# Liqtech International Inc: Form 10-Q for the period ended Mar 31, 2022

- Company: [Liqtech International Inc](/companies/liqt.md) (CIK 1307579)
- Form: 10-Q
- Filed: 2022-05-12
- Accepted by EDGAR: May 12, 2022, 20:50 ET
- Period: 2022-03-31
- Accession: 0001437749-22-012160
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1307579/000143774922012160/liqt20220331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1307579/000143774922012160/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-01-01 to 2022-03-31 | $3.6m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-01-01 to 2022-03-31 | $3.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-01-01 to 2022-03-31 | $245.5k | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-01-01 to 2022-03-31 | $602.7k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2022-01-01 to 2022-03-31 | −$3.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-01-01 to 2022-03-31 | −$15.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-01-01 to 2022-03-31 | −$3.7m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2022-01-01 to 2022-03-31 | −$0.18 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-01-01 to 2022-03-31 | 21,350,455 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2022-01-01 to 2022-03-31 | −$5.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-01-01 to 2022-03-31 | $183.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Current assets | at 2022-03-31 | $24.3m | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-31 | $40.4m | us-gaap:Assets |
| Current liabilities | at 2022-03-31 | $19.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-03-31 | $31.6m | us-gaap:Liabilities |
| Long-term debt | at 2022-03-31 | $4.0m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2022-03-31 | $8.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 21,093 characters.

*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, 2022 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 and membranes. For more than two decades, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in three business areas: ceramic membranes for liquid filtration systems, diesel particulate filters (DPFs) to control 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 office in Denmark and through local representatives and distributors. The products are shipped directly to customers from our production facilities in Denmark.

The terms “LiqTech”, “we”, “our”, “us”, the “Company” or any derivative thereof, as used herein, refer to LiqTech International, Inc., a Nevada corporation, together with its direct and indirect wholly owned subsidiaries, including LiqTech USA, Inc., a Delaware corporation (“LiqTech USA”), which owns all of the outstanding equity interest in LiqTech NA, Inc., a Delaware corporation (“LiqTech NA”) and in LiqTech Holding A/S, a Danish limited company, organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“LiqTech Holding”), together with its direct wholly owned subsidiaries LiqTech Ceramics A/S (“LiqTech Ceramics”), LiqTech Water A/S (“LiqTech Water”), LiqTech Plastics A/S (“LiqTech Plastics”), LiqTech Water Projects A/S ("LiqTech Water Projects”), LiqTech Emission Control A/S (“LiqTech Emission Control”), all Danish limited companies organized under the Danish Act on Limited Companies of the Kingdom of Denmark, and LiqTech Environment Technologies (China) Co., Ltd. (“LiqTech China”), a Chinese company organized under the Chinese Act on Limited Companies in the Peoples Republic of China. Collectively, LiqTech USA, LiqTech NA, LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics, LiqTech Water Projects, LiqTech Emission Control and LiqTech China are referred to herein as our “Subsidiaries”.

At present, we conduct our operations in the Kingdom of Denmark. Our Danish operations are located in the Copenhagen area, in Hobro, and in Aarhus.

### Our Strategy

Our strategy is to leverage our core competencies in material science, 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 operators and services companies. We are expanding our range of products to better leverage existing customer relationships and develop new relationships within the oil & gas, marine, and global 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.

26

### 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, 2022 and 2021:

|  | Three Months Ended March 31, 2022 | As a % of Sales | 2021 | As a % of Sales | Period to Period Change Variance | Percent % |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Revenue** | 3,637,236 | 100.0% | 3,997,877 | 100.0% | (360,641) | (-9.0)% |
| Cost of goods sold | 3,391,695 | 93.2 | 3,883,262 | 97.1 | (491,567) | (12.7) |
| **Gross Profit** | 245,541 | 6.8 | 114,615 | 2.9 | 130,926 | 114.2 |
| **Operating Expenses** |  |  |  |  |  |  |
| Selling expenses | 1,059,948 | 29.1 | 1,009,498 | 25.3 | 50,450 | 5.0 |
| General and administrative expenses | 1,916,517 | 52.7 | 1,474,670 | 36.9 | 441,847 | 30.0 |
| Research and development expenses | 602,737 | 16.6 | 437,607 | 10.9 | 165,130 | 37.7 |
| Total Operating Expenses | 3,579,202 | 98.4 | 2,921,775 | 73.1 | 657,427 | 22.5 |
| **Loss from Operation** | (3,333,661) | (91.7) | (2,807,160) | (70.2) | (526,501) | (18.8) |
| **Other Income (Expense)** |  |  |  |  |  |  |
| Interest and other income | 99 | - | - | - | 99 | 100.0 |
| Interest (expense) | (206,461) | (5.7) | (40,419) | (1.0) | (166,042) | 410.8 |
| Amortization discount, convertible note | (297,338) | (8.2) | - | - | (297,338) | 100.0 |
| Gain (loss) on currency transactions | 75,993 | 2.1 | 371,864 | 9.3 | (295,691) | (79.6) |
| Total Other Income (Expense) | (427,707) | (11.8) | 331,365 | 8.3 | (758,972) | (229.1) |
| **Loss Before Income Taxes** | (3,761,368) | (103.4) | (2,475,895) | (61.9) | (1,285,473) | (51.9) |
| Income Tax Benefit | (14,944) | (0.4) | (16,466) | (0.4) | 1,522 | 0.1 |
| **Net Loss** | (3,746,424) | (103.0) | (2,459,429) | (61.5) | (1,286,995) | (52.3) |

