LIQTECH INTERNATIONAL INC - Quarter Report: 2018 September (Form 10-Q)

 

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, 2018

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, DK2750 Ballerup, Denmark
(Address of principal executive offices)	(Zip Code)

 

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

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 (Do not check if a smaller  reporting company)	☐	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 14, 2018, was 72,905,547 shares.  

 

 

 

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended September 30, 2018

 

TABLE OF CONTENTS

 

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	4
Condensed consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017	4
Condensed consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and September 30, 2017 (unaudited)	6
Condensed consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and September 30, 2017 (unaudited)	8
Notes to Condensed consolidated Financial Statements (unaudited)	10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	30
PART II. OTHER INFORMATION
Item 1A. Risk Factors	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3. Defaults Upon Senior Securities	31
Item 4. Mine Safety Disclosures	31
Item 5. Other Information	31
Item 6. Exhibits	32
SIGNATURES	33

 

 

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, 2017. 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.  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.

  

 

 

		As of				As of
		September 30,				December 31,
		2018				2017
		Unaudited
Current Assets:
Cash		$	3,861,595			$	2,486,199
Accounts receivable, net			2,453,293				1,124,842
Other receivables			677,295				636,539
Contract assets			703,971				490,100
Inventories, net			4,253,149				4,661,866
Prepaid expenses			38,162				28,151
Total Current Assets			11,987,465				9,427,697
Property and Equipment, net accumulated depreciation			1,605,831				1,959,205
Other Assets:
Investments at cost			5,783				6,001
Intangible assets			1,363				3,349
Deposits			350,950				283,686
Total Other Assets			358,096				293,036
Total Assets		$	13,951,392			$	11,679,938

---

		As of				As of
		September 30,				December 31,
		2018				2017
		Unaudited
Current Liabilities:
Current portion of capital lease obligations		$	74,313			$	26,186
Accounts payable			1,474,214				1,775,230
Accrued expenses			1,607,675				1,724,986
Contract liabilities			440,378				306,845
Accrued income taxes payable			570				580
Deferred revenue / customers deposits			724,382				933,994
Total Current Liabilities			4,321,532				4,767,821
Total Liabilities			4,321,532				4,767,821
Agreements and Contingencies See Note 9			-				-
Stockholders' Equity:
Series A Convertible Preferred Stock; par value $0.001, 0 and 2,200,837 shares issued and outstanding at September 30, 2018 and December 31, 2017 respectively			-				2,201
Common stock; par value $0,001, 100,000,000 shares authorized, 72,740,547 and 44,429,264 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively			72,741				44,430
Additional paid-in capital			46,356,874				40,457,907
Accumulated deficit			(31,190,458	)			(28,471,696	)
Deferred compensation			(46,666	)			(79,933	)
Other comprehensive income, net			(5,562,631	)			(5,040,792	)
Total Stockholders' Equity			9,629,860				6,912,117
Total Liabilities and Stockholders' Equity		$	13,951,392			$	11,679,938

---

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2018				2017				2018				2017
Net Sales		$	3,347,204			$	2,456,484			$	9,336,614			$	8,350,758
Cost of Goods Sold			3,058,465				2,772,451				8,447,645				8,202,634
Gross Profit (Loss)			288,739				(315,967	)			888,969				148,124
Operating Expenses:
Selling expenses			414,504				521,627				1,288,294				1,506,329
General and administrative expenses			657,714				433,368				1,914,927				1,518,935
Non-cash compensation expenses			5,833				24,055				93,267				150,013
Research and development expenses			152,849				121,680				498,526				375,026
Total Operating Expenses			1,230,900				1.100,730				3,795,014				3,550,343
Loss from Operations			(942,161	)			(1,416,697	)			(2,906,045	)			(3,402,219	)
Other Income (Expense)
Interest and other income			1,814				2,790				12,271				3,093
Interest expense			(5,463	)			(3,781	)			(65,937	)			(23,308	)
Gain (loss) on currency transactions			23,861				(26,913	)			240,947				(54,600	)
Loss on sale of equipment			-				(34,824	)			-				(28,056	)
Total Other Income (Expense)			20,212				(62,728	)			187,281				(102,871	)
Loss Before Income Taxes			(921,949	)			(1,479,425	)			(2,718,764	)			(3,505,090	)
Income Tax Expense			-				-				-				-
Net Loss		$	(921,949	)		$	(1,479,425	)		$	(2,718,764	)		$	(3,505,090	)
Basic and Diluted Loss Per Share		$	(0.013	)		$	(0.03	)		$	(0.04	)		$	(0.09	)
Basic and Diluted Weighted Average Common Shares Outstanding			72,740,547				44,229,264				60,799,235				40,604,129

