UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the three months period ended
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:
LiqTech International, Inc.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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Registrant’s telephone number, including area code: +
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| | | The |
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 ☐
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 ☐
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 | ☐ |
| | ☒ | 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
As of May 11, 2023, there were
LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Period Ended March 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 supply chain related disruptions, inflationary pressure, prevailing macro-economic uncertainty and 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. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.
Forward-looking statements include, but are not limited to, statements concerning:
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The impact from the prevailing Ukraine and Russia conflict and overall changes to the economic environment and our operational flexibility; |
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Risk of a prolonged period of inflationary pressure including energy shortages and volatile energy and electricity prices in Europe; |
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Our exposure to increased macro-economic uncertainty; |
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The resurgence of COVID-19 or similar global pandemics; |
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Our dependence on a few major customers and the ability to maintain future relationships with one or more of these major customers; |
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Our ability to operate with financial stability and secure adequate access to external financing and liquidity; |
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Our ability to secure and source supplies of raw materials and key components in due time and at competitive prices; |
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Our reliance on subcontractors or delivery of new machinery to develop sufficient manufacturing capacity to meet demand; |
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Our ability to achieve revenue growth and execution of the company strategy; |
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Our dependence on the expertise and experience of our management team and the retention of key employees; |
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Our reliance and access to qualified personnel to expand our business; |
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Our ability to adapt to potentially adverse changes in legislative, regulatory and political frameworks; |
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Changes in emissions and environmental regulations, and potential further tightening of emission standards; |
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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; |
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The exposure to potentially adverse tax consequences; |
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The financial impact from the fluctuation and volatility of foreign currencies; |
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The potential monetary costs of defending our intellectual property rights; |
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Our ability to successfully protect our intellectual property rights and manufacturing know how; |
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The possibility of a dispute over intellectual property developed in conjunction with third parties with whom we have contractual relationships; |
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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; |
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The potential negative impact to the sale of our products caused by technological advances of our competitors; |
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The potential liability for environmental harm or damages resulting from technical faults or failures of our products; |
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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; |
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The possibility that we may not be able to develop and maintain an effective system of internal controls over financial reporting, leading to inaccurate reports of our financial results; |
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The possibility of breaches in the security of our information technology systems; |
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The liability risk of our compliance to environmental laws and regulations; |
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The potential negative impact of more stringent environmental laws and regulations as governmental agencies seek to improve minimum standards; and |
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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 | |||||||
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and restricted cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ and $ at March 31, 2023 and December 31, 2022, respectively | ||||||||
| Inventories, net of allowance for excess and obsolete inventory of $ and $ at March 31, 2023 and December 31, 2022, respectively | ||||||||
| Contract assets | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Assets held for sale | ||||||||
| Total Current Assets | ||||||||
| Long-Term Assets: | ||||||||
| Property and equipment, net of accumulated depreciation of $ and $ at March 31, 2023 and December 31, 2022, respectively | ||||||||
| Operating lease right-of-use assets | ||||||||
| Deposits and other assets | ||||||||
| Intangible assets, net of accumulated amortization of $ and $ at March 31, 2023 and December 31, 2022, respectively | ||||||||
| Goodwill | ||||||||
| Total Long-Term Assets | ||||||||
| Total Assets | $ | $ | ||||||
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 | |||||||
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of finance lease obligations | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Contract liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Deferred tax liability | ||||||||
| Finance lease obligations, net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Senior promissory notes payable, less current portion | ||||||||
| Total Long-term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred stock; par value $, shares authorized, shares issued and outstanding at March 31, 2023 and December 31, 2022 | ||||||||
| Common stock; par value $, shares authorized, and shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
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 |
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| March 31, |
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| 2023 |
2022 |
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| Revenue |
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| Cost of goods sold |
