LIQTECH INTERNATIONAL INC - Quarter Report: 2020 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, 2020

or

 

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

 

For the transition period from _______________________ to _______________________

 

Commission File Number: 001-36210

 

LiqTech International, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada		20-1431677
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Industriparken 22C, DK 2750 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 11, 2020, was 20,555,880 shares. 

 

 

 

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended March 31, 2020

 

TABLE OF CONTENTS

 

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	4
Condensed Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019	4
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2020 and March 31, 2019 (unaudited)	6
Condensed Consolidated Statement of Stockholder’s Equity for the period ended March 31, 2020 and March 31, 2019 (unaudited)	8
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and March 31, 2019 (unaudited)	9
Notes to Condensed Consolidated Financial Statements (unaudited)	11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
Item 4. Controls and Procedures	28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	29
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, 2019. Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Especially underlined by the anticipated impacts from the COVID-19 pandemic on the Company, including the related effects to our business operations, results of operations, cash flows, and financial position, and our future responses to the COVID-19 pandemic. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate.  In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

 

Assets		As of				As of
		March 31,				December 31,
		2020				2019
		(Unaudited)
Current Assets:
Cash, cash equivalents and restricted cash		$	6,299,042			$	9,783,932
Accounts receivable, net of allowance for doubtful accounts of $599,863 and $612,434 at March 31, 2020 and December 31, 2019, respectively			8,042,101				6,272,760
Inventories, net of allowance for excess and obsolete inventory of $654,895 and $665,308 at March 31, 2020 and December 31, 2019, respectively			5,324,499				5,199,238
Contract assets			5,137,111				5,664,929
Prepaid expenses and other current assets			822,306				566,398
Total Current Assets			25,625,059				27,487,257
Long-Term Assets:
Property and Equipment, net			5,529,919				4,825,952
Operating lease right-of-use assets			4,876,698				5,053,614
Deposits and other			488,656				498,053
Intangible assets, net			456,517				488,716
Goodwill			231,285				236,131
Total Long-Term Assets			11,583,075				11,102,466
Total Assets		$	37,208,134			$	38,589,723

Liabilities and Stockholders’ Equity		As of				As of
		March 31,				December 31,
		2020				2019
		(Unaudited)
Current Liabilities:
Accounts payable		$	3,226,114			$	4,339,070
Accrued expenses			3,290,386				3,222,951
Current portion of finance lease obligations			34,403				34,772
Current maturities of operating lease liabilities			985,360				999,685
Current portion of contingent earn-out			293,436				299,585
Contract liabilities			1,351,666				1,421,376
Income taxes payable			14,402				14,692
Total Current Liabilities			9,195,767				10,332,131
Deferred tax liability			316,587				338,763
Finance lease obligations, net of current portion			160,006				172,273
Operating lease liabilities, net of current maturities			3,994,609				4,141,855
Contingent earn-out, net of current portion			586,872				599,170
Total Long-term Liabilities			5,058,074				5,252,061
Total Liabilities			14,253,841				15,584,192
Stockholders' Equity:
Series A Mandatory Convertible Preferred stock; par value $0.001, 2,500,000 shares authorized, 0 and 0 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively			-				-
Common stock; par value $0.001, 25,000,000 shares authorized, 20,555,880 and 20,547,668 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively			20,556				20,548
Additional paid-in capital			61,539,364				61,398,150
Accumulated deficit			(31,943,109	)			(32,246,608	)
Accumulated other comprehensive loss			(6,662,518	)			(6,166,559	)
Total Stockholders' Equity			22,954,293				23,005,531
Total Liabilities and Stockholders' Equity		$	37,208,134			$	38,589,723

 

