in 2021, representing an increase of $130,926. The increase in gross profit compared to last year was caused by an improvement in sales mix and elevated profitability from sales of plastics components as well as spare-parts and commission activities, partly offset by the negative impact from rising input cost inflation associated with the production of our silicon carbide products, more specifically increased electricity and raw material prices, labor cost inflation, and general price increased on freight and logistic services. Included in the gross profit was depreciation of $496,049 and $471,885 for the three months ended March 31, 2022 and 2021, respectively.
Expenses
Total operating expenses for the three months ended March 31, 2022 were $3,579,202, representing an increase of $657,427, or 23%, compared to $2,921,775 for the same period in 2021.
Selling expenses for the three months ended March 31, 2022 were $1,059,948 compared to $1,009,498 for the same period in 2021, representing an increase of $50,450, or 5%, due to increased costs associated with direct sales, consulting services, and intensified marketing activities.
General and administrative expenses for the three months ended March 31, 2022 were $1,916,517 compared to $1,474,670 for the same period in 2021, representing an increase of $441,847, or 30%. The increase was mainly driven by project management and leasehold expenses in China, coupled with the implementation of a new ERP platform, general recruitment costs, and an increase in overall headcount from 12 as of March 31, 2021 to 14 as of March 31, 2022. Included in general and administrative expenses was non-cash compensation of $178,778 and $102,388 for the three months ended March 31, 2022 and 2021, respectively.
The following is a summary of non-cash compensation:
| For the Three Months Ended |
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| March 31, |
March 31, |
|||||||
| 2022 |
2021 |
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| Compensation for vesting of restricted stock awards issued to the Board of Directors |
$ | 51,125 | $ | 49,376 | ||||
| Compensation for vesting of restricted stock awards issued to management |
127,653 | 53,012 | ||||||
| Total Non-Cash Compensation |
$ | 178,778 | $ | 102,388 | ||||
Research and development expenses for the three months ended March 31, 2022 were $602,737 compared to $437,607 for the same period in 2021, representing an increase of $165,130, or 38%. The increase represents the completion of several development projects during the quarter as well as an increase in the average number of employees engaged in research and development activities from 14 as of March 31, 2021, to 17 as of March 31, 2022.
Other Income (Expenses)
Other Income (Expenses) for the three months ended March 31, 2022 was $(427,707) compared to $331,265 for the comparable period in 2021, representing a decrease of $758,972. This change was mainly related to the Convertible Note issued in April 2021, with $297,338 for the amortization discount and $187,500 for interest expenses, along with a reduction in the gain on currency transactions due to a less favorable DKK/USD exchange rate during the period
Net Loss
Net loss for the three months ended March 31, 2022, was $(3,746,424) compared to $(2,459,429) for the comparable period in 2021, representing an increase in net loss of $1,286,995.
This change was primarily attributable to the reduced revenue, increased operating expenses, and other expenses including interest and amortization discount pertaining to the Convertible Note.
Liquidity and Capital Resources
Based on the prolonged negative effects of the global pandemic and other current global geopolitical issues, we are unable to predict the full impact that these will have on our long-term financial condition, results of operations, liquidity and cash flows. Our compliance with the measures implemented to avoid the spread of COVID-19 has clearly had a material adverse impact on our financial results since March 2020. Based on current projections, which are subject to uncertainties, including the duration and severity of these global macro-economic issues, we believe our cash on hand, as well as our ongoing cash generated from operations might not be sufficient to cover our capital requirements for the next 12 months based on the reported financials ended March 31, 2022 including committed investments to generate revenue growth. In addition, as a result of the reduced order intake, continued supply chain disruptions and decreased manufacturing levels, our gross profit will also likely be unfavorably impacted until such time that we are able to operate our manufacturing facilities at the higher capacity levels that were originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels and continued supply chain disruptions, 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 2022.
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect nor how our business may be adversely affected as a result of these global economic issues and associated supply chain disruptions. In the future, we may experience reduced or changed demand for our products, especially if there is global recession or structural shifts in the demand for our products across our end markets. We could also experience limitations to our ability to produce and ship products resulting from governmental actions and regulations along with further disruptions in the global supply chain.