### Revenue

Revenue for the three months ended March 31, 2022 was $3,637,236 compared to $3,997,877 for the same period in 2021, representing a decrease of $360,641, or 9%. The decrease was attributable to a decline in sales of liquid filters, water treatment systems, and DPFs of $685,213, partly offset by an increase in sales of plastic components of $324,572. The decrease in liquid filters and water treatment systems largely reflect the downturn in the marine industry during the COVID-19 pandemic, whereas the decline in DPFs reflects general market conditions and delays in orders due to continued supply chain constraints. The increase in plastics components was a result of dedicated sales effort and increased market penetration.

### Gross Profit

Gross profit for the three months ended March 31, 2022 was $245,541 compared to gross profit of $114,615 for the same period in 2021, representing an increase of $130,926. The increase in gross profit compared to last year was caused by an improvement in sales mix and elevated profitability from sales of plastics components as well as spare-parts and commission activities, partly offset by the negative impact from rising input cost inflation associated with the production of our silicon carbide products, more specifically increased electricity and raw material prices, labor cost inflation, and general price increased on freight and logistic services. Included in the gross profit was depreciation of $496,049 and $471,885 for the three months ended March 31, 2022 and 2021, respectively.

### Expenses

Total operating expenses for the three months ended March 31, 2022 were $3,579,202, representing an increase of $657,427, or 23%, compared to $2,921,775 for the same period in 2021.

Selling expenses for the three months ended March 31, 2022 were $1,059,948 compared to $1,009,498 for the same period in 2021, representing an increase of $50,450, or 5%, due to increased costs associated with direct sales, consulting services, and intensified marketing activities.

General and administrative expenses for the three months ended March 31, 2022 were $1,916,517 compared to $1,474,670 for the same period in 2021, representing an increase of $441,847, or 30%. The increase was mainly driven by project management and leasehold expenses in China, coupled with the implementation of a new ERP platform, general recruitment costs, and an increase in overall headcount from 12 as of March 31, 2021 to 14 as of March 31, 2022. Included in general and administrative expenses was non-cash compensation of $178,778 and $102,388 for the three months ended March 31, 2022 and 2021, respectively.

The following is a summary of non-cash compensation:

|  | For the Three Months Ended March 31, 2022 | March 31, 2021 |
| --- | ---: | ---: |
| Compensation for vesting of restricted stock awards issued to the Board of Directors | $51,125 | $49,376 |
| Compensation for vesting of restricted stock awards issued to management | 127,653 | 53,012 |
| **Total Non-Cash Compensation** | **$178,778** | **$102,388** |

Research and development expenses for the three months ended March 31, 2022 were $602,737 compared to $437,607 for the same period in 2021, representing an increase of $165,130, or 38%. The increase represents the completion of several development projects during the quarter as well as an increase in the average number of employees engaged in research and development activities from 14 as of March 31, 2021, to 17 as of March 31, 2022.

### Other Income (Expenses)

Other Income (Expenses) for the three months ended March 31, 2022 was $(427,707) compared to $331,265 for the comparable period in 2021, representing a decrease of $758,972. This change was mainly related to the Convertible Note issued in April 2021, with $297,338 for the amortization discount and $187,500 for interest expenses, along with a reduction in the gain on currency transactions due to a less favorable DKK/USD exchange rate during the period

### Net Loss

Net loss for the three months ended March 31, 2022, was $(3,746,424) compared to $(2,459,429) for the comparable period in 2021, representing an increase in net loss of $1,286,995.

This change was primarily attributable to the reduced revenue, increased operating expenses, and other expenses including interest and amortization discount pertaining to the Convertible Note.

### Liquidity and Capital Resources

Based on the prolonged negative effects of the global pandemic and other current global geopolitical issues, we are unable to predict the full impact that these will have on our long-term financial condition, results of operations, liquidity and cash flows. Our compliance with the measures implemented to avoid the spread of COVID-19 has clearly had a material adverse impact on our financial results since March 2020. Based on current projections, which are subject to uncertainties, including the duration and severity of these global macro-economic issues, we believe our cash on hand, as well as our ongoing cash generated from operations might not be sufficient to cover our capital requirements for the next 12 months based on the reported financials ended March 31, 2022 including committed investments to generate revenue growth. In addition, as a result of the reduced order intake, continued supply chain disruptions and decreased manufacturing levels, our gross profit will also likely be unfavorably impacted until such time that we are able to operate our manufacturing facilities at the higher capacity levels that were originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels and continued supply chain disruptions, 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 2022.

