LIQTECH INTERNATIONAL INC - Quarter Report: 2015 September (Form 10-Q)

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		As of				As of
		September 30,				December 31,
		2015				2014
		UNAUDITED
Current Assets:
Cash		$	2,347,656			$	5,853,752
Restricted cash			-				218,879
Accounts receivable, net			3,917,945				1,992,206
Other receivables			268,294				344,331
Cost in excess of billing			480,188				1,172,658
Inventories			4,461,616				4,914,866
Prepaid expenses			3,212				55,990
Current deferred tax asset			127,350				109,637
Total Current Assets			11,606,261				14,662,319
Property and Equipment, net accumulated depreciation			3,734,669				4,524,386
Other Assets:
Other investments			5,594				6,085
Long term deferred tax asset			4,182,353				3,496,459
Goodwill			7,777,704				8,460,512
Other intangible assets			11,843				16,708
Deposits			247,671				259,070
Total Other Assets			12,225,165				12,238,834
Total Assets		$	27,566,095			$	31,425,539

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		As of				As of
		September 30,				December 31,
		2015				2014
		UNAUDITED
Current Liabilities:
Current portion of capital lease obligations		$	158,954			$	170,187
Accounts payable			2,579,026				2,336,942
Accrued expenses			1,223,645				1,439,735
Billing in excess of cost			40,051				-
Accrued income taxes payable			-				570
Deferred revenue / customers deposits			271,418				144,476
Total Current Liabilities			4,273,094				4,091,910
Long-term capital lease obligations, less current portion			203,694				368,614
Total Long-Term Liabilities			203,694				368,614
Total Liabilities			4,476,788				4,460,524
Stockholders' Equity:
Common stock; par value $0,001, 100,000,000 shares authorized, 39,532,035 and 39,404,782 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively			39,532				39,405
Additional paid-in capital			35,991,082				35,632,410
Accumulated deficit			(7,726,730	)			(5,382,852	)
Deferred compensation			(599,454	)			(504,748	)
Other comprehensive income, net			(4,615,123	)			(2,835,917	)
Non-controlled interest in subsidiaries			-				16,717
Total Stockholders' Equity			23,089,307				26,965,015
Total Liabilities and Stockholders' Equity		$	27,566,095			$	31,425,539

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		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Net Sales		$	6,933,197			$	4,931,406			$	10,738,753			$	12,102,595
Cost of Goods Sold			4,618,603				3,464,284				9,029,567				9,229,131
Gross Profit			2,314,594				1,467,122				1,709,186				2,873,464
Operating Expenses:
Selling expenses			646,269				831,990				2,084,204				2,430,814
General and administrative expenses			656,090				738,761				2,155,218				2,174,942
Non-cash compensation expenses			106,448				(19,663	)			264,094				372,960
Research and development expenses			171,157				83,113				536,614				223,532
Total Operating Expense			1,579,964				1,634,201				5,040,130				5,202,248
Income (Loss) from Operations			734,630				(167,079	)			(3,330,944	)			(2,328,784	)
Other Income (Expense)
Interest and other income			48,978				16,032				98,680				29,777
Interest expense			(8,677	)			(18,794	)			(43,504	)			(40,914	)
Gain (loss) on investments			(10	)			9				7,285				(832	)
Gain (loss) on currency transactions			(34,834	)			237,551				97,907				192,226
Total Other Income (Expense)			5,457				234,798				160,368				180,257
Income (Loss) Before Taxes			740,087				67,719				(3,170,576	)			(2,148,527	)
Income Tax Expense (Benefit)			118,678				(276,870	)			(848,426	)			(972,430	)
Net Income (Loss)			621,409				344,589				(2,322,150	)			(1,176,097	)
Less Net Income (Loss) Attributable To Non-Controlled Interests in Subsidiaries			(29	)			(2,915	)			21,731				(6,029	)
Net Income (Loss) Attributable To LiqTech		$	621,438			$	347,504			$	(2,343,881	)		$	(1,170,068	)
Basic Earnings (Loss) Per Share		$	0.02			$	0.01			$	(0.06	)		$	(0.04	)
Weighted Average Common Shares Outstanding			39,519,705				35,613,164				39,471,745				30,043,493
Diluted Earnings (Loss) Per Share		$	0.02			$	0.01			$	(0.06	)		$	(0.04	)
Weighted Average Common Shares Outstanding Assuming Dilution			39,531,786				36,034,570				39,471,745				30,043,493

