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 ninethree months period ended September 30, 2022March 31, 2023
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to 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: +45 3131 5941
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 ☒
As of November 10, 2022,May 11, 2023, there were 43,896,87145,271,441 shares of common stock, $0.001 par value per share, outstanding.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2022March 31, 2023
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. Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. This is especially underlined by the impacts from the COVID-19 pandemic, related supply chain related disruptions, inflationary pressure, prevailing macro-economic uncertainty and the European energy crisis on the Company, including the related effects to our business operations, results of operations, cash flows, and financial position. 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 Quarterly Report on Form 10-Q will prove to be accurate. ConsideringIn 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.
Forward-looking statements include, but are not limited to, statements concerning:
● | The |
● | Risk of a prolonged period of inflationary pressure including |
● | Our exposure to increased macro-economic uncertainty; | |
● | The resurgence of COVID-19 or similar global pandemics; | |
● | Our dependence on a few major customers |
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● | Our ability to | |
● | Our ability to secure and source supplies of raw materials and key components in | |
● | Our reliance on subcontractors or delivery of new machinery to develop sufficient manufacturing capacity to meet demand; | |
● | Our ability to achieve revenue growth and |
● | Our dependence on the expertise and experience of our management team and the retention of key |
● | Our |
● | Our ability to | |
● | Changes in emissions and environmental regulations, and potential further tightening of emission |
● | Our dependence on corporate or government funding for emissions control programs; |
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● | Our ability to compete under changing governmental standards by which our products are evaluated; |
● | The exposure to potentially adverse tax consequences; |
● | The financial impact from the fluctuation and volatility of foreign currencies; |
● | The potential monetary costs of defending our intellectual property rights; |
● | Our ability to successfully protect our intellectual property |
● | The possibility of a dispute over intellectual property developed in conjunction with third parties with whom we have contractual relationships; |
● | The possibility that we could become subject to litigation that could be costly, limit, or cancel our intellectual property rights or divert time and efforts away from our business operations; |
● | The potential negative impact to the |
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● | The potential liability for environmental harm or damages resulting from technical faults or failures of our products; |
● | The possibility that an investor located within the United States may not be able to or find it difficult to enforce any judgments obtained in United States courts because a significant portion of our assets and some of our officers and directors may be located outside of the United States; |
● | The possibility that we may not be able to develop and maintain an effective system of internal |
● | The possibility of breaches in the security of our information technology systems; |
● | The liability risk of our compliance to environmental laws and regulations; |
● | The potential negative impact of more stringent environmental laws and regulations as governmental agencies seek to improve minimum standards; and |
● | The possibility that enforcement actions to suspend or severely restrict our business operations could be brought against the Company for our failure to comply with laws or regulations and the potential costs of defending against such actions. |
Any forward-looking statement made by us herein speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
PART I - FINANCIAL INFORMATION
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of | As of | As of | As of | |||||||||||||
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and restricted cash | $ | 17,605,377 | $ | 17,489,380 | $ | 14,309,933 | $ | 16,597,371 | ||||||||
Accounts receivable, net of allowance for doubtful accounts of $161,311 and $409,076 at September 30, 2022 and December 31, 2021, respectively | 2,843,864 | 1,957,579 | ||||||||||||||
Inventories, net of allowance for excess and obsolete inventory of $578,076 and $268,470 at September 30, 2022 and December 31, 2021, respectively | 4,657,188 | 5,421,027 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $60,628 and $59,559 at March 31, 2023 and December 31, 2022, respectively | 2,736,043 | 2,310,344 | ||||||||||||||
Inventories, net of allowance for excess and obsolete inventory of $675,137 and $663,227 at March 31, 2023 and December 31, 2022, respectively | 4,421,748 | 4,062,001 | ||||||||||||||
Contract assets | 2,078,472 | 1,906,510 | 2,447,668 | 2,253,295 | ||||||||||||
Prepaid expenses and other current assets | 2,653,978 | 1,292,285 | 2,088,530 | 1,720,902 | ||||||||||||
Assets held for sale | 734,709 | 723,872 | ||||||||||||||
Total Current Assets | 29,838,879 | 28,066,781 | 26,738,631 | 27,667,785 | ||||||||||||
Long-Term Assets: | ||||||||||||||||
Property and equipment, net of accumulated depreciation of $7,848,569 and $7,554,803 at September 30, 2022 and December 31, 2021, respectively | 6,877,185 | 8,858,993 | ||||||||||||||
Property and equipment, net of accumulated depreciation of $9,774,851 and $9,046,499 at March 31, 2023 and December 31, 2022, respectively | 7,934,496 | 8,296,807 | ||||||||||||||
Operating lease right-of-use assets | 3,119,806 | 6,925,807 | 3,190,273 | 3,271,997 | ||||||||||||
Deposits and other assets | 390,634 | 628,109 | 457,398 | 450,038 | ||||||||||||
Intangible assets, net of accumulated amortization of $376,954 and $357,231 at September 30, 2022 and December 31, 2021, respectively | 218,190 | 334,743 | ||||||||||||||
Intangible assets, net of accumulated amortization of $472,098 and $438,250 at March 31, 2023 and December 31, 2022, respectively | 190,779 | 212,933 | ||||||||||||||
Goodwill | 206,639 | 240,259 | 230,157 | 226,095 | ||||||||||||
Total Long-Term Assets | 10,812,454 | 16,987,911 | 12,003,103 | 12,457,870 | ||||||||||||
Total Assets | $ | 40,651,333 | $ | 45,054,692 | $ | 38,741,734 | $ | 40,125,655 | ||||||||
The accompanying notes are an integral part of these unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of | As of | As of | As of | |||||||||||||
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable | $ | 1,617,452 | $ | 1,646,662 | $ | 2,215,226 | $ | 1,389,355 | ||||||||
Accrued expenses | 3,447,107 | 4,685,665 | 2,699,232 | 3,087,206 | ||||||||||||
Current portion of finance lease obligations | 321,788 | 373,824 | 410,060 | 399,198 | ||||||||||||
Current portion of operating lease liabilities | 511,240 | 846,544 | 579,552 | 561,182 | ||||||||||||
Current portion of Convertible Note payable | - | 8,400,000 | ||||||||||||||
Contract liabilities | 635,167 | 914,828 | 710,604 | 649,557 | ||||||||||||
Total Current Liabilities | 6,532,754 | 16,867,523 | 6,614,674 | 6,086,498 | ||||||||||||
Deferred tax liability | 154,478 | 224,779 | 142,946 | 154,645 | ||||||||||||
Other liabilities, net of current portion | - | 346,939 | ||||||||||||||
Finance lease obligations, net of current portion | 1,911,361 | 2,499,591 | 2,322,913 | 2,384,011 | ||||||||||||
Operating lease liabilities, net of current portion | 2,608,566 | 6,154,064 | 2,610,721 | 2,710,815 | ||||||||||||
Senior Promissory Notes, net | 5,395,240 | - | ||||||||||||||
Convertible Note payable, less current portion | - | 6,186,936 | ||||||||||||||
Senior promissory notes payable, less current portion | 5,564,842 | 5,480,314 | ||||||||||||||
Total Long-term Liabilities | 10,069,645 | 15,412,309 | 10,641,422 | 10,729,785 | ||||||||||||
Total Liabilities | 16,602,399 | 32,279,832 | 17,256,096 | 16,816,283 | ||||||||||||
Stockholders' Equity: | ||||||||||||||||
Preferred stock; par value $0.001, 2,500,000 shares authorized, 0 shares issued and outstanding at September 30, 2022 and December 31, 2021 | - | - | ||||||||||||||
Common stock; par value $0.001, 100,000,000 shares authorized, 43,896,871 and 21,285,706 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 43,896 | 21,285 | ||||||||||||||
Preferred stock; par value $0.001, 2,500,000 shares authorized, 0 shares issued and outstanding at March 31, 2023 and December 31, 2022 | - | - | ||||||||||||||
Common stock; par value $0.001, 100,000,000 shares authorized, 45,271,441 and 43,986,079 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | 45,270 | 43,986 | ||||||||||||||
Additional paid-in capital | 96,785,016 | 70,910,902 | 97,092,877 | 96,936,988 | ||||||||||||
Accumulated deficit | (65,188,075 | ) | (53,181,928 | ) | (69,740,538 | ) | (67,351,035 | ) | ||||||||
Accumulated other comprehensive loss | (7,591,903 | ) | (4,975,399 | ) | (5,911,971 | ) | (6,320,567 | ) | ||||||||
Total Stockholders' Equity | 24,048,934 | 12,774,860 | 21,485,638 | 23,309,372 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 40,651,333 | $ | 45,054,692 | $ | 38,741,734 | $ | 40,125,655 | ||||||||
The accompanying notes are an integral part of these unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Revenue | $ | 3,305,534 | $ | 4,142,954 | $ | 11,961,062 | $ | 12,157,394 | $ | 4,011,519 | $ | 3,637,236 | ||||||||||||
Cost of Goods Sold | 3,198,255 | 3,946,732 | 11,460,102 | 11,525,847 | ||||||||||||||||||||
Cost of goods sold | 3,620,177 | 3,391,695 | ||||||||||||||||||||||
Gross Profit | 107,279 | 196,222 | 500,960 | 631,547 | 391,342 | 245,541 | ||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||
Selling expenses | 676,420 | 1,205,849 | 2,932,881 | 3,417,933 | 1,182,435 | 1,059,948 | ||||||||||||||||||
General and administrative expenses | 1,429,315 | 1,102,772 | 4,611,375 | 3,824,574 | 1,058,949 | 1,916,517 | ||||||||||||||||||
Research and development expenses | 283,524 | 497,823 | 1,377,097 | 1,370,059 | 342,619 | 602,737 | ||||||||||||||||||
Restructuring costs | (1,964 | ) | - | 1,786,863 | - | |||||||||||||||||||
Total Operating Expense | 2,387,295 | 2,806,444 | 10,708,216 | 8,612,566 | 2,584,003 | 3,579,202 | ||||||||||||||||||
Loss from Operations | (2,280,016 | ) | (2,610,222 | ) | (10,207,756 | ) | (7,981,019 | ) | (2,192,661 | ) | (3,333,661 | ) | ||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||
Interest and other income | 1,870 | - | 344,593 | - | 51,673 | 99 | ||||||||||||||||||
Interest expense | (28,514 | ) | (235,318 | ) | (394,532 | ) | (491,335 | ) | (12,001 | ) | (206,461 | ) | ||||||||||||
Amortization discount on Notes | (84,098 | ) | (292,129 | ) | (2,304,054 | ) | (543,933 | ) | ||||||||||||||||
Amortization discount on convertible note | (84,528 | ) | (297,338 | ) | ||||||||||||||||||||
Gain (Loss) on currency transactions | 628,137 | 218,030 | 361,928 | 506,018 | (166,278 | ) | 75,993 | |||||||||||||||||
Gain on lease termination | (3,317 | ) | - | 150,258 | - | |||||||||||||||||||
Gain on sale of fixed assets | (19 | ) | (8 | ) | 642 | 1,126 | ||||||||||||||||||
Total Other Income (Expense) | 514,059 | (309,425 | ) | (1,841,165 | ) | (528,124 | ) | (211,134 | ) | (427,707 | ) | |||||||||||||
Loss Before Income Taxes | (1,765,957 | ) | (2,919,647 | ) | (12,048,421 | ) | (8,509,143 | ) | (2,403,795 | ) | (3,761,368 | ) | ||||||||||||
Income Tax Benefit | (13,293 | ) | (15,691 | ) | (42,274 | ) | (47,650 | ) | (14,292 | ) | (14,994 | ) | ||||||||||||
Net Loss | $ | (1,752,664 | ) | $ | (2,903,956 | ) | $ | (12,006,147 | ) | $ | (8,461,493 | ) | $ | (2,389,503 | ) | $ | (3,746,424 | ) | ||||||
Basic and Diluted Loss Per Share | $ | (0.04 | ) | $ | (0.13 | ) | $ | (0.37 | ) | $ | (0.39 | ) | $ | (0.05 | ) | $ | (0.18 | ) | ||||||
Basic and Diluted Weighted Average Common Shares Outstanding | 43,891,799 | 21,769,461 | 32,529,152 | 21,661,945 | 45,228,596 | 21,350,455 | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS (UNAUDITED)
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Net Loss | (1,752,664 | ) | (2,903,956 | ) | (12,006,147 | ) | (8,461,493 | ) | (2,389,503 | ) | (3,746,424 | ) | ||||||||||||
Other Comprehensive Loss - Currency Translation, Net | (1,646,038 | ) | (603,894 | ) | (2,616,504 | ) | (1,547,311 | ) | ||||||||||||||||
Other Comprehensive Income - Currency Translation, Net | 408,596 | (355,891 | ) | |||||||||||||||||||||
Total Comprehensive Loss | $ | (3,398,702 | ) | $ | (3,507,850 | ) | $ | (14,622,651 | ) | $ | (10,008,804 | ) | $ | (1,980,907 | ) | $ | (4,102,315 | ) | ||||||
The accompanying notes are an integral part of these unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