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 amounting to DKK 20,000,000 (approximately $3,000,000), which was used for a leasing arrangement and guarantees issued to customers for prepayments and warranties after delivery. On March 31, 2022, we had cash of $11,227,061 and net working capital of $5,158,696, and on December 31, 2021, we had cash of $17,489,380 and net working capital of $11,199,259. On March 31, 2022, our net working capital had decreased by $6,040,563 compared to December 31, 2021, mainly as a result of a reduction in cash and cash equivalents and an increase in the current portion of the Convertible Note.
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 guaranteed credit line of EUR1,750,000 (approximately $1,850,000). The credit line is secured by a cash deposit.
Convertible Note
On March 24, 2021, we entered into a Securities Purchase Agreement with an institutional investor pursuant to which the Company agreed to issue and sell a $15.0 million principal amount senior convertible note (the “Note”) due on October 1, 2023 and 80,000 shares of our Common Stock for an aggregate purchase price of $15.0 million upon the satisfaction of the closing conditions set forth in the Purchase Agreement. The Closing occurred on April 8, 2021, and the Company issued to the Investor the securities in connection with the Closing.
The Note is a senior, unsecured obligation of the Company, payable at 112% of the principal amount at maturity (October 1, 2023), or earlier upon redemption or repurchase as set forth in the Note. The Note is convertible into shares of Common Stock pursuant to the terms of the Note, in part or in whole, from time to time, at the election of the Investor. The initial conversion rate is 100.6749 shares of Common Stock per $1,000 of principal amount of the Note. The conversion rate is subject to anti-dilution adjustments including for: stock dividends, splits and combinations; issuances of options, warrants or similar rights; spin-offs and distributions of property; cash dividends or distributions; and tender or exchange offers, in each case as further described in and pursuant to the terms of the Note.
The Note has interest payable quarterly beginning June 1, 2021, at a rate of 5% per annum. The number of shares issuable if the Company elects to pay interest in shares of Common Stock shall be based on the Market Price.
The Company may provide written notice to the Holder electing to convert the entire Principal Amount of the Note if (1) the Daily VWAP per share of Common Stock exceeds one hundred and seventy-five percent (175%) of the Conversion Price on each of twelve (12) consecutive VWAP Trading Days beginning after September 24, 2021; and (2) the Equity Conditions are satisfied on each of such twelve (12) consecutive VWAP Trading Days.
Beginning on March 1, 2022, and on the first day of each calendar month thereafter, at the election of the Investor or Holder, if applicable, the Company shall be required to redeem $840,000 of the amounts due under the Note in cash or Common Stock at 90% of the lesser of (i) the volume-weighted average price (“VWAP”) of the Common Stock on the trading day immediately preceding the payment date and (ii) the average of the lowest three (3) VWAPs over the 10 trading days immediately preceding the payment date, which shall in no case be less than the floor price of $1.75 per share. On March 1, 2022, the Company paid the first installment of $840,000 in cash. On April 1, 2022 and May 1, 2022 the Investor also elected to receive the $840,000 payment in cash.
Cash Flows
Three months ended March 31, 2022 compared to three months ended March 31, 2021
Cash provided by (used in) operating activities for the period ending March 31, 2022 was resulted primarily from the net loss for the period and adjusted for certain non-cash items and changes in assets and liabilities. Cash used in operating activities for the three months ended March 31, 2022 was $(5,034,944), representing a decrease of $3,731,054 compared to cash used in operating activities of $(1,303,890) for the three months ended March 31, 2021. The cash used in operating activities for the three months ended March 31, 2022 consists mainly of the net loss for the period of $(3,746,424) adjusted for depreciation and other non-cash-related items of $1,207,529. Changes in assets and liabilities include increased Accounts receivable of $237,953 and net Contract assets/liabilities of $790,884, with the latter being explained by a work on water treatment systems for delivery in Q2 2022. Furthermore, Accrued expenses and Accounts payable increased by $209,038 and $414,995 respectively.
Net cash used in investing activities was $(183,031) for the three months ended March 31, 2022, as compared to $(414,875) for the three months ended March 31, 2021, representing an increase of $231,844. The investing activities include the purchase of production equipment in Ballerup to increase production capacity and the continued investment in the new ERP platform which is expected to be fully implemented in Q2 2022.
