LIQTECH INTERNATIONAL, INC. 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 theU.S. Securities and Exchange Commission onMarch 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. OverviewLiqTech 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 two business areas: ceramic membranes for liquid filtration and diesel particulate filters (DPFs) for the control of soot exhaust particles from diesel engines. 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 inthe United States andDenmark and through local representatives and distributors. The products are shipped directly to customers from our production facilities inthe United States andDenmark . The terms "LiqTech", "we", "our", "us", the "Company" or any derivative thereof, as used herein, refer toLiqTech International, Inc. , aNevada corporation, together with its direct and indirect wholly owned subsidiaries, includingLiqTech USA, Inc. , aDelaware corporation ("LiqTech USA "), which owns all of the outstanding equity interest in LiqTech Holding A/S (formerly known asLiqTech International A/S ), a Danish limited company organized under the Danish Act on Limited Companies of the Kingdom ofDenmark ("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 ofDenmark andLiqTech NA, Inc. , aDelaware corporation ("LiqTech Delaware"). Collectively,LiqTech USA ,LiqTech Holding , LiqTech Water, LiqTech Ceramics, LiqTech Plastics and LiqTech Delaware are referred to herein as our "Subsidiaries".
We conduct operations in the Kingdom of
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
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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Table of Contents 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
The following table sets forth our revenues, expenses and net income for the
three months ended
Three Months Ended June 30,
Period to Period Change
As a % As a % Percent
2020 of Sales 2019 of Sales US$ %
Revenue 4,641,483 100.0 % 9,297,186 100.0 % (4,655,703 ) (50.1 )%
Cost of Goods Sold 4,147,020 89.3 7,222,076 77.7 (3,075,056 ) (42.6 )
Gross Profit 494,463 10.7 2,075,110 22.3 (1,580,647 ) (76.2 )
Operating Expenses Selling expenses 605,947 13.1 514,037 5.5 91,900 17.9 General and administrative expenses 1,509,772 32.5 1,001,179 10.8 508,593 50.8 Research and development expenses 316,559 6.8 199,184 2.1 117,375 58.9 Total Operating Expenses 2,432,278 52.4 1,714,400 18.4 717,878 41.9 Profit (Loss) from Operation (1,937,815 ) (41.7 ) 360,710 3.9 (2,298,525 ) (637.2 ) Other Income (Expense) Interest and other income 247 0.0 18,173 0.2 (17,926 ) (98.6 ) Interest (expense) (36,047 ) (0.8 ) (3,760 ) (0.0 ) (32,287 ) 858.7 Fair value adjustment of warrants (236,900 ) (5.1 ) - - (236,900 ) - Gain (loss) on currency transactions (368,561 ) (7.9 ) (206,718 ) (2.2 ) (161,843 ) 78.3 Gain (loss) on sale of fixed assets - - (21,619 ) (0.2 ) 21,619 100.0 Total Other Income (Expense) (641,261 ) (13.8 ) (213,924 )
(2.3 ) (427,337 ) 199.8
Profit (loss) Before Income Taxes (2,579,076 ) (55.6 ) 146,786 1.6 (2,725,863 ) (1,857.0 ) Income Taxes Expense (Income) (15,265 ) (0.3 ) - - (15,265 ) - Net Profit (loss) (2,563,811 ) (55.2 ) 146,786 1.6 (2,710,598 ) (1,846.6 ) Revenues Revenue for the three months endedJune 30, 2020 was$4,641,483 compared to$9,297,186 for the same period in 2019, representing a decrease of$4,655,703 or 50%. The change in sales consists of a decrease in sales of liquid filters of$5,901,426 , offset by an increase in sales DPFs of$413,460 , an increase in sales of plastics of$762,384 , and an increase in sales of development projects of$69,878 .. 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 increase in demand for our DPFs is due to an increased interest in environmental solutions to reduce the CO2-emmissions globally. The increase in sales of plastic components is related to the newly acquired business in 2019. Gross Profit Gross profit for the three months endedJune 30, 2020 was$494,463 compared to gross profit of$2,075,110 for the same period in 2019, representing a decrease of$1,580,647 or 76%. The decrease in gross profit is due to the decrease 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 the investments in additional employees, improvement of the business facilities and other fixed costs included in Cost of good sold, and therefore had the consequence of a decrease in gross profit due to the decline in Revenue. Included in the gross profit is depreciation of$491,374 and$246,846 for the three months endedJune 30, 2020 and 2019, respectively. 26
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Table of Contents Expenses
Total operating expenses for the three months ended
Selling expenses for the three months endedJune 30, 2020 were$605,947 compared to$514,037 for the same period in 2019, representing an increase of$91,910 or 18%. 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. 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 endedJune 30, 2020 were$1,509,772 compared to$1,001,179 for the same period in 2019, representing an increase of$508,593 , or 51%. This change is attributable to the addition of administrative employees, where the number of employees increased from 12 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$82,335 and$23,167 for the three months endedJune 30, 2020 andJune 30, 2019 , representing an increase of$59,168 or 255%, attributable to stock grants to members of the Board and management.