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| Gross Profit |
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| Operating Expenses: |
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| Selling expenses |
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| General and administrative expenses |
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| Research and development expenses |
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| Total Operating Expense |
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| Loss from Operations |
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| Other Income (Expense) |
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| Interest and other income |
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| Interest expense |
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| Amortization discount on convertible note |
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| Gain (Loss) on currency transactions |
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| Total Other Income (Expense) |
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| Loss Before Income Taxes |
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| Income Tax Benefit |
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| Net Loss |
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| Basic and Diluted Loss Per Share |
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| Basic and Diluted Weighted Average Common Shares Outstanding |
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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 |
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| March 31, |
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2022 |
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| Net Loss |
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| Other Comprehensive Income - Currency Translation, Net |
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| Total Comprehensive Loss |
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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 March 31, 2023 and March 31, 2022
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| BALANCE, December 31, 2022 |
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| Common stock issued in settlement of RSUs |
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| Net Loss |
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| BALANCE, March 31, 2023 |
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| BALANCE, December 31, 2021 |
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| Net Income |
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| BALANCE, March 31, 2022 |
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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 | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operations: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of discount on convertible notes payable | ||||||||
| Stock-based compensation | ||||||||
| Change in deferred tax asset / liability | ( | ) | ) | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Contract assets | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Contract liabilities | ( | ) | ||||||
| Assets held for sale | ||||||||
| Total Adjustments |
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| Net Cash used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net Cash used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Payments on finance lease obligation | ( | ) | ( | ) | ||||
| Interest payments on convertible note | ( | ) | ||||||
| Net Cash used in Financing Activities | ( | ) | ( | ) | ||||
| Gain (Loss) on Currency Translation | ( | ) | ||||||
| Net change in Cash and Restricted Cash | ( | ) | ( | ) | ||||
| Cash and Restricted Cash at Beginning of Period | ||||||||
| Cash and Restricted Cash at End of Period | $ | $ | ||||||
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 March 31, | ||||||||
| 2023 | 2022 | |||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | ( | ) | $ | ||||
| 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 “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, the management's discussion and analysis section. The Company engages in the development, design, production, marketing and sale of automated filtering systems, ceramic silicon carbide membrane applications and diesel particulate air filters in North America, Europe, Asia, Australia, and 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.
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 March 31, 2023 and December 31, 2022, the Company held $
Accounts held in each U.S. institution are insured by the Federal Deposit Insurance Company (“FDIC”) up to $250,000. At March 31, 2023 and December 31, 2022 the Company had $
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 accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, age, financial information that is publicly accessible and other currently available evidence.
The roll-forward of the allowance for doubtful accounts for the periods ended March 31, 2023 and December 31, 2022 is as follows:
| March 31, 2023 | December 31, 2022 | |||||||
| Allowance for doubtful accounts at the beginning of the period | $ | $ | ||||||
| Bad debt expense | ( | ) | ||||||
| Receivables written off during the periods | ( | ) | ||||||
| Effect of currency translation | ( | ) | ||||||
| Allowance for doubtful accounts at the end of the period | $ | $ | ||||||
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, where revenue is recognized at the transfer of control based upon signed acceptance of the water treatment unit by the customer. Most commonly this invoice is sent to the customer at commissioning of the product or no later than 12 months after the delivery. Also included in 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 cost for lease payments will be recognized on a straight-line basis over the lease term.
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 to years. Customer relationships and other non-contractual intangible assets with determinable lives are amortized over periods of years.
The Company evaluates the recoverability of long-lived assets by comparing the carrying amount of an asset to estimated future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying 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 -- The Company sells products throughout the world, and sales by geographical region are as follows for the three months ended March 31, 2023 and 2022:
| For the Three months | ||||||||||||||||
| % Distribution | Ended March 31, | |||||||||||||||
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| Americas | % | % | $ | $ | ||||||||||||
| Asia-Pacific | % | % | ||||||||||||||
| Europe | % | % | ||||||||||||||
| Middle East & Africa | % | % | ||||||||||||||
| % | % | $ | $ | |||||||||||||
The Company’s sales by product line are as follows for the three months ended March 31, 2023 and 2022:
| For the Three Months | ||||||||||||||||
| % Distribution | Ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Water | % | % | $ | $ | ||||||||||||
| Ceramics | % | % | ||||||||||||||
| Plastics | % | % | ||||||||||||||
| Corporate | % | % | ||||||||||||||
| 100 | % | 100 | % | $ | $ | |||||||||||
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.