Cash used from financing activities was $(931,807) for the three months ended March 31, 2022, compared to $(101,192) for the three months ended March 31, 2021, representing an increase of $830,615. The increase was mainly driven by the repayment of $840,000 regarding the Convertible Note issued in April 2021. Further, cash from financing activities was negatively impacted by the payment of $91,806 related to the furnace lease agreement.
Off Balance Sheet Arrangements
As of March 31, 2022, 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:
| ● |
The assessment of revenue recognition, which impacts revenue and cost of sales; |
| ● |
the assessment of allowance for product warranties, which impacts gross profit; |
| ● |
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; |
| ● |
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; |
| ● |
the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes; |
| ● |
the valuation of inventory, which impacts gross profit; and |
| ● |
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
For a description of subsequent events, see “Note 12 – Subsequent Events”.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not required to provide quantitative and qualitative disclosures about market risk because we are a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Interim 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. 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 overriding 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 Interim Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of March 31, 2022 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 31, 2022 for the year ended December 31, 2021.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Remediation Initiatives
In response to the identified material weaknesses, Company 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 has hired additional employees into the finance department, and we plan to continue to work on remediating the material weaknesses during 2022 by improving competencies and work processes. Further, an investment in a new ERP system has been made along with other supporting IT systems to support the controls and processes of the Company. These investments are an important part of our remediation plan. Lastly, the Company has started the process of redesigning and ensuring documentation of all processes and procedures related to financial reporting to ensure the effective design and operation of process-level controls.
While management believes that the steps that have been taken and plan to take will improve the overall system of internal control over financial reporting and will remediate the identified material weaknesses, these material weaknesses cannot be considered fully 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.
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.
For a description of contingencies, see “Note 7 – Agreements And Commitments”.
Not required for a “smaller reporting company.”
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.
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
On May 10, 2022, the Board of Directors accepted the resignation of Sune Mathiesen as Chief Executive Officer and a director of the Company effective May 12, 2022 (the “Separation Date”). As previously announced, Mr. Mathiesen has been on a leave of absence since March 17, 2022. In connection with Mr. Mathiesen’s resignation, on May 11, 2022, Mr. Mathiesen and the Company entered into a Separation Agreement and Release (the “Separation Agreement”). Under the Separation Agreement, Mr. Mathiesen will receive DKK1,605,000 (equivalent to US$227,080), which is the equivalent of six months of salary, car allowance and pension contributions, in a lump sum payment, less applicable deductions and withholdings within five days of the date of the Separation Agreement (the “Severance Amount”). In addition, Mr. Mathiesen agreed to cancel 144,000 unvested restricted stock units (“RSUs”), and return, for no value, 39,133 shares of common stock previously issued to him upon the vesting of RSUs, in exchange for 80,000 new RSUs which will vest on December 31, 2022, subject to Mr. Mathiesen’s compliance with the restrictive covenants set forth in the Separation Agreement.
The foregoing summary of the terms of the Separation Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of each, copies of which are attached as Exhibit 10.1 hereto.
| 3.1 | Articles of Incorporation, as amended as of April 28, 2022 | Filed herewith |
| 10.1 | Separation Agreement and Release between LiqTech International A/S and Sune Mathiesen dated May 11, 2022 | Filed herewith |
| 31.1 |
Filed herewith |
|
| 31.2 |
Filed herewith |
|
| 32.1 |
Furnished herewith |
|
| 32.2 |
Furnished herewith |
|
| 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) |
Provided herewith |
| 101. CAL |
Inline XBRL Taxonomy Extension Calculation Link base Document |
Provided herewith |
| 101. DEF |
Inline XBRL Taxonomy Extension Definition Link base Document |
Provided herewith |
| 101. LAB |
Inline XBRL Taxonomy Label Link base Document |
Provided herewith |
| 101. PRE |
Inline XBRL Extension Presentation Link base Document |
Provided herewith |
| 101. SCH |
Inline XBRL Taxonomy Extension Scheme Document |
Provided herewith |
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
Provided herewith |
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.
| LiqTech International, Inc. |
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| Dated: May 12, 2022 |
/s/ Alexander J. Buehler |
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| Alexander J. Buehler, Interim Chief Executive Officer |
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| (Principal Executive Officer) |
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| Dated: May 12, 2022 |
/s/ Simon S. Stadil |
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| Simon S. Stadil, Chief Financial Officer |
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| (Principal Financial and Accounting Officer) |
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