For the period ended September 30,March 31, 2023 and March 31, 2022 and September 30, 2021
Accumulated Other | Additional | Accumu- | Accumulated Other | |||||||||||||||||||||||||||||||||||||||||||||
Additional | Compre- | Common Stock | Paid-in | lated | Comprehensive | |||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income/(Loss) | TOTAL | |||||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2022 | 43,986,079 | 43,986 | 96,936,988 | (67,351,035 | ) | (6,320,567 | ) | 23,309,372 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued in settlement of RSUs | 1,285,362 | 1,284 | (1,284 | ) | - | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 157,173 | 157,173 | ||||||||||||||||||||||||||||||||||||||||||||||
Currency translation, net | 408,596 | 408,596 | ||||||||||||||||||||||||||||||||||||||||||||||
Net Loss | (2,389,503 | ) | (2,389,503 | ) | ||||||||||||||||||||||||||||||||||||||||||||
BALANCE, March 31, 2023 | 45,271,441 | 45,270 | 97,092,877 | (69,740,538 | ) | (5,911,971 | ) | 21,485,638 | ||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | hensive | |||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income/(Loss) | TOTAL | |||||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2021 | 21,285,706 | 21,285 | 70,910,092 | (53,181,928 | ) | (4,975,399 | ) | 12,774,860 | 21,285,706 | 21,285 | 70,910,092 | (53,181,928 | ) | (4,975,399 | ) | 12,774,860 | ||||||||||||||||||||||||||||||||
Common stock issued in settlement of RSUs | 66,982 | 67 | (67 | ) | - | 66,982 | 67 | (67 | ) | - | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 178,778 | 178,778 | 178,778 | 178,778 | ||||||||||||||||||||||||||||||||||||||||||||
Currency translation, net | (355,891 | ) | (355,891 | ) | (355,891 | ) | (355,891 | ) | ||||||||||||||||||||||||||||||||||||||||
Net Loss | (3,746,424 | ) | (3,746,424 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net Income | (3,746,424 | ) | (3,746,424 | ) | ||||||||||||||||||||||||||||||||||||||||||||
BALANCE, March 31, 2022 | 21,352,688 | 21,352 | 71,089,613 | (56,928,352 | ) | (5,331,290 | ) | 8,851,323 | 21,352,688 | 21,352 | 71,089,613 | (56,928,352 | ) | (5,331,290 | ) | 8,851,323 | ||||||||||||||||||||||||||||||||
Common shares issued for cash at $0.50 per share, net of offering cost of $1,996,469, in May 2022 | 22,535,850 | 22,536 | 24,430,992 | 24,453,528 | ||||||||||||||||||||||||||||||||||||||||||||
Warrants issued in connection with Senior Promissory Notes | 664,704 | 664,704 | ||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 221,472 | 221,472 | ||||||||||||||||||||||||||||||||||||||||||||||
Currency translation, net | (614,575 | ) | (614,575 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net Loss | (6,507,059 | ) | (6,507,059 | ) | ||||||||||||||||||||||||||||||||||||||||||||
BALANCE, June 30, 2022 | 43,888,538 | 43,888 | 96,406,781 | (63,435,411 | ) | (5,945,865 | ) | 27,069,393 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued in settlement of RSUs | 8,333 | 8 | (8 | ) | - | |||||||||||||||||||||||||||||||||||||||||||
Adjustment to warrants issued in connection with Senior Promissory Notes | (3,868 | ) | (3,868 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 382,111 | 382,111 | ||||||||||||||||||||||||||||||||||||||||||||||
Currency translation, net | (1,646,038 | ) | (1,646,038 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net Loss | (1,752,664 | ) | (1,752,664 | ) | ||||||||||||||||||||||||||||||||||||||||||||
BALANCE, September 30, 2022 | 43,896,871 | 43,896 | 96,785,016 | (65,188,075 | ) | (7,591,903 | ) | 24,048,934 | ||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2020 | 21,655,461 | 21,655 | 69,897,698 | (42,054,968 | ) | (3,046,070 | ) | 24,818,315 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued in settlement of RSUs | 41,912 | 42 | (42 | ) | - | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 102,388 | 102,388 | ||||||||||||||||||||||||||||||||||||||||||||||
Currency translation, net | (1,311,521 | ) | (1,311,521 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net Income | (2,459,429 | ) | (2,459,429 | ) | ||||||||||||||||||||||||||||||||||||||||||||
BALANCE, March 31, 2021 | 21,697,373 | 21,697 | 70,000,044 | (44,514,397 | ) | (4,357,591 | ) | 21,149,753 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued as commitment fee for Convertible Note | 80,000 | 80 | 531,649 | 531,729 | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 125,076 | 125,076 | ||||||||||||||||||||||||||||||||||||||||||||||
Currency translation, net | 368,104 | 368,104 | ||||||||||||||||||||||||||||||||||||||||||||||
Net Loss | (3,098,108 | ) | (3,098,108 | ) | ||||||||||||||||||||||||||||||||||||||||||||
BALANCE, June 30, 2021 | 21,777,373 | 21,777 | 70,656,769 | (47,612,505 | ) | (3,989,487 | ) | 19,076,554 | ||||||||||||||||||||||||||||||||||||||||
Common stock issued in settlement of RSUs | 8,333 | 8 | (8 | ) | - | |||||||||||||||||||||||||||||||||||||||||||
Exchange of common stock to prefunded warrants | (500,000 | ) | (500 | ) | 500 | - | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 127,519 | 127,519 | ||||||||||||||||||||||||||||||||||||||||||||||
Currency translation, net | (603,894 | ) | (603,894 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net Loss | (2,903,956 | ) | (2,903,956 | ) | ||||||||||||||||||||||||||||||||||||||||||||
BALANCE, September 30, 2021 | 21,285,706 | 21,285 | 70,784,780 | (50,516,461 | ) | (4,593,381 | ) | 15,696,223 | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended | ||||||||||||||||
For the Nine Months Ended September 30, | March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||
Net Loss | $ | (12,006,147 | ) | $ | (8,461,493 | ) | $ | (2,389,503 | ) | $ | (3,746,424 | ) | ||||
Adjustments to reconcile net loss to net cash provided by (used in) operations: | ||||||||||||||||
Depreciation and amortization | 2,260,060 | 1,968,011 | 756,631 | 746,357 | ||||||||||||
Amortization of discount on Notes payable | 2,304,054 | 543,933 | ||||||||||||||
Amortization of discount on convertible notes payable | 84,528 | 297,338 | ||||||||||||||
Stock-based compensation | 782,361 | 354,983 | 157,173 | 178,778 | ||||||||||||
Change in deferred tax asset / liability | (42,274 | ) | (47,650 | ) | (14,292 | ) | (14,944 | ) | ||||||||
Gain on lease termination | (150,258 | ) | - | |||||||||||||
Gain on sale of fixed assets | (642 | ) | (1,126 | ) | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable | (1,262,577 | ) | 741,514 | (379,330 | ) | (237,953 | ) | |||||||||
Inventory | 5,728 | 94,319 | (283,157 | ) | (505,962 | ) | ||||||||||
Contract assets | (485,469 | ) | 628,368 | (151,812 | ) | (585,678 | ) | |||||||||
Prepaid expenses and other current assets | (1,497,612 | ) | 299,949 | (336,388 | ) | (1,399,481 | ) | |||||||||
Accounts payable | 212,304 | (188,035 | ) | 791,702 | 414,995 | |||||||||||
Accrued expenses | (1,028,428 | ) | 599,086 | (433,045 | ) | 209,038 | ||||||||||
Operating lease liabilities | (409,008 | ) | (755,503 | ) | (138,699 | ) | (185,804 | ) | ||||||||
Contract liabilities | (165,028 | ) | (184,447 | ) | 48,755 | (205,206 | ) | |||||||||
Assets held for sale | 2,136 | - | ||||||||||||||
Total Adjustments | 523,211 | 4,053,402 | 107,201 |
| (1,288,522 | ) | ||||||||||
Net Cash used in Operating Activities | (11,482,936 | ) | (4,408,091 | ) | (2,285,301 | ) | (5,034,944 | ) | ||||||||
| Cash Flows from Investing Activities: | ||||||||||||||||
Purchase of property and equipment | (792,523 | ) | (932,293 | ) | (87,470 | ) | (183,031 | ) | ||||||||
Proceeds from sale of fixed assets | 642 | 1,126 | ||||||||||||||
Net cash paid for earn-out agreement | - | (321,574 | ) | |||||||||||||
Net Cash used in Investing Activities | (791,881 | ) | (1,252,741 | ) | (87,470 | ) | (183,031 | ) | ||||||||
Cash Flows from Financing Activities: | ||||||||||||||||
Payments on finance lease obligation | (259,197 | ) | (287,526 | ) | (98,945 | ) | (91,807 | ) | ||||||||
Proceeds from issuance of common stock and prefunded warrants | 24,418,612 | - | ||||||||||||||
Proceeds from issuance of Senior Promissory Notes | 6,000,000 | - | ||||||||||||||
Payments on Convertible Note | (16,800,000 | ) | 14,283,333 | |||||||||||||
Interest payments on convertible note | - | (840,000 | ) | |||||||||||||
Net Cash provided by Financing Activities | 13,359,415 | 13,995,807 | ||||||||||||||
Net Cash used in Financing Activities | (98,945 | ) | (931,807 | ) | ||||||||||||
Gain (Loss) on Currency Translation | (968,601 | ) | (907,085 | ) | 184,278 | (112,537 | ) | |||||||||
Net change in Cash and Restricted Cash | 115,997 | 7,427,890 | (2,287,438 | ) | (6,262,319 | ) | ||||||||||
Cash and Restricted Cash at Beginning of Period | 17,489,380 | 13,264,449 | 16,597,371 | 17,489,380 | ||||||||||||
Cash and Restricted Cash at End of Period | $ | 17,605,377 | $ | 20,692,339 | $ | 14,309,933 | $ | 11,227,061 | ||||||||
The accompanying notes are an integral part of these unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 364,846 | $ | 483,321 | ||||
Income Taxes | - | - | ||||||
Non-cash financing activities | ||||||||
Original issue discount on Convertible Note | - | 1,800,000 | ||||||
Convertible Note debt conversion feature | - | 3,048,396 | ||||||
Debt issuance costs on Convertible Note | - | 716,667 | ||||||
Common Stock issued for conversion of Convertible Note | - | 531,729 | ||||||
Debt discount on Senior Promissory Notes | 695,749 | - | ||||||
For the Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | (41,506 | ) | $ | 203,289 | |||
Income Taxes | - | - | ||||||
The accompanying notes are an integral part of these unaudited financial statements.
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
The consolidated financial statements include the accounts of LiqTech International, Inc., the(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 in Item 2, Management's Discussionthe management's discussion and Analysis of Financial Condition and Results of Operation.analysis section. The Company engages in the development, design, production, marketing and sale of automated filtering systems, ceramic silicon carbide liquidmembrane applications and diesel particulate air filters in the Americas, Asia-Pacific,North America, Europe, Asia, Australia, and the Middle East & Africa.South America.
These interim consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements should be read in conjunction with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. The results of operations for the period ended March 31, 2023 are not necessarily indicative of the operating results for the full year and are unaudited. In the opinion of management, all adjustments consisting of normal recurring nature, necessary for a fair presentation have been included.
Consolidation -- The consolidated financial statements include the accounts of the Company and 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 Holding, LiqTech Water, LiqTech Plastics, LiqTech Ceramics, LiqTech Water Projects and LiqTech Emission Control is the Danish Krone (“DKK”); the functional currency of LiqTech China is the Renminbi (“RMB”); 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 ninethree months ended September 30, 2022March 31, 2023 and 2021.2022. Translation gains and losses are deferred and accumulated as a component of other comprehensive income (loss) 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 and Restricted Cash -- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, the Company held $1,314,637$1,469,325 and $2,125,695,$1,440,394, 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 products.
Accounts held in each U.S. institution are insured by the Federal Deposit Insurance Company (“FDIC”) up to $250,000. At September 30, 2022March 31, 2023 and December 31, 20212022 the Company had respectively $14,198,027$275,028, and $11,346,826$12,999,271 in excess of the FDIC insured limit.limit, respectively.
Accounts Receivable -- Accounts receivable consist of trade receivables arising in the normal course of business. The Company establishes an allowance for doubtful accounts that reflects the Company’s best estimate of probable losses inherent in the Accountsaccounts 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 periods ended September 30, 2022March 31, 2023 and December 31, 20212022 is as follows:
September 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
Allowance for doubtful accounts at the beginning of the period | $ | 409,076 | $ | 498,044 | $ | 59,559 | $ | 409,076 | ||||||||
Bad debt expense | 91,519 | (28,499 | ) | - | (24,534 | ) | ||||||||||
Receivables written off during the periods | (298,850 | ) | (24,415 | ) | - | (295,778 | ) | |||||||||
Effect of currency translation | (40,434 | ) | (36,054 | ) | 1,069 | (29,205 | ) | |||||||||
Allowance for doubtful accounts at the end of the period | $ | 161,311 | $ | 409,076 | $ | 60,628 | $ | 59,559 | ||||||||
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 costs, applying 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 management determines that the cost cannot be recovered due to obsolescence or other factors.
Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movement, expected useful lives, and estimated future demand of the products and spare parts.
Contracts Assets / 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. When the Company issues invoices to the customer and the billing is higher than the capitalized Contract assets, the net amount is transferred to Contract liabilities. Contract assets/liabilities are transferred to revenue and cost of goods sold when the right to consideration is unconditional and billed per the terms of the contractual agreement.
Contract assets also include unbilled receivables, which usually comprise the last invoice remaining after the delivery of the water treatment unit, from whichwhere revenue is recognized at the transfer of control based upon signed acceptance of the water treatment unit by the customer. Most oftencommonly this invoice is sent to the customer at commissioning of the product or no later than 12 months after the delivery. Also included in Contract assets are short-term receivables such as VAT and other receivables.
Assets Held for Sale -- Assets are classified as held for sale when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. When all of these criteria have been met, the assets are classified as held for sale on the balance sheet. Assets classified as held for sale are reported at the lower of their carrying value or fair value less costs to sell. Depreciation and amortization of assets ceases upon designation as held for sale.
Leases -- The Company has elected 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 are 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 is 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 reduced by accrued lease payments. The Company’s lease terms may include options to extend or terminate the lease, for which the Company will reflect the change when it is reasonably certain that those options will be exercised. Operating lease costscost for lease payments will be recognized on a straight-line basis over the lease term.
Property and Equipment -- Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed for financial statement purposes on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years.
Goodwill and Intangible Assets -- The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business, with the residual purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
Acquired intangible assets with determinable useful lives are amortized on a straight-line or accelerated basis over the estimated periods benefited, ranging from one to ten years. Customer relationships and other non-contractual intangible assets with determinable lives are amortized over periods of five years.
The Company evaluates the recoverability of long-lived assets by comparing the carrying amount of an asset to the estimated future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. The evaluation of recoverability involves estimates of future operating cash flows based upon certain forecasted assumptions, including, but not limited to, revenue growth rates, gross profit margins, and operating expenses over the expected remaining useful life of the related asset. A shortfall in these estimated operating cash flows could result in an impairment charge in the future.
Goodwill is not amortized but is evaluated annually for impairment at the reporting unit level or when indicators of a potential impairment are present. The Company estimates the fair value of the reporting unit using the discounted cash flow and market approaches. Forecasts of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, using primarily expected category expansion, pricing, market segment fundamentals, and general economic conditions.
Revenue Recognition -- On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” which includes clarifying ASUs issued in 2015,2016 and 2017 (“new revenue standard”). The new revenue standard was applied to all open revenue contracts using the modified retrospective method as of January 1, 2018.
The Company sells products throughout the world, and sales by geographical region are as follows for the three and ninemonths ended September 30, 2022March 31, 2023 and 2021:2022:
For the Three Months | For the Nine Months | For the Three months | ||||||||||||||||||||||||||||||
Ended September 30, | Ended September 30, | % Distribution | Ended March 31, | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Americas | $ | 382,573 | $ | 211,575 | $ | 861,260 | $ | 573,365 | 9 | % | 4 | % | $ | 333,530 | $ | 139,307 | ||||||||||||||||
Asia-Pacific | 895,696 | 636,622 | 2,944,449 | 3,225,691 | 11 | % | 23 | % | 451,895 | 835,365 | ||||||||||||||||||||||
Europe | 1,903,930 | 3,294,757 | 6,651,065 | 8,358,338 | 77 | % | 73 | % | 3,099,785 | 2,662,564 | ||||||||||||||||||||||
Middle East & Africa | 123,335 | - | 1,504,288 | - | 3 | % | - | % | 126,309 | - | ||||||||||||||||||||||
| $ | 3,305,534 | $ | 4,142,954 | $ | 11,961,062 | $ | 12,157,394 | 100 | % | 100 | % | $ | 4,011,519 | $ | 3,637,236 | |||||||||||||||||
The Company’s sales by product and serviceline are as follows for the three and ninemonths ended September 30, 2022March 31, 2023 and 2021:2022:
For the Three Months | For the Nine Months | For the Three Months | ||||||||||||||||||||||||||||||
Ended September 30, | Ended September 30, | % Distribution | Ended March 31, | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Water | $ | 785,046 | $ | 1,493,549 | $ | 3,522,049 | $ | 3,730,889 | 36 | % | 16 | % | $ | 1,434,919 | $ | 592,990 | ||||||||||||||||
Ceramics | 1,854,981 | 1,703,057 | 5,548,951 | 5,444,863 | 35 | % | 52 | % | 1,409,372 | 1,880,118 | ||||||||||||||||||||||
Plastics | 665,507 | 855,896 | 2,839,809 | 2,686,292 | 29 | % | 31 | % | 1,167,228 | 1,138,597 | ||||||||||||||||||||||
Corporate | - | 90,452 | 50,253 | 295,350 | - | % | 1 | % | - | 25,530 | ||||||||||||||||||||||
| $ | 3,305,534 | $ | 4,142,954 | $ | 11,961,062 | $ | 12,157,394 | 100 | % | 100 | % | $ | 4,011,519 | $ | 3,637,236 | |||||||||||||||||
For Water (systems and aftermarket), Ceramics (diesel particulate filters and membranes), and Plastics (components), revenue is recognized when performance obligations specified within the terms of a contract with the customer are satisfied, which occurs when control of the product 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 along with 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 is 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 to receive 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. Considering the relatively short time 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 to the customer based upon sales and delivery conditions specified in the sales contract. This typically occurs upon shipment of the system from the production facility but can also occur upon other agreed delivery terms. In connection with the completion of the system, it is normal procedure to issue a FAT (Factory Acceptance Test) asserting that the customer has accepted the performance of the system as it is being shipped from our production facility in Hobro. As part of the performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer), and this commissioning is therefore considered a second performance obligation and is valued at cost, with the addition of a standard gross margin. This second performance obligation is recognized as revenue at the time of the commissioning services being rendered 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), this portion is recognized as Contract liabilities.
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 filtration systems. We measure the transfer of control of the performance obligation on long-term contracts utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs such as labor and materials. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenue and a significant factor in the accounting for such performance obligations. The timing of when we bill our customers is generally dependent upon advance billings terms, milestone billings based on completion of certain phases of the work, or when services are provided or products are shipped. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported on our balance sheet as Contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported on our balance sheet as Contract liabilities.
Contract assets represent 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 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 assets/liabilities are transferred to revenue and cost of goods sold when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract liabilities also include deferred revenue related to the second performance obligation stated under Revenue Recognition, for which the obligation is attributed to the commissioning of the water treatment system.
The roll-forward of Contract assets / liabilities for the periods ended September 30, 2022,March 31, 2023 and December 31, 20212022 areis as follows:
September 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
Cost incurred | $ | 3,602,967 | $ | 3,381,994 | $ | 4,338,453 | $ | 3,860,179 | ||||||||
Unbilled project deliveries | 667,670 | 454,158 | 506,509 | 950,105 | ||||||||||||
VAT | 383,701 | 542,255 | 327,718 | 229,006 | ||||||||||||
Other receivables | 9,240 | 60,158 | 75,804 | 45,814 | ||||||||||||
Prepayments | (3,082,635 | ) | (2,947,736 | ) | (3,445,720 | ) | (3,363,039 | ) | ||||||||
Deferred Revenue | (137,638 | ) | (499,146 | ) | (65,701 | ) | (118,327 | ) | ||||||||
| $ | 1,443,305 | $ | 991,682 | $ | 1,737,063 | $ | 1,603,738 | |||||||||
Distributed as follows: | ||||||||||||||||
Contract assets | $ | 2,078,472 | $ | 1,906,510 | $ | 2,447,668 | $ | 2,253,295 | ||||||||
Contract liabilities | (635,167 | ) | (914,828 | ) | (710,604 | ) | (649,557 | ) | ||||||||
| $ | 1,443,305 | $ | 991,682 | $ | 1,737,063 | $ | 1,603,738 | |||||||||
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 for the three-month periods ended September 30, 2022March 31, 2023 and 20212022 were $39,094$32,599 and $41,141, respectively. Total advertising costs amounted to $142,522 and $166,376 for the nine months ended September 30, 2022 and 2021,$55,524, respectively.
Research and Development Cost -- The Company expenses research and development costs as incurred. Included in operating expense for the three-month periods ended September 30, 2022March 31, 2023 and 20212022 were research and development costs of $283,524$342,619 and $497,823, respectively. For the nine-month periods ended September 30, 2022 and 2021, research and development costs were $1,377,097 and $1,370,059,$602,737, respectively.
Income Taxes -- The Company accounts for income taxes in accordance with FASB ASC Topic 740, Accounting for Income Taxes. This statement requires an asset and liability approach with respect to 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 shares of Common Stock 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 shares of Common Stock included in the diluted earnings per share calculation include in-the-money stock options, RSUs and warrants that have been granted but have not yet been exercised.
Stock Awards -- During the years presented in the accompanying consolidated financial statements, the Company has granted stock awards. The Company accounts for stock awards in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation.
Fair Value of Financial Instruments -- The Company accounts for fair value measurements for financial assets and liabilities in accordance with FASB ASC Topic 820. The authoritative guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
● | Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities; |
● | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
● | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, other receivables, prepaid expenses, accounts payable, accrued expenses, Senior Promissory Notesconvertible notes payable, and Convertible Notessenior promissory notes payable approximate their recorded values due to their short-term maturities.
Accounting Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets including accounts receivable; allowance for doubtful accounts; contract assets; reserve for excess and obsolete inventory; depreciation and impairment of property, plant and equipment; goodwill; 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 November 2021, the FASB issued ASU 2021-10, Disclosures by Business Entities about Government Assistance. The FASB is issuing this Update to increase the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. The ASU will be effective for annual reporting periods after January 1, 2022. We are still assessing the impact of ASU 2021-10 on our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06 Accounting for Convertible Instruments and Contracts in An Entity’s Own Equity. ASU 2020-06 simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion feature and for convertible instruments with a beneficial conversion feature. As a result, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. Additionally, ASU 2020-06 amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The treasury stock method is no longer available. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company early adopted ASU 2020-06 on January 1, 2022, using a modified retrospective approach.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is intended to help stakeholders during the global market-wide reference rate transition period and will be in effect for a limited time through December 31, 2022. Adoption is permitted at any time. The Company is currently evaluating the impact on its financial statements.
Other recentRecent accounting pronouncements issued by the FASB did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
NOTE 2 – GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States of America, which contemplate continuation of the Company as a going concern; however, the Company has incurred significant recent losses, which raises substantial doubt about the ability of the Company to continue as a going concern for a period of one year from the issuance of these financial statements. There is no assurance that the Company will be successful in executing the proposed cost reductions and revenue growth,profitability improvement measures, thus achieving profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
NOTE 3– RESTRUCTURING COSTS
During the second quarter, the Company completed a restructuring program to reduce costs, decrease operating losses and improve cash flow. Total restructuring and restructuring-related net charges pursuant to this program were $1,786,863, which were recorded separately in the income statement as “restructuring costs”, and allocated as follows:
CEO separation -- On May 10, 2022, the Board of Directors accepted the resignation of Sune Mathiesen as Chief Executive Officer and a director of the Company, effective May 12, 2022. As previously announced, Mr. Mathiesen had been on a medical leave of absence since March 17, 2022. In connection with Mr. Mathiesen’s resignation, Mr. Mathiesen and the Company entered into a Separation Agreement and Release (the “Separation Agreement”). Under the provisions of the Separation Agreement, Mr. Mathiesen received DKK1,605,000 (equivalent to $230,538), which is the equivalent of six months of salary, car allowance and pension contributions, in a lump-sum payment, less applicable deductions and withholdings.
Terminated employees – In the second quarter of 2022, the Company re-aligned its corporate management structure, which involved a reduction in headcount and labor costs of approximately 25%. The new organization reflects a focused effort to align key leaders with strategic imperatives, inspire greater accountability and performance management, eliminate silos and layers of middle management, and operate a leaner, more efficient business. Provisions for salary obligations to employees amounted to $159,841, reflecting the costs related to select employees released from duties with immediate effect. No provisions were made for the employees working during the notice period.
China close-down – In the second quarter of 2022, the Company reduced and suspended planned capital investments, including the Company’s program to build a manufacturing and service center in China. Pursuant to the suspended plans, the Company terminated and settled agreements with consultants, select project employees, and domestic property development providers, resulting in a net payment of termination and cancellation charges of $278,391.