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		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Net Income (Loss)			621,409				344,589				(2,322,150	)			(1,176,097	)
Currency Translation, Net of Taxes			(169,571	)			(1,852,400	)			(1,779,206	)			(1,874,600	)
Other Comprehensive Income (Loss)		$	451,838			$	(1,507,811	)		$	(4,101,356	)		$	(3,050,697	)
Comprehensive Income (Loss) Attributable To Non-controlling Interest in Subsidiaries			25				(1,745	)			(1,633	)			(1,928	)
Comprehensive Income (Loss) Attributable To LiqTech International, Inc.		$	451,813			$	(1,506,066	)		$	(4,099,723	)		$	(3,048,769	)

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		For the Nine Months Period
		Ended September 30
		2015				2014
Cash Flows from Operating Activities:
Net Loss		$	(2,322,150	)		$	(1,176,097	)
Adjustments to reconcile net (loss) to net cash provided (used) by operations:
Depreciation and amortization			1,055,555				1,264,536
Non-cash compensation			264,094				372,960
Bad debt expense			35,163				131,111
Reserve for obsolete inventory			76,492				-
Change in deferred tax asset / liability			(703,607	)			(893,309	)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable			(1,884,865	)			9,570
(Increase) decrease in inventory			376,758				434,124
(Increase) decrease in prepaid expenses/deposits			64,177				(54,803	)
Increase (decrease) in accounts payable			242,084				(1,146,846	)
Increase (decrease) in accrued expenses			(89,718	)			(2,211,334	)
Increase (decrease) long-term contracts			732,521				(438,682	)
Total Adjustments			168,654				(2,532,673	)
Net Cash Used by Operating Activities			(2,153,496	)			(3,708,770	)
Cash Flows from Investing Activities:
Purchase of property and equipment			(409,093	)			(190,440	)
Acquisition of Provital Solutions AS			-				(1,874,684	)
Net Cash Provided (Used) by Investing Activities			(409,093	)			(2,065,124	)
Cash Flows from Financing Activities:
Restricted Cash			218,879				-
Payments on notes payable			-				(131,559	)
Net payments on lines of credit			-				(1,791,895	)
Net payments proceeds on capital lease obligation			(176,153	)			(144,596	)
Proceeds from issuance of common stock and warrants			-				12,071,250
Payment of stock offering costs			-				(1,149,096	)
Net Cash Provided (Used) by Financing Activities			42,726				8,854,104
Loss on Currency Translation			(986,233	)			(1,228,372	)
Net Increase (Decrease) in Cash and Cash Equivalents			(3,506,098	)			1,851,838
Cash and Cash Equivalents at Beginning of Period			5,853,752				4,884,275
Cash and Cash Equivalents at End of Period		$	2,347,656			$	6,736,113

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		For the Nine Months Period Ended September 30
		2015				2014
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest		$	43,504			$	40,914
Income Taxes			-			$	1,000
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Compensation upon vesting of stock options (pre-vested forfeitures) granted to employees and the board of directors		$	112,528			$	(6,439	)
Compensation for vesting of restricted stock awards issued to the board of directors			146,250				319,999
Value of stock issued to acquire Provital Solutions AS			-				6,067,173
Value of warrants issued for services			5,316				59,400
Total		$	264,094			$	6,440,133

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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Business and Basis of Presentation

 

The consolidated financial statements include the accounts of LiqTech International, Inc. (“Parent”) and its subsidiaries. The terms "Company", “us", "we" and "our" as used in this report refer to Parent and its subsidiaries, which are set forth below. The Company engages in the development, design, production, marketing and sale of automated filtering systems, liquid filters, diesel particulate air filters and kiln furniture in United States, Canada, Europe, Asia and South America. Set forth below is a description of Parent and each of its subsidiaries:

 

LiqTech International, Inc., a Nevada corporation incorporated in July 2004, formerly known as Blue Moose Media, Inc. (also referred to herein as Parent).

