Liqtech International Inc: Form 10-Q for the period ended Sep 30, 2020

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 30, 2020 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 products for gas and liquid purification by manufacturing ceramic silicon carbide filters. For more than a decade, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in three business areas: ceramic membranes for liquid filtration, diesel particulate filters (DPFs) for the control of soot exhaust particles from diesel engines and plastic components for usage in 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 offices in Denmark and the United States and through local representatives and distributors. The products are shipped directly to customers from our production facilities in Denmark and the United States.

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 Holding A/S (formerly known as LiqTech International 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 Water A/S (formerly known as LiqTech Systems A/S) (“LiqTech Water”), LiqTech Ceramics A/S (“LiqTech Ceramics”) and LiqTech Plastics A/S (formerly known as BS Plastic A/S) (“LiqTech Plastics”), three Danish limited companies organized under the Danish Act on Limited Companies of the Kingdom of Denmark and LiqTech NA, Inc., a Delaware corporation (“LiqTech NA”). Collectively, LiqTech USA, LiqTech Holding, LiqTech Water, LiqTech Ceramics, LiqTech Plastics and LiqTech NA are referred to herein as our “Subsidiaries”.

We conduct operations in the Kingdom of Denmark and the United States. Our Danish operations are located in the Copenhagen area, Hobro and Aarhus, and our U.S. operations are conducted in White Bear Lake, Minnesota.

As part of our cost reduction plan and due to several years of declining activity, we have decided to start the process of closing down operations in LiqTech NA.

Our Strategy

Our strategy is to create stockholder value by leveraging our competitive strengths in silicon carbide filters and membranes by focusing on discrete applications in key end markets. Essential features of our strategy include:

• Maintain and gain new marine industry customers. We currently provide water filtration systems for scrubber technology providers, ship owners and ship operators. We are expanding our range of marine products to better leverage existing customer relationships.
• Enter new geographic markets and expand existing markets. We plan to continue to manufacture and sell our products from our core operations in Denmark. We work with distributors, agents and partners to access other important geographic markets.
• Strengthen our position in the DPF market. We believe that we have a strong position in the retrofit market for diesel particulate filter (DPF) systems. We intend to continue our efforts to maintain our market position in this area. Furthermore, we intend to leverage our experience in the OEM market by expanding our presence with new products relating to diesel particulate filter systems.
• Develop and improve technologies and enter new end markets. We intend to continue to develop our ceramic membranes and improve the efficiency for our filtration products. Through continuous research and development, we intend to find new uses for our products and plan to expand into new markets that offer significant opportunity for the Company.
• Focus on the development and sales of standardized water filtration and treatment systems. We will continue our focus on selling systems based on our unique SiC Filters. We will also combine the ceramic membranes with other technologies to offer our customers complete filtration solutions. We will continue our focus on developing smaller standard systems, like our ground water treatment system and our residential swimming pool system.

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Developments

Results of Operations

The financial information below is derived from our unaudited condensed consolidated financial statements included elsewhere in this report.

Comparison of the Three Months Ended September 30, 2020 and September 30, 2019

The following table sets forth our revenues, expenses and net income for the three months ended September 30, 2020 and 2019:

Revenues

Revenue for the three months ended September 30, 2020 was $3,543,730 compared to $9,672,716 for the same period in 2019, representing a decrease of $6,128,986, or 63%. The change in revenue consists of a decrease in sales of liquid filters of $6,021,586 and in sales of DPFs of $320,792, offset by an increase in sales of plastics of $218,811. The decrease in sales of liquid filters and water treatment systems is a result of the negative impact of the COVID-19 virus that has caused a significant decrease in new orders since the start of 2020. The demand for our DPFs also decreased in the period, but we see increased interest in environmental solutions to reduce global CO2-emissions, and received new orders in the third quarter of 2020. The increase in sales of plastic components is related to the business acquired in September 2019.

Gross Profit

Gross profit for the three months ended September 30, 2020 was $(308,480) compared to $2,227,738 for the same period in 2019, representing a decrease of $2,536,218 or 114%. The decrease in gross profit is due to the decline in sales of liquid filters and water treatment systems where sales command a higher gross margin. This resulted in the gross profit being negatively impacted by costs related to decisions made prior to the impact of COVID-19, as the Company had decided to ramp-up investments in additional employees, improvement of the business facilities and other fixed costs that are now included in Cost of Goods sold. Further the initial effect of closing our activities in North America has resulted in a write-off of inventory in the amount of $170,000, which has been expensed in the period. Included in the gross profit is depreciation of $476,705 and $298,576 for the three months ended September 30, 2020 and 2019, respectively.