Capex commitments -- As part of efforts to balance future investments with expected demands and cash flow, the Company commenced the renegotiation of all material Capex commitments during the quarter, with the ambition to reduce, cancel, or delay deliveries under the contracts, which initially amounted to approximately $9,000,000. Substantial progress was made during the second quarter, with expected closure of the renegotiation in the second half of 2022. As part of the renegotiation, a provision was made during the second quarter of $668,606 regarding expected cancellation charges and contractual termination costs. However, during this quarter the amount of paid cancellation charges has exceeded the provision by $28,607, which explains the total amount regarding capex commitments of $697,213.
Write-downs -- The re-routing of production equipment and machinery to Denmark (originally planned for China), resulted in a write-down of $243,075 on legacy installed equipment and machinery that was decommissioned as part of the arrival and implementation of new and more efficient equipment. Furthermore, review of obsolete inventory and existing product demand resulted in a write-down of $177,804.
The Company’s restructuring costs are as follows for the nine months ended September 30, 2022, of which $1,763,015 has been settled, resulting in $23,848 remaining unsettled as of September 30, 2022:
September 30, 2022 | ||||
CEO separation | $ | 230,538 | ||
Terminated employees | 159,841 | |||
China close-down | 278,391 | |||
Capex commitments | 697,213 | |||
Write-downs | 420,880 | |||
| $ | 1,786,863 | |||
The following table displays a roll-forward of the restructuring accruals, presented within “accrued expenses”, for the nine months ended September 30, 2022 and 2021:
2022 | 2021 | |||||||
Restructuring accruals, January 1 | $ | - | $ | - | ||||
Restructuring costs, net | 1,786,863 | - | ||||||
Cash payments | (1,342,135 | ) | - | |||||
Asset impairments | (420,880 | ) | - | |||||
Restructuring accruals, September 30 | $ | 23,848 | $ | - | ||||
NOTE 4 - INVENTORY
Inventory consisted of the following on September 30, 2022,March 31, 2023, and December 31, 2021:2022:
September 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
Furnace parts and supplies | $ | 609,550 | $ | 213,224 | $ | 67,689 | $ | 66,495 | ||||||||
Raw materials | 2,157,268 | 2,144,067 | 2,721,031 | 2,474,227 | ||||||||||||
Work in process | 936,059 | 1,671,290 | 1,155,789 | 982,973 | ||||||||||||
Finished goods and filtration systems | 1,532,387 | 1,660,907 | 1,152,376 | 1,201,533 | ||||||||||||
Reserve for obsolescence | (578,076 | ) | (268,470 | ) | (675,137 | ) | (663,227 | ) | ||||||||
Net Inventory | $ | 4,657,188 | $ | 5,421,027 | $ | 4,421,748 | $ | 4,062,001 | ||||||||
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.
During the third quarter the Company made further provisions for excess and obsolete inventory in a period with changing market fundamentals.
NOTE 54 - LEASES
The Company leases certain vehicles, real property, production equipment 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. During the second quarter of 2022, the Company terminated the lease agreement for the office and production space in Taicang, China.
During the ninethree months ended September 30, 2022,March 31, 2023, cash paid for amounts included for the measurement of finance lease liabilities was $316,246,$98,945, and the Company recorded finance lease expenses in other income (expenses) of $221,928.$109,165.
During the ninethree months ended September 30, 2022,March 31, 2023, cash paid for amounts included for the measurement of operating lease liabilities was $733,390,$188,555, and the Company recorded operating lease expense of $812,032.$188,555.
Supplemental balance sheet information related to leases as of September 30, 2022,March 31, 2023 and December 31, 20212022 was as follows:
September 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
Operating leases: | ||||||||||||||||
Operating lease right-of-use assets | $ | 3,119,806 | $ | 6,925,807 | $ | 3,190,273 | $ | 3,271,997 | ||||||||
Operating lease liabilities – current | $ | 511,240 | $ | 846,544 | $ | 579,552 | $ | 561,182 | ||||||||
Operating lease liabilities – long-term | 2,608,566 | 6,154,064 | 2,610,721 | 2,710,815 | ||||||||||||
Total operating lease liabilities | $ | 3,119,806 | $ | 7,000,608 | $ | 3,190,273 | $ | 3,271,997 | ||||||||
Finance leases: | ||||||||||||||||
Property and equipment, at cost | $ | 2,852,356 | $ | 3,334,830 | $ | 3,947,597 | $ | 3,877,955 | ||||||||
Accumulated depreciation | (424,959 | ) | (336,337 | ) | (631,838 | ) | (544,653 | ) | ||||||||
Property and equipment, net | $ | 2,427,397 | $ | 2,998,494 | $ | 3,315,759 | $ | 3,333,302 | ||||||||
Finance lease liabilities – current | $ | 321,788 | $ | 373,824 | $ | 410,060 | $ | 399,198 | ||||||||
Finance lease liabilities – long-term | 1,911,361 | 2,499,591 | 2,322,913 | 2,384,011 | ||||||||||||
Total finance lease liabilities | $ | 2,233,149 | $ | 2,873,415 | $ | 2,732,973 | $ | 2,783,209 | ||||||||
Weighted average remaining lease term: | ||||||||||||||||
Operating leases | 9.6 | 8.9 | 9.6 | 9.6 | ||||||||||||
Finance leases | 5.2 | 5.9 | 5.1 | 5.4 | ||||||||||||
Weighted average discount rate: | ||||||||||||||||
Operating leases | 6.2 | % | 6.5 | % | 6.1 | % | 6.2 | % | ||||||||
Finance leases | 2.8 | % | 2.8 | % | 2.2 | % | 2.2 | % | ||||||||
Maturities of lease liabilities at September 30, 2022March 31, 2023 were as follows:
Operating Lease | Finance lease | |||||||
2022 (remaining 3 months) | $ | 176,803 | $ | 97,263 | ||||
2023 | 681,709 | 389,052 | ||||||
2024 | 552,318 | 389,876 | ||||||
2025 | 287,898 | 386,752 | ||||||
2026 | 278,383 | 354,565 | ||||||
Thereafter | 2,157,468 | 846,130 | ||||||
Total payment under lease agreements | 4,134,579 | 2,463,638 | ||||||
Less imputed interest | (1,014,773 | ) | (230,489 | ) | ||||
Total lease liability | $ | 3,119,806 | $ | 2,233,149 | ||||
Operating Lease | Finance lease | |||||||
2023 (remaining 9 months) | $ | 568,313 | $ | 420,124 | ||||
2024 | 615,177 | 537,720 | ||||||
2025 | 320,664 | 534,241 | ||||||
2026 | 310,065 | 498,391 | ||||||
2027 | 310,065 | 498,391 | ||||||
Thereafter | 2,092,942 | 741,592 | ||||||
Total payment under lease agreements | 4,217,226 | 3,230,460 | ||||||
Less imputed interest | (1,026,953 | ) | (497,487 | ) | ||||
Total lease liability | $ | 3,190,273 | $ | 2,732,973 | ||||
NOTE 65 - LINES OF CREDIT
In connection with certain orders, we provide the Company provides to customerscustomer a working guarantee, a prepayment guarantee or a security bond. For that purpose, the Company haswe have a guaranteed credit line of EUR 1,350,000 (approx. $1,315,000)(approximately $1,470,000) secured by a cash deposit. As of September 30, 2022,March 31, 2023, our bank has issued working guaranties of $306,327 to$259,366 for our customers against the credit line.
NOTE 76 – LONG-TERM DEBT
Convertible Note
On March 24, 2021, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which the Company agreed to issue and sell a $15.0 million principal amount senior Convertible Noteconvertible note (the “Note”“Convertible Note”) maturing on October 1, 2023 and 80,000 shares of our common stock, $0.001 par value (“Common Stock”), for an aggregate purchase price of $15.0 million upon the satisfaction of the closing conditions set forth in the Securities Purchase Agreement. The Closing occurred on April 8, 2021, and the Company issued to the Investor the securities in connection with the Closing.
The Convertible Note was a senior, unsecured obligation of the Company, payable at 112% of the principal amount at maturity ( October 1, 2023), or earlier upon redemption or repurchase as set forth in the Convertible Note. The Convertible Note was convertible into shares of Common Stock pursuant to the terms of the Convertible Note, in part or in whole, from time to time, at the election of the Investor. The initial conversion rate was 100.6749 shares of Common Stock per $1,000 of principal amount of the Convertible Note. The conversion rate was subject to anti-dilution adjustments, including for stock dividends, splits, and combinations; issuances of options, warrants, or similar rights; spin-offs and distributions of property; cash dividends or distributions; and tender or exchange offers, in each case as further described in and pursuant to the terms of the Convertible Note.
Beginning on March 1, 2022, and on the first day of each calendar month thereafter, at the election of the Investor or Holder, if applicable, the Company was required to redeem $840,000 of the amounts due under the Convertible Note in cash or Common Stock at 90% of the lesser of (i) the volume-weighted average price (“VWAP”) of the Common Stock on the trading day immediately preceding the payment date and (ii) the average of the lowest three (3) VWAPs over the 10 trading days immediately preceding the payment date, which shall in no case be less than the floor price of $1.75 per share. Beginning on March 1, 2022, the Company paid the first monthly installment of $840,000 in cash, totaling $3,360,000.cash.
As of June 22, 2022, the Convertible Note, including accrued interest and all relevant obligations, was repaid in full, amounting to $13,446,875, allocated between a principal repayment of $11,640,000 and contractual repayment premium of $1,806,875.
The components of the Convertible Note are as follows:
September 30, 2022 | December 31, 2021 | |||||||
Convertible Note | $ | - | 16,800,000 | |||||
Less: unamortized debt issuance costs | - | (2,213,064 | ) | |||||
Convertible Note payable | $ | - | $ | 14,586,936 | ||||
Current portion of Convertible Note payable | - | 8,400,000 | ||||||
Convertible Note payable, less current portion | - | 6,186,936 | ||||||
Convertible Note payable | $ | - | $ | 14,586,936 | ||||
March 31, 2023 | March 31, 2022 | |||||||
Convertible note | $ | - | 15,960,000 | |||||
Less: unamortized debt issuance costs | - | (1,915,726 | ||||||
Convertible note payable | $ | - | $ | 14,044,274 | ||||
Current portion of convertible note payable | - | 10,080,000 | ||||||
Convertible note payable, less current portion | - | 3,964,273 | ||||||
Convertible note payable | $ | - | $ | 14,044,274 | ||||
For the three months ended September 30, 2022March 31, 2023 and 2021,2022, the Company recognized interest expense of $0 and $481,712,$187,500, respectively, and $0 and $292,129, respectively, related to the amortization of debt issuance costs.
For the nine months ended September 30, 2022 and 2021, the Company recognized interest expense of $308,958 and $904,350, respectively, and $2,213,065 and $360,417,$297,338, respectively, related to the amortization of debt issuance costs.
Senior Promissory Notes
On June 22, 2022, the Company issued and sold Senior Promissory Notes in an aggregate principal amount of $6.0 million (the "Notes") and issued warrants to purchase 4,250,000 shares of common stock of the Company to affiliates of Bleichroeder L.P., 21 April Fund, L.P., and 21 April Fund, Ltd. (together, the "Purchasers"), pursuant to a note and warrant purchase agreement entered into with the Purchasers.
The Notes have a term of 24 months and do not bear interest during this period. However, ifIf the notes are not repaid on or before the second anniversary of issuance, however, the Notes will thereafter bear interest of 10% per annum, which will increase by 1% each month the Notes remain unpaid, up to a maximum of 16% per annum, payable monthly.
Additionally, as part of the transaction, the Company issued 230,000 warrants to the placement agent. All of the warrants issued in this transaction have an exercise price of $0.65 per share, a term of five years and are exercisable for cash at any time.
As a result, the Company recorded an initial debt discount of $664,704,$695,749, based on the relative fair value of the warrants and notes issued. The Company determined the fair value of the warrants by using the Black-Scholes Option Pricing Model, with the following assumptions: expected term of 2.5 years, stock price of $0.43, exercise price of $0.65, volatility of 80.8%, risk-free rate of 3.13%, and no forfeiture rate. The debt discount will be accreted according to the effective interest method over the contractual term of the note. The warrants qualified for equity classification and were reported within Additional Paid-In Capital.
The components of notes payable are as follows:
September 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
Senior Promissory Notes | $ | 6,000,000 | - | $ | 6,000,000 | 6,000,000 | ||||||||||
Less: unamortized debt discount | (604,760 | ) | - | (435,158 | ) | (519,686 | ) | |||||||||
Senior Promissory Notes payable | $ | 5,395,240 | $ | - | $ | 5,564,842 | $ | 5,480,314 | ||||||||
Current portion of Senior Promissory Notes payable | - | - | - | - | ||||||||||||
Senior Promissory Notes payable, less current portion | 5,395,240 | - | 5,564,842 | 5,480,314 | ||||||||||||
Senior Promissory Notes payable | $ | 5,395,240 | $ | - | $ | 5,564,842 | $ | 5,480,314 | ||||||||
For the three months ended September 30, 2022,March 31, 2023 and 2021,2022, the Company recognized interest expense of $84,098$0 and $0, respectively, and $84,528 and $0, respectively on the Senior Promissory Notes, related to the amortization of the debt discount.issuance costs.
