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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

 

FORM 10-Q

 

(Mark One) 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the nine months period ended September 30, 2020

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: 001-36210

 

LiqTech International, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada

 

20-1431677

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

  

 

  

Industriparken 22C, DK 2750 BallerupDenmark

 

  

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  +4544986000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol(s)

 

Name of each exchange on which

registered

Common Stock, $0.001 par value

 

LIQT

 

The Nasdaq Stock Market LLC

 

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. Yes ☒ No ☐

 

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). Yes ☒ No ☐.

 

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

Non-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 No ☒

 

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, at November 9, 2020, was 21,655,461 shares. 

 

 

 

 

 
 

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended September 30, 2020

 

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

4

 

 

Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019

4

 

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) for the Three and Nine Months Ended September 30, 2020 and September 30, 2019 (unaudited)

6

 

 

Condensed Consolidated Statement of Stockholder’s Equity for the period ended September 30, 2020 and September 30, 2019 (unaudited)

8

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and September 30, 2019 (unaudited)

9

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

11

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

26

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

33

 

 

Item 4. Controls and Procedures

33

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

34

 

 

Item 1A. Risk Factors

34

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

Item 3. Defaults Upon Senior Securities

34

 

 

Item 4. Mine Safety Disclosures

34

 

 

Item 5. Other Information

34

 

 

Item 6. Exhibits

35

 

 

SIGNATURES

36

 

2

 

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.

 

3

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

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

 $14,492,549  $9,783,932 

Accounts receivable, net of allowance for doubtful accounts of $154,089 and $612,434 at September 30, 2020 and December 31, 2019, respectively

  3,636,765   6,272,760 

Inventories, net of allowance for excess and obsolete inventory of $765,512 and $665,308 at September 30, 2020 and December 31, 2019, respectively

  5,966,538   5,199,238 

Contract assets

  3,008,541   5,664,929 

Prepaid expenses and other current assets

  665,402   566,398 
         

Total Current Assets

  27,769,795   27,487,257 
         

Long-Term Assets:

        

Property and Equipment, net of accumulated depreciations of $12,066,768 and $10,815,995 at September 30, 2020 and December 31, 2019, respectively

  6,754,404   4,825,952 

Operating lease right-of-use assets

  4,817,875   5,053,614 

Deposits and other assets

  521,649   498,053 

Intangible assets, net of accumulated depreciations of $229,335 and $141,282 at September 30, 2020 and December 31, 2019, respectively

  456,922   488,716 

Goodwill

  247,864   236,131 
         

Total Long-Term Assets

  12,798,714   11,102,466 
         

Total Assets

 $40,568,509  $38,589,723 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

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

 $1,692,550  $4,339,070 

Accrued expenses

  4,988,842   3,222,951 

Current portion of finance lease obligations

  37,620   34,772 

Current portion of operating lease liabilities

  953,087   999,685 

Current portion of contingent earn-out liability

  -   299,585 

Contract liabilities

  1,427,618   1,421,376 

Income taxes payable

  15,394   14,692 
         

Total Current Liabilities

  9,115,111   10,332,131 
         

Deferred tax liability

  306,911   338,763 

Finance lease obligations, net of current portion

  152,476   172,273 

Operating lease liabilities, net of current portion

  4,028,986   4,141,855 

Contingent earn-out liability, net of current portion

  -   599,170 
         

Total Long-term Liabilities

  4,488,373   5,252,061 
         

Total Liabilities

  13,603,484   15,584,192 
         
         

Stockholders' Equity:

        

Series A Mandatory Convertible Preferred stock; par value $0.001, 2,500,000 shares authorized, 0 shares issued and outstanding at September 30, 2020 and December 31, 2019

  -   - 

Common stock; par value $0.001, 25,000,000 shares authorized, 21,655,461 and 20,547,668 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

  21,655   20,548 

Additional paid-in capital

  69,824,156   61,398,150 

Accumulated deficit

  (38,380,339

)

  (32,246,608

)

Accumulated other comprehensive loss

  (4,500,447

)

  (6,166,559

)

         

Total Stockholders' Equity

  26,965,025   23,005,531 
         

Total Liabilities and Stockholders' Equity

 $40,568,509  $38,589,723 

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

5

 

 

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

   

For the Three Months

Ended

   

For the Nine Months

Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

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       -       301,573       -  

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

)

    -       (901,250

)

    -  

Gain (Loss) on currency transactions

    (660,747

)

    403,432       (821,681

)

    244,872  

Gain (Loss) on sale of fixed assets

    -       474       -       (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

)

    -       (46,687

)

    -  
                                 

Net Income (Loss)

  $ (3,873,419

)

  $ 656,357     $ (6,133,731

)

  $ 837,387  
                                 
                                 

Basic Income (Loss) Per Share

  $ (0.18

)

  $ 0.03     $ (0.29

)

  $ 0.04  
                                 

Diluted Income (Loss) Per Share

  $ (0.18

)

  $ 0.03     $ (0.29

)

