LIQTECH INTERNATIONAL INC - Quarter Report: 2019 March (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 three months period ended March 31, 2019

or

 

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

 

For the transition period from _______________________ to _______________________

 

Commission File Number: 001-36210

 

LiqTech International, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada		20-1431677
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Industriparken 22C, DK 2750 Ballerup, Denmark
(Address of principal executive offices)		(Zip Code)

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

 

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

 

Title of each class		Trading symbol(s)		Name of each exchange on which registered
Common Stock, $0.001 par value		LIQT		The Nasdaq Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ☐   No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ☐   No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

 

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, at May 10, 2019, was 18,302,880 shares. 

 

 

 

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended March 31, 2019

 

TABLE OF CONTENTS

 

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	4
Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	4
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2019 and March 31, 2018 (unaudited)	6
Condensed Consolidated Statement of Stockholder’s Equity for the period ended March 31, 2019 and March 31, 2018 (unaudited)	8
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and March 31, 2018 (unaudited)	9
Notes to Condensed Consolidated Financial Statements (unaudited)	11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
Item 4. Controls and Procedures	28
PART II. OTHER INFORMATION
Item 1A. Risk Factors	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3. Defaults Upon Senior Securities	29
Item 4. Mine Safety Disclosures	29
Item 5. Other Information	29
Item 6. Exhibits	30
SIGNATURES	31

 

 

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, 2018. 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.

  

 

 

Assets		As of				As of
		March 31,				December 31,
		2019				2018
		(Unaudited)
Current Assets:
Cash		$	2,483,141			$	3,776,111
Cash, restricted			117,904				-
Accounts receivable, net			2,711,293				1,308,122
Other receivables			3,622,934				1,098,796
Deposits			945,496				-
Contract Assets			1,442,861				624,275
Inventories, net			4,296,715				4,432,055
Prepaid expenses			250,414				133,847
Total Current Assets			15,870,758				11,373,206
Property and Equipment, net			1,484,471				1,431,649
Operating lease right-of-use asset			1,930,932				-
			3,415,403				1,431,649
Other Assets:
Investments at costs			5,606				5,714
Other intangible assets			153				748
Deposits			347,662				347,932
Total Other Assets			353,421				354,394
Total Assets		$	19,639,582			$	13,159,249

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Liabilities and Stockholders’ Equity		As of				As of
		March 31,				December 31,
		2019				2018
		(Unaudited)
Current Liabilities:
Current maturities of finance lease obligations		$	6,651			$	13,789
Current maturities of operating lease liabilities			459,528				-
Accounts payable			5,541,179				2,122,479
Accrued expenses			2,378,961				1,868,229
Contract liabilities			838,246				516,335
Deferred revenue / customers deposits			289,087				98,781
Total Current Liabilities			9,513,652				4,619,613
Operating lease liabilities, net of current maturities			1,504,328				-
Total Long-term Liabilities			1,504,328				-
Total Liabilities			11,017,980				4,619,613
Commitments and Contingencies			-				-
Stockholders' Equity:
Common stock; par value $0,001, 25,000,000 shares authorized 18,302,880 and 18,228,887 (each after the 4-to-1 reverse stock split) shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively			18,303				18,229
Additional paid-in capital			46,849,057				46,575,986
Accumulated deficit			(32,251,980	)			(32,286,224	)
Deferred compensation			(35,000	)			(23,499	)
Other comprehensive income, net			(5,958,778	)			(5,744,856	)
Total Stockholders' Equity			8,621,602				8,539,636
Total Liabilities and Stockholders' Equity		$	19,639,582			$	13,159,249

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		For the Three Months Ended March 31,
		2019				2018
Net Sales		$	7,421,198			$	2,391,382
Cost of Goods Sold			5,946,118				2,450,974
Gross Profit			1,475,080				(59,592	)
Operating Expenses:
Selling expenses			483,587				409,792
General and administrative expenses			770,864				762,439
Research and development expenses			203,172				169,396
Total Operating Expense			1,457,623				1,341,627
Income (Loss) from Operations			17,457				(1,401,219	)
Other Income (Expense)
Interest and other income			7,277				3,284
Interest expense			(38,648	)			(56,300	)
Gain (Loss) on currency transactions			48,158				(79,054	)
Total Other Income (Expense)			16,787				(132,070	)
Income (Loss) Before Income Taxes			34,244				(1,533,289	)
Income Tax Expense (Income)			-				-
Net Income (Loss)		$	34,244			$	(1,533,289	)
Basic and Diluted Income (Loss) Per Share		$	0.00			$	(0.03	)
Basic Weighted Average Common Shares Outstanding			18,267,068				11,121,838
Diluted Weighted Average Common Shares Outstanding			19,145,875				11,121,838