		For the Three Months Ended March 31,
		2020				2019
Revenue		$	10,281,844			$	7,421,198
Cost of Goods Sold			7,642,768				5,946,118
Gross Profit			2,639,076				1,475,080
Operating Expenses:
Selling expenses			676,800				483,587
General and administrative expenses			1,470,393				770,864
Research and development expenses			310,954				203,172
Total Operating Expense			2,458,147				1,457,623
Income from Operations			180,929				17,457
Other Income (Expense)
Interest and other income			4,490				7,277
Interest expense			(104,856	)			(38,648	)
Gain on currency transactions			207,627				48,158
Total Other Income			107,261				16,787
Income Before Income Taxes			288,190				34,244
Income Tax Benefit			(15,309	)			-
Net Income		$	303,499			$	34,244
Basic Income Per Share		$	0.01			$	0.00
Diluted Income Per Share		$	0.01			$	0.00
Basic Weighted Average Common Shares Outstanding			20,554,524				18,267,068
Diluted Weighted Average Common Shares Outstanding			20,711,035				19,145,875

 

		For the Three Months Ended
		March 31,
		2020				2019
Net Income			303,499				34,244
Other Comprehensive Loss - Currency Translation, Net			(495,959	)			(213,922	)
Total Comprehensive Loss		$	(192,460	)		$	(179,678	)

 

																		Accumulated Other
										Additional				Retained				Compre-
		Common Stock								Paid-in				accumulated				hensive
		Shares				Amount				Capital				Deficit				Income/(Loss)				TOTAL
BALANCE, December 31, 2019			20,547,668				20,548				61,398,150				(32,246,608	)			(6,166,559	)			23,005,531
Common shares issued at $5.48 per share for services by the board of directors			8,212				8				44,992												45,000
Stock based compensation											96,222												96,222
Currency translation, net																			(495,959	)			(495,959	)
Net Income															303,499								303,499
BALANCE, March 31, 2020			20,555,880				20,556				61,539,364				(31,943,109	)			(6,662,518	)			22,954,293
BALANCE, December 31, 2018			18,228,887				18,229				46,552,487				(32,286,224	)			(5,744,856	)			8,539,636
Common shares issued at $4.63 per share for services by the board of directors			28,993				29				112,471												112,500
Stock based compensation											15,944												15,944
Exercising of stock options			45,000				45				133,155												133,200
Currency translation, net																			(213,922	)			(213,922	)
Net Income															34,244								34,244
BALANCE, March 31, 2019			18,302,880				18,303				46,814,057				(32,251,980	)			(5,958,778	)			8,621,602

 

		For the Three Months Ended
		March 31,
		2020				2019
Cash Flows from Operating Activities:
Net Income		$	303,499			$	34,244
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation and amortization			534,021				278,400
Stock-based compensation			141,222				128,444
Change in deferred tax asset / liability			(15,309	)			-
Changes in assets and liabilities:
Accounts receivable			(1,769,341	)			(1,403,171	)
Inventory			(125,261	)			135,340
Contract assets			527,818				(3,342,724	)
Deposits			-				(945,496	)
Prepaid expenses and other current assets			(255,908	)			(122,094	)
Accounts payable			(1,112,956	)			3,418,700
Accrued expenses			67,435				701,038
Operating lease liabilities			(183,180	)			(92,691	)
Contract liabilities			(69,710	)			321,911
Total Adjustments			(2,261,169	)			(922,343	)
Net Cash used in Operating Activities			(1,957,670	)			(888,099	)
Cash Flows from Investing Activities:
Purchase of property and equipment			(1,064,960	)			(169,546	)
Purchase of other intangible assets			(2,739	)			-
Net Cash used in Investing Activities			(1,067,699	)			(169,546	)
Cash Flows from Financing Activities:
Payments on finance lease obligation			(8,434	)			(7,138	)
Proceeds from exercise of stock options			-				133,200
Net Cash provided by (used in) Financing Activities			(8,434	)			126,062
Loss on Currency Translation			(451,087	)			(243,483	)
Net change in Cash, Cash Equivalents and Restricted Cash			(3,484,890	)			(1,175,066	)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period			9,783,932				3,776,111
Cash, Cash Equivalents and Restricted Cash at End of Period		$	6,299,042			$	2,601,045

		For the Three Months Ended March 31,
		2020				2019
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest Paid		$	16,514			$	23,541
Income Taxes		$	-			$	-

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business and Basis of Presentation

 

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

 

LiqTech International, Inc., a Nevada corporation organized in July 2004, formerly known as Blue Moose Media, Inc.

 

LiqTech USA, a Delaware corporation and a 100% owned subsidiary of the Company formed in May 2011.