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Expenses

Total operating expenses for the three months ended September 30, 2020 were $2,524,304, representing an increase of $520,650, or 26%, compared to $2,003,654 for the same period in 2019.

Selling expenses for the three months ended September 30, 2020 were $741,738 compared to $461,010 for the same period in 2019, representing an increase of $280,728 or 61%. This change is attributable to the pre COVID-19 decision of adding new sales employees to grow future sales and the average of sales employees has therefore increased from 9 in 2019 to 12 in 2020. Other expenses related to the update of the Company’s website and other marketing materials have also resulted in increased selling expenses.

General and administrative expenses for the three months ended September 30, 2020 were $1,526,327 compared to $1,353,428 for the same period in 2019, representing an increase of $172,899, or 13%. Included in expenses for the three months ended September 30, 2020 is an estimated write-off of $200,000 related to the valuation of the remaining fixed assets in LiqTech NA. Further, the increase in expenses is attributable to the addition of administrative employees, where the number of employees increased from 17 in 2019 to 20 in 2020. The increase in the number of employees also created additional IT and office costs. As part of the cost reductions implemented after the impact of the COVID-19, several employees have exited as of September 30, 2020. Included in general and administrative expenses is non-cash compensation expenses of $46,681 and $23,167 for the three months ended September 30, 2020 and September 30, 2019, respectively, representing an increase of $23,514, or 101%, attributable to stock grants to members of the Board and management.

The following is a summary of non-cash compensation:

Research and development expenses for the three months ended September 30, 2020 were $256,239 compared to $189,216 for the same period in 2019, representing an increase of $67,023, or 35%. This change is attributable to an increase in the number of employees engaged in research and development activities as the Company focuses on the further development of existing and new products for the marine industry.

Other Income (Loss)

Net other income (loss) for the three months ended September 30, 2020 was $(1,056,748) compared to $432,273 for the comparable period in 2019, representing a decrease of $1,489,021. Included in the net expenses for the three months ended September 30, 2020 is the negative effect of $664,350 resulting from the fair value measurement of the prefunded warrants issued in May 2020. The agreement was changed in August 2020 resulting in a reclassification of the warrant from debt to an equity instrument that does not require fair value measurement. Additionally, losses on currency translations due to the negative impact of the USD/DKK exchange rate has impacted Net other income (loss) for the period, resulting in an expense of $660,747 compared to income of $403,432 in the comparable period and representing a decrease of $1,064,179, or 264%. Further Net income (loss) is positively affected by $301,573 relating to the gain on modification of the earn-out agreement with the former owner of BS Plastic A/S, where the former owner has agreed to reduce the earn-out consideration from a total of DKK 6 million over three years to a fixed earn-out of DKK 4 million over a period of two years.

Net Income (Loss)

Net income (loss) for the three months ended September 30, 2020 was $(3,873,419) compared to $656,357 for the comparable period in 2019, representing a decrease of $4,529,776.

This change was primarily attributable to the significant decrease in revenue and the increase in operating expenses caused primarily by the growth in headcount to support additional sales and production that was negatively impacted by COVID-19. Additionally, the fair value measurement associated with the warrant liability and the negative adjustment caused by currency translation as described above further widened the net loss for the period ended September 30, 2020.

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Comparison of the Nine Months Ended September 30, 2020 and September 30, 2019

The following table sets forth our revenues, expenses and net income for the nine months ended September 30, 2020 and 2019:

Revenues

Revenue for the nine months ended September 30, 2020 was $18,467,057 compared to $26,391,100 for the same period in 2019, representing a decrease of $7,924,043 or 30%. The change in revenue consists of a decrease in sales of liquid filters and water treatment systems of $8,983,058 and a decrease of sales in DPFs of $590,537, offset by an increase in sales of plastics of $1,562,606 and an increase in sales of development projects of $86,946. The increase in sales of plastic components is related to the business acquired in September 2019. The decrease in demand for our liquid filters, water treatment systems and DPFs is mainly due to impacts of the ongoing COVID-19 pandemic, which have resulted in significant restrictions and business limitations across the globe, causing a significant decline in delivery of water treatment systems for the marine scrubber industry.

Gross Profit

Gross profit for the nine months ended September 30, 2020 was $2,825,059 compared to gross profit of $5,777,928 for the same period in 2019, representing a decrease of $2,952,869, or 51%. The decrease in gross profit is due to the decline in sales of liquid filters and water treatment systems, where sales command a higher gross margin. Included in the gross profit is depreciation of $1,384,344 and $724,205 for the nine months ended September 30, 2020 and 2019, respectively.