 

LiqTech USA, a Delaware corporation and a wholly owned subsidiary of Parent formed in May 2011.

 

LiqTech International AS (“LiqTech Int. DK”), a Danish corporation, incorporated on January 15, 2000, a 100% owned subsidiary of LiqTech USA, engages in development, design, application, marketing and sales of ceramic liquid filters, diesel particulate filters and catalytic converters in Europe, Asia and South America.

 

LiqTech NA, Inc. (“LiqTech NA”), incorporated in Delaware on July 1, 2005, a 100% owned subsidiary of LiqTech USA as of December 31, 2013, prior to December 31, 2013 LiqTech NA, Inc. was owned 90% by LiqTech International AS and 10% by LiqTech USA, LiqTech NA, Inc. engages in the production, marketing and sale of ceramic diesel particulate and liquid filters and kiln furniture in United States and Canada.

  

LiqTech Germany (“LiqTech Germany”), a 100% owned subsidiary of LiqTech Int. DK, incorporated in Germany on December 9, 2011, engages in marketing and sale of liquid filters in Germany.

 

LiqTech PTE Ltd, (“LiqTech Sing”), a 95% owned subsidiary of LiqTech Int. DK, incorporated in Singapore on January 19, 2012, engages in marketing and sale of liquid filters in Singapore and other countries in the area.

 

Provital Solutions AS (“Provital”), a Danish corporation was incorporated on September 1, 2009 and engages in the manufacture of fully automated filtering systems for application within the pool and spa markets, marine applications, and a number of industrial applications within Denmark and international markets. The financial statements include the accounts of Provital from the date of acquisition on July 29, 2014.

 

LiqTech Asia (“LiqTech Asia”), a former 60% owned subsidiary of LiqTech Int. DK, incorporated in South Korea on July 20, 2006, liquidated in March 2015.

 

The accompanying financial statements are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2015 and 2014 and for the periods then ended have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.

 

It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2014 audited consolidated financial statements. The results of operations for the periods ended September 30, 2015 and 2014 are not necessarily indicative of the operating results for the full year.

 

Consolidation --The consolidated financial statements include the accounts and operations of the Company. The non-controlling interests in the net assets of the subsidiaries are recorded in equity. The non-controlling interests of the results of operations of the subsidiaries are included in the results of operations and recorded as the non-controlling interest in subsidiaries. All material intercompany transactions and accounts have been eliminated in the consolidation.

 

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 Int. DK and Provital 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 U.S. Dollar for the purpose of these financial statements. The foreign subsidiaries balance sheet accounts 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 years ended September 30, 2015 and 2014. 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.

 

 

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. The Company had no balances held in financial institutions in the United States in excess of federally insured amounts at September 30, 2015 and December 31, 2014.

 

Accounts Receivable -- Accounts receivable consist of trade receivables arising in the normal course of business. The Company establishes an allowance for doubtful accounts, which 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 and other currently available evidence.

 

The roll forward of the allowance for doubtful accounts for the nine months ended September 30, 2015 and the year ended December 31, 2014 is as follows:

 

   

Inventory -- Inventory is carried at the lower of cost or market, as determined on the first-in, first-out method.

 

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 (See Note 4). 

 

Long-Term Investments -- Investments in non-consolidated companies are included in long-term investments in the consolidated balance sheet and are accounted for under the cost method and equity method. For these non-quoted investments, we regularly review the assumptions underlying the operating performance and cash flow forecasts based on information requested from these privately held companies. Generally, this information may be more limited, may not be as timely as and may be less accurate than information available from publicly traded companies. Assessing each investment's carrying value requires significant judgment by management. If it is determined that there is an-other-than-temporary decline in the fair value of a non-public equity security, we write-down the investment to its fair value and record the related write-down as an investment loss in the consolidated statement of operations.