For the nine months ended September 30, 2022, and 2021, the Company recognized interest expense of $90,989 and $0, respectively, related to the amortization of the debt discount.
NOTE 87 –- AGREEMENTS AND COMMITMENTS
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.
TheIn November 2022, the Company has during the third quarter been in dialogue withentered into a former clientcommercial settlement agreement regarding marine waste-waterwastewater treatment systems delivered in 2019, regardingmore specifically potential warranty claims duerelated to alleged corrosion on selectcertain parts and component, with a total estimated remediation cost of $ 1.5 million.components. The Company is disputingdisputed the claim in full, however a commercialsubsequently reaching an amicable settlement is currently being discussedagreement with expected completion duringremediation work to be conducted in the fourthfirst quarter or earlyhalf of 2023. The cost of any remediation work is shared between the two parties.
Product Warranties --– The Company provides a standard warranty for 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 installation occurred. Revenue received for the sale of extended warranty contracts is deferred and recognized in the same manner as the costs incurred to perform under the warranty contracts.
The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the cost per claim.
Changes in the Company'sCompany’s current and long-term warranty obligations included in accrued expenses on the balance sheet, as of September 30, 2022March 31, 2023 and December 31, 2021,2022, were as follows:
September 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
Balance at January 1 | $ | 962,313 | $ | 1,056,613 | $ | 898,072 | $ | 962,313 | ||||||||
Warranty costs charged to cost of goods sold | 52,990 | 177,302 | 22,579 | 86,256 | ||||||||||||
Utilization charges against reserve | (77,720 | ) | (191,068 | ) | (239,052 | ) | (93,653 | ) | ||||||||
Release of accrual related to expired warranties | - | - | ||||||||||||||
Foreign currency effect | (132,653 | ) | (80,534 | ) | 13,343 | (56,844 | ) | |||||||||
Balance at the end of the period | $ | 804,930 | $ | 962,313 | $ | 694,943 | $ | 898,072 | ||||||||
The utilization charges against reserve for the three months ended March 31, 2023 relates to the commercial settlement agreement as described under “Note 7 – Agreements And Commitments”.
NOTE 98 -– EARNINGS PER SHARE
Basic and diluted net income (loss) per common share is determined by dividing net income (loss) by the weighted average number of shares of Common Stock outstanding during the period. For the periods where there is a net loss, stock options, warrants and Restricted Stock Units (“RSUs”) have been excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive. Consequently, the weighted average number of shares of Common Stock used to calculate both basic and diluted net loss per common share isare the same for the reported periods.
For the period endedAs of September 30, 2022,March 31, 2023, the Company had outstanding balances of 2,504,3402,832,909 RSUs, 31,440,000 prefunded warrants, and 4,480,000 warrants, all exercisable for shares of Common Stock.Stock
The following table shows the amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive Common Stock for the three and ninemonths ended September 30, 2022,March 31, 2023 and 2021:2022:
For the Three Months | For the Nine Months | |||||||||||||||||||||||
Ended September 30, | Ended September 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Net (Loss) | (1,752,664 | ) | (2,903,956 | ) | (12,006,147 | ) | (8,461,493 | ) | $ | (2,389,503 | ) | $ | (3,746,424 | ) | ||||||||||
Weighted average number of common shares used in basic earnings per share | 43,891,799 | 21,769,461 | 32,529,152 | 21,661,945 | 45,228,596 | 21,350,455 | ||||||||||||||||||
Effect of dilutive securities, stock options, RSUs, and warrants | - | - | - | - | - | - | ||||||||||||||||||
Weighted average number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share | 43,891,799 | 21,769,461 | 32,529,152 | 21,661,945 | 45,228,596 | 21,350,455 | ||||||||||||||||||
For the three and ninemonths ended September 30, 2022March 31, 2023 and 2021,2022 respectively, the Company had no options outstanding.outstanding to purchase common stock.
NOTE 109- STOCKHOLDERS' – STOCKHOLDERS’ EQUITY
Common Stock--– The Company has 100,000,000 authorized shares of common stock, $0.001 par value ("(“Common Stock"Stock”). As of September 30,March 31, 2023 and December 2022, and 2021,there were 43,896,87145,271,441 and 21,285,70643,986,079 shares of Common Stock issued and outstanding, respectively.
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, 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 shares of preferredPreferred stock, $0.001 par value. As of September 30, 2022,March 31, 2023, there were no shares of preferred stockshares issued and outstanding.
Stock Issuance
Since January 1, 2022,2023, the Company has made the following issuances of Common Stock:
On January 3, 2022,2023, the Company issued 18,64118,719 shares of Common Stock to settle RSUs. The RSUs were valued at $110,254 for services provided by the Board of Directors in 2021.2022. The Company recognized the stock-based compensation of the award over the requisite service period during the year ended December 31, 2022.
On January 3, 2022,2023, the Company issued 48,3411,266,643 shares of Common Stock to settle RSUs. The RSUs were valued at $674,164 for services provided by management in 2021.2022. The Company recognized the stock-based compensation of the award over the requisite service period during the year ended December 31, 2022.
On May 17, 2022, the Company issued 15,635,850 shares of Common Stock as part of the $23,000,000 public offering of common stock and 30,425,000 prefunded warrants to fund working capital, general corporate purposes, and partial repayment of its Senior Convertible Note.
On May 19, 2022, the Company exercised in full the option to issue 6,900,000 shares of Common Stock as part of the overallotment of $3,450,000, resulting in the closing of its previously announced public offering of $26,450,000 to fund working capital, general corporate purposes, and partial repayment of its Senior Convertible Note. Total transaction costs related to the combined public offering of $26,450,000 amounted to $1,996,472.
On August 25, 2022, the Company issued 8,333 shares of Common Stock to settle RSUs for services provided by the Board of Directors.
Warrants
On August 17, 2021, the Company entered an exchange agreement with an existing shareholder to exchange an aggregate of 500,000 shares of Common Stock for equivalent shares of prefunded warrants (the “Exchange Agreement”). The prefunded warrants will beare exercisable at an exercise price of $0.001 per share, subject to adjustments as provided under the terms of the prefunded warrants. The prefunded warrants will beare exercisable at any time on or after the closing date. The Exchange Agreement contained additional terms typical of exchange agreements including representations and warranties of the parties. In connection with and as of the date of the Exchange Agreement, the Company issued the prefunded warrants to the shareholder, and the prefunded warrants are exercisable on August 17, 2021, subject to the limitations on exercise and conditions set forth by the prefunded warrants. The prefunded warrants became subject to customary adjustments in the event of stock splits and dividends, fundamental transactions, and subsequent offerings of rights to purchase stock.
On May 17, 2022, the Company entered a warrant purchase agreement with existing shareholders to purchase 30,425,000 shares of common stock at an offering price of $0.499 per prefunded warrant, which represents the offering price of $0.50 per share of the Company’s common stock less the $0.001 per share exercise price for each pre-funded warrant, for total gross proceeds of approximately $15,182,075 as part of the Company’s public offering of common stock and pre-funded warrants totaling $23,000,000 before underwriting discounts, commissions, and offering expenses payable by the Company.
On June 23, 2022, the Company completed a private placement of Senior Notes in an aggregate principal amount of $6,000,000 and warrants to purchase 4,250,000 shares of common stock of the Company to affiliates of Bleichroeder L.P., 21 April Fund, L.P., and 21 April Fund, Ltd. (together, the "Purchasers"), pursuant to a note and warrant purchase agreement. Additionally, as part of the transaction, the Company issued 230,000230,770 warrants to the placement agent. All warrants issued in this transaction have an exercise price of $0.65 per share, a term of five years, and are exercisable for cash at any time.
BelowThe following is a summary of the periodic changes in warrants outstanding for the ninethree months ended September 30, 2022March 31, 2023 and 2021:2022:
2022 | 2021 | 2023 | 2022 | |||||||||||||
Warrants outstanding at January 1 | 1,015,000 | 515,000 | 35,920,000 | 1,015,000 | ||||||||||||
Warrants issued in connection with public offering and private placement | 34,905,000 | - | - | - | ||||||||||||
Common stock exchanged to prefunded warrant | 500,000 | |||||||||||||||
Exercises and conversions | - | - | - | - | ||||||||||||
Warrants outstanding at September 30 | 35,920,000 | 1,015,000 | ||||||||||||||
Warrants outstanding at March 31 | 35,920,000 | 1,015,000 | ||||||||||||||
Stock-based Compensation
In 2013, the Company’s Board of Directors adopted a Share Incentive Plan (the “Incentive Plan”). Under the terms and conditions of the Incentive Plan, the Board of Directors is empowered to grant RSUs to officers, directors, and directorsconsultants of the Company. At September 30, 2022,March 31, 2023, 2,504,3401,123,529 RSUs were granted and outstanding under the Incentive Plan. Directors of the Company receive share compensation as follows: an initial grant of 25,000 RSUs of Common Stock that vest over a three-year period upon appointment to the Board, followed by an annual grant of $36,750 ($73,500 for the Chairman of the Board) in RSUs per annum after full vesting of the initial grant. Further,
In 2022, the Company has granted sharesCompany’s Board of Common Stock inDirectors adopted an Equity Incentive Plan (the “2022 Incentive Plan”). Under the third quarter to management as partterms and conditions of the 2022Incentive Plan, totaling 722,456 sharesthe Board of which 97,456 shares vest inDirectors is empowered to grant RSUs to officers and directors of the Company. At JanuaryMarch 31, 2023, (part of Interim CEO agreement amended on September 13, 2022) 1,709,379 RSUs were granted and outstanding under the remaining shares vest over a three-year period.2022 Incentive Plan.
The Company recognizes compensation costs for RSU grants to directors and management based on the stock price on the date of the grant.
The Company recognized stock-based compensation expense related to RSU grants of $382,111$157,174 and $127,519$178,778 for the three-month periodsperiod ended September 30, 2022March 31, 2023 and 2021,2022, respectively. For the nine months periods ended September 30, 2022, and 2021, the stock-based compensation related to share grants was $782,360 and $354,983, respectively. On September 30, 2022,March 31, 2023, the Company had $827,939$1,122,970 of unrecognized compensation cost related to non-vested stock grants.
A summary of the status of the RSUs as of September 30, 2022March 31, 2023 and changes during the period are presented below:
September 30, 2022 | ||||||||||||
Number of units | Weighted Average Fair value | Aggregated Intrinsic | ||||||||||
Outstanding, December 31, 2021 | 149,636 | $ | 6.59 | $ | - | |||||||
Granted | 2,574,871 | 0.77 | - | |||||||||
Vested and settled with share issuance | (75,315 | ) | (6.59 | ) | - | |||||||
Forfeited | (144,853 | ) | (6.22 | ) | - | |||||||
Outstanding, September 30, 2022 | 2,504,340 | $ | 0.63 | $ | - | |||||||
March 31, 2023 | ||||||||||||
Number of units | Weighted Average Fair value | Aggregated Intrinsic | ||||||||||
Outstanding, December 31, 2022 | 2,408,892 | $ | 0.60 | $ | - | |||||||
Granted | 1,709,379 | 0.38 | - | |||||||||
Vested and settled with share issuance | (1,285,362 | ) | (0.61 | ) | - | |||||||
Outstanding, March 31, 2023 | 2,832,909 | $ | 0.46 | $ | - | |||||||
NOTE 1110 –- SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE
The following table presents customers accounting for 10% or more of the Company’s revenue:
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Customer A | 14 | % | 11 | % | 17 | % | 11 | % | ||||||||
Customer B | 12 | % | * | * | * | |||||||||||
Customer C | 11 | % | * | * | * | |||||||||||
Customer D | * | * | 12 | % | * | |||||||||||
Customer E | * | * | * | 21 | % | |||||||||||
Customer F | * | * | * | 10 | % | |||||||||||
For the Three Months | ||||||||
Ended March 31, | ||||||||
2023 | 2022 | |||||||
Customer A | * | % | 12 | % | ||||
Customer B | * | % | 10 | % | ||||
* Zero or less than 10%
The following table presents customers accounting for 10% or more of the Company’s Accounts receivable:
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March 31, 2023 | December 31, 2022 | |||||||
Customer C | 22 | % | 17 | % | ||||
Customer D | 10 | % | * | % | ||||
Customer B | * | % | 20 | % | ||||
Customer A | * | % | 10 | % | ||||
* Zero or less than 10%
As of September 30, 2022,March 31, 2023, approximately 62%95% of the Company’s assets were located in Denmark, 36%3% were located in the U.S., and 2% were located in China. As of December 31, 2021,2022, approximately 61%65% of the Company’s assets were located in Denmark, 26%33% were located in the U.S., and 13%2% were located in China.
NOTE 1211 – SEGMENT REPORTING
The Company operates in three segments: Water, Ceramics and Plastics. Effective as of January 1, 2020, the group structure was changed, with shared group activities transferred to an individual reporting unit separated from the business units. Costs and assets for these activities were therefore separated during 2020.