---

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2018				2017				2018				2017
Net Loss			(921,949	)			(1,479,425	)			(2,718,764	)			(3,505,090	)
Currency Translation, Net of Taxes			(63,279	)			142,599				(521,839	)			454,487
Other Comprehensive Loss		$	(985,228	)		$	(1,336,826	)		$	(3,240,603	)		$	(3,050,603	)

---

 

		For the Nine months ended
		September 30,
		2018				2017
Cash Flows from Operating Activities:
Net Loss		$	(2,718,764	)		$	(3,505,090	)
Adjustments to reconcile net loss to net cash provided (used) by operations:
Depreciation and amortization			621,460				732,963
Stock-based compensation			93,267				150,013
Bad debt expense			-				(59,409	)
Reserve for obsolete inventory			(163,671	)			-
Loss on sale of equipment			-				(28,056	)
Changes in assets and liabilities:
Accounts receivable			(1,369,207	)			(478,879	)
Inventory			454,238				238,986
Prepaid expenses/deposits			(47,243	)			26,817
Accounts payable			(301,016	)			27,657
Accrued expenses			(326,932	)			340,371
Long-term contracts			(80,338	)			(202,066	)
Total Adjustments			(1,119,442	)			804,510
Net Cash Used in Operating Activities			(3,838,206	)			(2,700,580	)
Cash Flows from Investing Activities:
Purchase of property and equipment			(145,984	)			(94,950	)
Proceeds from sale/recovery of property and equipment			-				12,827
Net Cash Used in Investing Activities			(145,984	)			(82,124	)
Cash Flows from Financing Activities:
Net proceeds/payments on capital lease obligation			48,127				(110,963	)
Payments on loans payable			-				(6,347	)
Proceeds from issuance of common stock			6,612,500				1,825,000
Payment of stock offering costs			(747,423	)			-
Net Cash Provided by Financing Activities			5,913,204				1,707,690
Gain (Loss) on Currency Translation			(553,618	)			394,930
Net Change in Cash and Cash Equivalents			1,375,396				(680,084	)
Cash and Cash Equivalents at Beginning of Period			2,486,199				1,208,650
Cash and Cash Equivalents at End of Period		$	3,861,595			$	528,566

---

		For the Nine Months Ended September 30,
		2018				2017
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest Paid		$	65,937			$	23,308
Income Taxes		$	-			$	-
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Common stock issued for conversion of mandatory preferred stock		$	8,803			$	-
Compensation upon vesting of stock options granted to employees			15,767				58,038
Compensation for vesting of restricted stock awards issued to the board of directors			77,500				78,750
Value of warrants issued for services			-				13,225
Total		$	93,267			$	150,013

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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business and Basis of Presentation

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements contained in its annual report on Form 10-K for the year ended December 31, 2017 ("Form 10-K"). The results of operations for the periods ended September 30, 2018 and 2017 are not necessarily indicative of the operating results for the full years.

 

The condensed 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, ceramic silicon carbide liquid and diesel particulate air filters 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 organized in July 2004, formerly known as Blue Moose Media, Inc.

 

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

 

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

 

LiqTech NA, Inc. (“LiqTech NA”), incorporated in Delaware on July 1, 2005, a wholly-owned subsidiary of 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 Systems AS, a Danish Corporation ("LiqTech Systems") (Formerly Provital Solutions AS) 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.

 

LiqTech Germany (“LiqTech Germany”), a 100% owned subsidiary of LiqTech Int. DK, incorporated in Germany on December 9, 2011, engaged in marketing and sale of liquid filters in Germany. The Company is in the process of closing operations, which is expected to be completed during 2018.

 

LiqTech PTE Ltd (“LiqTech Sing”), a 95% owned subsidiary of LiqTech Int. DK, incorporated in Singapore on January 19, 2012, engaged in marketing and sale of liquid filters in Singapore and other countries in the area. The Company is in the process of closing operations, which is expected to be completed during 2018.