 

Intangible Assets -- Definite life intangible assets include patents. The Company accounts for definite life intangible assets in accordance with Financial Accounting Standards Board, (“FASB”) Accounting Standards Codification, (“ASC”) Topic 350, “Goodwill and Other Intangible Assets” and amortized the patents on a straight-line basis over the estimated useful life of two to ten years. 

 

Goodwill -- Goodwill is evaluated for impairment annually, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows.

 

Revenue Recognition and Sales Incentives -- The Company accounts for revenue recognition in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101), FASB ASC 605 Revenue Recognition. The Company recognizes revenue when rights and risk of ownership have passed to the customer, when there is persuasive evidence of an arrangement, product has been shipped or delivered to the customer, the price and terms are finalized, and collections of resulting receivable is reasonably assured. Products are primarily shipped FOB shipping point at which time title passes to the customer. In some instances, the Company uses common carriers for the delivery of products. In these arrangements, sales are recognized upon delivery to the customer. The Company's revenue arrangements with its customers often include early payment discounts and such sales incentives are recorded against sales.

 

The Company has received long-term contracts for the installation of various water filtrations systems and grants from Government entities for development and use of silicon carbide membranes in various water filtration and treatment applications. Revenues from long-term contracts and grants are recognized on the percentage-of-completion method, measured by the percentage of project costs incurred to date to estimated total project costs for each long-term contract or grant multiplied by the long-term contract or grant income on a project by project basis. This method is used because management considers costs incurred to be the best available measure of progress on contracts in process.

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Project costs of the long-term contracts and grants include all direct material and labor costs and those indirect costs related to the project. Project costs are capitalized and accreted into cost of sales based on the percentage of the project completed. Should a loss be estimated on an incomplete project it would be recorded in the period in which such a loss is determined. Changes in estimated profitability of a project are recognized in the period in which the revisions are determined. The aggregate of costs incurred and income recognized on incomplete projects are recorded as costs in excess of billings and are shown as a current asset. The aggregate of billings in excess of related costs incurred and income recognized on projects is shown as a current liability.

 

In Denmark, Value Added Tax (“VAT”) of 25% of the invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities.

 

Advertising Cost -- Cost incurred in connection with advertising of the Company’s products is expensed as incurred. Such costs amounted to $30,045 and $17,120 for the nine months ended September 30, 2015 and 2014, respectively.

 

Research and Development Cost -- The Company expenses research and development costs for the development of new products and systems as incurred. Included in operating expense for the nine months ended September 30, 2015 and 2014 were $536,614 and $223,532, respectively, of research and development costs.

 

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 for 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 common shares 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 common shares included in the diluted earnings per share calculation include in-the-money stock options and warrants that have been granted but have not been exercised.

 

Stock Options -- The Companies have granted stock options to certain key employees. See Note 13. During the periods presented in the accompanying consolidated financial statements, the Company has granted options. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Non-cash compensation costs of $112,528 and $(6,439) have been recognized for the vesting of options granted to employees with an associated recognized tax benefit of $0 and $0 for the nine months ended September 30, 2015 and 2014, respectively.

 

Fair Value of Financial Instruments -- The Company accounts for fair value measurements for financial assets and financial 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 nonrecurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an asset or be 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, prepaid expenses, investments, accounts payable, accrued expenses, capital lease obligations and notes payable approximates 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 allowance for doubtful accounts receivable, cost in excess of billings, reserve for obsolete inventory, depreciation and impairment of property plant and equipment and impairment of goodwill and liabilities billings in excess of cost commitment 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.

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ( Continued)

 

Recent Accounting Pronouncements -- In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, the FASB agreed to delay the effective date by one year. In accordance with the agreed upon delay, the new standard is effective for us beginning in the first quarter of 2018 and we expect to adopt it at that time. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method nor have we determined the impact of the new standard on our consolidated condensed 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 - RELATED PARTY TRANSACTIONS

 

Payments to Related Parties -- On January 14, 2014, the Compensation Committee approved a special 2013-bonus payment in the amount of $175,000 to Aldo Petersen for his assistance in the Company’s successful 2013 capital raise. 