The roll-forward of Contract assets / liabilities for the periods ended March 31, 2023 and December 31, 2022 is as follows:
| March 31, 2023 | December 31, 2022 | |||||||
| Cost incurred | $ | $ | ||||||
| Unbilled project deliveries | ||||||||
| VAT | ||||||||
| Other receivables | ||||||||
| Prepayments | ( | ) | ( | ) | ||||
| Deferred Revenue | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| Distributed as follows: | ||||||||
| Contract assets | $ | $ | ||||||
| Contract liabilities | ( | ) | ( | ) | ||||
| $ | $ | |||||||
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 March 31, 2023 and 2022 were $
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, convertible notes payable, and senior promissory notes payable approximate their recorded values due to their short-term maturities.
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 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 - INVENTORY
Inventory consisted of the following on March 31, 2023, and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||
| Furnace parts and supplies | $ | $ | ||||||
| Raw materials | ||||||||
| Work in process | ||||||||
| Finished goods and filtration systems | ||||||||
| Reserve for obsolescence | ( | ) | ( | ) | ||||
| Net Inventory | $ | $ | ||||||
Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movements, expected useful lives, and estimated future demand for the products.
NOTE 4 - 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 leases for production and office space in Hobro, Aarhus and Copenhagen, Denmark.
During the three months ended March 31, 2023, cash paid for amounts included for the measurement of finance lease liabilities was $
During the three months ended March 31, 2023, cash paid for amounts included for the measurement of operating lease liabilities was $
Supplemental balance sheet information related to leases as of March 31, 2023 and December 31, 2022 was as follows:
| March 31, 2023 | December 31, 2022 | |||||||
| Operating leases: | ||||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Operating lease liabilities – current | $ | $ | ||||||
| Operating lease liabilities – long-term | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Finance leases: | ||||||||
| Property and equipment, at cost | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| Finance lease liabilities – current | $ | $ | ||||||
| Finance lease liabilities – long-term | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term: | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted average discount rate: | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
Maturities of lease liabilities at March 31, 2023 were as follows:
| Operating Lease | Finance lease | |||||||
| 2023 (remaining 9 months) | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total payment under lease agreements | ||||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Total lease liability | $ | $ | ||||||
NOTE 5 - LINES OF CREDIT
In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or a security bond. For that purpose, we have a guaranteed credit line of EUR
NOTE 6 – 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 $
The Convertible Note was a senior, unsecured obligation of the Company, payable at
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 $
As of June 22, 2022, the Convertible Note, including accrued interest and all relevant obligations, was repaid in full, amounting to $
The components of the Convertible Note are as follows:
| March 31, 2023 | March 31, 2022 | |||||||
| Convertible note | $ | |||||||
| Less: unamortized debt issuance costs | ( | |||||||
| Convertible note payable | $ | $ | ||||||
| Current portion of convertible note payable | ||||||||
| Convertible note payable, less current portion | ||||||||
| Convertible note payable | $ | $ | ||||||
For the three months ended March 31, 2023 and 2022, the Company recognized interest expense of $
Senior Promissory Notes
On June 22, 2022, the Company issued and sold Senior Promissory Notes in an aggregate principal amount of $
The Notes have a term of
Additionally, as part of the transaction, the Company issued
As a result, the Company recorded an initial debt discount of $
The components of notes payable are as follows:
| March 31, 2023 | December 31, 2022 | |||||||
| Senior Promissory Notes | $ | |||||||
| Less: unamortized debt discount | ( | ) | ( | ) | ||||
| Senior Promissory Notes payable | $ | $ | ||||||
| Current portion of Senior Promissory Notes payable | ||||||||
| Senior Promissory Notes payable, less current portion | ||||||||
| Senior Promissory Notes payable | $ | $ | ||||||
For the three months ended March 31, 2023 and 2022, the Company recognized interest expense of $
NOTE 7 – 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.