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Expenses

Total operating expenses for the nine months ended September 30, 2020 were $7,494,094, representing an increase of $2,282,034, or 44%, compared to $5,212,060 for the same period in 2019.

Selling expenses for the nine months ended September 30, 2020 were $2,024,485 compared to $1,458,633 for the same period in 2019, representing an increase of $565,852, or 39%. This change is attributable to the addition of new sales employees from an average of 9 in 2019 to an average of 12 in 2020.

General and administrative expenses for the nine months ended September 30, 2020 were $4,585,857 compared to $3,161,855 for the same period in 2019, representing an increase of $1,424,002, or 45%. Included in expenses for the nine months ended September 30, 2020 is an estimated write-off of $200,000 related to the valuation of the remaining fixed assets in LiqTech North America. Further the increase is attributable to the addition of administrative employees, where the number of employees increased from 13 in 2019 to 23 in 2020. The increase in the number of employees also created additional IT and office costs. Included in general and administrative expenses is Non-cash compensation expenses that were $270,238 and $174,778 for the nine months ended September 30, 2020 and September 30, 2019, respectively, representing an increase of $95,458, or 55%, attributable to stock grants to members of the Board and management.

The following is a summary of non-cash compensation:

Research and development expenses for the nine months ended September 30, 2020 were $883,752 compared to $591,572 for the same period in 2019, representing an increase of $292,180, or 49%. This change is attributable to an increase in the number of employees engaged in research and development activities as the Company focuses on the further development of existing and new products for the marine industry.

Other Income (Loss)

Net other income (loss) for the nine months ended September 30, 2020 was $(1,511,383) compared to $271,519 for the comparable period in 2019, representing a decrease of $1,782,902. Included in the net other expenses for the nine months ended September 30, 2020 is the negative effect of $901,250 resulting from the fair value measurement of the prefunded warrants issued in May 2020. Additionally, losses on currency translations due to the negative impact of the USD/DKK exchange rate has impacted Net other income (loss) for the period resulting in an expense of $821,681 compared to income of $244,872 in the comparable period, representing a decrease of $1,066,553. Further, Net income (loss) is positively affected by $301,573 relating to the gain on modification of the earn-out agreement with the former owner of BS Plastic A/S, where the former owner has agreed to reduce the earn-out consideration from a total of DKK 6 million over three years to a fixed earn-out of DKK 4 million over a period of two years.

Net Income (Loss)

Net income (loss) for the nine months ended September 30, 2020 was $(6,133,731) compared to $837,387 for the comparable period in 2019, representing a decrease of $6,971,118.

This change was primarily attributable to the significant decrease in revenue and the increase in operating expenses caused primarily by the growth in headcount to support additional sales and production. Further losses on currency translations due to the negative impact of the USD/DKK exchange rate and the negative fair value adjustment of $901,250 related to the prefunded warrant liability have widened the Net Loss for the period.

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Liquidity and Capital Resources

In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid-March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who must work at our production facilities. Otherwise, most of our employees worked remotely during the shutdown. Since the beginning of May, businesses in Denmark began opening up as the effect of COVID-19 had largely been contained and the number of infections and fatalities decreased significantly. However, we now again see the number of infected people and fatalities increasing all over the world and tight restrictions are again being introduced in many countries. Since the start of September, we have again introduced limitations in the number of employees working directly at our production sites. All employees who can work from home are encouraged to do so.

We are unable to predict the full impact that COVID-19 will have on our long-term financial condition, the results of operations, liquidity and cash flows due to uncertainties. Our compliance with the measures implemented to avoid the spread of the virus have had a material adverse impact on our financial results for the second and third quarters of 2020. To the extent possible, we have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for at least the next 12 months from the issuance of this quarterly report. In addition, as a result of the reduced order intake and decreased manufacturing levels, our future gross profit will also likely be unfavorably impacted until such time that we are able to operate our manufacturing facilities at higher capacity levels as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2020.

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

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. At the filing date, the Company had an available line of credit from the bank amounting to DKK20,000,000 ($3,000,000), which is used for a leasing arrangement and guarantees issued to customers for prepayments and for warranties after delivery.

Additionally, on May 21, 2020, the Company completed a private placement with certain accredited investors pursuant to which the Company issued and sold an aggregate of 1,085,000 shares of common stock, par value $0.001 per share, at a purchase price of $5.00 per share for gross proceeds of $4,662,125, including costs of $762,875 for placement fees, legal fees, auditor fees and other cost related to the capital raise, and a prefunded warrant to purchase an aggregate of 515,000 shares of Common Stock, at a purchase price of $5.00 per share, for gross proceeds of $2,575,000.