 

During October and December 2014, an officer of LiqTech NA provided $25,000 and $35,000, respectively, in non-interest bearing advances to the Company. These advances have been included in accounts payable at December 31, and were repaid in January 2015.

 

During March 2015, an officer of LiqTech NA provided $25,000 in non-interest bearing advances to the Company. These advances were repaid in May 2015.

 

NOTE 3 - INVENTORY

 

Inventory consisted of the following at September 30, 2015 and December 31, 2014:

 

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at September 30, 2015 and December 31, 2014:

 

 

Depreciation expense amounted to $1,050,690 and $1,258,479 for the nine months ended September 30, 2015 and 2014, respectively. 

 

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NOTE 5 - INVESTMENTS AT COSTS

 

The following tables summarize Level 1, 2 and 3 financial assets and financial (liabilities) by their classification in the Statement of Financial Position:

 

 

   

At September 30, 2015 and December 31, 2014, our total investments of $5,594 and $6,085, respectively consisted of an investment in LEA Technology in France to strengthen our sales channels in the French market. 

 

NOTE 6 - DEFINITE-LIFE INTANGIBLE ASSETS

 

At September 30, 2015 and December 31, 2014, definite-life intangible assets, net of accumulated amortization, consisted of patents on the Company’s products of $11,843 and $16,708, respectively. The patents are recorded at cost and amortized over two to ten years. Amortization expense for the nine months ended September 30, 2015 and 2014 was $4,865 and $6,057, respectively. Expected future amortization expense for the years ended are as follows: 

 

 

NOTE 7 - GOODWILL

 

The following is a summary of goodwill:

 

 

 

 

 

Impairment -- During December 2014, management performed its annual test of impairment of goodwill by comparing the net carrying value of the intangible asset with the fair value of the reporting unit. Based upon the results of this analysis, it was determined that the goodwill was not impaired. During December 2014, an adjustment was made to the goodwill acquired in the acquisition of Provital for $775,788 in allowances established against acquired receivables and $196,255 in additional cost on record on long-term contacts net of $135,990 in taxes.

 

NOTE 8 - LINES OF CREDIT

 

Provital had previously a DKK 2,000,000 (approximately $300,000 at September 30, 2015) standby line of credit with a bank, subject to certain borrowing base limitations. Outstanding borrowings are due on demand. Interest is calculated based on a variable interest rate and is payable quarterly. The line was cancelled June 12, 2015. 

 

In connection with certain orders, we have to give the customer a working guarantee or a prepayment guarantee or security bond. For that purpose, we have a credit line of DKK 500,000 (approximately $75,000 at September 30, 2015) with a bank, subject to certain base limitations. As September 30, 2015, we had DKK 473,100 (approximately $71,000) in working guarantee against the line. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of Provital such as receivables, inventory and equipment.

 

NOTE 9 – LEASES

 

Operating Leases -- The Company leases office and production facilities under operating lease agreements expiring in August 2018, March 2017, February 2017, June 2017, December 2016 and June 2016. In some of these lease agreements, the Company has the right to extend.

 

The future minimum lease payments for non-cancelable operating leases having remaining terms in excess of one year as of September 30, 2015 are as follows:

 

 

Lease expense charged to operations was $521,871 and $539,443 for the nine months ended September 30, 2015 and 2014, respectively.

 

Capital Leases -- The Company leases equipment on various variable rate capital leases currently calling for monthly payments of approximately $9,871, $3,825, $625 and $563 expiring through July 2018. Included in property and equipment, at September 30, 2015 and December 31, 2014, the Company had recorded equipment on capital lease at $1,335,480 and $1,599,633, respectively, with related accumulated depreciation of $1,025,125 and $963,467, respectively. 

  

During the nine months ended September 30, 2015 and 2014, depreciation expense for equipment on capital leases amounted to $107,375, and $153,378, respectively, and has been included in depreciation expense. During the nine months ended September 30, 2015 and 2014, interest expense on a capital lease obligation amounted to $21,139 and $30,227, respectively.