  $ 0.04  
                                 

Basic Weighted Average Common Shares Outstanding

    21,653,514       20,547,667       21,059,251       19,350,533  
                                 

Diluted Weighted Average Common Shares Outstanding

    21,653,514       20,563,540       21,059,251       19,366,545  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 

 

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE -LOSS (UNAUDITED)

 

   

For the Three Months

Ended

   

For the Nine Months

Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

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

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7

 

 

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

  20,547,668   20,548   61,398,150   (32,246,608

)

  (6,166,559

)

  23,005,531 
                         

Common shares issued in settlement of RSUs for services by the board of directors

  8,212   8   44,992         45,000 
                         

Stock based compensation

         96,222         96,222 
                         

Currency translation, net

               (495,959

)

  (495,959

)

                         

Net Income

            303,499      303,499 
                         

BALANCE, March 31, 2020

  20,555,880   20,556   61,539,364   (31,943,109

)

  (6,662,518

)

  22,954,293 
                         

Common shares issued in settlement of RSUs for services by the board of directors

  8,333   8   (8

)

        - 
                         

Common shares issued for cash at $5.00 per share, net of offering cost of $680,952, May 2020

  1,085,000   1,085   4,742,963         4,744,048 
                         

Stock based compensation

         82,335         82,335 
                         

Currency translation, net

               739,777   739,777 
                         

Net Loss

            (2,563,811

)

     (2,563,811

)

                         

BALANCE, June 30, 2020

  21,649,213   21,649   66,364,654   (34,506,920

)

  (5,922,741

)

  25,956,642 
                         

Prefunded warrants, 515,000, transferred to equity upon modification in August 2020

         3,476,250         3,476,250 
                         

Additional offering cost of $81,923, related to the capital raise in May 2020

         (81,923

)

        (81,923

)

                         

Exercise of stock options

  6,248   6   18,494         18,500 
                         

Stock based compensation

         46,681         46,681 
                         

Currency translation, net

               1,422,294   1,422,294 
                         

Net Loss

            (3,873,419

)

     (3,873,419

)

                         

BALANCE, September 30, 2020

  21,655,461   21,655   69,824,156   (38,380,339

)

  (4,500,447

)

  26,965,025 
                         
                         

BALANCE, December 31, 2018

  18,228,887   18,229   46,552,487   (32,286,224

)

  (5,744,856

)

  8,539,636 
                         

Common shares issued in settlement of RSUs for services by the board of directors

  28,993   29   112,471         112,500 
                         

Stock based compensation

         15,944         15,944 
                         

Exercise of stock options

  45,000   45   133,155         133,200 
                         

Currency translation, net

               (213,922

)

  (213,922

)

                         

Net Income

            34,244      34,244 
                         

BALANCE, March 31, 2019

  18,302,880   18,303   46,814,057   (32,251,980

)

  (5,958,778

)

  8,621,602 
                         

Stock based compensation

         23,167         23,167 
                         

Exercise of warrants

  28,887   29   (29

)

        - 
                         

Common shares issued for cash at $7.25 per share, net of offering cost of $1,390,262, May 2019

  2,215,862   2,216   14,672,522         14,674,738 
                         

Rounding shares in connection with reverse stock split

  39                     
                         

Currency translation, net

               381,217   381,217 
                         

Net Income

            146,786      146,786 
                         

BALANCE, June 30, 2019

  20,547,668   20,548   61,509,717   (32,105,194

)

  (5,577,561

)

  23,847,510 
                         

Stock based compensation

         23,167         23,167 
                         

Additional offering costs of $73,184, related to the capital raise in May 2019

         (73,184

)

        (73,184

)

                         

Currency translation, net

               (1,014,265

)

  (1,014,265

)

                         

Net Income

            656,357      656,357 
                         

BALANCE, September 30, 2019

  20,547,668   20,548   61,459,700   (31,448,837

)

  (6,591,826

)

  23,439,585 

 

8

 

 

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

For the Nine Months Ended

 
   

September 30,

 
   

2020

   

2019

 

Cash Flows from Operating Activities:

               

Net Income (Loss)

  $ (6,133,731

)

  $ 837,387  

Adjustments to reconcile net income to net cash provided by (used in) operations:

               

Depreciation and amortization

    2,019,147       852,705  

Stock-based compensation

    270,238       174,778  

Change in fair value of warrant liability

    901,250       -  

Gain on modification of earn-out liability

    (301,573

)

    -  

Change in deferred tax asset / liability

    (46,687

)

    -  

Changes in assets and liabilities:

               

Accounts receivable

    2,635,995       (4,652,294

)

Inventory

    (767,300

)

    (430,776

)

Contract assets

    2,656,388       (2,610,493

)

Deposits

    -       (2,138,406

)

Prepaid expenses and other current assets

    (82,756

)

    (104,928

)

Accounts payable

    (2,646,520

)

    1,481,881  

Accrued expenses

    1,451,421       1,769,893  

Operating lease liabilities

    (565,209

)

    (347,747

)