 

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

 

LiqTech NA, Inc. (“LiqTech NA”), incorporated in Delaware on July 1, 2005, a 100% owned subsidiary of LiqTech USA. LiqTech NA, Inc. engaged in the production, marketing and sale of ceramic diesel particulate and liquid filters in the United States and Canada.

 

LiqTech Systems A/S, a Danish Corporation (“LiqTech Systems”), incorporated on September 1, 2009, engaged in the manufacture of fully automated filtering systems for use within marine applications, municipal pool and spa applications, and other industrial applications within Denmark and international markets.

 

BS Plastic A/S, a Danish Corporation (“BS Plastic”), acquired on September 1, 2019, engaged in the manufacture of specialized machined and welded plastic parts within Denmark and international markets.

 

LiqTech Ceramics A/S, a Danish corporation (“LiqTech Ceramics”), incorporated on December 20, 2019 that is a dormant company without activity.

 

LiqTech Germany (“LiqTech Germany”), a 100% owned subsidiary of LiqTech Int. DK, incorporated in Germany on December 9, 2011. The Company is in the process of closing operations, which is expected to be completed during 2020.

 

LiqTech PTE Ltd (“LiqTech Sing”), a 95% owned subsidiary of LiqTech Int. DK, incorporated in Singapore on January 19, 2012. The Company is in the process of closing operations, which is expected to be completed during 2020.

 

Consolidation -- The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority-owned subsidiary. All material intercompany transactions and accounts have been eliminated in the consolidation.

 

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, LiqTech Systems, LiqTech Ceramics and BS Plastic is the Danish Krone (“DKK”); the functional currency of LiqTech Germany is the Euro; and the functional currency of LiqTech Singapore is the Singapore Dollar. The Company’s reporting currency is the U.S. Dollar for the purpose of these consolidated financial statements. The balance sheet accounts of the foreign subsidiaries are translated into U.S. Dollars at the period-end exchange rates, and all revenue and expenses are translated into U.S. Dollars at the average exchange rates prevailing during the three months ended March 31, 2020 and 2019. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arose from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred. 

 

 

Cash, Cash Equivalents and Restricted Cash -- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. As of March 31, 2020 and December 31, 2019, the Company held $2,711,273 and $2,714,173, respectively, of restricted cash. The restricted cash is held as security by a local financial institution for ensuring a leasing facility and for payment guarantees issued for the benefit of customers in connection with prepayments of sales orders and for warranties after the delivery of sales orders. The restricted cash is held in a local financial institution. The Company had no balances held in a financial institution in the United States in excess of federally insured amounts at March 31, 2020 and December 31, 2019.

 

Accounts Receivable -- Accounts receivables consist of trade receivables arising in the normal course of business. The Company establishes an allowance for doubtful accounts that reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, age, financial information that is publicly accessible and other currently available evidence. 

 

The roll-forward of the allowance for doubtful accounts for the period ended March 31, 2020 and December 31, 2019 is as follows: 

 

  

Inventory – Inventory directly purchased is carried at the lower of cost or net realizable value, as determined on the first-in, first-out method.

 

For inventory produced, standard costs that approximate actual cost on the FIFO method are used to value inventory.  Standard costs are reviewed at least annually by management, or more often in the event that circumstances indicate a change in cost has occurred.

 

Work in process and finished goods include material, labor and production overhead costs.  The company adjusts the value of its inventory to the extent that management determines that the cost cannot be recovered due to obsolescence or other factors.

 

Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movement, expected useful lives, and estimated future demand of the products and spare parts.

 

Unbilled receivables – Unbilled receivables usually comprises the last invoice remaining after the delivery of the systems, where revenue is recognized at the transfer of control based upon signed acceptance of the system by the customer. Most commonly this invoice is sent to the customer at commissioning of the product or no later than 12 months after the delivery. Also included in unbilled receivables are short-term receivables such as Contract Assets, VAT etc.

 

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

 

 

On January 1, 2019, the Company adopted Topic 842 using the optional transition method 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 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 costs for lease payments will be recognized on a straight-line basis over the lease term. The Company’s adoption of Topic 842 did not materially impact its results of operation.

 

Property and Equipment -- Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed for financial statement purposes on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years.