   

Future minimum capital lease payments are as follows for the periods ended December 31: 

 

 

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NOTE 10 – AGREEMENTS AND COMMITMENTS

 

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, 2015 and 2014, matching contributions were expensed and totaled $10,784 and $12,110, respectively.

 

NOTE 11 – INCOME TAXES

 

The Company accounts for income taxes in accordance with FASB ASC Topic 740, Accounting for Income Taxes; which requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carry forwards. The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which cannot be determined.

 

The temporary differences, tax credits and carry forwards gave rise to the following deferred tax asset (liabilities) at September 30, 2015 and December 31, 2014: 

 

  

In accordance with prevailing accounting guidance, the Company is required to recognize and disclose any income tax uncertainties. The guidance provides a two-step approach to recognizing and measuring tax benefits and liabilities when realization of the tax position is uncertain. The first step is to determine whether the tax position meets the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%.

 

The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which can difficult to determine and can only be estimated. Management estimates that it is more likely than not that the Company will generate adequate net profits to use the deferred tax assets; management has estimated that all of the deferred tax will be realized and consequently, a valuation allowance was not recorded.

 

A reconciliation of income tax expense at the federal statutory rate to income tax expense at the Company’s effective rate is as follows for the nine months ended September 30, 2015 and 2014: 

 

 

The components of income tax expense (benefit) from continuing operations for the nine months ended September 30, 2015 and 2014 consisted of the following:

 

 

Deferred income tax expense / (benefit) results primarily from the reversal of temporary timing differences between tax and financial statement income.

 

The Company files Danish and U.S. federal and Minnesota state income tax returns. LiqTech International AS is generally no longer subject to tax examinations for years prior to 2009 for their Danish tax returns. LiqTech NA is generally no longer subject to tax examinations for years prior to 2011 for U.S. federal and U.S. states tax returns. 

 

NOTE 12 – INCOME (LOSS) PER SHARE

 

The following data shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of potential dilutive common stock for the nine months ended September 30, 2015 and 2014:  

 

 

For the nine months ended September 30, 2015, Parent had 1,013,500 options outstanding to purchase common stock of the Parent at $0.74 to $1.90 per share and Parent had 7,225,575 warrants outstanding to purchase common stock of the Parent at $1.00 to $4.06 per share, which were not included in the loss per share computation because their effect would be anti-dilutive.

 

For the nine months ended September 30, 2014, Parent had 2,416,630 options outstanding to purchase common stock of the Parent at $1.50 to $3.60 per share and Parent had 7,425,575 warrants outstanding to purchase common stock of the Parent at $1.50 to $4.06 per share, which were not included in the loss per share computation because their effect would be anti-dilutive.

 

NOTE 13 - STOCKHOLDERS' EQUITY

 

Common Stock -- Parent has 100,000,000 authorized shares of common stock, $0.001 par value. As of September 30, 2015 and December 31, 2014, respectively, there were 39,532,035 and 39,404,782 common shares issued and outstanding.    

 

 

Voting -- Holders of Parent 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 which may at the time be outstanding, holders of Parent 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 of Parent, 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 Parent common stock will be entitled to share ratably in the distribution of any of our remaining assets.  

  

Other Matters -- Holders of Parent common stock have no conversion, preemptive or other subscription rights, and there are no redemption rights or sinking fund provisions with respect to the common stock. All of the issued and outstanding shares of common stock on the date of this report are validly issued, fully paid and non-assessable.

 

Preferred Stock -- Our Board of Directors has the authority to issue Parent 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 Parent preferred stock may have the effect of delaying, deferring or preventing a change in control of us without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.

 

Common Stock Issuance

 

On April 14, 2015, the Company issued an additional 27,253 shares of restricted stock valued at $20,167 for services provided and to be provided by the board of directors. The Company will recognize the non-cash compensation of the award over the requisite service period, of which 27,253 shares will vest on December 31, 2015.