Segment information for the business areas is as follows:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Water | $ | 785,046 | $ | 1,493,549 | $ | 3,522,049 | $ | 3,730,889 | $ | 1,434,919 | $ | 592,990 | ||||||||||||
Ceramics | 1,854,981 | 1,703,057 | 5,548,951 | 5,444,863 | 1,409,372 | 1,880,118 | ||||||||||||||||||
Plastics | 665,507 | 855,896 | 2,839,809 | 2,686,292 | 1,167,228 | 1,138,597 | ||||||||||||||||||
Corporate | - | 90,452 | 50,253 | 295,350 | - | 25,531 | ||||||||||||||||||
Total consolidated Revenue | 3,305,534 | 4,142,954 | 11,961,062 | 12,157,394 | 4,011,519 | 3,637,236 | ||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Income (Loss) | ||||||||||||||||
Water | $ | (107,681 | ) | $ | (531,868 | ) | $ | (864,378 | ) | $ | (2,112,430 | ) | ||||
Ceramics | (772,862 | ) | (798,615 | ) | (3,519,182 | ) | (2,681,013 | ) | ||||||||
Plastics | (152,492 | ) | (358,880 | ) | (392,092 | ) | (887,184 | ) | ||||||||
Other | (719,629 | ) | (1,214,593 | ) | (7,230,495 | ) | (2,780,866 | ) | ||||||||
Total consolidated Loss | (1,752,664 | ) | (2,903,956 | ) | (12,006,147 | ) | (8,461,493 | ) | ||||||||
For the Three Months Ended | ||||||||
March 31, | ||||||||
2023 | 2022 | |||||||
Income (Loss) | ||||||||
Water | $ | (463,475 | ) | $ | (793,949 | ) | ||
Ceramics | (561,684 | ) | (1,056,348 | ) | ||||
Plastics | (66,061 | ) | (107,402 | ) | ||||
Other | (1,298,283 | ) | (1,788,725 | ) | ||||
Total consolidated Loss | (2,389,503 | ) | (3,746,424 | ) | ||||
As of | ||||||||
September 30, 2022 | December 31, 2021 | |||||||
| Total Assets | ||||||||
Water | $ | 6,874,447 | $ | 7,767,679 | ||||
Ceramics | 13,889,897 | 13,961,057 | ||||||
Plastics | 1,207,357 | 1,645,879 | ||||||
Other | 18,679,632 | 21,680,077 | ||||||
Total consolidated Assets | $ | 40,651,333 | $ | 45,054,692 | ||||
As of | ||||||||
Total Assets | March 31, 2023 | December 31, 2022 | ||||||
Water | $ | 8,285,608 | $ | 7,781,211 | ||||
Ceramics | 13,924,728 | 13,808,529 | ||||||
Plastics | 1,272,322 | 1,099,019 | ||||||
Other | 15,259,076 | 17,436,896 | ||||||
Total consolidated Assets | $ | 38,741,734 | $ | 40,125,655 | ||||
NOTE 1312 - SUBSEQUENT EVENTS
None.None
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report. In addition, the following discussion should be read in conjunction with our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 31, 20222023 and the financial statements and notes thereto. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Overview
LiqTech International, Inc. is a clean technology company that provides state-of-the-art gas and liquid purification products by manufacturing ceramic silicon carbide filters, membranes and membranes.providing engineered systems. For more than two decades, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in threethe following business areas: water treatment systems and services, ceramic membranes for liquid filtration, systems, diesel particulate filters (DPFs) to control soot exhaust particles from diesel engines, and plastic components for usage inapplications across various industries. Using nanotechnology, we develop proprietary products using patented silicon carbide technology. Our products are based on unique silicon carbide membranes that facilitate new applications and improve existing technologies. We market our products from our office in Denmark and through local representatives and distributors. The products are shipped directly to customers from our production facilities in Denmark.
The terms “LiqTech”, “we”, “our”, “us”, the “Company” or any derivative thereof, as used herein, refer to LiqTech International, Inc., a Nevada corporation, together with its direct and indirect wholly owned subsidiaries, including LiqTech USA, Inc., a Delaware corporation (“LiqTech USA”), which owns all of the outstanding equity interest in LiqTech NA, Inc., a Delaware corporation (“LiqTech NA”) and in LiqTech Holding A/S, a Danish limited company, organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“LiqTech Holding”), together with its direct wholly owned subsidiaries LiqTech Ceramics A/S (“LiqTech Ceramics”), LiqTech Water A/S (“LiqTech Water”), LiqTech Plastics A/S (“LiqTech Plastics”), LiqTech Water Projects A/S ("LiqTech Water Projects”), LiqTech Emission Control A/S (“LiqTech Emission Control”), all Danish limited companies organized under the Danish Act on Limited Companies of the Kingdom of Denmark, and LiqTech Environment Technologies (China) Co., Ltd. (“LiqTech China”), a Chinese company organized under the Chinese Act on Limited Companies in the Peoples Republic of China. Collectively, LiqTech USA, LiqTech NA, LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics, LiqTech Water Projects, LiqTech Emission Control and LiqTech China are referredwe collectively refer to herein as our “Subsidiaries”.
At present, we conduct our operations in the Kingdom of Denmark. Our Danish operations are located in the Copenhagen area, in Hobro, and in Aarhus.
Our Strategy
Our strategy is to leverage our core competencies in material science, advanced filtration,fluid dynamics, and systems integration, creating differentiated products with compelling value propositions to penetrate attractive end markets with regulatory and ESG tailwinds. Essential imperatives associated with our strategy include the following:
● | Develop and reinforce new products and applications to provide clean water and reduce | |
● | Better penetrate existing end markets where our value proposition is |
● | Develop new end markets for our core products and applications. Our existing products and systems are relevant for and valuable to other end markets, and we regularly evaluate opportunities to partner with strategic customers to perfect new applications and validate associated value propositions. |
Results of Operations
The financial information below is derived from our unaudited condensed consolidated financial statements included elsewhere in this report.
The following table sets forth our revenues, expenses and net loss for the three months ended September 30, 2022March 31, 2023 and 2021:2022:
Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
Period to Period Change | Period to Period Change | |||||||||||||||||||||||||||||||||||||||||||||||
2022 | As a % of Sales | 2021 | As a % of Sales | Variance | Percent % | 2023 | As a % of Sales | 2022 | As a % of Sales | Variance | Percent % | |||||||||||||||||||||||||||||||||||||
Revenue | 3,305,534 | 100.0 | % | 4,142,954 | 100.0 | % | (837,420 | ) | (20.2 | )% | 4,011,519 | 100.0 | % | 3,637,236 | 100.0 | % | 374,283 | 10.3 | % | |||||||||||||||||||||||||||||
Cost of Goods Sold | 3,198,255 | 96.8 | 3,946,732 | 95.3 | (748,477 | ) | (19.0 | ) | ||||||||||||||||||||||||||||||||||||||||
Cost of goods sold | 3,620,177 | 90.2 | 3,391,695 | 93.2 | 228,482 | 6.7 | ||||||||||||||||||||||||||||||||||||||||||
Gross Profit | 107,279 | 3.2 | 196,222 | 4.7 | (88,943 | ) | (45.3 | ) | 391,342 | 9.8 | 245,541 | 6.8 | 145,801 | 60.0 | ||||||||||||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||||||||||||||||||
Selling expenses | 676,420 | 20.5 | 1,205,849 | 29.1 | (529,429 | ) | (43.9 | ) | 1,182,435 | 29.5 | 1,059,948 | 29.1 | 122,487 | 11.6 | ||||||||||||||||||||||||||||||||||
General and administrative expenses | 1,429,315 | 43.2 | 1,102,772 | 26.6 | 326,543 | 29.6 | 1,058,949 | 26.4 | 1,916,517 | 52.7 | (857,568 | ) | (44.7 | ) | ||||||||||||||||||||||||||||||||||
Research and development expenses | 283,524 | 8.6 | 497,823 | 12.0 | (214,299 | ) | (43.0 | ) | 342,619 | 8.5 | 602,737 | 16.6 | (260,118 | ) | (43.2 | ) | ||||||||||||||||||||||||||||||||
Restructuring costs | (1,964 | ) | (0.1 | ) | - | - | (1,964 | ) | - | |||||||||||||||||||||||||||||||||||||||
Total Operating Expenses | 2,387,295 | 72.2 | 2,806,444 | 67.7 | (419,149 | ) | (14.9 | ) | 2,584,003 | 64.0 | 3,579,202 | 98.4 | (995,199 | ) | (27.8 | ) | ||||||||||||||||||||||||||||||||
Loss from Operation | (2,280,016 | ) | (69.0 | ) | (2,610,222 | ) | (63.0 | ) | 330,206 | (12.7 | ) | (2,192,661 | ) | (54.7 | ) | (3,333,661 | ) | (91.7 | ) | 1,141,000 | (34.2 | ) | ||||||||||||||||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest and other income | 1,870 | 0.1 | - | - | 1,870 | - | 51,673 | 1.3 | 99 | - | 51,574 | 52,094.8 | ||||||||||||||||||||||||||||||||||||
Interest (expense) | (28,514 | ) | (0.9 | ) | (235,318 | ) | (5.7 | ) | 206,804 | (87.9 | ) | (12,001 | ) | (0.3 | ) | (206,461 | ) | (5.7 | ) | 194,460 | (94.2 | ) | ||||||||||||||||||||||||||
Amortization discount, Notes | (84,098 | ) | (2.5 | ) | (292,129 | ) | (7.1 | ) | 208,031 | (71.2 | ) | |||||||||||||||||||||||||||||||||||||
Amortization discount, convertible note | (84,528 | ) | (2.1 | ) | (297,338 | ) | (8.2 | ) | 212,810 | (71.6 | ) | |||||||||||||||||||||||||||||||||||||
Gain (loss) on currency transactions | 628,137 | 19.0 | 218,030 | 5.3 | 410,107 | 188.1 | (166,278 | ) | (4.1 | ) | 75,993 | 2.1 | (242,271 | ) | (318.8 | ) | ||||||||||||||||||||||||||||||||
Gain on lease termination | (3,317 | ) | (0.1 | ) | - | - | (3,317 | ) | - | |||||||||||||||||||||||||||||||||||||||
Gain (loss) on sale of fixed assets | (19 | ) | - | (8 | ) | 0.0 | (11 | ) | 137.5 | |||||||||||||||||||||||||||||||||||||||
Total Other Income (Expense) | 514,059 | 15.6 | (309,425 | ) | (7.5 | ) | 823,484 | (266.1 | ) | (211,134 | ) | (5.3 | ) | (427,707 | ) | (11.8 | ) | 216,573 | (50.6 | ) | ||||||||||||||||||||||||||||
Loss Before Income Taxes | (1,765,957 | ) | (53.4 | ) | (2,919,647 | ) | (70.5 | ) | 1,153,690 | (39.5 | ) | (2,403,795 | ) | (59.9 | ) | (3,761,368 | ) | (103.4 | ) | 1,357,572 | (36.1 | ) | ||||||||||||||||||||||||||
Income Tax Benefit | (13,293 | ) | (0.4 | ) | (15,691 | ) | (0.4 | ) | 2,398 | (0.2 | ) | (14,292 | ) | (0.4 | ) | (14,944 | ) | (0.4 | ) | 652 | 0.0 | |||||||||||||||||||||||||||
Net Loss | (1,752,664 | ) | (53.0 | ) | (2,903,956 | ) | (70.1 | ) | 1,151,292 | (39.6 | ) | (2,389,503 | ) | (59.6 | ) | (3,746,424 | ) | (103.0 | ) | 1,356,921 | (36.2 | ) | ||||||||||||||||||||||||||
Revenue
Revenue for the three months ended September 30, 2022,March 31, 2023 was $3,305,534$4,011,519 compared to $4,142,954$3,637,236 for the same period in 2021,2022, representing a decreasean increase of $837,420,$374,283, or 20%10%. The decreasepositive development was particularly attributedattributable to a reductionan increase in deliveriessales of water treatmentliquid filtration systems of $708,503$613,337, aftermarket sales of $229,658 and a decrease in Plastics revenueplastics products of $190,389 amid general market uncertainty exacerbated by the European energy crisis,$28,035, partly offset by ana decline in sales of DPFs and ceramic membranes. The increase in Ceramics revenueliquid filtration systems pertains to deliveries of $151,924 due topool and marine orders in Europe and Asia, increased sales of spare parts and associated services related to legacy installations. The offsetting decline in DPF sales was caused by large deliveries of legacy orders in the first quarter of 2022 combined with a strategic decision to focus on improved product mix and higher profit orders that are better suited for Ceramic manufacturing . The decline in ceramic membranes and large-scale DPF deliveries for the Asian market.revenue was largely driven by slow order intake due to reduced sales activity.