While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect nor how our business may be adversely affected as a result of these global economic issues and associated supply chain disruptions. In the future, we may experience reduced or changed demand for our products, especially if there is global recession or structural shifts in the demand for our products across our end markets. We could also experience limitations to our ability to produce and ship products resulting from governmental actions and regulations along with further disruptions in the global supply chain.

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 amounting to DKK 20,000,000 (approximately $3,000,000), which was used for a leasing arrangement and guarantees issued to customers for prepayments and warranties after delivery. On March 31, 2022, we had cash of $11,227,061 and net working capital of $5,158,696, and on December 31, 2021, we had cash of $17,489,380 and net working capital of $11,199,259. On March 31, 2022, our net working capital had decreased by $6,040,563 compared to December 31, 2021, mainly as a result of a reduction in cash and cash equivalents and an increase in the current portion of the Convertible Note.

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 EUR1,750,000 (approximately $1,850,000). The credit line is secured by a cash deposit.

### Convertible Note

On March 24, 2021, we 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 “Note”) due on October 1, 2023 and 80,000 shares of our Common Stock for an aggregate purchase price of $15.0 million upon the satisfaction of the closing conditions set forth in the Purchase Agreement. The Closing occurred on April 8, 2021, and the Company issued to the Investor the securities in connection with the Closing.

The Note is 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 Note. The Note is convertible into shares of Common Stock pursuant to the terms of the Note, in part or in whole, from time to time, at the election of the Investor. The initial conversion rate is 100.6749 shares of Common Stock per $1,000 of principal amount of the Note. The conversion rate is 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 Note.

The Note has interest payable quarterly beginning June 1, 2021, at a rate of 5% per annum. The number of shares issuable if the Company elects to pay interest in shares of Common Stock shall be based on the Market Price.

The Company may provide written notice to the Holder electing to convert the entire Principal Amount of the Note if (1) the Daily VWAP per share of Common Stock exceeds one hundred and seventy-five percent (175%) of the Conversion Price on each of twelve (12) consecutive VWAP Trading Days beginning after September 24, 2021; and (2) the Equity Conditions are satisfied on each of such twelve (12) consecutive VWAP Trading Days.

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 shall be required to redeem $840,000 of the amounts due under the 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. On March 1, 2022, the Company paid the first installment of $840,000 in cash. On April 1, 2022 and May 1, 2022 the Investor also elected to receive the $840,000 payment in cash.

### Cash Flows

### Three months ended March 31, 2022 compared to three months ended March 31, 2021

Cash provided by (used in) operating activities for the period ending March 31, 2022 was resulted primarily from the net loss for the period and adjusted for certain non-cash items and changes in assets and liabilities. Cash used in operating activities for the three months ended March 31, 2022 was $(5,034,944), representing a decrease of $3,731,054 compared to cash used in operating activities of $(1,303,890) for the three months ended March 31, 2021. The cash used in operating activities for the three months ended March 31, 2022 consists mainly of the net loss for the period of $(3,746,424) adjusted for depreciation and other non-cash-related items of $1,207,529. Changes in assets and liabilities include increased Accounts receivable of $237,953 and net Contract assets/liabilities of $790,884, with the latter being explained by a work on water treatment systems for delivery in Q2 2022. Furthermore, Accrued expenses and Accounts payable increased by $209,038 and $414,995 respectively.

Net cash used in investing activities was $(183,031) for the three months ended March 31, 2022, as compared to $(414,875) for the three months ended March 31, 2021, representing an increase of $231,844. The investing activities include the purchase of production equipment in Ballerup to increase production capacity and the continued investment in the new ERP platform which is expected to be fully implemented in Q2 2022.

Cash used from financing activities was $(931,807) for the three months ended March 31, 2022, compared to $(101,192) for the three months ended March 31, 2021, representing an increase of $830,615. The increase was mainly driven by the repayment of $840,000 regarding the Convertible Note issued in April 2021. Further, cash from financing activities was negatively impacted by the payment of $91,806 related to the furnace lease agreement.

### Off Balance Sheet Arrangements

As of March 31, 2022, 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;
- 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

For a description of subsequent events, see “Note 12 – Subsequent Events”.

## Market risk

As filed, 133 characters.

We are not required to provide quantitative and qualitative disclosures about market risk because we are a smaller reporting company.

## Controls and procedures

As filed, 4,869 characters.

#### Evaluation of Disclosure Controls and Procedures

Management, with the participation of our Interim 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 Interim Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of March 31, 2022 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, 2022 for the year ended December 31, 2021.

#### 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 2022 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.

Filed May 12, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-012160. Last ingested by Listed: Oct 24, 2026, 15:11 ET. No prices; not investment advice.