 

Goodwill and Intangible Assets -- The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business, with the residual purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.

 

Acquired intangible assets with determinable useful lives are amortized on a straight-line or accelerated basis over the estimated periods benefited, ranging from one to 10 years. Customer relationships and other non-contractual intangible assets with determinable lives are amortized over periods of five years.

 

The Company evaluates the recoverability of long-lived assets by comparing the carrying amount of an asset to estimated future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The evaluation of recoverability involves estimates of future operating cash flows based upon certain forecasted assumptions, including, but not limited to, revenue growth rates, gross profit margins, and operating expenses over the expected remaining useful life of the related asset. A shortfall in these estimated operating cash flows could result in an impairment charge in the future.

 

Goodwill is not amortized, but is evaluated annually for impairment at the reporting unit level or when indicators of a potential impairment are present. The Company estimates the fair value of the reporting unit using the discounted cash flow and market approaches. Forecast of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment fundamentals, and general economic conditions.

 

Revenue Recognition -- On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” which includes clarifying ASUs issued in 2015, 2016 and 2017 (“new revenue standard”). The new revenue standard was applied to all open revenue contracts using the modified retrospective method as of January 1, 2018. The new revenue standard did not have a material impact on revenue recognition.

 

 

The Company sells products throughout the world; sales by geographical region are as follows for the three months ended March 31, 2020 and 2019:

 

 

 The Company’s sales by product line are as follows for the three months ended March 31, 2020 and 2019:

 

 

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 or DPF transfers to the customer or when services are rendered by the Company. The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title and risks and rewards of ownership have transferred to the customer. This generally occurs when the product is shipped or accepted by the customer.  Revenue for service contracts are recognized as the services are provided. Revenue is measured as the amount of consideration expected to be received in exchange for transferring the goods or providing services. The satisfaction of performance obligations under the terms of a revenue contract generally gives rise to the right for payment from the customer. The Company's standard payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Pre-payments received prior to satisfaction of performance obligations are recorded as a Contract liability. Given the insignificant days between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers.

 

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

 

System sales are recognized when the Company transfers control based upon signed acceptance of the system by the customer 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 performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer) and this commissioning is therefore considered a second performance obligation and is valued at cost, with the addition of a standard gross margin. This second performance obligation is recognized as revenue at the time of provision of the commissioning services together with the cost incurred. Part of the invoicing to the customer is also attributed to the commissioning, and at transfer of the control of the system (i.e. the first performance obligation), some of the invoicing will still be awaiting commissioning and is therefore recognized as Unbilled Receivables, while the revenue related to the commissioning is recognized as Contract liability.

 

 

Aftermarket sales represent parts, extended warranties and maintenance services. For the sale of aftermarket parts, the Company transfers control and recognizes revenue when parts are shipped to the customer. When customers are given the right to return eligible parts and accessories, the Company estimates the expected returns based on an analysis of historical experience. The Company adjusts estimated revenues at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed. The Company recognizes revenue for extended warranty and maintenance agreements based on the standalone selling price over the life of the contract.

 

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

 

Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract Liabilities are payments received from customers prior to satisfaction of performance obligations and these balances are typically related to prepayments for third party expenses that are incurred shortly after billing. Contract liabilities also include deferred revenue related to the second performance obligation stated under Revenue Recognition, where the obligation is attributed to the commissioning of the water treatment system.

 

The roll-forward of Contract Assets / Liabilities for the three months ended March 31, 2020 and December 31, 2019 is as follows:

 

 

Advertising Cost -- Costs incurred in connection with advertising of the Company’s products are expensed as incurred. Advertising costs are included in sales expenses and total advertising costs amounted to $25,237 and $22,592 for the three months ended March 31, 2020 and 2019, 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, 2020 and 2019 were $310,954 and $203,172, 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) is based on the weighted average number of common shares outstanding during each period. Diluted earnings per common share is based on shares outstanding (computed as under basic EPS) and potentially dilutive common shares. Potential common shares included in the diluted earnings per share calculation include in-the-money stock options, RSU´s, and warrants that have been granted but have not been exercised.