Gross Profit
Gross profit for the three months ended September 30, 2022,March 31, 2023 was $107,279$391,342 compared to gross profit of $196,222$245,541 for the same period in 2021,2022, representing a decreasean increase of $88,943.$145,801, or 60%. The decreaseincrease in gross profit was mainly causedprimarily driven by revenue growth, improvements in product mix, and improved pricing discipline underpinned by the continuedenhanced insights gained from the newly implemented ERP platform. The efforts resulted in improved profitability from our recurring business activities, despite ongoing remediation costs associated with legacy liquid filtration systems and ongoing manufacturing optimization initiatives seeking to improve kiln utilization and manufacturing throughput. Furthermore, profitability within our ceramics business continues to benefit from the proactive measures implemented in the second half of 2022 to help offset the negative impact from rising inputthe inflationary cost inflation associated with the production of our silicon carbide products, including increases in electricity,pressures on raw material prices, labor, freightmaterials and logistic services. The gross profit in the third quarter was further impacted by adjustments for excess and obsolete inventory in a period with changing market fundamentals, resulting in write-downs of select items and implementation of revised standard cost calculations. The negative impact was partly offset by deliveries of high-margin Ceramics membranes and increased aftermarket sales during the quarter.labor. Included in the gross profit was depreciation of $436,257$614,592 and $473,327$496,049 for the three months ended September 30,March 31, 2023, and 2022, and 2021, respectively.
Expenses
Total operating expenses for the three months ended September 30, 2022March 31, 2023 were $2,387,295,$2,584,003, representing a decrease of $419,149,$995,199, or 15%28%, compared to $2,806,444$3,579,202 for the same period in 2021, mainly reflecting the cost reduction, restructuring, and reorganization efforts implemented in 2022.
Selling expenses for the three months ended September 30, 2022March 31, 2023 were $676,420$1,182,435 compared to $1,205,849$1,059,948 for the same period in 2021,2022, representing a decreasean increase of $529,429,$122,487, or 44%. This decline was the result12%, due to increased costs associated with direct sales efforts, onboarding of organizational streamlining that included a reduction in headcounts of seven compared to same period in 2021, partly offset by increasednew sales leadership, interim consulting services, and intensified travel and marketing and travel activities following the easing of COVID-19 restrictions.activities.
General and administrative expenses for the three months ended September 30, 2022,March 31, 2023 were $1,429,315$1,058,949 compared to $1,102,772$1,916,517 for the same period in 2021,2022, representing an increasea decrease of $326,543,$857,568, or 30%45%. The decrease was attributable to the cost reduction and reorganization efforts initiated in 2022 as well as elevated spend in the same period last year due to the implementation of the new corporate ERP platform and China expansion. Included in general and administrative expenses was increasedwere non-cash compensation of $254,592 related to onboarding of new CFO, CEO,$157,173 and interim CEO agreement,$178,778 for the three months ended March 31, 2023 and increased employee expenses related to onboarding of key staff, partly offset by a decrease in legal expenses.2022, respectively.
The following is a summary of non-cash compensation:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
September 30, | September 30, | March 31, | March 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Compensation for vesting of restricted stock awards issued to the Board of Directors | $ | 51,125 | $ | 49,375 | $ | 51,124 | $ | 51,125 | ||||||||
Compensation for vesting of restricted stock awards issued to management | 330,986 | 78,144 | 106,049 | 127,653 | ||||||||||||
Total Non-cash compensation | $ | 382,111 | $ | 127,519 | ||||||||||||
Total Non-Cash Compensation | $ | 157,173 | $ | 178,778 | ||||||||||||
Research and development expenses for the three months ended September 30, 2022,March 31, 2023 were $283,524$342,619 compared to $497,823$602,737 for the same period in 2021,2022, representing a decrease of $214,299,$260,118, or 43%. The decrease representschange is attributable to more focused R&D efforts with fewer ongoing projects combined with a reductiondecrease in the average number of externalemployees engaged in research and development projects along with efficienciesactivities from 17 as of March 31, 2022 to 8 as of March 31, 2023, as the Company streamlined and saving achieved through the streamlining and centralization ofcentralized the R&D function.
Restructuring costs for the three months ended September 30, 2022, were $(1,964) compared to $0 for the same period in 2021, representing additional restructuring costs for the completion of the restructuring program announced in the second quarter (see Note 3), offset by the continued appreciation of the USD against EUR and DKK.
Other Income (Expenses)
Other Income (Expenses) for the three months ended September 30, 2022,March 31, 2023 was $514,059$(211,134) compared to Other Expenses of $309,425$(427,707) for the comparable period in 2021,2022, representing a positive variance of $823,484. The change was mainly related to a decrease in other expenses of $216,573, or 51%. The change reflects the improved capital structure with reduced interest expensesexpense and amortization discount of $414,835, explained bycost due to the early repayment and refinancing of the Convertible Note in the second quarter of 2022, withoffset by the new $6 million Senior Promissory Note and gainloss on currency transactions of $410,107.$242,271 due to the USD depreciation against the EUR/DKK during the period.
Net Loss
Net loss for the three months ended September 30, 2022,March 31, 2023 was $1,752,664$(2,389,503) compared to $2,903,956$(3,746,424) for the comparable period in 2021,2022, representing a decreasereduction in net loss of $1,151,292, supported by the intensified cost reduction efforts, gain on currency transactions, and the benefits from the refinancing of the Convertible Note.
Comparison of the Nine Months Ended September 30, 2022 and September 30, 2021$1,356,921.
The following table sets forth our revenues, expenses and net loss for the nine months ended September 30, 2022 and 2021:
Nine Months Ended September 30, | ||||||||||||||||||||||||
Period to Period Change | ||||||||||||||||||||||||
2022 | As a % of Sales | 2021 | As a % of Sales | Variance | Percent % | |||||||||||||||||||
Revenue | 11,961,062 | 100.0 | % | 12,157,394 | 100.0 | % | (196,332 | ) | (1.6 | )% | ||||||||||||||
Cost of Goods Sold | 11,460,102 | 95.8 | 11,525,847 | 94.8 | (65,745 | ) | (0.6 | ) | ||||||||||||||||
Gross Profit | 500,960 | 4.2 | 631,547 | 5.2 | (130,587 | ) | (20.7 | ) | ||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||
Selling expenses | 2,932,881 | 24.5 | 3,417,933 | 28.1 | (485,052 | ) | (14.2 | ) | ||||||||||||||||
General and administrative expenses | 4,611,375 | 38.6 | 3,824,574 | 31.5 | 786,801 | 20.6 | ||||||||||||||||||
Research and development expenses | 1,377,097 | 11.5 | 1,370,059 | 11.3 | 7,038 | 0.5 | ||||||||||||||||||
Restructuring costs | 1,786,863 | 14.9 | - | - | 1,786,863 | - | ||||||||||||||||||
Total Operating Expenses | 10,708,216 | 89.5 | 8,612,566 | 70.8 | 2,095,650 | 24.3 | ||||||||||||||||||
Loss from Operation | (10,207,256 | ) | (85.3 | ) | (7,981,019 | ) | (65.6 | ) | (2,226,237 | ) | 27.9 | |||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||
Interest and other income | 344,593 | 2.9 | - | - | 344,593 | - | ||||||||||||||||||
Interest (expense) | (394,532 | ) | (3.3 | ) | (491,335 | ) | (4.0 | ) | 96,804 | (19.7 | ) | |||||||||||||
Amortization discount, Notes | (2,304,054 | ) | (19.3 | ) | (543,933 | ) | (4.5 | ) | (1,760,121 | ) | 323.6 | |||||||||||||
Gain (loss) on currency transactions | 361,928 | 3.0 | 506,018 | 4.2 | (144,090 | ) | (28.5 | ) | ||||||||||||||||
Gain on lease termination | 150,258 | 1.3 | - | - | 150,258 | - | ||||||||||||||||||
Gain (loss) on sale of fixed assets | 642 | - | 1,126 | 0.0 | (484 | ) | (43.0 | ) | ||||||||||||||||
Total Other Income (Expense) | (1,841,165 | ) | (15.4 | ) | (528,124 | ) | (4.3 | ) | (1,313,040 | ) | 248.6 | |||||||||||||
Loss Before Income Taxes | (12,048,421 | ) | (100.7 | ) | (8,509,143 | ) | (70.0 | ) | (3,539,277 | ) | 41.6 | |||||||||||||
Income Tax Benefit | (42,274 | ) | (0.4 | ) | (47,650 | ) | 0.4 | 5,376 | (11.3 | ) | ||||||||||||||
Net Loss | (12,006,147 | ) | (100.4 | ) | (8,461,493 | ) | (69.6 | ) | (3,544,653 | ) | 41.9 | |||||||||||||
Revenue
Revenue for the nine months ended September 30, 2022, was $11,961,062 compared to $12,157,394 for the same period in 2021, representing a decrease of $196,332, or 1.6%. The decrease was mainly driven by increased Plastics revenue of $153,517 and Ceramics revenue of $104,088, offset by the continued appreciation of the USD against the EUR due to revenue denominated in DKK or EUR, coupled with lower share of completed development projects of $245,098 and reduced Water revenue of $208,840.
Gross Profit
Gross profit for the nine months ended September 30, 2022, was $500,960 compared to gross profit of $631,547 for the same period in 2021, representing a decrease of $130,587. The change reflects reduced profitability within the Plastics and Ceramics businesses due to unfavorable mix, further exacerbated by continued input cost inflation and the European energy crisis. Proactive measures such as price increases and power price surcharges have been launched by the company to defend profitability. Included in the gross profit was depreciation of $1,406,003 and $1,440,382, for the nine months ended September 30, 2022 and 2021, respectively.
Expenses
Total operating expenses for the nine months ended September 30, 2022, were $10,708,216, representing an increase of $2,095,650, or 24%, compared to $8,612,566 for the same period in 2021, mainly driven by restructuring costs of $1,786,863 recognized in the second quarter of 2022.
Selling expenses for the nine months ended September 30, 2022, were $2,932,881 compared to $3,417,933 for the same period in 2021, representing a decrease of $485,052, or 14%. The decrease is explained by the cost reduction and reorganization efforts initiated in 2022, and more specifically headcounts reductions and organization streamlining, partly offset by increased costs associated with intensified direct sales efforts, consulting service engagements, direct marketing activities, and bad debt provisions.
General and administrative expenses for the nine months ended September 30, 2022, were $4,611,375 compared to $3,824,574 for the same period in 2021, representing an increase of $786,801, or 21%. The increase was mainly caused by increased headcount and costs associated with the China capacity expansion, recruitment of key employees, and general legal and audit costs. Also included in general and administrative expenses for the period was increased cost associated with the recent CEO transition that included increased non-cash compensation of $782,361 for the nine months ended September 30, 2022, compared to $354,983 in the same period in 2021.
The following is a summary of non-cash compensation:
For the Nine Months Ended | ||||||||
September 30, | September 30, | |||||||
2022 | 2021 | |||||||
Compensation for vesting of restricted stock awards issued to the Board of Directors | $ | 153,375 | $ | 148,125 | ||||
Compensation for vesting of restricted stock awards issued to management | 628,985 | 206,858 | ||||||
Total Non-Cash Compensation | $ | 782,360 | $ | 354,983 | ||||
Research and development expenses for the nine months ended September 30, 2022, were $1,377,097 compared to $1,370,059 for the same period in 2021, representing an increase of $7,038, or 0.5%.
Restructuring costs for the nine months ended September 30, 2022, were $1,786,863 compared to $0 for the same period in 2021. The restructuring program was executed in the second quarter (See Note 3).
Other Income (Expense)
Other Expense for the nine months ended September 30, 2022, was $1,841,165 compared to $528,124 for the comparable period in 2021, representing a negative variance of $1,313,040.
The variance was mainly related to the early repayment of the Convertible Note issued in April 2021, reflecting the full recognition of the repayment premium and amortization cost in the second quarter of 2022. Further, the period was impacted by a lower gain on currency transactions of $144,090, partly offset by the receipt of COVID-19 grants in the Danish entities and gain on lease terminations.
Net Loss
Net loss for the nine months ended September 30, 2022, was $12,006,147 compared to $8,461,493 for the comparable period in 2021, representing an unfavorable variance in net loss of $3,544,653.
This change was primarily attributable to the restructuring charges,improved gross profit of $145,801, savings in operating expenses of $995,199, reduced interesting expense and refinancing cost relatedamortization costs, and higher interest income on excess cash, partly offset by the loss on currency transactions due to the repayment ofUSD depreciation against the Convertible Note in the second quarter. EUR/DKK.
Liquidity and Capital Resources
Based on the continued and more recently increased market volatility and geopolitical unrest pertaining to the Russia and Ukraine conflict, European energy crisis, and highly inflationary environment, and macro-economic uncertainty, the Company is unable to predict the full impact this will have on our long-term financial condition, results of operations, liquidity, and cash flows. The Company has planned and executed on decisive measures in 2022 to help safeguard the business and its financial position by reducing cost, headcount, and overall capex commitments, which together with the successful completion of the $26.45$26.5 million public offering of common stock and pre-funded warrants, substantially improveimproved the near-term liquidity position of the Company.
Furthermore, in June 2022, the Company completed the refinancing of its $15 million Convertible Note due in 2023, partly funded by the issuance of the new $6 million Senior Promissory Notes due in June 2024 along with the proceeds from the public offering. The Senior Promissory Notes are interest-free, with full redemption after 24 months.