In November 2022, the Company entered into a commercial settlement agreement regarding marine wastewater treatment systems delivered in 2019, more specifically potential warranty claims related to alleged corrosion on certain parts and components. The Company disputed the claim in full, subsequently reaching an amicable settlement agreement with expected remediation work to be conducted in the first half 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 to 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 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’s current and long-term warranty obligations included in accrued expenses on the balance sheet, as of March 31, 2023 and December 31, 2022, were as follows:
| March 31, 2023 | December 31, 2022 | |||||||
| Balance at January 1 | $ | $ | ||||||
| Warranty costs charged to cost of goods sold | ||||||||
| Utilization charges against reserve | ( | ) | ( | ) | ||||
| Foreign currency effect | ( | ) | ||||||
| Balance at the end of the period | $ | $ | ||||||
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 8 – 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 are the same for the reported periods.
As of March 31, 2023, the Company had outstanding balances of
As of March 31, 2022, the Company had
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 months ended March 31, 2023 and 2022:
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net (Loss) | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of common shares used in basic earnings per share | ||||||||
| 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 | ||||||||
For the three months ended March 31, 2023 and 2022 respectively, the Company had
NOTE 9 – STOCKHOLDERS’ EQUITY
Common Stock – The Company has
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
Stock Issuance
Since January 1, 2023, the Company has made the following issuances of Common Stock:
On January 3, 2023, the Company issued
On January 3, 2023, the Company issued
Warrants
On August 17, 2021, the Company entered an exchange agreement with an existing shareholder to exchange an aggregate of shares of Common Stock for equivalent shares of prefunded warrants (the “Exchange Agreement”). The prefunded warrants are exercisable at an exercise price of $
On May 17, 2022, the Company entered a warrant purchase agreement with existing shareholders to purchase
On June 23, 2022, the Company completed a private placement of Senior Notes in an aggregate principal amount of $
The following is a summary of the periodic changes in warrants outstanding for the three months ended March 31, 2023 and 2022:
| 2023 | 2022 | |||||||
| Warrants outstanding at January 1 | ||||||||
| Warrants issued in connection with public offering and private placement | ||||||||
| Exercises and conversions | ||||||||
| Warrants outstanding at March 31 | ||||||||
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 consultants of the Company. At March 31, 2023,
In 2022, the Company’s Board of Directors adopted an Equity Incentive Plan (the “2022 Incentive Plan”). Under the terms and conditions of the 2022 Incentive Plan, the Board of Directors is empowered to grant RSUs to officers and directors of the Company. At March 31, 2023,
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 $
A summary of the status of the RSUs as of March 31, 2023 and changes during the period are presented below:
| March 31, 2023 | ||||||||||||
| Number of units | Weighted Average Fair value | Aggregated Intrinsic | ||||||||||
| Outstanding, December 31, 2022 | $ | $ | ||||||||||
| Granted | - | |||||||||||
| Vested and settled with share issuance | ( | ) | ( | ) | - | |||||||
| Outstanding, March 31, 2023 | $ | $ | ||||||||||
NOTE 10 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE
The following table presents customers accounting for 10% or more of the Company’s revenue:
| For the Three Months |
||||||||
| Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Customer A |
* | % |
% |
|||||