 

Stock Options and Awards -- During the years presented in the accompanying consolidated financial statements, the Company has granted stock options and awards. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Stock-based compensation costs of $141,222 and $128,444 have been recognized for the vesting of options and stock awards granted to Directors, management and certain key employees for the three months ended March 31, 2020 and 2019, respectively.

 

Fair Value of Financial Instruments -- The Company accounts for fair value measurements for financial assets and liabilities in accordance with FASB ASC Topic 820. The authoritative guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or 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, other receivables, prepaid expenses, accounts payable and accrued expenses approximates their recorded values due to their short-term maturities.

 

The following table sets forth the liabilities at March 31, 2020, which is recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy. As required, these are classified based on the lowest level of input that is significant to the fair value measurement:

 

 

The roll forward of the Earn-out liability is as follows:

 

 

Accounting Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets including accounts receivable; allowance for doubtful accounts; contract assets; reserve for excess and obsolete inventory; depreciation and impairment of property, plant and equipment; goodwill; liabilities including contract liabilities and contingencies; the disclosures of contingent assets and liabilities at the date of the financial statements; and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.

 

 

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

 

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash that requires companies, in the Statement of Cash Flows, to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Consequently, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. For the period ended March 31, 2020 the Company has recorded $2,711,273 as Restricted cash, $3,587,769 as Unrestricted cash and a total of $6,299,042 as Cash, Cash equivalents and Restricted cash. For the period ended December 31, 2019 the amounts were $2,714,173 in Restricted cash and $7,069,759 in Unrestricted cash.

 

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, 2020 and December 31, 2019:

 

 

Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movements, expected useful lives, and estimated future demand for the products.

 

 

 

NOTE 3 - LINES OF CREDIT

 

In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or security bond. For that purpose, we have a guarantee credit line DKK10,000,000 (approximately $1,500,000). The credit line is secured by a cash deposit of $2,700,000. Further, we have a guarantee for a specific project delivered in 2016 of DKK 94,620 (approximately $13,882 at March 31, 2020) with a bank, subject to certain base limitations. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Systems such as receivables, inventory and equipment.

 

 NOTE 4 - LEASES

 

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

 

  

Supplemental balance sheet information related to leases as of March 31, 2020 and December 31, 2019 was as follows:

 

 

Maturities of lease liabilities at March 31, 2020 were as follows:

 

 

 

NOTE 5 - 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, 2020 and 2019, matching contributions were expensed and totaled $3,949 and $2,621, 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 AS contacted the Company with a claim of DKK 448,500 ($68,800) alleging that an Agreement from 2016 had not been respected. The Company has contested the claim due to lack of evidence to support the claim. No provision has been made as of March 31, 2020 as the Company has meritorious defenses and does not expect the claim to materialize in any payments to the former supplier.

 

On February 27, 2019, LiqTech Systems AS was contacted by a former supplier alleging that the Company owed DKK 543,905 ($83,400) for services rendered in 2017. The claimant has previously filed a lawsuit to claim payment for the services, which was denied by the Company due to severe errors in the services supplied, and the claim was rejected by a court of law in 2018. Due to the nature of the new claim and the previous ruling from the court of law, no provision has been made as of March 31, 2020.

 

Product Warranties - The Company provides a standard warranty on its systems, generally for a period of one to three years after customer acceptance. The Company estimates the costs that may be incurred under its standard warranty programs and records a liability for such costs at the time product revenue is recognized.

 

In addition, the Company sells an extended warranty for certain systems, which generally provides a warranty for up to four years from the date of commissioning. The specific terms and conditions of the warranties vary depending upon the product sold and the country in which the Company does business. Revenue received for the sale of extended warranty contracts is deferred and recognized in the same manner as the costs incurred to perform under the warranty contracts.

 

The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the cost per claim. The Company has assessed the adequacy of the recorded warranty liability at the end of the third quarter of 2019 based on realized warranty expenses for the four years passed since the start-up of producing water treatment systems. Based on the assessment, the Company has reduced the warranty accrual from 7% to 3% of the sales value for delivered products since January 1, 2019 and going forward.