 

Consolidation -- The condensed 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 inter-company 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 LiqTech Systems AS 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 condensed consolidated 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 three and nine months ended September 30, 2018 and 2017. 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 a financial institution in the United States in excess of federally insured amounts at September 30, 2018 and December 31, 2017.

 

Accounts Receivable -- Accounts receivables 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, 2018 and the year ended December 31, 2017 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. 

 

Revenue Recognition and Sales Incentives 

 

Revenue Recognition -- Adoption of the new revenue standard: 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 does not expect the impact of the adoption of the new standard to be material to net income on an ongoing basis.

 

 

Accounting policy: Revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied which occurs when control of the system, membrane, DPF or services are transferred to the customer. 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 for the right to 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 customer deposit liability. Given the insignificant days between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers. 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.   The estimated costs of product warranties are recognized as expense when the products are sold. See Note 9 for further information on product warranties. 

 

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. Impairment losses recognized on receivables or contract assets were not significant for the nine months ended September 30, 2018.

 

The customer generally arranges and pays for shipping activities.  When the Company does arrange for shipping, it is billed to the Customer. The Cost to prepare the product for shipment handling are paid by the Company and reported on the line “Cost of goods sold” in the unaudited consolidated statements of operations.

 

System sales are recognized when the Company transfers control based upon signed acceptance of the system by the customer, upon shipment or upon final installation of the system based on the terms of the contract. For the majority of Liquid Membrane Filters and Diesel Particulate Filters, the Company transfers control and recognizes revenue when products are shipped to the customer according to the terms of the contract or purchase order. Aftermarket sales represent part sales, extended warranty and maintenance services. For the sale of aftermarket parts, the Company transfers control and recognizes revenue when parts are shipped to the customer or services are provided. 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, which reflects the costs to perform under these contracts, which corresponds with, and thereby depicts the transfer of control to the customer. For invoicing to customers where the transfer of control has not occurred (prepayments), the invoiced amount is recognized as Deferred revenue / Customer deposits.

 

The Company has received long-term contracts for grants from government entities for 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 Sheets 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 Sheets as contract liabilities.   

 

The two tables below set forth the costs incurred, and earnings accrued on uncompleted contracts compared with the billings on those contracts through September 30, 2018 and December 31, 2017 and reconcile the net excess billings to the amounts included in the balance sheets at those dates.

 

 

 

 

The Company’s disaggregated revenue is reported in Note 12.

  

Advertising Cost -- Costs incurred in connection with advertising of the Company’s products is expensed as incurred. Such costs amounted to $25,018 and $9,270 for the nine months ended September 30, 2018 and 2017, respectively.

 

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, 2018 and 2017 were $498,526 and $375,026, 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 and Awards -- The Company has granted stock options to certain key employees during the years presented in the accompanying condensed consolidated financial statements (see note 11). The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Non-cash compensation costs of $93,267 and $150,013 have been recognized for the vesting of options and stock awards granted to employees.

 

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 that, 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 including accounts receivable, allowance for doubtful accounts, cost in excess of billings, reserve for obsolete inventory, depreciation and impairment of property plant and equipment, and goodwill; liabilities including billings in excess of costs and contingencies; the disclosures of contingent assets and liabilities at the date of the financial statements; and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.

 

Recent Accounting Pronouncements -- On February 25, 2016, the FASB issued ASU 2016-02, "Leases," which makes many changes to accounting for leases. The standard will be effective for public companies with interim and annual periods beginning after December 15, 2018. One of the most notable changes is many of the leases that are currently accounted for as operating leases will have to be capitalized and accounted for similarly to how capital leases are currently accounted for, unless certain criteria are met. We have begun evaluating the impact this standard will have on our lease accounting. The standard will require us to capitalize a right-of use asset and lease liability equal to the present value of the future minimum lease payments disclosed in Note 8. We will continue to evaluate the impact of this standard as the effective date approaches.   

 

Other recent accounting pronouncements issued by the FASB did not or are not believed by management to have a material impact on the Company’s present or future financial statements. 

   

 

 

NOTE 2 - GOING CONCERN

 

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has limited cash and has recently incurred significant losses. These factors raise substantial doubt about the ability of the Company to continue as a going concern for a period of one year from the issuance of these financial statements. There is no assurance that the Company will be successful in raising additional cash through the issuance of debt or equity instruments or return to profitable operations in the future. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. 