| Customer B |
* | % |
% |
|||||
* Zero or less than 10%
The following table presents customers accounting for 10% or more of the Company’s Accounts receivable:
| March 31, 2023 |
December 31, 2022 |
|||||||
| Customer C |
% |
% |
||||||
| Customer D |
% |
* | % |
|||||
| Customer B |
* | % |
% |
|||||
| Customer A |
* | % |
% |
|||||
* Zero or less than 10%
As of March 31, 2023, approximately
NOTE 11 – 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 | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | ||||||||
| Water | $ | $ | ||||||
| Ceramics | ||||||||
| Plastics | ||||||||
| Corporate | ||||||||
| Total consolidated Revenue | ||||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Income (Loss) | ||||||||
| Water | $ | ( | ) | $ | ( | ) | ||
| Ceramics | ( | ) | ( | ) | ||||
| Plastics | ( | ) | ( | ) | ||||
| Other | ( | ) | ( | ) | ||||
| Total consolidated Loss | ( | ) | ( | ) | ||||
| As of | ||||||||
| Total Assets | March 31, 2023 | December 31, 2022 | ||||||
| Water | $ | $ | ||||||
| Ceramics | ||||||||
| Plastics | ||||||||
| Other | ||||||||
| Total consolidated Assets | $ | $ | ||||||
NOTE 12 - SUBSEQUENT EVENTS
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, 2023 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 providing engineered systems. For more than two decades, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in the following business areas: water treatment systems and services, ceramic membranes for liquid filtration, diesel particulate filters (DPFs) to control soot exhaust particles from diesel engines, and plastic components for applications 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, which we 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, Hobro, and Aarhus.
Our Strategy
Our strategy is to leverage our core competencies in material science, 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 pollution We currently provide water filtration systems for scrubber technology providers, shipowners, and ship operators as well as tailored filtration systems for oil & gas clients, industrial wastewater applications, and integrated services companies. We are expanding our range of products to better leverage existing customer relationships and develop new relationships within the oil & gas, marine, global manufacturing, and chemical industries. | |
|
|
||
| ● |
Better penetrate existing end markets where our value proposition is strong We have successfully sold products and installed systems into several end markets--including automotive/transportation, clean water and pool filtration, marine, industrial wastewater, and oil & gas. We are focused on targeting and activating new customers in these end markets while working with distributors, agents, and partners to access other important geographic markets. |
|
|
|
||
| ● |
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 March 31, 2023 and 2022:
| Three Months Ended March 31, |
||||||||||||||||||||||||
| Period to Period Change |
||||||||||||||||||||||||
| 2023 |
As a % of Sales |
2022 |
As a % of Sales |
Variance |
Percent % |
|||||||||||||||||||
| Revenue |
4,011,519 | 100.0 | % |
3,637,236 | 100.0 | % |
374,283 | 10.3 | % |
|||||||||||||||
| Cost of goods sold |
3,620,177 | 90.2 | 3,391,695 | 93.2 | 228,482 | 6.7 | ||||||||||||||||||
| Gross Profit |
391,342 | 9.8 | 245,541 | 6.8 | 145,801 | 60.0 | ||||||||||||||||||
| Operating Expenses |
||||||||||||||||||||||||
| Selling expenses |
1,182,435 | 29.5 | 1,059,948 | 29.1 | 122,487 | 11.6 | ||||||||||||||||||
| General and administrative expenses |
1,058,949 | 26.4 | 1,916,517 | 52.7 | (857,568 | ) |
(44.7 | ) |
||||||||||||||||
| Research and development expenses |
342,619 | 8.5 | 602,737 | 16.6 | (260,118 | ) |
(43.2 | ) |
||||||||||||||||
| Total Operating Expenses |
2,584,003 | 64.0 | 3,579,202 | 98.4 | (995,199 | ) |
(27.8 | ) |
||||||||||||||||
| Loss from Operation |
(2,192,661 | ) |
(54.7 | ) |
(3,333,661 | ) |
(91.7 | ) |
1,141,000 | (34.2 | ) |
|||||||||||||