 

On April 13, 2015, the Company issued an additional 100,000 shares of restricted stock valued at $75,000 for services provided and to be provided by the board of directors. The Company will recognize the non-cash compensation of the award over the requisite service period, of which 33,333 shares will vest on December 31, 2015, 33,333 shares will vest on December 31, 2016 and 33,334 shares will vest on December 31, 2017.

 

On July 28, 2014, Parent completed a registered public offering of its common stock. As part of the closing, Parent issued 8,000,000 shares of common stock at a per share price of $1.50 and generated net proceeds of $10,736,278 net of offering costs of $1,263,722.  

 

On the July 29, 2014, the Company, through its subsidiary, LiqTech Int. DK, completed the acquisition of all of the issued and outstanding capital stock (the “Provital Shares”) of Provital and as part of the consideration for the Provital Shares, the Company issued 4,044,782 of Parent’s common shares. 

 

During the third quarter 2014, the Company issued 47,500 shares of common stock in connection with the exercise of 47,500 stock options with an exercise price of $1.50 each.

 

During 2014, the Company issued an additional 100,000 shares of restricted stock valued at $158,000 for services provided by the board of directors. The Company will recognize the non-cash compensation of the award over the requisite service period, of which 33,333 shares vested on December 31, 2014, 33,333 shares will vest on December 31, 2015 and 33,334 shares will vest on December 31, 2016. During 2013, the Company issued an additional 300,000 shares of restricted stock valued at $960,000 for services provided and to be provided by the board of directors. The Company will recognize the non-cash compensation of the award over the requisite service period, of which 133,333 shares vested on December 31, 2013, 133,333 shares vested on December 31, 2014 and 33,334 shares will vest on December 31, 2015. As of December 31, 2014 and 2013, the Company has recorded non-cash compensation expense of $479,333 and $426,667 relating to the awards, respectively.  

  

 

Common Stock Purchase Warrants

 

A summary of the status of the warrants outstanding at September 30, 2015 is presented below:

 

    

At September 30, 2015, the Company had 133,333 non-vested warrants. We have recorded non-cash compensation expense of $5,316 for the period ended September 30, 2015 related to the warrants issued.

 

The exercise price of the warrants and the number of shares underlying the warrants are subject to adjustment for stock dividends, subdivisions of the outstanding shares of common stock and combinations of the outstanding shares of common stock. For so long as the warrants remain outstanding, we are required to keep reserved from our authorized and unissued shares of common stock a sufficient number of shares to provide for the issuance of the shares underlying the warrants.

 

On June 4, 2015, the Company issued to Wolfe Axelrod Weinberger Associates, LLC a warrant to purchase 200,000 shares at an exercise price of $1.00 per share. The warrants are exercisable 1/3 upon issuance, 1/3 on June 4, 2016 and 1/3 on June 2017 and will remain exercisable until December 31, 2017.

 

On July 28, 2014, the Company issued to the Underwriter in our public offering, for a price of $50, a warrant to purchase 400,000 shares at an exercise price of $1.65 per share. The warrants are immediately exercisable and will remain exercisable for five years from date of issuance.

 

Stock Options  

 

In August 2011, Parent’s Board of Directors adopted a Stock Option Plan (the “Plan”). Under the terms and conditions of the Plan, the Board of Directors is empowered to grant stock options to employees, officers, and directors of the Companys. At September 30, 2015, 1,013,500 options were granted and outstanding under the Plan. 

 

The Company recognizes compensation costs for stock option awards to employees based on their grant-date fair value. The value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average assumptions used to estimate the fair values of the stock options granted using the Black-Scholes option-pricing model are as follows:

 

 

The Company recognized stock based compensation expense related to the options of $68,317 and $119,891 for the nine months ended September 30, 2015 and 2014, respectively. At September 30, 2015 the Company had approximately $260,248 of unrecognized compensation cost related to non-vested options expected to be recognized through April 13, 2020.

 

 

A summary of the status of the options outstanding under the Company’s stock option plans at September 30, 2015 is presented below: 

 

 

A summary of the status of the options at September 30, 2015, and changes during the period is presented below:

 

 

At September 30, 2015, the Company had 721,167 non-vested options with a weighted average exercise price of $1.03 and with a weighted average grant date fair value of $0.52, resulting in unrecognized compensation expense of $374,781, which is expected to be expensed over a weighted-average period of 3.46 years.