 

Management believes the Company is progressing toward alleviating this substantial doubt as to the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. During April of 2018, the Company raised $6.6 million through the sale of 19,448,529 common shares, and the Company has signed framework agreements with a total of three large marine scrubber manufacturers for the potential future sale of a significant number of filtration systems in late 2018 and 2019.

 

 

 

NOTE 3 - INVENTORY

 

Inventory consisted of the following at September 30, 2018 and December 31, 2017:

 

  

 

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at September 30, 2018 and December 31, 2017:

 

 

Depreciation expense amounted to $619,536 and $731,312 for the nine months ended September 30, 2018 and 2017, respectively. The property and equipment are held as collateral on lines of credit and guarantees with financial institutions. See Note 7.  

 

 

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, 2018, our total investments of $5,783 consisted of an investment of $5,783 in LEA Technology in France to strengthen our sales channels in the French market.

 

At December 31, 2017, our total investments of $6,001 consisted of an investment of $6,001 in LEA Technology in France to strengthen our sales channels in the French market.

 

 

 NOTE 6 - DEFINITE-LIFE INTANGIBLE ASSETS

 

At September 30, 2018 and December 31, 2017, definite-life intangible assets, net of accumulated amortization, consisted of patents on the Company’s products of $1,363 and $3,349, respectively. The patents are recorded at cost and amortized over two to ten years. Amortization expense for the nine months ended September 30, 2018 and 2017 was $1,924 and $1,651, respectively. Expected future amortization expense for the years ended are as follows: 

 

 

 

 

NOTE 7 - LINES OF CREDIT

 

In connection with certain orders, the Company may provide a working guarantee, prepayment guarantee or security bond. For that purpose, we have a guarantee credit line of DKK 94,620 (approximately $14,690 at September 30, 2018) with a bank, subject to certain base limitations. As of September 30, 2018, we had DKK 94,620 (approximately $14,690) 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 LiqTech Systems such as receivables, inventory and equipment. The Company has no other available lines of credit.

 

 

NOTE 8 - LEASES

 

Operating Leases -- The Company leases office and production facilities under operating lease agreements expiring in November 2018, March 2019 and March 2021. 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, 2018 are as follows:

 

 

Lease expense charged to operations was $490,700 and $481,001 for the nine months ended September 30, 2018 and 2017, respectively.

 

Capital Leases - The Company leases equipment on various variable rate capital leases currently calling for monthly payments of approximately $1,376, which expires in February and July of 2019 whereupon we are subject to a balloon payment of $9,231 to purchase the equipment.

  

The following represents future minimum capital lease payments as of September 30, 2018: 

 

 

 

NOTE 9 - COMMITMENTS AND CONTINGENCIES

 

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, 2018 and 2017, matching contributions were expensed and totaled $8,275 and $8,636, 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 September 9, 2014, Mr. Raffaele Bruno Tronchetti Provera (“Plaintiff”), the 60% owner of LiqTech Italy s.r.l. (the “Venture”), sued LiqTech Int. DK, the 40% owner of the Venture (“Defendant”), for damages of €750,000 before the Court of Como, Italy, alleging, among other things, that certain products provided by Defendant to the Venture were defective. On July 31, 2018, the Judge rejected the Plaintiff’s claim and his request of compensation of €750,000, ordering the Plaintiff to pay the Company’s legal expenses.

 

 

On December 20, 2017, the Company received a demand for approximately $1,098,678 from the previous installation of a water treatment system. The customer is disputing that the system complies with the contact based on testing inputs to the system outside the parameters of the contract. The Company has completed the installation of the system, tested the system, and contends it is compliance with the contract’s requirements. On September 28, 2018 the Company entered an agreement with the customer resulting in the customer paying $437,000 as final payment of outstanding unpaid balances and foregoing any further demands.

 

In connection with certain orders, the Company may provide a working guarantee, prepayment guarantee, or security bond. For that purpose, we have a guarantee credit line of DKK 94,620 (approximately $14,690 at September 30, 2018) with a bank, subject to certain base limitations. As of September 30, 2018, we had DKK 94,620 (approximately $14,690) in working guarantee against the line. 