| Other Income (Expense) |
||||||||||||||||||||||||
| Interest and other income |
51,673 | 1.3 | 99 | - | 51,574 | 52,094.8 | ||||||||||||||||||
| Interest (expense) |
(12,001 | ) |
(0.3 | ) |
(206,461 | ) |
(5.7 | ) |
194,460 | (94.2 | ) |
|||||||||||||
| Amortization discount, convertible note |
(84,528 | ) |
(2.1 | ) |
(297,338 | ) |
(8.2 | ) |
212,810 | (71.6 | ) |
|||||||||||||
| Gain (loss) on currency transactions |
(166,278 | ) |
(4.1 | ) |
75,993 | 2.1 | (242,271 | ) |
(318.8 | ) |
||||||||||||||
| Total Other Income (Expense) |
(211,134 | ) |
(5.3 | ) |
(427,707 | ) |
(11.8 | ) |
216,573 | (50.6 | ) |
|||||||||||||
| Loss Before Income Taxes |
(2,403,795 | ) |
(59.9 | ) |
(3,761,368 | ) |
(103.4 | ) |
1,357,572 | (36.1 | ) |
|||||||||||||
| Income Tax Benefit |
(14,292 | ) |
(0.4 | ) |
(14,944 | ) |
(0.4 | ) |
652 | 0.0 | ||||||||||||||
| Net Loss |
(2,389,503 | ) |
(59.6 | ) |
(3,746,424 | ) |
(103.0 | ) |
1,356,921 | (36.2 | ) |
|||||||||||||
Revenue
Revenue for the three months ended March 31, 2023 was $4,011,519 compared to $3,637,236 for the same period in 2022, representing an increase of $374,283, or 10%. The positive development was attributable to an increase in sales of liquid filtration systems of $613,337, aftermarket sales of $229,658 and plastics products of $28,035, partly offset by a decline in sales of DPFs and ceramic membranes. The increase in liquid filtration systems pertains to deliveries of pool 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 revenue was largely driven by slow order intake due to reduced sales activity.
Gross Profit
Gross profit for the three months ended March 31, 2023 was $391,342 compared to gross profit of $245,541 for the same period in 2022, representing an increase of $145,801, or 60%. The increase in gross profit was primarily driven by revenue growth, improvements in product mix, and improved pricing discipline underpinned by the enhanced 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 the inflationary cost pressures on raw materials and labor. Included in the gross profit was depreciation of $614,592 and $496,049 for the three months ended March 31, 2023, and 2022, respectively.
Expenses
Total operating expenses for the three months ended March 31, 2023 were $2,584,003, representing a decrease of $995,199, or 28%, compared to $3,579,202 for the same period in 2022.
Selling expenses for the three months ended March 31, 2023 were $1,182,435 compared to $1,059,948 for the same period in 2022, representing an increase of $122,487, or 12%, due to increased costs associated with direct sales efforts, onboarding of new sales leadership, interim consulting services, and intensified travel and marketing activities.
General and administrative expenses for the three months ended March 31, 2023 were $1,058,949 compared to $1,916,517 for the same period in 2022, representing a decrease of $857,568, or 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 were non-cash compensation of $157,173 and $178,778 for the three months ended March 31, 2023 and 2022, respectively.
The following is a summary of non-cash compensation:
| For the Three Months Ended |
||||||||
| March 31, |
March 31, |
|||||||
| 2023 |
2022 |
|||||||
| Compensation for vesting of restricted stock awards issued to the Board of Directors |
$ | 51,124 | $ | 51,125 | ||||
| Compensation for vesting of restricted stock awards issued to management |
106,049 | 127,653 | ||||||
| Total Non-Cash Compensation |
$ | 157,173 | $ | 178,778 | ||||
Research and development expenses for the three months ended March 31, 2023 were $342,619 compared to $602,737 for the same period in 2022, representing a decrease of $260,118, or 43%. The change is attributable to more focused R&D efforts with fewer ongoing projects combined with a decrease in the average number of employees engaged in research and development activities from 17 as of March 31, 2022 to 8 as of March 31, 2023, as the Company streamlined and centralized the R&D function.