The following is a summary of non-cash compensation:
For the Three Months Ended
June 30 , June 30,
2020 2019Compensation for vesting of restricted stock awards issued to the Board of Directors
$ 40,668 $ 23,167 Compensation for vesting of restricted stock awards issued to management 41,667 - Total Non-Cash Compensation$ 82,335 $ 23,167 Research and development expenses for the three months endedJune 30, 2020 were$316,559 compared to$199,184 for the same period in 2019, representing an increase of$117,375 , or 59%. 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. Net Income (Loss)
Net income (loss) for the three months ended
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 unfortunately did not persist in the second quarter due to impacts associated with COVID-19. Further losses on currency translations due to the negative impact of the USD/DKK exchange rate and the negative fair value adjustment of$236,900 related to the prefunded warrant liability have influenced the Net Loss for the period. 27
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Comparison of the Six Months Ended
The following table sets forth our revenues, expenses and net income for the six
months ended
Six Months Ended June 30,
Period to Period
Change
As a % As a %
of of Percent
2020 Sales 2019 Sales $ %
Revenue 14,923,327 100.0 % 16,718,384 100.0 % (1,795,057 ) (10.7 )%
Cost of Goods Sold 11,789,788 79.0 13,168,194 78.8 (1,378,406 ) (10.5 )
Gross Profit 3,133,539 21.0 3,550,190 21.2 (416,651 ) (11.7 )
Operating Expenses
Selling expenses 1,282,747 8.6 997,623 6.0 285,124 28.6
General and administrative
expenses 3,059,530 20.5 1,808,427 10.8 1,251,103 69.2
Research and development
expenses 627,513 4.2 402,356 2.4 225,157 56.0
Total Operating Expenses 4,969,790 33.3 3,208,406 19.2 1,761,384 54.9
Profit (Loss) from
Operations (1,836,251 ) (12.3 ) 341,784 2.0 (2,178,035 ) (637.3 )
Other Income (Expense)
Interest and other income 4,737 0.0 25,450 0.2 (20,713 ) (81.4 )
Interest (expense) (61,538 ) (0.4 ) (6,025 ) (0.0 ) (55,513 ) 921.4
Fair value adjustment of
warrants (236,900 ) (1.6 ) - - (236,900 ) -
Loss on currency
transactions (160,934 ) (1.1 ) (158,560 ) (0.9 ) (2,374 ) 1.5
Gain (loss) on sale of
fixed assets - - (21,619 ) (0.1 ) 21,619 (100.0 )
Total Other Income
(Expense) (454,635 ) (3.0 ) (160,754 ) (1.0 ) (293,881 ) 182.8
Profit (Loss) Before Income
Taxes (2,290,886 ) (15.4 ) 181,030 1.1 (2,471,916 ) (1,365.5 )
Income Taxes Expense
(Income) (30,574 ) (0.2 ) - - (30,574 ) -
Net Profit (Loss) (2,260,312 ) (15.1 ) 181,030 1.1 (2,441,342 ) (1,348.6 )
Revenues
Revenue for the six months ended June 30, 2020 was $14,923,327 compared to
$16,718,384 for the same period in 2019, representing a decrease of $1,795,057
or 11%. The change in sales consists of a decrease in sales of liquid filters
and water treatment systems of $2,961,472 and a decrease of sales in DPFs of
$269,745 offset by an increase in sales of plastics of $1,343,794 and an
increase in sales of development projects of $92,366 . The increase in sales of
plastic components is related to the newly acquired business in 2019. The
decrease in demand for our liquid filters and water treatment systems 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. The decrease in demand for our DPFs is mainly due to the
relative decline in sales realized in the first quarter of 2020 compared to 2019
and even though sales in the second quarter of 2020 improved compared to 2019,
accumulated sale of DPFs for the six months ended June 30, 2020 is 9% lower than
the same period in 2019.
Gross Profit
Gross profit for the six months ended June 30, 2020 was $3,133,539 compared to
gross profit of $3,550,190 for the same period in 2019, representing a decrease
of $416,651 or 12%. 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 $907,639 and
$554,129 for the six months ended June 30, 2020 and 2019, respectively.