 

Product Warranties - The Company provides a standard warranty on its systems, generally for one to three years. The Company estimates the costs which 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 provide a warranty for up to four years from the date of commissioning. The specific terms and conditions of those 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, including deferred revenue on extended warranty contracts included in accrued expenses on the balance sheet, are as follows:

 

 

 NOTE 10 - EARNINGS PER SHARE

 

For the nine months ended September 30, 2018, Parent had 380,000 options outstanding to purchase common stock of Parent at $0.74 to $1.01 per share, and Parent had 400,000 warrants outstanding to purchase common stock of Parent at $1.65 per share, which were not included in the loss per share computation because their effect would be anti-dilutive.

 

As of September 30, 2018, there were 780,000 common stock equivalents from options and warrants that were excluded from the diluted EPS (earnings per share) calculation as their effect is anti-dilutive.

 

 

 

NOTE 11 - STOCKHOLDERS' EQUITY

 

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 without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.

 

Parent has 10,000,000 authorized shares of preferred stock, $0.001 par value. As of September 30, 2018, and December 31, 2017, respectively, there were 0 and 2,200,837 mandatory convertible preferred shares of Series A Convertible Preferred Stock issued and outstanding. 

 

Common Stock -- Parent has 100,000,000 authorized shares of common stock, $0.001 par value. As of September 30, 2018 and December 31, 2017, respectively, there were 72,740,547 and 44,429,264 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, if any, 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 our 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.

 

Stock Issuances 

 

On April 16, 2018, Parent completed a registered public offering of its common stock. At closing, Parent issued 19,448,529 shares of common stock at a per share price of $0.34 and generated net proceeds of $5,865,077.  

 

On January 2, 2018, Parent issued 59,406 shares of restricted stock valued at $60,000 for services provided by the Board of Directors. The Company recognized the non-cash compensation during the period ending September 30, 2018. The shares vested immediately.

 

On November 22, 2017, the Parent completed a private placement of 2,200,837 shares of mandatory convertible preferred stock (1 to 4 conversion rate) or 8,803,348 shares of common stock at a per share price of $1.20 per preferred share for aggregate proceeds to the Parent of $2,641,004, net of offering costs of $127,736.  During the period ending September 30, 2018, 2,200,837 mandatory convertible preferred shares of Series A Convertible Preferred Stock were converted into 4 common shares per share, or 8,803,348 common shares.

 

  

Common Stock Purchase Warrants 

 

A summary of the status of the warrants outstanding at September 30, 2018 is presented below:

 

    

At September 30, 2018 and 2017, the Company had zero non-vested warrants. We have recorded non-cash compensation expense of $0 and $13,225 for the period ended September 30, 2018 and 2017 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.

 

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 Company. At September 30, 2018, 380,000 options were granted and outstanding under the Plan. 

 

The Company recognizes stock based 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 Company recognized stock based compensation expense related to the options of $33,267 and $58,038 for the nine months ended September 30, 2018 and 2017, respectively. At September 30, 2018, the Company had $46,666 unrecognized compensation cost related to non-vested options expected to be recognized through August 14, 2020.

 

A summary of the status of the options outstanding under the Company’s stock option plans at September 30, 2018 is presented below: 

 

 

 

 

A summary of the status of the options at September 30, 2018, and changes during the period is presented below:

 

 

The total intrinsic value of options at September 30, 2018 was $314,500. Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at September 30, 2018 (for outstanding options), less the applicable exercise price.  

 

 

 

NOTE 12 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE

 

For the nine months ended September 30, 2018, our largest customer accounted for approximately 9% of our net sales.

 

For the nine months ended September 30, 2017, our four largest customers accounted for approximately 13%, 12%, 9% and 5% of our net sales.

 

The Company sells products throughout the world; disaggregated revenue by geographical region is as follows for the three and nine months ended September 30, 2018 and 2017:

 

 

The Company’s disaggregated revenue by product line is as follows for the three and nine months ended September 30, 2018 and 2017:

 

 

 

As of September 30, 2018, approximately 91% and 9% of the Company’s assets were located in Denmark and the United States, respectively. As of September 30, 2017, approximately 85% and 15% of the Company’s assets were located in Denmark and the United States, respectively.

 

 

 

NOTE 13 - SUBSEQUENT EVENTS

 

The Company’s management reviewed material events through November 14, 2018 and there were no material subsequent events.

 

 

 

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