On September 30, 2020, we had cash of $14,492,549 and net working capital of $18,654,526, and at December 31, 2019, we had cash of $9,783,932 and net working capital of $17,155,126. On September 30, 2020, our net working capital has increased by $1,499,400 compared to December 31, 2019 primarily related to the increase in cash as a result of the private placement in May 2020.

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 guarantee credit line of DKK10,000,000 (approximately $1,500,000). The credit line is secured by a cash deposit of $1,500,000. Further, we have a guarantee for a specific project delivered in 2016 of DKK 94,620 (approximately $14,878 at September 30, 2020) with a bank, subject to certain base limitations. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Systems such as receivables, inventory, and equipment.

Cash Flows

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

Cash provided (used) by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. Cash used by operating activities for the nine months ended September 30, 2020 was $603,095, representing an increase of $3,915,556 compared to cash used by operating activities of $4,518,651 for the nine months ended September 30, 2019. The change in cash used by operating activities for the nine months ended September 30, 2020 compared to the same period in 2019 was mainly due to reductions in Accounts receivable of $7,288,289 and Contract assets/liabilities (net) of $4,623,774, off-set by the decrease in Net Income (Loss) of $6,971,118 and a decrease in Accounts payable of $4,128,401.

Net cash used in investing activities was $3,229,674 for the nine months ended September 30, 2020 as compared to net cash used in investing activities of $1,641,605 for the nine months ended September 30, 2019, representing an increase of $1,588,069. This increase was due primarily to the purchase of property and equipment related to the installation of new furnaces in Ballerup to increase production capacity. Further, the Company has paid the first earn-out installment ($301,573) related to the purchase of LiqTech Plastics (former known as BS Plastic).

Cash provided by financing activities was $7,229,505 for the nine months ended September 30, 2020 as compared to net cash provided by financing activities of $14,720,965 for the nine months ended September 30, 2019. This change of $7,491,460 was mainly due to net cash proceeds of $7,237,125 related to the capital raise in May 2020 compared to net proceeds of $14,601,554 from the capital raise in May 2019.

Off Balance Sheet Arrangements

As of September 30, 2020, we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in our consolidated financial statements.

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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, which impacts gross profit; and
• 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

The Company’s management reviewed material events through November 9, 2020.

On November 3, 2020, the Company amended its Articles of Incorporation to increase the number of authorized shares of the Company’s Common Stock from 25,000,000 shares to 100,000,000 shares following approval by the Company’s shareholders at the annual meeting held on October 29, 2020.

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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. We have excluded the acquired company LiqTech Plastics (formerly known as BS Plastic) from the assessment of internal controls over financial reporting as of September 30, 2020 due to the limited time that the Company has been part of the LiqTech Group and an immaterial impact on the consolidated financial statements. 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 override 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, 2020 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 30, 2020 for the year ended December 31, 2019.

Changes in Internal Control over Financial Reporting

The implementation of the new ERP-system from the beginning of 2020 together with implementation of additional internal control procedures, has strengthened the Company´s internal control environment. From the report received from the Company´s external auditor as a result of the audit of 2019, we have focused on improving controls to address each reported deficiency; however, the impact of COVID-19 restrictions has restricted the pace of the progress significantly.

Management's Remediation Initiatives

In response to the identified material weaknesses, our 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 in 2019 hired additional employees into the finance department, and we plan to continue to work on remediating the material weaknesses during 2020 by improving competencies and processes. Further, an investment in a new ERP system has been made along with other supporting IT programs to support the controls and processes of the Company, and these investments are an important part of the remediation of the material weaknesses. Lastly, the Company has started the process of redesigning and ensuring documentation of all processes and procedures related to the financial reporting process to ensure the effective design and operation of process-level controls.

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.

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.

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We are unable to accurately predict the full impact of COVID-19 on our business, and the COVID-19 pandemic may adversely impact our business as a result of the pandemic’s global economic impact.

In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid-March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, most of our employees were working remotely during the shutdown. Since the beginning of May, the businesses in Denmark have been opening up as the effect of COVID-19 has largely been constrained and the number of infections and fatalities decreased significantly. However, we now again see the number of infected people and fatalities increasing all over the world, and tightening restrictions are again introduced in many countries. Since the start of September, we have again introduced limitations in the number of employees working directly on the production sites, and all employees who can work from home are encouraged to do so.

We are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, results of operations, liquidity and cash flows due to uncertainties, and our compliance with the measures implemented to avoid the spread of the virus did have a material adverse impact on our financial results for the second and third quarters of 2020. We have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. In addition, as a result of reduced order intake and decreased manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic.

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