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		For the Three Months Ended
		March 31,
		2019				2018
Net Income (Loss)			34,244				(1,533,289	)
Currency Translation, Net of Taxes			(213,922	)			174,867
Other Comprehensive Loss		$	(179,678	)		$	(1,358,422	)

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																										Accumulated Other
																		Additional								Compre-				Deferred
		Preferred Stock								Common Stock								Paid-in				Accumulated				hensive				Compen-
		Shares				Amount				Shares				Amount				Capital				Deficit				Income/(Loss)				sation
BALANCE, December 31, 2017			2,200,837				2,201				11,107,316				11,108				40,491,229				(28,471,696	)			(5,040,792	)			(79,933	)
Common shares issued at $4.04 per share for services provided and to be provided by the board of directors											14,852				15				59,985
Stock based compensation expenses recognized for the period ended March 31, 2018																															18,273
Currency translation, net																											174,867
Net Income for the period ended March 31, 2018																							(1,533,287	)
BALANCE, March 31, 2018			2,200,837				2,201				11,122,168				11,123				40,551,214				(30,004,983	)			(4,865,925	)			(61,660	)
BALANCE, December 31, 2018			-				-				18,228,887				18,229				46,575,986				(32,286,224	)			(5,744,856	)			(23,499	)
Common shares issued at $4.63 per share for services provided and to be provided by the board of directors											28,993				29				134,138												(21,667	)
Stock based compensation expenses recognized for the period ended March 31, 2019																			5,778												10,166
Exercising of stock options											45,000				45				133,155
Currency translation, net																											(213,922	)
Net Income for the period ended March 31, 2019																							34,244
BALANCE, March 31, 2019			-				-				18,302,880				18,303				46,849,057				(32,251,980	)			(5,958,778	)			(35,000	)

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		For the Three Months Ended
		March 31,
		2019				2018
Cash Flows from Operating Activities:
Net Income (Loss)		$	34,244			$	(1,533,289	)
Adjustments to reconcile net profit (loss) to net cash provided (used) by operations:
Depreciation and amortization			278,400				217,508
Non-cash compensation			128,444				78,273
Loss on sale of equipment			-				-
Changes in assets and liabilities:
Accounts receivable			(1,403,171	)			(19,405	)
Other receivables			(2,524,138	)			249,801
Deposits			(945,496	)			-
Inventory			135,340				(221,180	)
Prepaid expenses/deposits			(122,094	)			(118,174	)
Accounts payable			3,418,700				298,472
Accrued expenses			701,038				(923,912	)
Operating lease liability			(92,691	)			-
Long-term contracts			(496,675	)			209,282
Total Adjustments			(922,343	)			(229,335	)
Net Cash Used by Operating Activities			(888,099	)			(1,762,624	)
Cash Flows from Investing Activities:
Purchase of property and equipment			(169,546	)			(59,937	)
Net Cash Used by Investing Activities			(169,546	)			(59,937	)
Cash Flows from Financing Activities:
Net payments on financing lease obligation			(7,138	)			(12,320	)
Proceeds from exercise of stock options			133,200				-
Net Cash provided by (Used in) Financing Activities			126,062				(12,320	)
Gain (Loss) on Currency Translation			(243,483	)			175,802
Net change in Cash, Cash Equivalents and Restricted Cash			(1,175,066	)			(1,659,079	)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period			3,776,111				2,486,199
Cash, Cash Equivalents and Restricted Cash at End of Period		$	2,601,045			$	827,120

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		For the Three Months Ended March 31,
		2019				2018
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest Paid		$	23,541			$	56,300
Income Taxes		$	-			$	-

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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, 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 A/S, a Danish corporation, incorporated on January 15, 2000 (“LiqTech Int. DK”), a 100% 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 100% 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 A/S, a Danish Corporation ("LiqTech Systems") (Formerly Provital Solutions A/S) 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 2019.

 

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 2019.

 

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 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 A/S is the Danish Krone (“DKK”), the functional currency of LiqTech Germany is the Euro (“EUR”) and the functional currency of LiqTech Singapore is the Singapore Dollar (“SGD”). The Company’s reporting currency is U.S. Dollar for the purpose of these 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 months ended March 31, 2019 and 2018. 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. For the three months ended March 31, 2019 and 2018, the Company has $117,904 and $0 respectively as restricted cash. The restricted cash is a payment guarantee issued in benefit of a customer in connection with prepayment for a sales order. The restricted cash is held in a local financial institution and will be freed as order deliveries is made and accepted by the customer. The Company had no balances held in a financial institution in the United States in excess of federally insured amounts at March 31, 2019 and December 31, 2018.