Contract liabilities

    6,242       649,349  
                 

Total Adjustments

    5,530,636       (5,356,038

)

                 

Net Cash (used in) Operating Activities

    (603,095

)

    (4,518,651

)

                 

Cash Flows from Investing Activities:

               

Purchase of property and equipment

    (2,904,169

)

    (510,403

)

Purchase of other intangible assets

    (23,932

)

    23,700  

Net cash paid for acquisition

    (301,573

)

    (1,154,902

)

                 

Net Cash used in Investing Activities

    (3,229,674

)

    (1,641,605

)

                 

Cash Flows from Financing Activities:

               

Payments on finance lease obligation

    (26,120

)

    (13,789

)

Proceeds from exercise of stock options

    18,500       133,200  

Proceeds from issuance of prefunded warrants

    2,575,000       -  

Proceeds from issuance of common stock, net

    4,662,125       14,601,554  
                 

Net Cash provided by Financing Activities

    7,229,505       14,720,965  
                 

Gain on Currency Translation

    1,311,881       (700,412

)

                 

Net change in Cash, Cash Equivalents and Restricted Cash

    4,708,617       7,860,297  
                 

Cash, Cash Equivalents and Restricted Cash at Beginning of Period

    9,783,932       3,776,111  
                 

Cash, Cash Equivalents and Restricted Cash at End of Period

  $ 14,492,549     $ 11,636,408  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

9

 

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

For the Nine Months Ended

September 30,

 
   

2020

   

2019

 

Supplemental Disclosures of Cash Flow Information:

               

Cash paid during the period for:

               

Interest

  $ 83,014     $ 4,909  

Income Taxes

  $ -     $ -  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

10

 

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 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 no 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: 

 

  

September 30,

2020

  

December 31,

2019

 

Allowance for doubtful accounts at the beginning of the period

 $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 at the end of the period

 $154,089  $612,434 

  

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 three to ten 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 one to ten years. Customer relationships and other non-contractual intangible assets with determinable lives are amortized over periods of five 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

 $122,135  $701,194  $556,097  $1,389,423 

Australia

  118,089   139,451   222,050   354,965 

South America

  (1,972

)

  -   20,967   - 

Asia

  358,430   2,962,521   2,684,474   5,135,327 

Europe

  2,947,048   5,869,550   14,983,469   19,511,385 
  $3,543,730  $9,672,716  $18,467,057  $26,391,100 

 

 

 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

 $1,899,160  $7,920,745  $12,431,157  $21,414,214 

Diesel particulate filters

  1,009,545   1,330,337   3,730,302   4,320,839 

Plastic components

  503,297   284,486   1,847,092   284,486 

Development projects

  131,728   137,148   458,506   371,561 
  $3,543,730  $9,672,716  $18,467,057  $26,391,100 

 

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

 $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

)

  $1,580,923  $4,243,553 
         

Distributed as follows:

        

Contract assets

 $3,008,541  $5,664,929 

Contract liabilities

  (1,427,618

)

  (1,421,376

)

  $1,580,923  $4,243,553 

 

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:

 

 

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 $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. 

 

 

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

 $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 

 

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 $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

 

  

September 30,

2020

  

December 31,

2019

 

Operating leases:

        

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 operating lease liabilities

 $4,982,073  $5,141,540 
         

Finance leases:

        

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 finance lease liabilities

 $190,096  $207,045 
         

Weighted average remaining lease term:

        

Operating leases

  10.2   10.2 

Finance leases

  4.8   5.5 
         

Weighted average discount rate:

        

Operating leases

  6.3

%

  6.4

%

Finance leases

  3.9

%

  3.9

%

 

Maturities of lease liabilities at September 30, 2020 were as follows:

 

  

Operating

lease

  

Finance

lease

 

2020 (remaining 3 months)

 $275,960  $11,098 

2021

  930,047   44,391 

2022

  847,876   42,745 

2023

  801,928   37,893 

2024

  642,760   38,882 

Thereafter

  3,182,473   34,166 

Total payment under lease agreements

  6,681,044   209,175 

Less imputed interest

  (1,698,971

)

  (19,079

)

Total lease liability

 $4,982,073  $190,096 

 

 

 

 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 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 Water such as receivables, inventory, and equipment.

 

  

 

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 one to three 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 four 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

 $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

  -   - 

Foreign currency effect

  48,818   (10,460

)

Balance at September 30

 $1,058,717  $813,288 

 

 

 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.

 

 

 

 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.

 $(6,133,731

)

 $837,387 

Weighted average number of common shares used in basic earnings per share

  21,059,251   19,350,533 

Effect of dilutive securities, stock options, RSUs, and warrants

  -   16,012 

Weighted average number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share

  21,059,251   19,366,545 

 

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.

 

   

 

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:

 

  

September 30,

2020

 

Warrants outstanding January 1, 2020

  - 

Prefunded warrants issued May 2020

  515,000 

Exercises and conversions

  - 

Warrants outstanding September 30, 2020

  515,000 

 

 

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