Based on current projections, which are subject to significant uncertainties, including the duration and severity of global macroeconomic issues, commodity volatility, and continued global supply chain disruptions, the Company believes the cash on hand, as well as ongoing cash generated from operations, will be sufficient to cover its capital requirements and committed investments for the next 12 months.
Continued market uncertainty and reduced order intake caused by weakening global macroeconomic conditions, recession, or a resurgence of the COVID-19 pandemic, however, could unfavorably impact the Company’s ability to generate positive cash flow and thereby significantly reduce theits profitability and liquidity position.
While the Company anticipates that its proactive measures will be sufficient to protect and fund the business over the coming 12 months, the Company cannot predict the specific duration and severity of the unfavorable market dynamics that may adversely affect the business as a result of these global economic issues and associated supply chain disruptions.business. In the future, the Company may experience reduced or changed demand for its products and services, especially if there is a global recession, or structural shift in regulation, or demand for its products across its core end markets.the continuation of escalating interest rates that adversely impacts the investment decisions of our customers.
The Company hasWe have historically satisfied itsour capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. On September 30, 2022, the CompanyMarch 31, 2023, we had cash of $17,605,377$14,309,933 and net working capital of $23,306,125,$20,123,957, and on December 31, 2021, the Company2022, we had cash of $17,489,380$16,597,371 and net working capital of $11,199,258. The increase in$21,581,287. On March 31, 2023, our net working capital of $12,106,867had decreased by $1,457,330 compared to December 31, 2021 is2022, mainly as a result of the capital raisea reduction in cash and repayment of the Convertible Note.cash equivalents.
In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or a security bond. For that purpose, we maintain a guaranteed credit line of EUR 1,350,000EUR1,350,000 (approximately $1,315,000)$1,470,000). The credit line is secured by a cash deposit.
assets and the satisfaction of liabilities during the normal course of business. As of March 31, 2023, we had cash and cash equivalents of $14,309,933, an accumulated deficit of $69,740,538, and total liabilities of $17,256,096. We have incurred losses from continuing operations, have used cash in our continuing operations, and are dependent on additional financing to fund operations. These conditions raise substantial doubt about our ability to continue as a going concern for one year after the date the financial statements are issued. The financial statements included elsewhere herein do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
The Company has initiated substantial cost reductions and profitability improvement measures in order to right size the business and develop a clear and sustainable path to profitability, further underpinned by an updated strategy and onboarding of key management resources. However, there can be no assurance that the Company will be able to obtain any sources of funding. Such additional funding may not be available or may not be available on reasonable terms, and, in the case of equity financing transactions, could result in significant additional dilution to our stockholders. If we do not obtain required additional equity or debt funding, our cash resources will be depleted and we could be required to materially reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that could result in our stockholders losing some or all of their investment in us.
Funding that we may receive during fiscal 2023 is expected to be used to satisfy existing and future obligations and liabilities and working capital needs, as well as future operating losses.
Convertible Note
On March 24, 2021, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which the Company agreed to issue and sell a $15.0 million principal amount senior Convertible Noteconvertible note (the “Note”“Convertible Note”) duematuring on October 1, 2023 and 80,000 shares of our common stock, $0.001 par value (“Common Stock”), for an aggregate purchase price of $15.0 million upon the satisfaction of the closing conditions set forth in the Securities Purchase Agreement. The Closing occurred on April 8, 2021, and the Company issued to the Investor the securities in connection with the Closing.
The Convertible Note was a senior, unsecured obligation of the Company, payable at 112% of the principal amount at maturity (October 1, 2023), or earlier upon redemption or repurchase as set forth in the Convertible Note. The Convertible Note was convertible into shares of Common Stock pursuant to the terms of the Convertible Note, in part or in whole, from time to time, at the election of the Investor. The initial conversion rate was 100.6749 shares of Common Stock per $1,000 of principal amount of the Convertible Note. The conversion rate was subject to anti-dilution adjustments, including for stock dividends, splits, and combinations; issuances of options, warrants, or similar rights; spin-offs and distributions of property; cash dividends or distributions; and tender or exchange offers, in each case as further described in and pursuant to the terms of the Convertible Note.
Beginning on March 1, 2022, and on the first day of each calendar month thereafter, at the election of the Investor or Holder, if applicable, the Company was required to redeem $840,000 of the amounts due under the Convertible Note in cash or Common Stock at 90% of the lesser of (i) the volume-weighted average price (“VWAP”) of the Common Stock on the trading day immediately preceding the payment date and (ii) the average of the lowest three (3) VWAPs over the 10 trading days immediately preceding the payment date, which shall in no case be less than the floor price of $1.75 per share. Beginning on March 1, 2022, the Company paid the first monthly installmentsinstallment of $840,000 in cash, totaling $3,360,000.cash.
As of June 22, 2022, the Note, including accrued interestsinterest and all relevant obligations, was repaid in full, amounting to $13,446,875, allocated tobetween a principal repayment of $11,640,000 and contractual repayment premium of $1,806,875.
Senior Promissory Notes
On June 22, 2022, the Company issued and sold Senior Promissory Notes in an aggregate principal amount of $6.0 million (the "Notes"“Notes”) and issued warrants to purchase 4,250,000 shares of common stock of the Company to affiliates of Bleichroeder L.P., 21 April Fund, L.P., and 21 April Fund, Ltd. (together, the "Purchasers"“Purchasers”), pursuant to a note and warrant purchase agreement entered into with the Purchasers.
The Notes have a term of 24 months and do not bear interest during this period. If the notes are not repaid on or before the second anniversary of issuance, however, the Notes will thereafter bear interest of 10% per annum, which will increase by 1% each month the Notes remain unpaid, up to a maximum of 16% per annum, payable monthly.
Additionally, as part of the transaction, the Company issued 230,000 warrants to the placement agent. All of the warrants issued in this transaction have an exercise price of $0.65 per share, a term of five years and are exercisable for cash at any time.
As a result, the Company recorded an initial debt discount of $664,704 based on the relative fair value of the warrants and notes issued. The Company determined the fair value of the warrants by using the Black-Scholes Option Pricing Model with the following assumptions: expected term of 2.5 years, stock price of $0.43, exercise price of $0.65, volatility of 80.8%, risk-free rate of 3.13%, and no forfeiture rate. The debt discount will be accreted according to the effective interest method over the contractual term of the note. The warrants qualified for equity classification and were reported within Additional Paid-In Capital.
Cash Flows
NineThree months ended September 30, 2022March 31, 2023 compared to ninethree months ended September 30, 2021March 31, 2022
Cash used inflows from operating activities for the nine months ended September 30, 2022 of $11,482,936 represents a decrease of $7,074,845 compared to $4,408,091 for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the result is mainly explained byperiod ending March 31, 2023 derived from the net loss for the period, adjusted for non-cash items and changes in assets and liabilities. Cash flows from operating activities for the three months ended March 31, 2023 was $(2,285,301), representing an improvement of $12,006,147$2,749,643 compared to cash flows from operating activities of $(5,034,944) for the three months ended March 31, 2022. The cash flows from operating activities for the period consists mainly of the net loss of $(2,389,503) adjusted for depreciation and other non-cash-related items of $5,153,301. Changes$984,040, partly offset by a reduction in assetsaccrued expenses of $433,045 due to this quarter’s utilization charges against the warranty reserve and liabilities includea decrease in salary provisions, and increased Accountsaccounts receivable of $1,262,577 and net Contract assets/liabilities$379,330 due to back-end loaded revenue recognition.
Cash flows from investing activities was $(87,470) for the three months ended March 31, 2023 as compared to $(183,031) for the three months ended March 31, 2022, representing a decrease of $650,497, with$95,561. The investing activities include the latter causedpurchase of production equipment in Ballerup to help optimize production throughput.
Cash flows from financing activities was $(98,945) for the three months ended March 31, 2023 compared to $(931,807) for the three months ended March 31, 2022, representing a decrease of $832,862. The decrease was mainly driven by the deliveryrepayment of a water treatment system$840,000 regarding the Convertible Note in the second quarter of 2022 with an extended service, commissioning, and payment schedule running until August 2025. The increase in prepaid expenses and other current assets of $1,497,612 is related to prepayments on production equipment. Furthermore, accounts payable increased by $212,304 and accrued expenses decreased by $1,028,428 due to repayment of COVID-19 loans provided by the Danish government.2022.
Net cash used in investing activities was $791,881 for the nine months ended September 30, 2022, compared to $1,252,741 for the nine months ended September 30, 2021, representing a decrease of $460,860.Off Balance Sheet Arrangements
Cash provided from financing activities was $13,359,415 for the nine months ended September 30, 2022 compared to $13,995,807 for the nine months ended September 30, 2021, representing a decreaseAs of $636,392. For the nine-month period ended September 30, 2022, the change is mainly explained by the equity capital raiseMarch 31, 2023, we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in the second quarter, generating net proceeds of $24,418,612 from the issuance of common stock and prefunded warrants, combined with the $6,000,000 proceeds from the issuance of the new Senior Promissory Notes, and offset by the full repayment of the Convertible Note issued in April 2021 of $16,800,000.our consolidated financial statements.
Significant Accounting Policies and Critical Accounting Estimates
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:
● | The assessment of revenue recognition, which impacts revenue and cost of sales; |
● | the assessment of allowance for product warranties, which impacts gross profit; |
● | the assessment of collectability of Accounts receivable, which impacts operating expenses when and if we record bad debt or adjust the allowance for doubtful accounts; |
● | the assessment of recoverability of long-lived assets, which impacts gross profit or operating expenses when and if we record asset impairments or accelerate their depreciation; |
● | the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes; |
● | the valuation of inventory, |
● | the recognition and measurement of loss contingencies, which impact gross profit or operating expenses when we recognize a loss contingency, revise the estimate for a loss contingency, or record an asset impairment. |
Recently Enacted Accounting Standards
For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see “Note 1: Recently Enacted Accounting Standards” in the accompanying Financial Statements.
Subsequent Events
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not required to provide quantitative and qualitative disclosures about market risk because we are a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the design and effectiveness of our internal controls over financial reporting and disclosure controls and procedures (pursuant to Rule 13a-15(b) and (c) under the Exchange Act) as of the end of the period covered by this Quarterly Report. A weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a misstatement of the registrant's financial statements will not be prevented or detected on a timely basis.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2022March 31, 2023 were not effective as of the period covered by this Quarterly Report due to material weaknesses in internal controls over financial reporting. For more information on material weaknesses identified by management, please reference our Form 10-K filed on March 31, 20222023 for the year ended December 31, 2021.2022.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Remediation Initiatives
In response to the identified material weaknesses, Company management, with oversight from the Company’s Audit Committee, has been and will continue to dedicate necessary resources to enhance the Company’s internal control over financial reporting and remediate the identified material weaknesses. As an example of such remediation, the Company has hired additional employees into the finance department, and we plan to continue to work on remediating the material weaknesses during 20222023 by improving competencies and work processes. Further, an investment in a new ERP system has been made along with other supporting IT systems to reinforcesupport the controls and processes of the Company. These investments are an important part of our remediation plan. Lastly, the Company has started the process of redesigning and ensuring documentation of all processes and procedures related to financial reporting to ensure the effective design and operation of process-level controls.
While management believes that the steps that have been taken and plan to take will improve the overall system of internal control over financial reporting and will remediate the identified material weaknesses, these material weaknesses cannot be considered fully remediated until the applicable relevant controls operate for a sufficient period of time.
Limitations on the Effectiveness of Internal Controls
An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
While management believes that the steps that we have taken and plan to take will improve the overall system of internal control over financial reporting and will remediate identified material weaknesses, the material weaknesses cannot be considered remediated until the applicable relevant controls operate for a sufficient period.period of time.
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. For a description of contingencies, see “Note 87 – Agreements andAnd Commitments”.
Not required for a “smaller reporting company.”
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
| Incorporated by reference to Exhibit | |||
3.2 | Amended and Restated Bylaws | Incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q as filed with the SEC on May 15, 2012 | ||
31.1 | Filed herewith | |||
31.2 | Filed herewith | |||
32.1 | Furnished herewith | |||
32.2 | Furnished herewith | |||
101. INS | Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | Provided herewith | ||
101. CAL | Inline XBRL Taxonomy Extension Calculation Link base Document | Provided herewith | ||
101. DEF | Inline XBRL Taxonomy Extension Definition Link base Document | Provided herewith | ||
101. LAB | Inline XBRL Taxonomy Label Link base Document | Provided herewith | ||
101. | Inline XBRL | Provided herewith | ||
101. | Inline XBRL Taxonomy Extension | Provided herewith | ||
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104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | Provided herewith |
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LiqTech International, Inc. | ||
Dated: | /s/ Fei Chen | |
Fei Chen, | ||
(Principal Executive Officer) | ||
Dated: | /s/ Simon S. Stadil | |
Simon S. Stadil, Chief Financial Officer | ||
(Principal Financial and Accounting Officer) | ||