 

 

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 three months ended March 31, 2019 and the year ended December 31, 2018 is as follows:

 

  

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

 

Leases -- The Company leases certain vehicles, real property and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. The assets and liabilities under finance leases are recorded at the lower of the present value of the minimum lease payments or the fair market value of the related assets. Assets under finance leases are amortized using the straight-line method over the initial lease term. Amortization of assets under finance leases is included in depreciation expense.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Subsequent ASUs were issued to provide additional guidance.

 

On January 1, 2019, the Company adopted Topic 842 using the optional transition method of adoption, under which the new standards were applied prospectively rather than restating the prior periods presented. The Company elected the package of practical expedients permitted, which, among other things, allowed the Company to carry forward the historical lease classification. The Company made the accounting policy elections to not recognize lease assets and lease liabilities with an initial term of 12 months or less and to not separate lease and non-lease components. The Company’s accounting for finance leases (formerly called capital lease obligations) remains substantially unchanged. Operating lease right-of-use (“ROU”) assets and liabilities were recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, an incremental borrowing rate based on the information available at the commencement date was used in determining the present value. The Company will use the implicit rate when readily determinable. The operating lease ROU asset also included prepaid lease payments and was reduced by accrued lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Operating lease cost for lease payments will be recognized on a straight-line basis over the lease term. The impact of adoption on the Company’s consolidated balance sheet was the recognition of a ROU asset of $2.1 million and an operating lease liability of $2.1 million primarily for office space leases. The Company’s adoption of Topic 842 did not materially impact its results of operations or cash flows.

 

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 3).

 

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 will 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 

 

Accounting policy: 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.

 

For membrane and DPF product sales, revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied which occurs when control of the 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.

 

For contracts with customers that include multiple performance obligations, judgment is required to determine whether performance obligations specified in these contracts are distinct and should be accounted for as separate revenue transactions for recognition purposes. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are generally determined based on the prices charged to customers or using expected cost-plus margin.

 

System sales are recognized when the Company transfers control based upon signed acceptance of the system by the customer upon shipment of the system based on the terms of the contract. For the majority of Systems, the Company transfers control and recognizes revenue when products are shipped to the customer according to the terms of the contract or purchase order. In connection with the system it is normal procedure to issue a FAT (Factory Acceptance Test) stating that the customer has accepted the performance of the system as it is being shipped from the production facility in Hobro. As part of the delivery performance, the customer is normally offered a commissioning (final assembly and configuration at a place designated by the customer) and this commission is therefore considered a second delivery performance and is valued at cost, based on the contractual performance given a standard gross margin rate. This second performance delivery is recognized as revenue at the time of delivery of the commissioning together with the cost incurred. Part of the invoicing to the customer is also contributed to the commissioning and at transfer of the control of the system, i.e. the first performance obligation, some of the invoicing will still be awaiting the commissioning and is therefore recognized as Other receivable while the revenue related to the commissioning is recognized as Deferred Income.

 

Aftermarket sales represent parts, 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 Contract assets / Contracts liabilities.

  

 

The Company has received long-term contracts for grants from government entities for the development and use of silicon carbide membranes in various water filtration and treatment applications and historically in the installation of various water filtrations systems. We measure transfer of control of the performance obligation on long-term contracts utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs, such as labor and materials. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenue and a significant factor in the accounting for such performance obligations. The timing of when we bill our customers is generally dependent upon advance billings terms, milestone billings based on completion of certain phases of the work or when services are provided, or products are shipped. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported on our Balance 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.

 

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 Company’s disaggregated revenue is reported in Note 9.

 

Advertising Cost -- Costs incurred in connection with advertising of the Company’s products is expensed as incurred. Such costs amounted to $22,592 and $528, for the three months ended March 31, 2019 and 2018, 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 three months ended March 31, 2019 and 2018 were $203,172, and $169,396, 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. See Note 8. During the years presented in the accompanying consolidated financial statements, the Company has granted stock options and awards. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Non-cash compensation costs of $15,944 and $78,273 have been recognized for the vesting of options and stock awards granted to employees and Directors of the Board for the three months ended March 31, 2019 and 2018, 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 commit-ment and contingencies, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.

 

Recent Accounting Pronouncements – In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation – Stock Compensation (“Topic 718”): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees except for certain circumstances. Any transition impact will be a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company adopted this guidance in the first quarter of 2019, and it did not have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurement by removing, modifying and adding certain disclosures. This ASU is effective for the annual period beginning after December 15, 2019, including interim periods within that annual period. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.