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Table of Contents Expenses Total operating expenses for the six months endedJune 30, 2020 were$4,969,790 , representing an increase of$1,761,384 , or 55%, compared to$3,208,406 for the same period in 2019. Selling expenses for the six months endedJune 30, 2020 were$1,282,747 compared to$997,623 for the same period in 2019, representing an increase of$285,124 , or 29%. This change is attributable to the addition of new sales employees from an average of 8 in 2019 to an average of 12 in 2020. General and administrative expenses for the six months endedJune 30, 2020 were$3,059,530 compared to$1,808,427 for the same period in 2019, representing an increase of$1,251,103 , or 69%. This change is attributable to the addition of administrative employees, where the number of employees increased from 12 in 2019 to 25 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$223,557 and$151,611 for the six months endedJune 30, 2020 andJune 30, 2019 , representing an increase of$71,946 or 47%, attributable to stock grants to members of the Board and management.
The following is a summary of non-cash compensation:
For the Six Months Ended
June 30 , June 30,
2020 2019Compensation for vesting of restricted stock awards issued to the Board of Directors
$ 126,334 $ 151,611 Compensation for vesting of restricted stock awards issued to management 97,223 - Total Non-Cash Compensation$ 223,557 $ 151,611 Research and development expenses for the six months endedJune 30, 2020 were$627,513 compared to$402,356 for the same period in 2019, representing an increase of$225,157 , or 56%. 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. Net Income (Loss)
Net income (loss) for the six months ended
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$236,900 related to the prefunded warrant liability have influenced the Net Loss for the period. 29
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Liquidity and Capital Resources
InMarch 2020 , theWorld Health Organization declared the outbreak of novel corona virus ("COVID-19"), a pandemic which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid-March, we elected to temporarily introduce 2-shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employeeswho are required to be present at our production facilities. In addition, the majority of our employees were working remotely during the shutdown. However since the beginning of May, the majority of the businesses inDenmark have been opening up as the effect of the COVID-19 had been constrained and the number of diseases and fatalities were going down to a minimum, which resulted in an incremental opening of social and business environment. We are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, result of operations, liquidity and cash flows due to uncertainties, and our compliance with the measures taken to avoid the spreading of the virus did have a material adverse impact on our financial results for the second quarter of the fiscal year 2020. We have taken precautionary measures to manage our resources conservatively by reducing and/or deferring capital and operating expenses to mitigate any potential adverse impacts of the pandemic as well as to conserve cash. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for the next 12 months from the issuance of this quarterly report. In addition, as a result of reduced order intake and reduced manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in fiscal year 2020. While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic's global economic impact. In the future, the pandemic may cause reduced demand for our products if it results in a recessionary global economic environment. It could also lead to volatility in access to our products due to government actions impacting our ability to produce and ship products. 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 toDKK20,000,000 ($3,000,000 ), which is used for a leasing arrangement and guarantees issued to customers for prepayments and for warranties after delivery. Additionally, onMay 21, 2020 , the Company completed a Securities Purchase Agreement with certain accredited investors in a private placement 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$4,744,048 including costs of$680,952 for placement fee, lawyer fee, auditor fee 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 . OnJune 30, 2020 , we had cash of$16,230,269 and net working capital of$21,400,770 , and atDecember 31, 2019 , we had cash of$9,783,932 and net working capital of$17,155,126 . OnJune 30, 2020 , our net working capital has increased by$4,245,644 compared toDecember 31, 2019 primarily related to the increase in cash as a result of the private placement inMay 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 ofDKK10,000,000 (approximately$1,500,000 ). The credit line is secured by a cash deposit of$2,700,000 . Further, we have a guarantee for a specific project delivered in 2016 ofDKK 94,620 (approximately$14,217 atJune 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
Six months ended
Cash provided (used) by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities for the six months endedJune 30, 2020 was$1,229,936 , representing an increase of$6,300,563 compared to cash used by operating activities of$5,070,627 for the six months endedJune 30, 2019 . The change in cash provided by operating activities for the six months endedJune 30, 2020 was mainly due to reductions in Account receivable of$8,972,271 and Contract assets/liabilities (net) of$2,180,120 , off-set by the decrease in Net Income (Loss) of$(2,353,792) and a decrease in Accounts payable of$4,860,284 . Net cash used in investing activities was$2,194,618 for the six months endedJune 30, 2020 as compared to net cash used in investing activities of$327,559 for the six months endedJune 30, 2019 , representing an increase of$1,867,059 . 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. Cash provided by financing activities was$7,302,077 for the six months endedJune 30, 2020 as compared to net cash provided by financing activities of$14,799,350 for the six months endedJune 30, 2019 . This change of$7,497,273 was mainly due to net cash proceeds of$7,319,050 related to the capital raise inMay 2020 compared to net proceeds of$14,807,938 from the capital raise inMay 2019 .
Off Balance Sheet Arrangements
As of
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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 impactsoperating 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 OnJuly 8, 2020 the Company issued a total of 3,100 shares in connection with employees exercising options in relation to the stock option plan entered in 2015. The shares were issued at a share price of$2.96 and generated net proceeds of$9,176 . 31
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