 

Changes in the Company's current and long-term warranty obligations included in accrued expenses on the balance sheet, as of March 31, 2020 and December 31, 2019 were as follows:

 

  

Purchase obligation - The Company has a purchase obligation to the supplier of the new furnaces to the production facility in Ballerup for which the Company has not received the related goods. The total obligation amounts to $3.8 million and the Company has entered into a leasing agreement with the bank to finance the purchase. The lease agreement will commence upon the receipt of all furnaces covered by the purchase contract. The Company has no right to cancel the order.

 

 

 

 

NOTE 6 - EARNINGS PER SHARE

 

The following data shows the amounts used in computing earnings per share and the weighted average number of shares of potential dilutive common stock for the three months ended March 31, 2020 and 2019:

 

 

For the three months ended March 31, 2020, the Company had 25,000 options outstanding to purchase common stock at $2.96 per share.

 

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.

 

 

 

NOTE 7 - STOCKHOLDERS' EQUITY

 

Common Stock – The Company has 25,000,000 authorized shares of common stock, $0.001 par value. As of March 31, 2020 and 2019, respectively, there were 20,555,880 and 18,302,880 common shares issued and outstanding.

 

Voting -- Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including the election of directors, and do not have any right to cumulate votes in the election of directors. 

 

Dividends -- Subject to the rights and preferences of the holders of any series of preferred stock, if any, which may at the time be outstanding, holders of common stock are entitled to receive ratably such dividends as our Board of Directors from time to time may declare out of funds legally available.  

 

Liquidation Rights -- In the event of any liquidation, dissolution or winding-up of affairs, after payment of all of our debts and liabilities and subject to the rights and preferences of the holders of any outstanding shares of any series of our preferred stock, the holders of common stock will be entitled to share ratably in the distribution of any of our remaining assets.  

  

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

 

Preferred Stock -- Our Board of Directors has the authority to issue preferred stock in one or more classes or series and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.

 

The Company has 2,500,000 authorized Preferred stock, $0.001 par value. As of March 31, 2020 and 2019 there were 0 mandatory convertible preferred shares issued and outstanding.

 

 

Stock Issuance 

 

Since January 1, 2020, the Company has made the following issuances of common stock: 

 

On January 15, 2020, the Company issued an additional 8,212 shares of restricted stock valued at $45,000 for services provided by the Board of Directors. The Company will recognize the stock-based compensation of the award over the requisite service period. The shares vested immediately.

 

For the three months ended March 31, 2020 and 2019, the Company has recorded stock-based compensation expense of $141,222 and $128,444, respectively.  

 

Stock Options 

 

In August 2015, 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, 2020, 25,000 options were granted and outstanding under the Plan. 

 

The Company recognizes compensation costs for stock option awards to employees based on the 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 options of $0 for the three months ended March 31, 2020 and 2019. On March 31, 2020, 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 on March 31, 2020 is presented below: 

 

 

 

A summary of the status of the options on March 31, 2020 and changes during the period is presented below:

 

 

 

NOTE 8 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE

 

The following table presents customers accounting for 10% or more of the Company’s revenue:

 

* Zero or less than 10%

 

The following table presents customers accounting for 10% or more of the Company’s accounts receivables:

 

* Zero or less than 10%

 

As of March 31, 2020, approximately 95% and 5% of the Company’s assets were located in Denmark and the United States, respectively. As of December 31, 2019, approximately 91% and 9% of the Company’s assets were located in Denmark and the United States, respectively.

 

 

 

NOTE 9 - SUBSEQUENT EVENTS

 

The Company’s management reviewed material events through May 11, 2020.

 

In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”), a pandemic which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid-March, we elected to temporarily introduce 2-shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, the majority of our employees have been working remotely since that time.

 

While we are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, result of operations, liquidity and cash flows due to uncertainties, our compliance with these measures did not have a material adverse impact on our financial results for the first quarter of fiscal year 2020. We have, however, begun to take precautionary measures to manage our resources conservatively by reducing and/or deferring capital and operating expenses to mitigate any potential adverse impacts of the pandemic as well as to conserve cash. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for the next 12 months from the issuance of this quarterly report. In addition, as a result of our reduced manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in fiscal year 2020.

 

While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products if it results in a recessionary global economic environment. It could also lead to volatility in access to our products due to government actions impacting our ability to produce and ship products