 

In August 2018, the SEC adopted amendments to simplify certain disclosure requirements, as set forth in Securities Act Release No. 33-10532, Disclosure Update and Simplification, which includes a requirement for entities to present the changes in shareholders’ equity in the interim financial statements in quarterly reports on Form 10-Q. This amendment is effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendment and proximity to the filing date for most filers’ quarterly reports, the SEC has allowed for a filer’s first presentation of the changes in shareholders’ equity to be included in its Form 10-Q for the quarter that begins after the effective date. The Company adopted the SEC’s amendment to interim disclosures in the first quarter of 2019 and has presented the changes in shareholders’ equity on an interim basis.

 

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASC 842"), which requires lessees to recognize right-of-use ("ROU") assets and related lease liabilities on the balance sheet for all leases greater than one year in duration. We adopted ASC 842 on January 1, 2019 using a modified retrospective transition approach for leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach did not require any transition accounting for leases that expired before the earliest comparative period presented. The adoption of this standard resulted in the recording of ROU assets of approximately $2.1 million and lease liabilities of approximately $2.1 million for all of our lease agreements with original terms of greater than one year. The adoption of ASC 842 did not have a significant impact on our consolidated statements of operations or cash flows. See Note 5 for the required disclosures relating to our lease agreements.

 

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash which requires companies require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. For the period ended March 31, 2019 the Company have recorded $117,904 as Restricted cash and $2,483,141 as Unrestricted cash and hereby a total of $2,601,045 as Cash, Cash equivalents and Restricted cash. For the period ended December 31, 2018 the amounts were $0 in Restricted cash and $3,776,111 in Unrestricetd cash.

 

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

 

 

 

NOTE 2 - INVENTORY

 

Inventory consisted of the following at March 31, 2019 and December 31, 2018:

 

 

 

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at March 31, 2019 and December 31, 2018:

 

 

Depreciation expense amounted to $213,071 and $216,929 for the three months ended March 31, 2019 and 2018, respectively. The property and equipment is held as collateral on lines of credit and guarantees with financial institutions. See Note 4.  

 

 

NOTE 4 - LINES OF CREDIT

 

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 guarantee credit line of DKK 94,620 (approximately $14,240 at March 31, 2019) with a bank, subject to certain base limitations. As of March 31, 2018, we had DKK 94,620 (approximately $15,743) 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.

 

 

 

NOTE 5 - LEASES

 

The Company leases certain vehicles, real property and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. The majority of our operating leases are non-cancelable operating leases for production and office space in Copenhagen and White Bear Lake, Minnesota.

 

On January 1, 2019, the Company adopted Topic 842 requiring organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The Company elected to use the transition method of adoption, under which the new standards were applied prospectively rather than restating the prior periods presented. As a result of the modified retrospective transition method of adoption certain accounts lack a comparable value for the same period of 2018, specifically accounts and values associated with operating leases and ROU assets.

 

 

Supplemental balance sheet information related to leases as of March 31, 2019 and 2018 was as follows:

 

 

 

As previously disclosed in our 2018 Form 10-K under the prior guidance of ASC 840, minimum payments under operating and finance lease agreements as of December 31, 2018 were as follows:

 

 

 

 

NOTE 6 - 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 three months ended March 31, 2019 and 2018, matching contributions were expensed and totaled $2,621 and $2,693, respectively.

 

Contingencies -- From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.

 

On November 20, 2018 a former supplier to Liqtech International A/S contacted the Company with a claim of DKK448,500 ($68,800) alleging that a former Agreement from 2016 had not been respected. The Company has contested the claim due to lack of evidence to support the claim. No provision has been made as per March 31, 2019 as the Company does not expect the claim to materialize in any payments to the former supplier.

 

On February 27, 2019, LiqTech Systems A/S was contacted by a former supplier alleging that the Company owed DKK543,905 ($83,400) for services rendered in 2017, The claimant has previously filed a lawsuit to claim payment for the services, which was denied by the Company due to severe errors in the services supplied, and the claim was rejected by the court of law in 2018. Due to the nature of the new claim and the previous ruling from the court of law, no provision has been made as per March 31, 2019.

  

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 guarantee line of DKK 94,620 (approximately $14,240 at March 31, 2019) with a bank, subject to certain base limitations. As of March 31, 2018, we had DKK 94,620 (approximately $15,743) in working guarantee against the line. 

 

Product Warranties - The Company provides a standard warranty on its systems, generally for one to five 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 claim and the cost per claim.