 

The total intrinsic value of options at September 30, 2015 was $67,250. Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at September 30, 2015 (for outstanding options), less the applicable exercise price. 

  

NOTE 14 - SIGNIFICANT CUSTOMERS / CONCENTRATION

 

For the nine months ended September 30, 2015, our four largest customers accounted for approximately 16%, 12%, 9% and 6%, respectively of our net sales (approximately 43% in total).

 

The Company had no customers that accounted for more than 10% of total sales at September 30, 2014.

   

The Company sells products throughout the world; sales by geographical region are as follows for the three and nine months ended September 30, 2015 and 2014:  

 

 

 

The Company’s sales by product line are as follows for the three and nine months ended September 30, 2015 and 2014:

 

 

NOTE 15 – COMMITTMENTS

 

Contingent Shares In Connection With Acquisition - On the July 29, 2014, the Company, through its subsidiary, LiqTech Int. DK, completed the acquisition of all of the issued and outstanding Provital Shares of Provital from Masu A/S, a Danish company (“MASU”). In consideration for the Provital Shares, MASU received cash consideration in the sum of DKK 12,600,000, (approximately USD$2,300,000 as of July 29, 2014), and 4,044,782 shares of the Company’s common stock (the “Payment Shares”). One-third (1/3) of the Payment Shares was subject to a lock-up period of six (6) months. The remaining two-thirds (2/3) of the Payment Shares shall be held in escrow and one-third of the Payment Shares will be released from escrow contingent upon Provital, for the year ending December 31, 2014, achieving (i) gross revenues of not less than DKK 65,000,000 and EBITDA of DKK 6,500,000, or (ii) EBITDA of not less than DKK 10,000,000 and gross revenues of not less than DKK 50,000,000. Another one-third (1/3) of the Payment Shares will be released from escrow contingent upon Provital, for the year ending December 31, 2015, achieving (i) gross revenues of not less than DKK 120,000,000 and EBITDA of DKK 12,000,000, or (ii) EBITDA of not less than DKK 16,000,000 and gross revenues of not less than DKK 80,000,000.   

 

The purchase agreement includes “catch up” provisions that provide that the Payment Shares placed in escrow will be released from escrow if Provital (1) for the years ending December 31, 2014 and December 31, 2015, achieves accumulated gross revenues (i) exceeding DKK 185,000,000 and EBITDA of DKK 18,500,000, or (ii) EBITDA of not less than DKK 26,000,000 and gross revenues of not less than DKK 130,000,000 or (2) for the year ending December 31, 2016, achieves gross revenues exceeding DKK 105,000,000 and EBITDA of not less than DKK 21,000,000. 

 

NOTE 16 – SUBSEQUENT EVENTS

 

The Company’s management reviewed material events through November 12, 2015 and there were no subsequent events.

 

 

 October 13, 2015, Parent held its annual meeting of stockholders (the “Meeting”). A total of 30,851,565 shares of Parent’s common stock, par value $0.001 per share (“Common Stock”), were present or represented by proxy at the Meeting, representing approximately seventy eight percent (78%) of the outstanding Common Stock as of September 8, 2015, the record date for the Meeting. At the Meeting, the following four (4) proposals were submitted for a vote and approved by the requisite votes of the stockholders: (a) the election of Aldo Petersen, Paul Burgon, Mark Vernon, Michael S. Barish, Rengarajan Ramesh, and Sune Mathiesen for terms until the next succeeding annual meeting of stockholders or until such directors’ successor shall have been duly elected and qualified, (b) the ratification of Gregory & Associates, LLC as Parent’s independent registered accounting firm. (c) the approval of a non-binding advisory resolution approving the compensation of Parent’s named executive officers and (d) the approval of a non-binding resolution regarding the frequency of future advisory votes on the compensation of Parent’s named executive officers which could be held every year, every two (2) years or every three (3) years.

 

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