Other Income (Expenses)
Other Income (Expenses) for the three months ended March 31, 2023 was $(211,134) compared to $(427,707) for the comparable period in 2022, representing a decrease in other expenses of $216,573, or 51%. The change reflects the improved capital structure with reduced interest expense and amortization cost due to the early repayment and refinancing of the Convertible Note in the second quarter of 2022, offset by the loss on currency transactions of $242,271 due to the USD depreciation against the EUR/DKK during the period.
Net Loss
Net loss for the three months ended March 31, 2023 was $(2,389,503) compared to $(3,746,424) for the comparable period in 2022, representing a reduction in net loss of $1,356,921.
The change was primarily attributable to the improved gross profit of $145,801, savings in operating expenses of $995,199, reduced interesting expense and amortization costs, and higher interest income on excess cash, partly offset by the loss on currency transactions due to the USD depreciation against the EUR/DKK.
Liquidity and Capital Resources
Based on the continued market volatility and geopolitical unrest pertaining to the Russia and Ukraine conflict, European energy crisis, 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 $26.5 million public offering of common stock and pre-funded warrants, substantially improved 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 its profitability and liquidity position.
While the Company anticipates that its proactive measures will be sufficient to protect 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. In the future, the Company may experience reduced or changed demand for its products and services, especially if there is a global recession, structural shift in regulation, or the continuation of escalating interest rates that adversely impacts the investment decisions of our customers.
We have historically satisfied our capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. On March 31, 2023, we had cash of $14,309,933 and net working capital of $20,123,957, and on December 31, 2022, we had cash of $16,597,371 and net working capital of $21,581,287. On March 31, 2023, our net working capital had decreased by $1,457,330 compared to December 31, 2022, mainly as a result of a reduction in cash and 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 EUR1,350,000 (approximately $1,470,000). The credit line is secured by a cash deposit.
Going Concern and Management’s Plans
The financial statements included elsewhere herein for the period ended March 31, 2023, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of 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 note (the “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.
As of June 22, 2022, the 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.
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. 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.
Cash Flows
Three months ended March 31, 2023 compared to three months ended March 31, 2022
Cash flows from operating activities for the period 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 $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 $984,040, partly offset by a reduction in accrued expenses of $433,045 due to this quarter’s utilization charges against the warranty reserve and a decrease in salary provisions, and increased accounts receivable of $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 $95,561. The investing activities include the purchase 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 repayment of $840,000 regarding the Convertible Note in the second quarter of 2022.
Off Balance Sheet Arrangements
As of March 31, 2023, we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in 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; |
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the assessment of allowance for product warranties, which impacts gross profit; |
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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; |
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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; |
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the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes; |
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the valuation of inventory, which impacts gross profit; and |
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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.
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 March 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, 2023 for the year ended December 31, 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 2023 by improving competencies and work processes. Further, an investment in a new ERP system has been made along with other supporting IT systems to support 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 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 7 – Agreements And 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.
| 3.1 |
Articles of Incorporation, as amended as of May 21, 2021 | Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K as filed with the SEC on March 30, 2022 |
| 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 |
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| 31.2 |
Filed herewith |
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| 32.1 |
Furnished herewith |
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| 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. PRE |
Inline XBRL Extension Presentation Link base Document |
Provided herewith |
| 101. SCH |
Inline XBRL Taxonomy Extension Scheme Document |
Provided herewith |
| 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. |
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| Dated: May 11, 2023 |
/s/ Fei Chen |
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| Fei Chen, Chief Executive Officer |
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| (Principal Executive Officer) |
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| Dated: May 11, 2023 |
/s/ Simon S. Stadil |
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| Simon S. Stadil, Chief Financial Officer |
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| (Principal Financial and Accounting Officer) |
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