 

Changes in the Company's current and long-term warranty obligations, including deferred revenue on extended warranty contracts, are as follows:

 

 

 

 

NOTE 7 - EARNINGS 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 three months ended March 31, 2019 and 2018:

 

 

For the three months ended March 31, 2019, the Company had 25,000 options outstanding to purchase common stock at $2.96 per share and 100,000 warrants outstanding to purchase common stock at $6.60 per share.

 

For the three months ended March 31, 2018, the Company had 113,750 options outstanding to purchase common stock at $2.96 per share and 100,000 warrants outstanding to purchase common stock at $6.60 per share, which were not included in the loss per share computation because their effect would be anti-dilutive.

 

 

NOTE 8 - STOCKHOLDERS' EQUITY

 

Common Stock – The Company has 25,000,000 authorized shares of common stock, $0.001 par value. As of March 31, 2019, and December 31, 2018, respectively, there were 18,302,880 (after the 4-to-1 reverse stock split effective as from April 8, 2019) and 18,228,887 common shares issued and outstanding.      

 

Voting -- Holders of the Company common stock is 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 the Company 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 the Company, 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 the Company common stock will be entitled to share ratably in the distribution of any of our remaining assets.  

  

Other Matters -- Holders of the Company 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.

 

Preferred Stock -- Our Board of Directors has the authority to issue Company 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.

 

The Company has 625,000 authorized shares of preferred stock, $0.001 par value. As of March 31, 2019, and December 31, 2018, respectively, there were 0 mandatory convertible preferred shares issued and outstanding.

 

Stock Issuance 

 

Since January 1, 2019, the Company has made the following issuances of common stock (adjusted to account for the 4-to-1 reverse stock-split on April 8, 2019): 

 

On March 5, 2019, the Company issued an additional 45,660 shares of restricted stock valued at $157,500 for services provided by the Board of Directors. The Company will recognize the non-cash compensation of the award over the requisite service period. The shares vested immediately.

 

On January 24. January 28, February 6 and March 1, 2019, the Company issued a total of 45,000 shares in connection with employees exercising shares in relation to the stock option plan entered in 2015. The shares were issued at a share price of $2.96 and generated net proceeds of $133,200.

 

For the three months ended March 31, 2019 and 2018, the Company has recorded non-cash compensation expense of $15,944 and $65,834 relating to the awards, respectively.   

 

 

Common Stock Purchase Warrants 

 

A summary of the status of the warrants outstanding at March 31, 2019 is presented below:

 

    

At March 31, 2019 and 2018, the Company had 0 non-vested warrants. We have recorded non-cash compensation expense of $0 for the period ended March 31, 2019 and 2018 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, the Company’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 March 31, 2019, 25,000 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 Company recognized stock-based compensation expense related to the options of $0 and $12,439 for three months ended March 31, 2019 and 2018, respectively. At March 31, 2019, the Company had $0 of unrecognized compensation cost related to non-vested options.

 

A summary of the status of the options outstanding under the Company’s stock option plans at March 31, 2019 is presented below: 

 

 

 

A summary of the status of the options at March 31, 2019, and changes during the period is presented below:

 

 

 

NOTE 9 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE

 

For the three months ended March 31, 2019, our four largest customers accounted for approximately 59% of our net sales.

 

For the three months ended March 31, 2018, our two largest customers accounted for approximately 21% of our net sales.

 

The Company sells products throughout the world; disaggregated revenue by geographical region are as follows for the three months ended March 31, 2019 and 2018:

 

 

The Company’s disaggregated revenue by product line are as follows for the three months ended March 31, 2019 and 2018:

 

 

As of March 31, 2019, approximately 92% of the Company’s assets were located in Denmark and 8% in the United States, respectively. As of March 31, 2018, approximately 85% of the Company’s assets were located in Denmark and 15% in the United States, respectively.

 

 

 

NOTE 10 - SUBSEQUENT EVENT

 

The Company’s management reviewed material events through May 14, 2019.

 

Reverse stock split - On April 8, 2019, the Company carried through a 4-to-1 reverse stock-split announced in March 26, 2019. The reverse stock-split was affected to ensure that the Company meet the per share price requirement in relation with the Company’s decision of moving the trading of the Company’s stock from NYSE American to the Nasdaq Capital Market. The reverse-split resulted in a change in our authorized and outstanding common stock from 100,000,000 shares to 25,000,000 shares and 73,211,520 shares to 18,269,546 shares, respectively

 

Trading on Nasdaq Capital Market - On April 16, 2019, the Company’s common stock started trading on Nasdaq Capital Market and to celebrate this, the Company was invited to the closing bell session on April 17, 2019 by Nasdaq. 

  

 

 

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